Companhia Paranaense de Energia :ELP-US: Earnings Analysis: Q3, 2017 By the Numbers : December 5, 2017

Companhia Paranaense de Energia reports financial results for the quarter ended September 30, 2017.

We analyze the earnings along side the following peers of Companhia Paranaense de Energia – Centrais Eletricas Brasileiras S.A. – Eletrobras Sponsored ADR Pfd Class B, CPFL Energia S.A. Sponsored ADR, Companhia Energetica de Minas Gerais SA Sponsored ADR Pfd, AES Corporation, Enel Americas S.A. Sponsored ADR, EDP-Energias de Portugal SA Sponsored ADR, Edenor SA Sponsored ADR Class B, Korea Electric Power Corporation Sponsored ADR, Gerdau S.A. Sponsored ADR Pfd and Petroleo Brasileiro SA Sponsored ADR (EBR.B-US, CPL-US, CIG-US, AES-US, ENIA-US, EDPFY-US, EDN-US, KEP-US, GGB-US and PBR-US) that have also reported for this period.

Highlights

  • Summary numbers: Revenues of USD 1,158.65 million, Net Earnings of USD 121.89 million.
  • Gross margins widened from 16.92% to 21.66% compared to the same period last year, operating (EBITDA) margins now 19.86% from 15.34%.
  • Year-on-year change in operating cash flow of -38.25% is about the same as the change in earnings, likely no significant movement in accruals or reserves.
  • Earnings growth from operating margin improvements as well as one-time items.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2017-09-30 2017-06-30 2017-03-31 2016-12-31 2016-09-30
Relevant Numbers (Quarterly)
Revenues (mil) 1158.65 976.09 1048.81 1049.32 897.74
Revenue Growth (%YOY) 29.06 -9.89 30.86 22.81 1.35
Earnings (mil) 121.89 43.08 130.53 -24.71 -26.9
Earnings Growth (%YOY) 553.1 -85.2 274.97 -124.39 -212.5
Net Margin (%) 10.52 4.41 12.45 -2.36 -3
EPS 0.45 0.16 0.48 -0.09 -0.1
Return on Equity (%) 2.52 0.9 2.73 -0.52 -0.55
Return on Assets (%) 4.8 1.77 5.46 -1.06 -1.15

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Market Share Versus Profits

Revenues History
Earnings History

ELP-US’s change in revenue this period compared to the same period last year of 29.06% is almost the same as its change in earnings, and is about average among the announced results thus far in its peer group, suggesting that ELP-US is holding onto its market share. Also, for comparison purposes, revenues changed by 18.70% and earnings by 182.96% compared to the immediate last period.

Revenues Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Leader, Earnings Focus, Laggard, Revenues Focus

Earnings Growth Analysis

The company’s earnings growth was influenced by year-on-year improvement in gross margins from 16.92% to 21.66% as well as better cost controls. As a result, operating margins (EBITDA margins) rose from 15.34% to 19.86% compared to the same period last year. For comparison, gross margins were 22.47% and EBITDA margins were 23.40% in the last reporting period.

Gross Margin Versus EBITDA Margin

Quadrant label definitions. Hover to know more

Differentiated; Low Cost, Commodity; Low Cost, Commodity; High Cost, Differentiated; High Cost

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

ELP-US’s improvement in gross margin has been accompanied by an improvement in its balance sheet as well. This suggests that gross margin improvements are likely from operating decisions and not accounting gimmicks. Its working capital days are now -33.10 days compared to 4.79 days for the same period last year.

Gross Margin Versus Working Capital Days

Quadrant label definitions. Hover to know more

Customer Financed, Cash Starved, Supplier Financed, Cash Rich

Cash Versus Earnings – Sustainable Performance?

It is important to examine a company�s cash versus earnings numbers to gauge whether its performance is sustainable.

ELP-US’s change in operating cash flow of -38.25% compared to the same period last year is about the same as its change in earnings this period. Additionally, this change in operating cash flow is about average among its peer group. This suggests that the company did not use accruals or reserves to manage earnings this period, and that, all else being equal, the earnings number is sustainable.

Operating Cash Flow Growth Versus Earnings Growth

Quadrant label definitions. Hover to know more

Cash Flow based Earnings, Likely Non-cash Earnings, Low Cash Flow Base, Likely Undeclared Earnings

Margins

The company’s earnings growth has also been influenced by the following factors: (1) Improvements in operating (EBIT) margins from 9.17% to 14.86% and (2) one-time items. The company’s pretax margins are now 9.35% compared to -1.15% for the same period last year.

EBIT Margin Versus PreTax Margin

Quadrant label definitions. Hover to know more

Operation driven Earnings, One-time Favorables, Low Earnings Base, One-time Unfavorables
EBIT Margin History
PreTax Margin History

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Company Profile

Companhia Paranaense de Energia engages in the generation, transmission, distribution and sale of electricity. It operates through the following segments: Power Generation and Transmission, Power Distribution and Sales, Telecommunications, Gas, and Holding Company. The Power Generation and Transmission segment involves in the generation of electric energy from hydraulic, wind, and thermal projects, the transport and transformation of the power. The Power Distribution and Sales segment offers distribution and sale of electric energy; the operation and maintenance of the distribution infrastructure. The Telecommunications segment includes telecommunications and general communications services. The Gas segment comprises the public service of piped natural gas distribution. The Holding Company segment includes participation in other companies. The company was founded on October 26, 1954 and is headquartered in Curitiba, Brazil.

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