2023-11-22 17:28:01 ET
Summary
- Copel's profitability grew strongly in 3Q23, driven by higher tariffs, increased energy sales, and cost savings from the Voluntary Severance Program.
- The company's management is committed to maintaining its current dividend payout ratio of 50%.
- Copel approved a CapEx program of R$2.4 billion for 2024 to support growth initiatives.
- I don't consider Copel a favorable choice for short-term dividend strategies, as it is expected to decrease its dividend yield due to forthcoming concession payments.
The investment thesis for Copel ( ELP ) has been centered around its privatization in 2023, marking its transition from being state-controlled by Paraná in Brazil to becoming a private company.
The privatization initiative coincided with efforts to renew contracts for Copel's primary hydroelectric power plants, which required private ownership to facilitate the process without competitive bidding. Notably, Copel shares experienced a 56% increase in value since March of this year, primarily influenced by the privatization news.
As highlighted in my previous article on Copel, the anticipated benefits of privatization include improved operational efficiency, refined capital structure and projects, resulting in increased profitability, a higher EBITDA margin, more substantial dividends, and enhanced shareholder value.
However, due to its rapid share price appreciation, I maintain a neutral stance on Copel shares. This has led to trading at valuations significantly above its historical average, and the company's dividend payout should stick around 50% for the next couple of years.
Despite notable growth in key indicators, the recent third-quarter results did not bring any significant surprises. Given the unexciting third-quarter performance and Copel's temporary reduction in dividend yield due to concessions, I prefer to stay on the sidelines. I will keep the stock on my watchlist, considering its potential as a good dividend payer in the long term.
Copel’s 3Q23 Earnings Results
Copel's 3Q23 results were generally neutral, with the company exhibiting significant growth in most key metrics.
The reported net revenue was R$4.9 billion, reflecting an annual increase of 8.4%. This growth was primarily driven by a 1% expansion in the billed wire market (7,767 GWh) and tariff increases of 6.3% in Tariffs for the Use of the Distribution (TUSD) and 17.4% in Energy Tariff ((TE)).
Furthermore, the expansion of 5,707 GWh, representing an 11.8% increase in energy sold in generation, was influenced significantly (4.5% in commercial capacity) by the start-up of Jandaíra and the acquisition of Aventura and SRMN. Additionally, the Annual Permitted Revenue ((RAP)) of R$1.6 billion in transmission saw a 12.2% yearly increase, attributed to the commencement of the 2023-2024 cycle in July.
Adjusting the results for non-recurring negative and positive effects, or those without an impact on cash generation, the company reported an adjusted EBITDA of R$1.4 billion, marking a 26.8% year-over-year increase.
The primary adjustment was a non-recurring cost of R$610.1 million for indemnities under the Voluntary Severance Plan (PDV) to be paid in August 2024. This situation is expected to trigger recurring annual savings of R$428 million due to the departure of 1,437 employees (24.6% of the workforce).
In this context, the company posted an adjusted net profit of R$839 million, a year-over-year increase of 108.2%, further impacted by the deduction of amounts in Income Tax and Social Contribution on Net Income (CSLL), coupled with the favorable tax effect of the Interest on Equity (JCPs) totaling R$958 million, contributed to the financial outcome.
Total investments amounted to R$469.3 million, with an estimated R$307.9 million focused on growth (R$285.9 million above depreciation in the distribution base and R$22 million in reinforcements and improvements that could increase the transmission RAP) and R$161.4 million allocated to maintenance.
Considering the net cash generation of R$975.5 million in the period, a free cash flow yield of 3.1% was observed in the past quarter, providing a sense of comfort at the current price level.
Reassuringly, the company maintains control over leverage, standing at 2.3 times adjusted EBITDA (+0.4 p.p. versus 3Q22), supported by recurring cash generation and the funds raised in the privatization offer, around R$2 billion.
