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Copel Remains Neutral Rated

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We recently maintained a Neutral recommendation on Companhia Paranaense de Energia , also known as COPEL, anticipating an in-line performance with the market.

This Brazilian electric utility generates, transmits, and distributes electricity, primarily in the State of Parana and sources approximately 99% of its electricity from hydroelectric resources. Apart from its core electricity business, the company also engages in telecommunications, natural gas, engineering, water, and sanitation services, which account for roughly half of the company’s total revenue.

Thus, future appears bright for COPEL as revival in the global economy is inducing growth in emerging markets including Brazil. Investments made to improve the country’s infrastructure and power generation capabilities are heightening electricity demand. Also, hosting of two major sporting events in the near future will be an added electricity demand booster.

Besides retaining its position in the Brazilian electric utility sector, COPEL is making capital investments to improve its internal generation capacity and distribution network, for which a whooping amount of R$2.26 billion has been allocated for 2012. Of the total, roughly 47.4% has been put aside for generation and transmission, 48.9% for distribution and 3.7% for telecommunications.

On the flip side, accelerating operating expenses remain a major cause of concern in the near term. Expenses soared 18% in the second quarter 2012 as against 15% recorded in the first quarter and 9% in 2011. Being a state-owned company, political interference and unfavorable regulatory systems influence COPEL’s decision making to a great extent.

The current Zacks Consensus Earnings Estimate for the third quarter 2012 is 50 cents while for the fiscal years 2012 and 2013 are $2.00 and $2.46 per ADR. These represent year-over-year decline of 35.9% for the third quarter, 14.7% for 2012 and growth of 23.3% for 2013.

COPEL currently bears a Zacks #3 Rank, implying a short-term (1-3 months) Hold rating. The company’s major competitors Cia Energetica de Minas Gerais (CIG - Free Report) and Enersis S.A. currently retain a Zacks #3 Rank (Hold).

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