Eletrobras Seen Most Overvalued After 46% Drop: Corporate Brazil

Photographer: Adriano Machado/Bloomberg

Profit at Eletrobras, as Brazil’s largest generator is known, is suffering more than competitors after Brazil forced utilities to either cut power prices or return contracts to be re-auctioned when they’re completed. Close

Profit at Eletrobras, as Brazil’s largest generator is known, is suffering more than... Read More

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Photographer: Adriano Machado/Bloomberg

Profit at Eletrobras, as Brazil’s largest generator is known, is suffering more than competitors after Brazil forced utilities to either cut power prices or return contracts to be re-auctioned when they’re completed.

State-run utility Centrais Eletricas Brasileiras SA (ELET6) is the most overvalued company on Brazil’s benchmark index, according to analyst assessments, even after an 46 percent market decline in the past year.

Common shares trade 60 percent above the 12-month target and the preferred stock is priced 8.3 percent above, the biggest gaps on the Bovespa, data compiled by Bloomberg show.

Profit at Eletrobras, as Brazil’s largest generator is known, is suffering more than competitors after Brazil forced utilities to either cut power prices or return contracts to be re-auctioned when they’re completed. The Rio de Janeiro-based company, which had more contracts set to expire than any other utility, is reducing costs by 30 percent in three years after posting a record 6.88 billion-real ($3.41 billion) loss last year.

The new rates “will eliminate the company’s operating cash flow for three years,” Gabriel Salas, an analyst at JP Morgan & Co., who recommends selling the stock and is the most accurate analyst in the industry in the past year in a Bloomberg Absolute Return Ranking, said by telephone from New York. “For three years, all its investments will have to be made through external funding, with debt and so. We saw the big selloffs, but I don’t see any reason for the stock to regain value.”

The drop in Eletrobras shares underscores how the policies of President Dilma Rousseff’s administration are hurting the market value of some of Brazil’s biggest companies. The benchmark Bovespa index posted a 7.6 percent loss in the first quarter, the worst start to a year since 1995. The measures to lower electricity costs that manufacturers say are among the highest in the world triggered a selloff in utility stocks that wiped out $6 billion in value since the start of November.

Profit Forecasts

Analysts have slashed their 2013 earnings-per-share estimates for Eletrobras by 29 percent in the past three months, the most of any Brazilian utility after Eletropaulo Metropolitana Eletricidade de Sao Paulo SA.

Eletrobras’s press office declined to comment on the stock’s valuation in an e-mailed response to questions.

The company would have posted a 3.2 billion-real profit last year if it hadn’t been for the lower power prices, Chief Financial Officer Armando Casado de Araujo told reporters March 28.

The stock jumped 16 percent that day, the most since Nov. 30, after Eletrobras said it would pay a 1.63-real dividend per preferred share, or about 15 percent of the previous day’s closing price. Shares fell 2.3 percent to 12.46 reais at 11:44 a.m. in Sao Paulo as the Bovespa slid 0.2 percent.

Not ‘Desirable’

“Leaving the dividends aside, I don’t see any operating or governance improvements in the company as a whole,” said Eduardo Carlier, head of core equities at Schroder Investment’s Brazilian unit. “Operationally there’s nothing that makes it desirable.”

Efforts to restructure may make the stock more attractive, said Marcos Severine, a utilities analyst at Banco Itau SA.

In a bid to turn the company around, management plans to invest 52.4 billion reais through 2017. The company also expects about 4,500 workers, or 17 percent of its total workforce, to accept voluntarily retirement, Chief Executive Officer Jose da Costa Carvalho told reporters March 28.

“The market will start looking at Eletrobras with different eyes,” Severine, who rates the company the equivalent of a sell, said in a telephone interview from Sao Paulo. After the earnings “the company gave a few elements for the market to start looking at it a bit more favorable way. How favorably will depend on the restructuring plan it will announce, of which it gave only the guidelines, as well as the plan to restructure subsidiaries.”

Dividend Surprise

As part of the restructuring plan, Eletrobras may seek to sell distribution units even as it aims to make the units as a whole profitable by 2020, Carvalho Neto said. Meantime, the company will be turning to state-owned banks for 3 billion reais in credit lines this year, backed by a guarantee from the Treasury, to avoid tapping capital markets after cancelling a 2 reais local bond sale March 22.

“It surprised me that they paid dividends,” JP Morgan’s Salas said. “The future of Eletrobras is different from its past. It will be much worse; it will be much more difficult.”

To contact the reporter on this story: Rodrigo Orihuela in Rio de Janeiro at rorihuela@bloomberg.net

To contact the editor responsible for this story: James Attwood at jattwood3@bloomberg.net

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