We recently upgraded our rating for Companhia Paranaense de Energia (ELP), also known as COPEL, from Neutral to Outperform as the company stands well-positioned to benefit from the growing Brazilian economy, with an expected rise of 5% in electricity demand.
First Quarter Highlights
COPEL posted an EPS of R$0.82 or EPADR of 45 cents per share for the first quarter of 2010, down from an EPS of R$0.99, or EPADR of 42 cents in the first quarter of 2009. Reported EPADR missed the Zacks Consensus Estimate of 52 cents.
Net income for the quarter was R$224 million (US$123.8 million), down from R$272.1 million (US$117 million) in the same quarter of 2009, based on higher operating expenses.
Net revenues grew to R$1,500.9 million (US$829.3 million) from R$1,356.6 million (US$582.4 million) in the first quarter of 2009, an increase of 10.6% from the year-ago quarter. The growth was attributable to an increase in the average price per megawatt hour (MWh) and higher sales volume.
Upgraded to Outperform
We believe COPEL is one of the best-positioned companies in the Brazilian electric utility sector, accounting for approximately 7% of total electricity production. Due to the non-elastic demand for electricity, recent global financial crisis had limited impact on electric utilities, especially of emerging markets like Brazil. With the Brazilian economy growing, demand for electricity in Brazil is also expected to increase by roughly 5%.
To meet escalating demand, COPEL in its 2010 capital investment plan has allocated $323 million for Mauá Hydroelectric plant, $176 million for generation and transmission, $762 million for distribution, and $81 million for telecommunications.
However, COPEL, being a state-owned company, is largely influenced by political interference. The government of the State of Paraná owns 58.6% of the company’s outstanding voting shares, which gives it the power to control the election of the majority of the company’s Board of Directors and also appoint senior management. Unfavorable political decisions can impact the company’s financial over time.
Nevertheless, the company’s attractive valuation relative to its international peers, strong balance sheet, cost control measures, and investments to increase internal generation capacity make COPEL an attractive stock to own. We upgrade our recommendation on the ADR to Outperform from Neutral.