Equatorial’s first step in the sanitation sector is positive, but analysts warn of the “very high” price per concession

(Danilo Alvesd/Unsplash)

SAO PAULO – On Thursday (2), Equatorial Energia (EQTL3) won the auction of sanitation services in Amapá, taking its first step towards operating in the segment.

The company formed a consortium with SAM Ambiental and made a proposal considered aggressive by financial market analysts, of R$ 930.8 million, much higher than the proposals of other competitors and the minimum grant value defined in the notice, of R$ 50 million .

For comparison purposes, the second-place bid was R$ 426.5 million, less than half of the electricity company’s bid.

This Friday (3), EQTL3 shares operated at a drop of 3.8% on the Brazilian stock exchange, around 1 pm, traded at R$ 25.04.

In the evaluation of the Levante analysis house, entry into the sanitation sector is positive for the company, which had already been showing strong interest in the sector. This is because the company participated in the latest auctions carried out by the National Bank for Economic and Social Development (BNDES), such as those in Alagoas, Cariacica and Rio de Janeiro, which until then were unsuccessful, as it was unable to surpass the proposals of more traditional competitors in the sector – that had a timid presence at yesterday’s auction, analysts write.

For Credit Suisse, Equatorial was aggressive in its first investment in the segment, in a state where the company will already have to make large investments in the energy sector. To calculate the potential of valuation correctly, however, analysts say they prefer to wait for more details, as well as the company’s projections for this asset.

According to the bank, the company’s leverage is at a comfortable level and, therefore, analysts argue that raising funds to invest in this new asset will not be a problem.

“Infrastructure sectors have faced great competition (assets still with attractive returns and good financing conditions) and, consequently, new ventures have been acquired with lower internal rates of return (IRRs) compared to previous operations”, write the analysts .

Credit Suisse has a recommendation performer (above the market average) for Equatorial shares and target price of R$25.20.

High price for the concession

Itaú BBA, on the other hand, initially has a negative view of the announcement, given that, according to bank analysts, Equatorial paid a “very high” price to enter the sanitation segment.

“Our model assumes that additional investments destroy value since we don’t change our revenue assumptions because of them. We need to understand whether these additional investments will represent extra revenue for the company”, writes the analysis team.

Analysts estimate a negative net present value (NPV) in the winning bid, after an analysis to estimate IRR and NPV, varying the capex discount (expenses on capital goods) for the BNDES estimate, profit margin before interest, taxes , long-term depreciation and amortization (Ebitda), as well as leverage and cost of equity.

“We estimate a negative NPV even in an Ebitda margin scenario [Ebitda/receita líquida] above 70% and a Capex discount of over 20%”, writes Itaú.

Despite the negative assessment of the operation, Itaú BBA maintained the recommendation performer (above the market average) for Equatorial shares and target price of R$26.

Finally, Bank of America writes in a report that while preliminary estimates indicate tight returns, it is “too early to raise concerns.”

“First of all, we think that EQTL’s capital allocation history is indisputable. Secondly – ​​and more importantly – many of the company’s previous operations seemed unattractive at first sight, but ended up proving to overcome even previously optimistic assumptions (the case of CEEE and Cepisa, for example)”, argues the team.

In the case of sanitation in Amapá, a significant space for efficiency gains, according to analysts, may lie in the fact that Equatorial has recently acquired the energy distributor in the state.

The bank maintained its purchase recommendation for EQTL3 papers, given the valuation attractive, with an estimated target price of R$28.

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