Brazil Top Analyst for Top Stock Predicts More Gains to Come

  • Cemig will benefit from less government meddling: Santander
  • Stock surged 59% in past month, but still down over past years

Brazil’s biggest stock rally over the past month still has further to go, according to the most accurate forecaster for Cia. Energetica de Minas Gerais.

Cemig, as the electric utility owned by the state of Minas Gerais is known, is poised to benefit from a change in federal government that will lead to more mergers, an improved economy and less meddling in the industry, said Maria Carolina Carneiro, an analyst at Banco Santander Brasil SA who has rated the stock buy since October. Carneiro’s calls provided the biggest profit to investors in Cemig and three of the 14 other biggest publicly-traded Brazilian electricity companies, the best performance among analysts that cover the sector, according to data compiled by Bloomberg.

Michel Temer, who was made Brazil’s acting president in May as Dilma Rousseff awaits an impeachment trial, is seen as less likely to interfere in company operations and better able to revive growth in Latin America’s largest economy. Cemig and its peers lost a combined 62 billion reais ($19 billion) from September 2012, when Rousseff surprised investors by changing the rules for concession renewals, through the end of last year. Optimism about the outlook for Cemig sent the stock up 59 percent in the past 30 days, though the shares have still lost half their value since the end of 2011.

"Cemig was hit very hard after the change in regulation and became an ugly duckling," Carneiro said from Sao Paulo. "It’s a very interesting name now as it needs to sell assets and is working to shore up its balance sheet and trim risks."

Cemig, whose total debt has surged 56 percent in three years and exceeds the company’s current market value, will also see its debt servicing costs drop as local interest rates are reduced, according to Carneiro. Brazil’s benchmark interest rate is forecast to fall 1 percentage point to 13.25 by the end of this year, according to a weekly survey of economists by the central bank.

After contracting 3.3 percent in 2016, gross domestic product is estimated to grow 1 percent next year, according to the central bank poll. That will pave the way for utilities to sell electricity at higher prices and also become acquisition targets, Carneiro said.

The MSCI Brazil/Utilities Index soared 27 percent in the past month as State Grid Corp. of China agreed to buy a stake in the power distributor CPFL Energia SA.

"It’s been a long time that we haven’t seen many deal opportunities," said Carneiro, who also has buy recommendations for AES Tiete Energia SA, Cia. Paranaense de Energia, CPFL, and Alupar Energia SA. "It seems Brazil is the flavor of the month now."

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