Lastly, in the earnings conference call, Copel announced the development of a new remuneration structure with long-term incentives, expected to be approved and presented at the Annual General Meeting in April 2024. The company anticipates 86% of the board of directors' remuneration will come from salaries in 2023. However, the specific indicators pursued are yet unknown. I view the implementation of this plan positively, believing it will provide more incentives for results and foster greater alignment with shareholders.
The Latest Events
Additionally, the company has announced a CapEx guidance for this year, canceling the unit's program in the Brazilian stock exchange Ibovespa and implementing some corporate structure reorganizations.
Copel's board of directors has approved a CapEx program of R$2.4 billion for 2024, with allocations as follows: R$2.1 billion for distribution, R$265 million for generation and transmission, R$17 million for services, R$53 million for other holdings, and R$5 million for holding and marketing. Copel aims to increase CapEx, focusing on one-off modernizations and investments in innovation.
Furthermore, the Board has approved a new organizational structure for Copel's holding company, aligning with best market practices and optimizing the executive team. The Legal and Regulatory Board will merge with the Governance, Risk, and Compliance Board to create the new Legal and Compliance Board, fostering operational synergies and greater agility. Copel will also establish the Deputy Regulation Board to support the CEO, acting as a strategic arm on the regulatory front.
Regarding canceling units, Copel is streamlining its share classes, aiming to migrate to the Novo Mercado (the highest level of governance standards in Ibovespa), expected sometime next year or later.
Copel has been added to the MSCI Brazil index, included in the iShares MSCI Brazil ETF ( EWZ ), with a weight of 0.468% in the November update. This inclusion is expected to enhance the company's visibility and may lead to increased capital inflows from international investors seeking to diversify their portfolios.
Dividends and Valuation
This year, Copel has distributed $0.33 in annual dividends per share, resulting in a dividend yield of 3.5% for the last twelve trailing months. This calculation considers the share price increase from $6 per share in March to $9.40.
During the third quarter earnings call , Copel's management reiterated their commitment to maintaining a 50% payout for 2024. This policy is contingent on the company's leverage (net debt/EBITDA) remaining between 1.5x and 2.5x. The management further emphasized that they consider 2.5x leverage appropriate for the foreseeable future, possibly continuing at the same level into 2024 and perhaps the beginning of 2025.
In essence, it is not anticipated that the company will distribute substantial dividends in the coming years. Based on a single analyst, the consensus estimate for 2025 also suggests a projection of relatively low dividends.
Now, focusing on Copel's dividends, considering the current dividend per share of $0.33, representing 50% of the company's net profit to date, and applying a Return on Investment of 4%, the calculated price limit is $8.25 per share. This value stands approximately 12% above the current market price.
Analyzing Copel's multiples in comparison to other domestic private companies in the generation, transmission, and distribution sectors, such as Eletrobras ( EBR ), Cemig ( CIG ) (currently undergoing privatization), Equatorial Energia ( EQUEY ), Engie do Brasil ( EGIEY ), and CTEEP - Transmissão Paulista ( CTPZY ), Copel trades at a premium in terms of EV/EBITDA compared to all its peers except Eletrobras. It's worth noting that Eletrobras holds the largest generation market share in Brazil.
The Bottom Line
Copel's Q3 results demonstrated significant growth in profitability, marked by robust EBITDA expansion and the successful implementation of its 2023 Voluntary Severance Program (PDV). The PDV, adopted by nearly 25% of the workforce, positions the company to achieve recurring annual savings of almost half a billion BRL, contributing to a solid quarterly net profit.
Maintaining favorable leverage levels amidst growth-oriented investments, Copel is well-positioned to distribute half of its profits in dividends, a trend expected to continue into the following year, in alignment with its recent CapEx guidance.
While the share price has experienced a substantial increase since March, driven by the privatization's impact, investors who entered the market during that period have seen significant gains. However, given the current valuation, I perceive limited potential for an attractive entry point with a narrow margin of safety. Consequently, I maintain my neutral stance on the stock and believe that a fair price for Copel is $8.25 per share.
For further details see:
COPEL Q3 Earnings: Losing Its Dividend Appeal