We are keeping our Buy recommendation on CEMIG S.A. (CIG). The company posted positive results for the third quarter of 2008, and the short-to-medium term outlook still remains promising as demand for electricity in Brazil keeps growing.
At current levels, CEMIG's ADRs are trading at 6.2x our 2008 earnings estimates, well below the industry average. We believe that Brazil's country risk, regulatory uncertainties that are normal in Brazil and the productivity rule that reduces electric tariffs over the time and the current global credit crunch are the reasons for this large discount. Also, the company is a state-owned electric utility, a fact that raises some important concerns.
However, the short-term outlook remains positive, mainly after the expected positive tariff correction in 2009. Moreover, the stock's dividend yield is attractive. We used earnings multiple of around 9x our 2008 EPS, closer to the company's historical standards and to the S&P average, to arrive at the target price of US$23.50.
Read the full analyst report on CIG
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