February 1, 2023

AURE3: The deal (finally) agreed with the union is positive and boosts expectations of huge earnings

Oren (AURE3Announced the day before the judicial ratification of the agreement signed with the Federation, Cesp and the Federal Government for the repayment of non-expendable assets related to the Três Irmãos Hydroelectric Power Station.

This is the final stage of a long negotiation Significant breakthrough on December 7thwhen Oren signed an agreement with the federal government to pay the company a historic amount of R$ 1.7 billion (principal amount as of June 2012), re-determined at the Selic rate, which will be paid in 84 installments from October 2023.

Auren will receive compensation because the company was the result of the merger of Cesp, which was controlled by the Votorantim Group, with another company owned by the controller, Votorantim Energia.

AURE3 shares are up 2.54%, at R$14.55, at 10:50 am (Brasilia time) this Wednesday (11).

According to an analysis by Bradesco BBI, the news is positive and puts an end to doubts about the agreement – signed in December, before the change of government – being fully finalised.

For the bank’s analysts, although the repayment of the historical value of R$1.7 billion is already in the bottom line for analysts and market managers, the topic leads to two arguments that could unlock the value of the company: (1) the potential repayment of a large dividend prior to potential changes in policies dividend taxes; and (ii) assuming Auren becomes more of a dividend player, one issue could be compression of the internal rate of return (IRR), which currently trades at around 11% (real) versus 9% in the case of Engie Generator (EGIE3), under special control.

As for the dividend, expected changes in taxes in Brazil may prompt companies in general to accelerate the dividend payout, and we don’t think Oren will be an exception. The company will be compensated in 84 installments, but will likely underwrite receivables, amounting to about R$3.0 billion in additional cash/liquidity on the balance sheet,” he notes.

In case rising (estimated by BBI), Auren could pay up to R$4.0 billion in dividends for 2023 (about a 28% yield), and the net debt/Ebitda ratio is still around 2.5 times. It is not clear whether Auren will pay these dividends, but there is a possibility that, regardless, a large dividend should be paid in the next few years, as follows: (1) the net debt/Ebitda ratio is low; and (2) Auren will continue to Being selective about mergers and acquisitions/green field moves (new projects),” the analysts highlighted.

This is because throughout 2023, Auren could have accumulated accounting profits to pay up to R$4.2 billion in dividends (including the R$1.4 billion represented in net agreement profit in Q4 22 + R$1.7 billion in current dividend reserves ), while its total cash balance (before dividend) for 2023 (own cash flow generation + receivables securitization) will be approximately R$ 4.9 billion.

BBI analysts have an Outperformance (Overperforming Market Average, Equivalent to Buy) recommendation with a target of R$18.00 (Up28%) and with profit return 15% is expected, but with upside risks, as the model does not yet include a potential repayment securitization, which could result in a huge amount of money being paid out, driving up profits.

This news is also positive for Credit Suisse, as it reduces the risk of discrepancy in receivables and cash rewriting terms. Auren is the originator of Low Leverage and this transaction can help preserve your leverage profit return Higher from now on,” he points out.

It should be noted that the day before, Itaú BBA had reviewed the energy sector and, among the changes, downgraded the recommendation for Auren stock from equivalent Buy to Neutral, with a price target of R$15.70 (up 11% in relation to the eve’s close).

Continue after the announcement

The bank notes that Auren trades at an implied IRR of 9%, versus 6.3% for Brazilian Treasuries, which is fine, but not very attractive when compared to many of the institution’s electricity-covering names. The company is mostly contracted for 2023-25, but after that period it should find itself more exposed to a lower energy price environment.

Moreover, we do not see any short-term catalysts for this action, since the main catalyst has already been announced – the Tres Irmaus deal. However, we believe that investors may turn out to be more positive if the company reports a strong dividend, as the growth prospects look uninspiring.”