Marcelo Sá (Head of LatAm Utilities at UBS) has released a report rethinking Light´s investment case after 4Q17 results. Below we present his analyses and thoughts related to this topic, as well as his considerations about how this is likely to impact companies´ valuation and, consequently, be perceived by investors.
Questions about potential capitalization were answered vaguely
Light stated the main reason it is asking for shareholder authorization to increase the number of shares to 300m from 200m is to modernize the company’s bylaws and add flexibility for a potential sale. We asked the company about whether a potential followon equity offering would be a plan B if the sale of Cemig’s stake to a strategic buyerfails.
CEO Luís Fernando Paroli stated he believes Cemig’s focus remains on selling its stake in Light to a strategic buyer. Moreover, he said if Light decides to do a follow-on equity offering, the market would be informed. In our view, the company failed to explain the real reason behind the change in its bylaws and whether a follow-on equity offering would happen in the near term. Light’s share price fell 12.4% Wednesday on investor concerns regarding the potential offering.
4Q17 REN seems too high, considering the energy volume recovered
The company reported R$319m REN (revenue booked from “fraudulent customers”, those previously stealing the energy) in 4Q17 from recovering 329 GWh of energy in the quarter. If we divide the revenue by the volume, the implied average tariff reported would be R$968/MWh. If we do the same calculation for the last three quarters, the implied tariff would be much lower, ranging from R$736/MWh to R$795/MWh.
The company stated this difference can be explained by the change in the tariff mix and PIS/COFINS tax effects. However, if we do the same calculation with the net tariff, the conclusion is the same. Therefore, we were not fully convinced by the company’s explanation, as we think there may be other effects that justified the higher implied tariff.
Light is confident that REN will translate into cash in upcoming years
Light has R$1.4bn of debt in installments and cR$700m of provisions for delinquency related to these receivables. The company is confident that its level of provisions is adequate and the receivables will translate into cash in upcoming years.
Valuation: DCF/SOTP-based PT of R$27; Buy rating
Our fair value implies an EV/RAB multiple of 0.95x, while the company is trading at 0.67x RAB. Although a discount to RAB is justified, given Light’s below-regulatory EBITDA, we believe the current implied discount is exaggerated.
See Report provided by UBS: