With an expectation that the company would perform in line
with the market, we reiterated our Neutral recommendation on
Brazilian electric utility,
Companhia Paranaense de Energia
), also known as COPEL.
This $4.0 billion company generates, transmits, and distributes
electricity, primarily in the State of Parana. It directly serves
approximately 4.0 million customers in 396 municipalities and
1,114 localities. Apart from its core electricity business, the
company also engages in telecommunications, natural gas,
engineering, water, and sanitation services.
Reviving global economy has induced economic growth in emerging
markets like Brazil. The country of late has been making
investments to improve its infrastructure and power generation
capabilities, which are in turn boosting electricity demand.
Also, hosting of two major sporting events in the near future
will prove to be an added electricity demand booster.
Moreover, to leverage benefits from the growing demand, the
company too has been making capital investments for improving its
internal generation capacity and distribution network. Roughly an
amount of R$2.26 billion has been allocated, of which about 47.4%
has been put aside for investments in generation and
transmission, 48.9% for distribution and 3.7% for
On the flip side, some near-term concerns have forced us to
remain on the sidelines for the company. COPEL in the third
quarter 2012 reported a 7.7% decline in net income which came in
at R$319 million. EPADR was at US$0.59, way above the Zacks
Consensus Estimate of US$0.48.
Tangible improvement in all business categories induced a revenue
increase of 1.9%, although there was 31.5% decline in
construction revenue. However, revenue improvement was more than
offset by a 4 % increase in operating expenses that weakened the
company's margins in the quarter. Loan and financing at the end
of the quarter stood at R$2.0 billion. Such a trend in rising
operating costs and higher liabilities thus clouds our view on
Moreover, 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 fourth
quarter 2012 is 34 cents while for 2012 and 2013 are $1.70 and
$2.02 per ADR. These represent year-over-year decline of 26.1%
for the fourth quarter, 27.4% for 2012 and increase of 18.8% for
COPEL currently bears a Zacks #3 Rank, implying a short-term (1-3
months) Hold rating. The company's major competitor
Cia Energetica de Minas Gerais
) has a Zacks #1 Rank (Strong Buy) while
) has a Zacks #3 Rank (Hold).
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