Goldman Sachs Recommends Buying Top Brazilian Utilities

Goldman Sachs recommends buying Brazil’s Equatorial, Copel, Eletrobras, and Energisa, while selling Cemig shares.

The bank has set price targets of:

• R$54 for ELET3 and R$60 for ELET6 (representing a 39% upside from the previous closing), R$13.70 for CPLE6 (35% upside),
• R$65 for ENGI11 (36% upside),
• R$42.10 for EQTL3 (25% upside), and
• R$11.20 for CMIG4 (only 4% upside).

Key Recommendations:

• Eletrobras (ELET3; ELET6): Price targets R$54 and R$60 respectively, with 39% upside.
• Copel (CPLE6): Price target R$13.70, with 35% upside.
• Equatorial (EQTL3): Price target R$42.10, with 25% upside.
• Energisa (ENGI11): Price target R$65, with 36% upside.
• Cemig (CMIG4): Price target R$11.20, with only 4% upside.

Goldman Sachs sees attractive value (11.3% IRR) and strong investment opportunities, especially in energy distribution.

Recently privatized companies like Eletrobras and Copel are expected to cut costs and optimize portfolios, leading to higher dividends.

Specific Insights:

• Cemig: Despite recent efficiency gains, Cemig, still a state-owned company, is unlikely to significantly exceed regulatory EBITDA in energy distribution, limiting value creation.
• Copel and Equatorial: Copel is highlighted for its growing dividends supported by strong free cash flow prospects and cheap valuation (12.5% real internal rate of return). Equatorial is praised for capital allocation and reasonable valuation (9.7% real internal rate of return).
• Regulatory Environment: Goldman Sachs expects a healthy regulatory environment due to the 2016 State-Owned Companies Law, recent privatizations, a solid track record of Aneel, and the government’s need to promote private investment in the sector.

Investment Opportunities:

• Energy Distribution: A rising demand for quality energy distribution services represents an R$85 billion investment opportunity over the next five years, particularly benefiting Equatorial and Energisa.
• Transmission Lines: The need for new and improved transmission lines due to the development of distant solar and wind farms, with an estimated R$185 billion required over the next decade. Eletrobras stands to benefit significantly.
• Privatized Companies: Recently privatized companies like Copel and Eletrobras will reduce costs, optimize investments, and sell non-essential assets, boosting free cash flow and dividend potential.

Company-Specific Developments

• Equatorial: Successful in acquiring and rehabilitating energy distribution concessions, recently expanded into sanitation, requiring significant future investments.
• Energisa: Acquired several energy distribution concessions and entered the gas distribution market with the acquisition of ES Gás in 2023.
• Eletrobras: Positioned for significant capital allocation in transmission, with R$126 billion in gross assets and attractive returns due to regulatory frameworks.

Cash Flow and Dividends

• Energisa and Equatorial: Heavy investment in distribution limits short-term free cash flow, resulting in low single-digit dividend yields.
• Cemig: Not expected to generate positive free cash flow in the coming years but offers stable dividends around 7-8%, potentially increasing with recent asset sales.
• Copel: Cost-cutting initiatives and asset sales will boost dividends from 5% in 2024 to 9-13% in 2025-2026.
• Eletrobras: Significant free cash flow generation expected, leading to potential dividend increases, contingent on government agreements regarding CDE payments.

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