Summary
- EBR is the largest utility company, both in Brazil and in Latin America, and one of the biggest clean energy utilities in the world – owing to its widespread use of hydroelectric facilities to generate energy (). It generates about 40% and transmits about 70% of Brazil’s electricity.
- In this post we provide a simulation-based (sim-based) valuation () of EBR.
- If we use 1% as our estimate of earnings growth for the next 5 years, which is the expected growth rate for the Brazilian economy, our sim-based analysis results suggest the following fair values – stock price: $8.02, and price-to-earnings ratio: 7.54. At the time of this writing, EBR trades at $7.11, so it appears to be undervalued, with a potential upside of 12.80%.
- If we use 10% as our estimate of earnings growth for the next 5 years, which seems more reasonable given a likely increase in electricity demand and the possible sale of carbon credits, then a new sim-based analysis suggests the following fair values – stock price: $12.67, and price-to-earnings ratio: 11.92. With these numbers, the potential upside moves up to 78.20%.
Centrais Elétricas Brasileiras S.A. - Eletrobrás (EBR)
EBR is the largest utility company in Brazil and in Latin America, and one of the biggest clean energy utilities in the world – owing to its widespread use of hydroelectric facilities to generate energy (). It generates about 40% and transmits about 70% of Brazil’s electricity.
The Brazilian federal government owns a bit more than 50 percent of the company. The company is expected to be privatized soon. Nevertheless, some of its assets should remain under government control even after privatization – e.g., the binational Itaipu hydroelectric power plant.
Estimating a fair value for the stock
In this post we provide a simulation-based (sim-based) valuation () of EBR.
At the time of this writing the company had a profit margin of 27.08% and a price-to-earnings ratio of 6.69. The expected growth in earnings for the next 5 years is not clear; but recent trends in electric vehicle adoption projections suggest solid potential. We will assume an earnings growth rate of 1%, which is the expected growth rate for the Brazilian economy, to be the sim-based earnings growth rate for the next 5 years.
The table below summarize our sim-based results.
Since our sim-based analysis uses a S&P 500 return as a basis, our results summarized on the table above suggest the following fair values – stock price: $8.02, and price-to-earnings ratio: 7.54. At the time of this writing, EBR trades at $7.11, so it appears to be undervalued, with a potential upside of 12.80%.
Final thoughts
Our 1% growth projection is arguably very conservative, given the prospect of higher productivity from privatization, higher demand for electricity motivated by the growth in electric vehicle adoption, and the possibility of additional income via carbon credits.
It should be noted that hydroelectric generation is considered to be “green”, but the construction of hydroelectric plants usually has a devastating albeit localized environmental impact. Given this, income via carbon credits is very likely, because of the opposition to the building of new hydroelectric plants by the same groups who consider the ones already built to be green sources of energy.
If we use 10% as our estimate of earning growth, then a new sim-based analysis suggests the following fair values – stock price: $12.67, and price-to-earnings ratio: 11.92. With these numbers, the potential upside moves up to 78.20%. Overall, EBR seems like an asymmetric investment option at the moment, with limited downside and significant upside.
Disclosure
The author owns EBR shares at the time of this writing.
