Newcomer Alupar Dodges Rousseff Power Squeeze: Corporate Brazil

Alupar Investimento SA is the top pick among utilities as the length of the industry newcomer’s contracts put it in the fortuitous position to avoid President Dilma Rousseff’s pressure to cut electricity prices.

All five analysts covering the Sao Paulo-based company recommend buying the stock, which started trading in April, according to data compiled by Bloomberg. Transmissora Alianca de Energia Eletrica SA, or Taesa, has the second-best consensus rating with five buys and three holds. Eletropaulo Metropolitana SA ranks last with 11 sells, 5 holds and no buys.

Rousseff, as part of an effort to slow inflation that peaked at 6.7 percent in June, has sought to cut power prices by pressing utilities to lower rates now in exchange for the renewal of concessions set to expire through 2017. Alupar is sidestepping that pressure because its generation and transmission contracts expire starting in 2030.

“Alupar is benefiting from the fact that it got its licenses years after the older utilities,” Beatriz Nantes, an analyst at equity research firm Empiricus, said in a phone interview from Sao Paulo. “It offers the revenue predictability investors expect from power utilities that others in Brazil can’t.”

Stocks Drop

Alupar has only bid for concessions with later expiration dates so it can maintain stable revenue over long periods, Chief Financial Officer Marcelo Costa said in a phone interview from Sao Paulo. “The company even considered the possibility of buying some old licenses from utilities that were being privatized in the mid-2000s, but we knew that contracts expiring in 2015 were subject to reviews and nobody could foresee the result of those revisions,” he said.

The 16-member Bovespa Electric Energy Index has fallen 17 since Rousseff presented details about the electricity rate cut plan on Sept. 11. State-controlled Centrais Eletricas Brasileiras SA was among the hardest hit, dropping 52 percent, as it accepted the terms on all of its concessions. Taesa, which has contracts expiring between 2030 and 2042, slipped 2 percent. Alupar is down 5.4 percent since its April 24 debut.

Dividend Outlook

Goldman Sachs Group Inc. cited predictable dividends among the reasons to buy Alupar when it started coverage last month. Analysts led by Felipe Mattar projected in a June 3 report that the company would return a 9.2 percent average dividend yield.

While Alupar is benefiting from longer-term contracts, possible changes in government rules could alter the outlook, according to Credit Suisse AG, which initiated coverage of the company on June 6.

“Alupar’s business could be exposed to changes in the regulatory framework, which could modify the original return rates,” Credit Suisse analyst Vinicius Canheu wrote in the report. “Nonetheless, we believe the chances of a retroactive change in regulations are low.”

CFO Costa said he expects Alupar’s contracts “to be respected in every condition under which they where signed, no matter who is in control of the government.”

Eletropaulo, which distributes electricity in the Sao Paulo metropolitan area, has tumbled 74 percent since July 2, 2012, when power regulator Aneel ordered it to cut rates by an average 2.3 percent, saying the utility overestimated the value of some of its infrastructure investments.

‘Investors’ Darling’

“Eletropaulo was always the investors’ darling in this industry because it operates in the richest area of the country, has a very lean structure and was famous for paying good dividends,” Vitor Leonardo Sousa, an analyst at GBM Brasil, said in a phone interview form Sao Paulo. “Now revenue projections are very low and there’s absolutely no reason for the stock to rebound.”

Taesa, Eletropaulo and Eletrobras officials declined to comment.

While Alupar is the best-rated power utility, it’s one of the worst performers among companies going public in the past year. Software company Linx SA has gained 44 percent since its debut in February, and frequent-flyer program Smiles SA is up 25 percent since its April IPO.

“The Brazilian stock market is doing very poorly in general this year and investors got traumatized with the government’s recent decision regarding utilities,” Empiricus’s Nantes said. “It’s not always clear to everybody that some companies are not affected by the measure. Alupar is a good company, with good fundamentals.”

Before it's here, it's on the Bloomberg Terminal.