Thursday, April 14, 2016

Seeking Alpha: CEMIG Still Under Substantial Pressure

Readers didn't agree with me, but my cautious outlook on CEMIG (NYSE:CIG) back in May of 2015 was warranted, as the ADRs are down more than 50% from that point and that's after a 100% move from the January lows. This isn't just a Brazil problem, either, as COPEL (NYSE:ELP) has declined about 25% while CPFL Energia (NYSE:CPL) and Eletrobras (NYSE:EBR) are down around 10% to 15% over the same period.

Unfortunately, I don't see things getting substantially easier for CEMIG anytime soon. There is still the possibility of the company winning a favorable outcome on its concession dispute with the government over three hydro plants, but that doesn't change management's long track record of poor investment decisions or the company's high debt load. Add in ongoing service quality issues and weak demand for power, and it's not a pretty set-up.

I think today's price already factors in CEMIG keeping the disputed plants, albeit on terms that will require compensation back to the government. I do believe that the company can grow from here, but I'm concerned that the balance sheet will keep the company on the sidelines of consolidation (or involve them as net sellers) and I worry about the near-term liquidity crunch. If CEMIG can get its house in order, though, the upside would be large and few companies in Brazil's energy space would have more to gain if Brazil's credit market improves and interest rates ease up from recent levels in the mid-teens.

Read more here:
CEMIG Still Under Substantial Pressure

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