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CEMIG Long-term Growth Looks Good, Near-term Risks Prevail

Zacks Equity Research

On Aug 25, 2014, we issued an updated research report on Companhia Energetica de Minas Gerais (CIG), also known as CEMIG.

Brazil, over the past few years, has evolved as a strong economy recording nearly 2.5% growth in 2013. Several industries in the country, especially infrastructure, electricity and tourism have been flourishing and they offer solid growth opportunities going forward.

The country’s electricity market is the largest in South America with a total installed capacity of approximately 130.5 thousand Megawatts (MW) as on Jul 2014. In the seven months, nearly 4,215 MW of new power plants have been added, representing 70.3% of 6,000 MW of new power targeted for 2014. Electric consumption climbed 3.5% year over year in 2013, while it is expected to rise further in the years ahead.

CEMIG is making concerted efforts to capitalize on the growing electricity demand in the country. Investments to improve electricity generation capacity and distribution services are being given priority. Year-to-date, the company has acquired 49.9% stake in Retiro Baixo Energética and 12.4% interest in Madeira Energia. Also, CEMIG has agreed to collaborate with Renova Energia regarding construction of 25 wind farms with an installed generation capacity of 676.2 MW. Moreover, as part of creating a new company, Gás Natural do Brasil S.A, the company agreed to acquire 40% interest in Gasmig from Petrobras.

Over a period of 30 years, the company targets capturing a major share of the Brazilian generation and distribution businesses, thus becoming the chief player in the Brazilian electricity utility sector. CEMIG’s earnings grew 7% in the past five years while yielding a return of 63.8% year-to-date. This Brazilian electric utility, hence, comes across as an attractive investment option for long-term investors.  
Despite these positives, we believe certain near-term concerns might impede CEMIG’s growth momentum. Potential headwinds include rising operating expenses, governmental interference and dependence on hydro sources for electricity.

With a $10.8 billion market capitalization, CEMIG currently carries a Zacks Rank #4 (Sell). Some better-ranked companies in the electric utility industry include Huaneng Power International, Inc. (HNP), ALLETE, Inc. (ALE) and CMS Energy Corp. (CMS). While Huaneng Power International sports a Zacks Rank #1 (Strong Buy), both ALLETE and CMS Energy hold a Zacks Rank #2 (Buy).

Read the Full Research Report on CMS
Read the Full Research Report on CIG
Read the Full Research Report on ALE
Read the Full Research Report on HNP

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