Grid Modernization Will Fail As Customer Migration Will Choke Demand

Key Takeaways

• Expansion into smart infrastructure and renewables is expected to drive future margin growth, earnings diversification, and financial stability.
  
• Rising distributed generation and customer migration may dampen grid demand, threatening long-term revenue growth and earnings potential.
  
• Major investments in grid modernization, renewables, and efficiency are increasing operational strength, earnings resilience, and long-term stability while supporting regulatory alignment and dividend security.

Catalysts

Through its subsidiaries, engages in the generation, transmission, distribution, and sale of energy in Brazil.

• Investor optimism may be driven by expectations that Cemig's large-scale investment program in grid expansion, modernization, and automation-intended to address urban/industrial energy demand in Minas Gerais-will significantly accelerate revenue growth and enhance long-term earnings power.
  
• Anticipated capacity and efficiency gains linked to the rollout of digitalization, smart meters, and advanced network infrastructure are expected to support operating margin expansion and cost reductions over time, boosting EBITDA and net margins.
  
• The company's strategic push into renewables (e.g., new photovoltaic plants with significant CO2 reduction potential and long concession terms) is expected to further diversify earnings and position Cemig to benefit from future regulatory incentives and potential access to lower-cost financing, positively impacting long-term net income.
  
• Management's success securing multi-year concession extensions via recent auctions is likely being viewed as a catalyst for improving earnings visibility and cash flow stability, with some investors factoring in lower perceived regulatory risk for future years' financials.
  
• However, the rapid growth in distributed generation (e.g., rooftop solar) and ongoing customer migration to the free market continues to erode grid-supplied energy demand, which may weigh on long-term revenue growth and could limit the upside to earnings forecasts if headwinds persist.

Companhia Energética de Minas Gerais - CEMIG Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Companhia Energética de Minas Gerais - CEMIG's revenue will decrease by 12.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 15.5% today to 9.3% in 3 years time.
• Analysts expect earnings to reach R$2.7 billion (and earnings per share of R$1.21) by about August 2028, down from R$6.5 billion today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.3x on those 2028 earnings, up from 4.7x today. This future PE is greater than the current PE for the US Electric Utilities industry at 7.8x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 17.8%, as per the Simply Wall St company report.

Companhia Energética de Minas Gerais - CEMIG Future Earnings Per Share Growth

Risks

• CEMIG is executing its largest-ever investment program, focused on grid modernization, expansion, automation, and increased resilience in response to ongoing needs for electrification and distributed generation in the region; this long-term infrastructure commitment is likely to drive efficiency gains and support stable future earnings and margins.
  
• The company is concentrating investments in renewables (solar and hydro), grid reinforcement, and natural gas infrastructure, all of which align with favorable climate policy trends and the decarbonization agenda, which should help CEMIG capture regulatory incentives and favorable funding, supporting revenue and earnings stability.
  
• CEMIG recently secured significant extensions on key generation concessions through successful participation in auctions, locking in competitive contract prices beyond 2037 and reducing future revenue uncertainty, which is likely to enhance long-term cash generation and earnings visibility.
  
• Efficiency initiatives, including digital collections and smart meter rollouts, are already showing increased collection rates and regulatory loss reductions, which should translate into sustainably higher net margins and improved operational performance over the long run.
  
• The company's debt profile is strong, with low leverage (net debt to EBITDA of 1.59) and long maturities, enabling continued capex and strategic flexibility for further expansion or resilience measures; this financial robustness lowers risk of earnings volatility and supports dividend stability.

Valuation

• The analysts have a consensus price target of R$11.554 for Companhia Energética de Minas Gerais - CEMIG based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of R$13.2, and the most bearish reporting a price target of just R$8.9.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be R$28.5 billion, earnings will come to R$2.7 billion, and it would be trading on a PE ratio of 20.3x, assuming you use a discount rate of 17.8%.
  
• Given the current share price of R$10.57, the analyst price target of R$11.55 is 8.5% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.