RESEARCH ALERT-FULL TEXT- Eletrobras (SAO:ELE) buy
Reuters, Monday, February 09, 1998 at 11:45
NEW YORK, Feb 9 (Reuters) - Salomon Smith Barney said on
Monday it reiterated its buy on shares of Centrais Eletricas
Brasileiras SA and raised its earnings estimates on the stock.
The following is the full report.
SALOMON SMITH BARNEY
Company: CAIGY - Eletrobras S.A.
Headline: REITERATING BUY DESPITE UNCERTAINTIES-RAISING
EARNINGS ESTIMATE
Price (02/06/98): US$ 23.64 Target Price: US$ 32.00
Analyst: Sandra L. Boente
Release Date: 02/09/98
Current Rank: 1-S Prior
Rank: (212) 816-6447
--SUMMARY:--Eletrobras S.A.--Brazil
*Privatization should provide a catalyst for Eletrobras shares
in 1998 and we are reiterating our 1S rating on the stock.
Eletrobras is 34 percent undervalued in our view.
*We are revising our 98 EPS estimate upwards based on 30
percent operating efficiencies after-privatization, and larger
Interest on Capital payments.
*We are introducing a $2.55 1999 EPADR estimate, as well.
*We have revised our 12-month price target down to $32.00 from
$39.00. This is primarily owing to revised macroeconomic
assumptions, and a more conservative valuation of Eletrobras'
assets on the back of changes in regulations.
--EARNINGS:----------------------------------
FYE 1 Qtr 2 Qtr 3 Qtr 4 Qtr Year
US$ 12/96 EP/ADR 0.62A 1.17A 0.69A 1.35A US$ 2.14A
R$ 12/97 EPS 1.49A 1.28A 1.73A 1.79A R$ 6.29A
US$ 12/97 EP/ADR 0.70A 0.59A 0.79A 0.65A US$ 2.82A
R$ 12/98 EPS N/A N/A N/A N/A R$ 5.21E
US$ 12/98 EP/ADR N/A N/A N/A N/A US$ 2.19E
R$ 12/99 EPS N/A N/A N/A N/A R$ 6.37E
US$ 12/99 EP/ADR N/A N/A N/A N/A US$ 2.55E
--OPINION:-----------------------------------
PRIVATIZATION SHOULD BE THE DRIVING FORCE BEHIND STOCK
APPRECIATION
We are reiterating our 1S Buy rating on Eletrobras because we
believe that privatization will provide the catalyst for stock
appreciation over the next twelve months. Furthermore,
BNDES/Eletrobras' upcoming road show is likely to have a
positive impact on the stock, as it will showcase the advances
in the privatization program and dissipate doubts about the
company's long-term plans.
The upside to Eletrobras stock post-privation was reinforced by
the government's recent announcement that it may provide 8-year
volume contracts at regulated prices for those generators that
are privatized, delaying a fully competitive price structure
until the year 2006. This will ease Eletrobras' passage from a
monopoly to competitive company and be the basis for a period
of secured operating margins thanks to efficiency gains.
Moreover, last Friday's announcement of the expiration of the
RGR tax in five more years, will come to the rescue of any
potential slide in margins just in time when competition opens
up.
Longer term, its low debt load provides opportunity for
leveraged growth. Eletrobras owns over 32,347 MW of installed
capacity and 28,259 miles of transmission lines. Its plants
are relatively new, well-maintained, with a long remaining
useful life, and low operating costs as 90 percent of its
capacity comes from hydroelectric plants. It has a remarkably
low net debt position with $10.3 billion in net debt compared
to $65.4 billion in assets, which allows material room for
growth through leverage.
EARNINGS REVISED UPWARDS
We have raised our 1998 EP/ADR to $2.19 up from $1.17, and
established and EP/ADR estimate of $2.55 for 1999. We base the
revision on increases in sales volume, 30 percent lower
personnel and supply costs on those subsidiaries that are
privatized, and the inclusion of significant interest on
capital payments. EP/ADR for 1998 are falling compared to 1997
results ($2.82 EP/ADR) due to an anticipated $420mm provision
related to lawsuits against Eletrobras' subsidiary Chesf.
ANY WAY YOU LOOK AT IT, ELETROBRAS IS A GOOD VALUE
Based on each of the three valuation parameters we examined,
Eletrobras appears inexpensive. We have calculated the value of
Eletrobras' future cash flows, discounted at what we believe
are very conservative rates. Given the varying nature of
Eletrobras' three main asset bases (power generation plants and
transmission lines; lending portfolio; minority holdings in
other electric utilities), we have used separate methodologies
to value each one of its businesses. We have calculated the
discounted cash flow value of each of the company's four
generation subsidiaries, and then valued its financing
operations by discounting its future net interest margin.
Lastly, we priced Eletrobras' minority holdings in other
companies at market.
In this manner, we arrived at an equity value of $19 billion
for its power business, assuming the company's current tariff
structure stays intact and up to 30 percent efficiency gains
are extracted from the companies once privatized, and applying
a discount rate of 13.3 percent. For its financing operations,
we assumed no loan portfolio growth, effected the
securitization of Itaipu's receivables to repay RGR debt, and
applied a high 20.4 percent discounting rate. We derived a net
value of $6.9 billion for Eletrobras' "bank", a conservative
figure well below consensus. Lastly, we added the current
market value of Eletrobras' minority stakes in other
electricity companies (an additional $4.9 billion), bringing
Eletrobras' total equity value to roughly $31 billion. That is
25 percent above today's market cap of $25 billion.
Copyright 1998, Reuters News Service |
