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CEMIG: A “Green” Generating Utility
Related Stocks:
CIG06/28/2007:
Last week the Brazilian power company CEMIG got some favorable press on CNBC in recognition of a stock split. Seeing that this company has been hitting 52-week highs, I took a further look to see if the momentum can continue.
The Brazilian Energy Market
While most countries are raising interest rates, Brazil’s central bank has been cutting rates in an attempt to help its economy grow. To supply the additional 3,000 megawatts of electricity per year to meet increasing energy needs, Brazil is executing plans to expand its power generating capacity. Just last year Brazil auctioned 157 projects for the building and expansion of its power plants.
A Leader in Renewable Energy
CEMIG stands out among other Brazilian utilities because of its green energy initiatives and vision for the future. The bulk of its electricity is generated from 56 hydroelectric plants, a definitive advantage in a time of volatile energy prices. It has also been a leader in experimenting with renewable energy sources; its engineers have been actively testing the implementation of new solar and biofuel-based generators.
Recently management has announced plans to grow through the acquisition and development of more power plants. Expect to see more deals such as CEMIG’s recent bid for Companhia Brasiliana de Energia, or the possibility of participating in the building of the new 6,450 megawatt Rio Maderia hydroelectric plant.
CEMIG has also been growing its transmission and distribution network. They are constructing a transmission line to Chile, a move hailed as CEMIG’s first steps towards international development. Within Brazil, the “Light for Everyone” program promises to deliver power to an untapped market of 2.5 million low income rural homes.
Valuation
Since the stock has had a significant run, I looked into the possibility of whether it could be overvalued at the current price. Looking at past statements, earnings and free cash flow seemed hard to correlate with the stock price, but the revenue multiple seemed most stable.
In recent years, the forward price/revenue multiple steadily expanded but seemed to settle around 1.5, in line with comparisons to other utilities. Assuming that CEMIG can support an optimistic 19% revenue growth, I used a multiple of 1.4 to arrive at a current fair price of about 20.32. At the time of this writing, the stock is trading just over 21. I suggest waiting for a pullback before buying.
Risks
The past stock performance of the CEMIG ADR has been boosted by strengthening Brazilian currency. If this trend slows or reverses, it may offset some of the gains from owning this stock.
I should also mention that CEMIG is 51% owned by the state, which is unlikely to cause any near term harm. A stronger concern exists with the tightly regulated energy prices; government price ceilings will make it difficult for utilities to increase prices in Brazil.
Figure 1: Historical stock performance, ratios, and my future estimates
Full Disclosure: At the time of this writing, Winston does not hold a position in CIG stock.
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