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2Q14 Results: Isagen – Underperform

Worse than expected operating performance due to higher power purchases.

Price: COP 3,240; Target Price: COP 3,060

July 31, 2014 ( newswire) We expected a difficult quarter for Isagen due to complicated hydrological conditions, and consequently we anticipated the company would make lower power sales to avoid power purchases at historically high prices, maintaining the margins at similar levels than those observed in 2Q13. However, this scenario didn’t materialize and the higher revenues ended up being reflected in higher costs, which in turn deteriorated profitability. Isagen generated 2,414 GWh in the 2Q14, a 5.0% lower generation than that observed in the same period of 2013. Nevertheless, revenues grew 20.4% y/y due to higher power sales. Those higher sales had to be covered with higher power purchases which grew 117.6% y/y in a period in which the power spot price was at historical highs (2Q14 average power spot price: 364,4 COP/kWh). Thus, Isagen posted a sharp fall in EBITDA (-26.3% y/y) and Net income (-23.8% y/y), and the EBITDA margin stood at 20.9%, way below that observed in 1Q14 (45.1%) and our estimates for this quarter (33.2%).

In the full year, the bad financial results in 2Q14 were offset by the sound financial results in 1Q14 and the company close 1H14 in line with our initial expectations in terms of EBITDA. We maintain our 2014 T.P. of COP 3,060 and our UNDERPERFORM rating. However, we highlight that the market price of Isagen continues disconnected from the company's fundamentals and fair value and it is driven by speculation on the results of the sale process of the government's stake. The auction is scheduled August 22nd, and according to the rules of the process, the buyer should make a public tender (OPA) benefiting minority shareholders two and a half months after the auction.

Credicorp Capital

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