Cemig experiences rally with record high on the stock exchange.

Last Friday (8), Itaú BBA decided to raise its recommendation for Cemig (CMIG4The recommendation shifted from underperform to market perform, while the target price for the shares jumped from R$8,00 to R$10,00 by the end of the year, representing an upside potential of almost 30%. The question is: why did the recommendation come only now, after the shares have risen 56,8% on the stock exchange since the intraday low (at R$5,22) set on June 15th?

The justification from the bank's analysis team, headed by Pedro Manfredini, is that only now has the vision for the company's divestment program become clear. Until then, analysts were skeptical about whether the company would be able to implement it. Today, Cemig's shares – driven by this euphoria – jumped 8,22% on the Stock Exchange, reaching R$ 8,43 at 14:22 PM (Brasilia time).

Considering the closing low recorded this year (at R$ 4,07), the company's shares have accumulated a 107% increase in value so far - a surge that has taken the electric utility's shares to their highest level on the Bovespa stock exchange since August 2015. 

R$ 4,1 billion from asset sales
Driven by the possibility of selling the "non-core" assets of Santo Antônio, Telco, Gasmig, and the preferred shares of Taesa, analysts believe the company could raise up to R$ 4,1 billion with its divestment program, bringing its high leverage – measured by its consolidated net debt/EBITDA (including pension fund liabilities) – to 1,6 times by 2018, compared to 3,6 times in 2015. If nothing is done, the estimate is that the company will end 2018 with a leverage of 3 times. The optimistic scenario, according to analysts, opens up even if the company manages to sell the assets at a 20% discount to their fair value, which would bring the power company's leverage to 1,8 times. 

They emphasize, however, that although they see a clearer path for Cemig's deleveraging over the next few years, the main risk remains any delay in the process. "If the company's efforts fall short of expectations, regaining shareholder confidence will be a very difficult task," they stress. According to them, the best alternative would be to maintain the divestment process at full speed and pay the minimum permitted dividend of 50%, in accordance with the company's bylaws. 

For them, the main catalysts for the action will be an efficient cost reduction process, improved business results, and a favorable Supreme Court decision on Cemig's right to continue operating the three large hydroelectric plants: São Simão, Jaguara, and Miranda – although they believe such a decision is unlikely.

According to them, the decision to raise the recommendation now stems from this perception of a lower risk profile for the company. "While the upward revision of our target price was driven by a 190 basis point reduction in the company's cost of equity, we are less skeptical about the company's deleveraging capabilities in the medium term. We believe that the company's management could now use a more favorable window of opportunity to sell some of its non-core assets, even at a discount to fair book value," they commented.

Scenarios for Cemig's divestment program: