We recently maintained a Neutral recommendation on Companhia Energetica de Minas Gerais (CIG), also known as CEMIG, one of the largest integrated electric utilities in Brazil. The company has more than 6,896 megawatts of installed generation capacity.
With the global economy reviving from the recent crisis, economic growth in emerging countries is noticeable. Brazil, for instance, is one country that stands at an advantageous position making huge investments in infrastructure and power generation capabilities.
Presumably, the economic recovery in Brazil will prove to be extremely efficacious in promoting growth for CEMIG. Demand for electricity in the country, which is already on the rise would probably get a boost as the country hosts two major sporting events in the coming years.
Moreover, CEMIG’s location in the important state of Minas Gerais in southeastern Brazil as well as the company’s integrated nature of operation (generating and distributing energy) along with its aggressive expansion plan stands the company in good stead.
Over the long term, the company targets to achieve 20% market share in the various segments of the electricity market. It is anticipated that investments in the fiscal year 2011 and 2012 are to be approximately R$2.3 billion and R$1.1 billion, respectively.
Despite all these positives, the growth momentum gets a setback from rising operating expenses. In the first quarter of 2011, expenses grew by 21% year over year primarily due to higher expenses for electricity bought for resale and modest increases for outsourced services, gas, depreciation and provisions.
Furthermore, the strange rule formulated by ANEEL and interference from the state government tend to be problematic. CEMIG also faces competitive pressures in the Brazilian market from rivals like Companhia Paranaense de Energia (ELP). Besides, heavy dependence on natural water resources is risky for the company.
Considering all these factors, we currently maintained a Neutral recommendation on the stock.
CEMIG SA -ADR (CIG): Free Stock Analysis Report
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