(Updated at 4:11 pm to include comments from the interim CEO).
When investor Ronaldo Cezar Coelho built a 20% stake in Light, triggering a restructuring that attracted names like Beto Sicupira and a management team with experience in complex turnarounds, the market bought the thesis with some enthusiasm. Almost two years later, little went as imagined and JP Morgan analysts already think that the company could become a target for acquisitions.
Raimundo Nonato, the famous executive who made history by restructuring some of the most troubled electric energy concessions, resigned yesterday as CEO of Light. Nonato’s departure takes place a few months after Firmino Sampaio Neto leaves the post of chairman.
The company said that Nonato resigned for personal reasons – which raised a buzz in the market about a possible move to Eletrobras, which is composing a new team – and that Neto, who remained as a director, wanted to slow down in retirement. Wilson Poit, who was a member of the board, had previously assumed the position of chairman and will now be interim CEO.
Nonato’s departure had bad repercussions. At 10:23 am, Light’s shares were down nearly 12%. One of the main managers to bet on restructuring, Atmos had already thrown in the towel last year, eliminating Light’s position.
“It’s never a good sign when the chairman and CEO leave,” said one equity manager, who invests in energy but is out of Light. Seen as savior of the homeland — at the height of the euphoria, some managers even shared WhatsApp stickers with Nonato in place of Christ the Redeemer and, on his arrival, the action shot up 11% —, the duo Nonato and Neto came from Equatorial Energia with the promise to change the course of Light’s history.
In March 2020, the rate of cats (non-technical losses) was at 50.25%, well above the regulatory threshold of 36%. At the beginning of this year, it stood at 54.07% (the current regulatory level is also higher, at 40.9%).
In a note sent to Pipeline, Light’s interim CEO stated that the company is on the right path to reduce losses. “Light’s action plan, which includes fighting losses and improving revenue, was approved by the board. The pillars of this plan have already been solidified in the management of Nonato de Castro and by the board, who remains in the company. The recent results of the company show that we are on the right path, facing the unique challenges of our concession area”, said Poit.
Poit highlighted data that indicate an improvement in Light’s operational data, such as a 1.2 percentage point increase in revenue and the fourth consecutive quarter of reduction in total electricity losses. The indicator of total losses in 12 months ended March at 26.59%, a drop of 90 GWh. The company also highlighted that it invested R$ 450 million between 2020 and 2021 to reduce losses.
The change of command also comes at a particularly negative time for Light. On Tuesday, a billionaire impact law was enacted by President Jair Bolsonaro. In practice, electricity concessionaires will have to return PIS/Cofins credits to the final consumer. The bill for the carioca energy concessionaire is substantial: R$ 1.6 billion net, calculate JP Morgan analysts. The market value of Light today is R$ 2.55 billion, to give you an idea of the size of the imbroglio.
At Light, tax decision can weigh on the balance sheet — Photo: Disclosure
The analysts’ reading is that Light will try as much as possible to postpone the impact of the return of PIS/Cofins credits, judicializing the case until a decision is made by the STF. Other distributors, such as Cemig and Copel, also appropriated tax credits that the legislation has now defined as inappropriate — the companies’ understanding was that double charge credits with more than 10 years could be used.
In the accounts of analysts Fernando Abdalla, Henrique Peretti and Victor Burke, the new law may represent a downside of R$ 4.2 for Light shares, a relevant drop. Yesterday, the stock closed at R$6.85, showing a significant deterioration. Year-to-date, Light’s market value dropped 40%. At the height of the euphoria with the arrival of Nonato and Neto, the paper even traded above R$20.
The situation could further worsen Light’s capital structure. In the balance of the first quarter, the company reported a leverage (net debt/Ebitda) of 3.44 times, already around the 3.5 times that trigger the early maturity clause of some debts. In March, Light’s net debt totaled R$8.1 billion, with R$3.3 billion in cash.
Returning tax credits is yet another problem for a company struggling to restructure and now facing a more complicated economic environment, with the cost of debt rising. “We view the potential tax credit decline as negative news that adds to the frustrated turnaround, high leverage and slow post-covid recovery,” said JP Morgan analysts.
For a manager who follows the paper, the macro scenario greatly hindered Light’s plans. “The macro spoke louder, with a very complicated interest rate scenario for the company. In addition, a commercial turnaround done right would take a few years”, said this manager.
Other investors and analysts argue that the market was too confident in the new management’s ability to reduce cats (the “non-technical losses). “The company started a restructuring plan in 2019 focused on reducing energy losses, but this is not just a specific problem for the company, but a structural issue for the city of Rio de Janeiro”, argue Giuliano Ajeje and Guilherme Reifl, analysts at UBS.
Light is valued at R$ 2.5 billion on the stock exchange. Among the main shareholders is the Samambaia fund — a vehicle owned by Ronaldo Cezar Coelho that holds 20% of the company. Santander PB (10.1%) Blackrock (6.6%) and Verde (5.01%) are also major shareholders.