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Eletrobras Worst Utility With 313% Profit Gain

Eletrobras Worst Utility With 313% Profit Gain
Eletrobras is being punished in equity markets on speculation the government will demand lower electricity rates when it renews generation contracts, which expire in 2015 and account for 43 percent of the utility’s installed capacity. Photographer: Adriano Machado/Bloomberg

Centrais Eletricas Brasileiras SA is the Americas’ worst-performing utility stock, even after quarterly profit quadrupled, on investor concern Brazil will force the state-run company to reduce prices and rescue failing distributors.

The stock’s 24 percent plunge this year is the biggest of any electricity company with a market value of $1 billion or more, while its price-to-earnings ratio of 4.3 makes it the cheapest, data compiled by Bloomberg show. Eletrobras, as South America’s No. 1 power utility by capacity is known, posted a 313 percent increase in second-quarter profit on Aug. 14 after a weaker real boosted dollar revenue from Itaipu, the world’s largest hydroelectric dam by output.

Eletrobras is being punished in equity markets on speculation the government will demand lower electricity rates when it renews generation contracts, which expire in 2015 and account for 43 percent of the utility’s installed capacity. President Dilma Rousseff has said she wants to reduce power costs that are among the highest in the world.

“The government will need to cut the cost of electricity, and that stirs questions about how it will be done,” Pedro Galdi, chief strategist at Sao Paulo-based brokerage SLW Corretora SA, said in an Aug. 27 telephone interview. “This affects everybody, not only Eletrobras, but Eletrobras is the biggest generator in Brazil.”

Eletropaulo Plunges

Eletrobras dropped 3.8 percent to close at 19.70 reais in Sao Paulo, the biggest slump since May 21.

Brazil’s government, which missed a deadline to rule on the power concessions in June, probably will extend licenses for 20 years in exchange for lower electricity rates, Energy Minister Edison Lobao told reporters on July 26. The drive to reduce costs may include eliminating certain fees and cutting taxes, he said in June.

AES Corp.’s Eletropaulo Metropolitana Eletricidade de Sao Paulo SA, Brazil’s largest power distributor by market value, plunged 24 percent last month after it was ordered to cut rates 9.3 percent on July 2 as part of a government review undertaken every four years.

Cia. Energetica de Sao Paulo, known as Cesp; Cia. Energetica de Minas Gerais, or Cemig; and Cia. Paranaense de Energia, or Copel, are also awaiting concession renewals.

Eletrobras is also trading at a discount to peers because of concern the government is pressuring the utility to take on unprofitable projects that it considers strategic, including the 26 billion-real ($13 billion) Belo Monte hydroelectric dam in the Amazon, Banco Safra SA analyst Sergio Tamashiro said.

‘Heavy-Handed Intervention’

“Investors don’t like the government’s heavy-handed intervention,” Tamashiro, who rates the company neutral, said in a telephone interview from Sao Paulo. “The company ends up getting into projects with low rates of return.”

Eletrobras announced in December it would take a 51 percent stake in Celg Distribuicao SA. The plan is one of several “negatives” for Eletrobras because it increases exposure to the electricity distribution industry, where profit margins are smaller, Barclays Capital Plc analysts led by Francisco Navarrete said in an Aug. 13 report to clients.

Celg “has great potential,” Eletrobras’s press office said.

“Like all controlling shareholders, the government is concerned with increasing profits, but it must also think about the long-term wellbeing of the Brazilian people,” Eletrobras’s press office said in an e-mailed response to questions. “Both things need to be balanced -- a fact that the market, normally focused on short-term returns, has a certain trouble understanding.”

The Energy Ministry’s press office declined to comment.

Attractive Buy

To be sure, Eletrobras’s current value makes it an attractive buy, said Mauricio Abadia, who helps manage Brandes Investment Partners LP’s $2 billion emerging-market portfolio, including $200 million of Eletrobras shares.

The company’s second-quarter profit surged after the Brazilian real slumped 9.1 percent in the period, boosting the local-currency value of dollar-denominated revenue from the Itaipu dam, a joint venture with Paraguay that straddles the border of the two countries. Rousseff’s government took measures to weaken the real in the first half to boost exports amid an economic slowdown.

“When you look at investments in emerging markets, Eletrobras has several things in its favor,” Abadia said in a telephone interview from San Diego. It has a “solid capital structure, low leverage that could be increased, low exposure to commodities, good balance between assets and debt in foreign currency.”

Local-Market Expertise

Investor concern isn’t likely to abate anytime soon as the utility pushes ahead with plans to increase its international presence, said Safra’s Tamashiro.

Eletrobras this year agreed with China Three Gorges Corp. and China State Grid Corp. to develop projects and also signed a memorandum of understanding with the governments of Suriname, French Guiana and Guyana to develop power projects in the three countries. Eletrobras said in March it was also considering building a hydroelectric dam in Mozambique.

“Eletrobras’s expertise is in the local market and in that case it’s better to concentrate investments in Brazil,” Tamashiro said. “The less Eletrobras goes abroad, the better.”

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