Companhia Paranaense de Energia :ELP-US: Earnings Analysis: Q4, 2015 By the Numbers

Companhia Paranaense de Energia reports financial results for the quarter ended December 31, 2015.

We analyze the earnings along side the following peers of Companhia Paranaense de Energia – AES Corporation, Edenor SA Sponsored ADR Class B, Enersis Americas S.A. Sponsored ADR, Korea Electric Power Corporation Sponsored ADR, Pampa Energia SA Sponsored ADR and Petroleo Brasileiro SA Sponsored ADR (AES-US, EDN-US, ENI-US, KEP-US, PAM-US and PBR-US) that have also reported for this period.

Highlights

  • Gross margins widened from 14.67% to 19.86% compared to the same period last year, operating (EBITDA) margins now 30.46% from 14.47%.
  • Year-on-year change in operating cash flow of 321.86% 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:

2014-12-31 2015-03-31 2015-06-30 2015-09-30 2015-12-31
Relevant Numbers (Quarterly)
Revenues (mil) 1743.28 1462.01 1262.01 885.77 854.41
Revenue Growth (%YOY) 64.32 11.94 -9.86 -37.64 -50.99
Earnings (mil) 92.69 149.74 88.9 23.91 101.35
Earnings Growth (%YOY) 22.68 -34.8 -6.82 -74.81 9.34
Net Margin (%) 5.32 10.24 7.04 2.7 11.86
EPS 0.34 0.56 0.33 0.09 N/A
Return on Equity (%) 6.89 12.52 7.92 2.35 11.16
Return on Assets (%) 3.7 6.58 4.05 1.19 5.61

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Earnings Growth Analysis

The company’s earnings growth was influenced by year-on-year improvement in gross margins from 14.67% to 19.86% as well as better cost controls. As a result, operating margins (EBITDA margins) rose from 14.47% to 30.46% compared to the same period last year. For comparison, gross margins were 12.06% and EBITDA margins were 11.67% in the last reporting period.

Gross Margin Versus EBITDA Margin

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 gross margin improvement has not produced any big difference in its working capital. Working capital days are currently 64.62, compared to last year’s level of 28.17 days. This leads Capital Cube to conclude that the improvements in gross margins are likely from operating decisions and not trade-offs with the balance sheet.

Gross Margin Versus Working Capital Days

Cash Versus Earnings – Sustainable Performance?

ELP-US‘s change in operating cash flow of 321.86% 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

Margins

The company’s earnings growth has also been influenced by the following factors: (1) Improvements in operating (EBIT) margins from 10.72% to 25.27% and (2) one-time items. The company’s pretax margins are now 17.32% compared to 7.22% for the same period last year.

EBIT Margin Versus PreTax Margin
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. The company also provides telecommunications and other services. It operates its business through the following segments: Power Generation and Transmission, Power distribution and Sales, Telecommunications, Gas and Holding Company. The Power Generation and Transmission segment comprises the generation of electric energy from hydraulic, wind, and thermal projects, the transport and transformation of the power generated by the company, and the construction, operation, and maintenance of all power transmission substations and lines. The Power Distribution and Sales segment comprises the distribution and sale of electric energy, the operation and maintenance of the distribution infrastructure, and related services. The Telecommunications segment comprises telecommunications and general communications services. The Gas segment comprises the public service of piped natural gas distribution. The Holding Company segment comprises participation in other companies. Companhia Paranaense de Energia was founded on October 26, 1954 and is headquartered in Curitiba, Brazil.

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