Older investors can likely remember a time when those who wanted to
invest in emerging markets had few choices outside of telecom, bank, and
utility companies. Nowadays there is a much larger menu of choices and
sectors like utilities have had to do deal with the same sort of
regulatory and growth issues that affect their developed market peers.
In the case of CEMIG (or "Cemig") (CIG),
Brazil's second-largest utility has the advantage of a sizable
distribution and transmission business to offset risks in the generation
business, but the company is looking at the loss of sizable generating
concessions and a much more aggressive regulatory environment. It also
does not help matters that Brazil's electricity sector appears to be
moving toward oversupply and that management is willing to allocate
capital to projects with IRRs only basically in line with the company's
cost of capital.
That said, the market's valuation of Cemig
already reflects a lot of these challenges. Moreover, even if the future
isn't likely to be as profitable as the past, this is a company with a
good history of free cash flow generation and returns on capital
relative to its sector. Management seems committed to paying a healthy
dividend and these shares don't look very expensive today.
Read more here:
CEMIG Walking A Fine Line In A Challenging Market
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