Thursday, June 17, 2010

New position in Brazil: Copel

I have been searching for attractive investment opportunities in the utility sector besides Fortum Corporation (Helsinki: FUM1V) and now I have found a good one: “Companhia Paranaense de Energia” or “COPEL” (NYSE: ELP).

Copel is a Brasilian company and that’s a big plus to start with. Long term, I believe that BRIC countries are better places to put your money than the so called developed countries. One word: Growth!

The company was founded 1954 and is now the largest company in the state of Parana. It serves some 2,8 million homes, 67 plants and 300 commercial establishments and has staff of 8440 employees. Copel produces about 7% of the total electricity consumed in Brazil.

I am a big fan of electric power companies that generate majority of their power in either nuclear- or hydroelectric plants (i.e. no direct CO2 emissions). Copel is basically pure hydro play as out of its fully owned 18 plants 17 are hydroelectric plants. Hydroelectric plants have total of 4530 MW of installed capacity. The only fully owned thermoelectric plant has installed capacity of 20 MW. Via partnerships the company also has 220 MW of hydro, 388 MW of thermal and 2,5 MW of wind power.

Most of the contracted energy seems to go to regulated market until 2012 after which the free market portion will grow from the current low figure of 11%. To me this kind of information translates to higher average sales price for electricity and there seems to be definitely a big upside for profits in near future.

In addition, Copel has close to 2000km of high-voltage transmission lines and 180.000 km of distribution lines. It also operates optical transmission network for telecom/data reaching 217 cities and totalling 9580 km worth of optical cables.

The state of Parana owns 31,08% of the company, BNDESPAR (BNDES being Brazilian Development Bank so this looks like some sort of government entity) owns 23,95%. 44,09% of the stocks are free float. The stock capital is divided to common stock and two different preferred stock. Only 13,5% of common stock is free float while 78,5% of preferred stock is free float.

When buying the company from NYSE, you basically get preferred B stock. The dividend policy seems to favour preferred A, but on the other hand preferred B stock gets more dividend than common stock. For year 2009, the dividend was R$ 1,63 per class A, R$ 0,96 for class B and R$ 0,87 per common stock. With current real/USD exchange rate and ELP quote, 2009 dividend yield is around 2,8% for preferred B stock.

Some statistics (source:
  • P/E 7,7
  • P/B 1,2
  • ROA 9,8%
  • ROE 16,1%
  • ROI 11,8%
  • Gross margin 58,3%
  • Profit margin 21,8%
Debt/Shareholders’ equity ratio is 0,24. Out of all debt, most is denominated in local currency.

I hope they keep up the good work as I now own a little piece of the company!

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