Analysts are resuming coverage of electric company after privatization
07/20/2022
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Eletrobras: the largest power utility in Latin America gained ten positions and overtook B3 giants — Foto: Ana Branco/Agência O Globo
After a self-imposed quarantine, analysts are slowly resuming coverage of the “new” Eletrobras, now privatized. The company’s investor website reports that it is covered by 12 banks and brokerage firms. It turns out that all were directly or indirectly involved in the public offering that led to the privatization and therefore decided to suspend coverage.
There is talk on Faria Lima Avenue, São Paulo’s financial hub, that this was a ban by Brazil’s securities market authority CVM. This is not the case. “The CVM rules don’t prohibit reporting, but in practice that’s what happens,” said Lucy Sousa, president of the Association of Capital Market Investment Analysts and Professionals (Apimec).
It does not forbid it, but the regulator of the capital market has already suspended offers because of news in the press, including raids on brokerage houses. So, although there is a separation between the analysis segment and the sector that makes the public offers, the investment bank, nobody says or writes anything to avoid any suspicion of conflict of interest. The investor who depended on this information had to look for it in the smaller, so-called independent houses, which, in these circumstances, is still an appropriate identification.
Now freed from the shackles of conflict, analysts are talking wonders. At a time of widespread cuts in target prices in an environment of inflation and high interest rates, with valuation professionals in a frantic race to adjust their models to rapidly changing scenarios, Eletrobras shines among the few exceptions.
The company’s shares had already been rising with the prospect of the federal government’s exit, but it was a risky bet in a presidential election year in which one of the candidates is radically against privatization and even threatened to reverse it if elected. The bravado did not prevent the privatization, which put the power utility on a new level, reflected in the valuation of its shares.
At the end of June, both common and preferred (PNB) stocks hit nominal record highs of R$46.20 and R$46.70, valuations of 44% and 50%, respectively, in the semester, while benchmark stock index Ibovespa fell 5.18% and the IEE, the electric sector’s index, rose 5.48% in the period. In the public offering, in May, the common share was sold by the federal government for R$42.
The largest power utility in Latin America gained ten positions and overtook B3 giants such as Suzano, JBS and Banco do Brasil in the ranking of the largest publicly traded companies by market capitalization. On Wednesday, it was vying for seventh place with BTG Pactual, valued at around R$100 billion. Twelve months ago, the then state-owned company was worth R$68 billion.
Analysts expect more. With expectations of more cost cuts and efficiency gains, the projected prices for twelve months range from R$62 to R$67 for the common share and from R$62 to R$71 for the PNB, potential appreciations of about 50% in relation to this Tuesday’s prices.
Four banks resumed coverage, all with a buy recommendation – Bank of America (BofA), BTG Pactual, JP Morgan and Credit Suisse. As a consequence of the new private management, they are forecasting better results. With this, a new level of dividends, closer to what is usually expected from a company in the electricity sector. And a migration to Novo Mercado, a section of the B3 exchange with stricter governance rules, is also expected soon.
BofA’s target prices are R$62 (common shares) and R$67 (preferred stock, PNB). BTG analysts, with a price of R$62 (common stock), consider it one of the cheapest shares among those monitored by the bank. For JP Morgan, it is the main choice of the sector, at R$64 (common share). Credit Suisse sees a “bright future” and sets prices of R$67 (common stock) and R$71 for PNB.]
*By Nelson Niero — São Paulo
Source: Valor International