A 50-year-old Colombian electrical company delivered its fourth quarter and fiscal year 2016 results in February. Interconexion Electrica SA ESP (BOG:ISA, Financial) (IESFY, Financial) reported an impressive 130% total revenue growth to 12.1 trillion Colombian pesos ($4.1 billion) and a whopping 205% profit growth to 2.14 trillion pesos.
Interconexion recognized this jump in its sales and identified a RBSE recognition of 6.6 trillion pesos. RBSE revenue recognition came from the company’s Brazil subsidiary Companhia de Transmissão de Energia Elétrica Paulista (CTEEP).
Nonetheless, Interconexion would still have grown its top and bottom lines by 4.9% and 8.9%, respectively, excluding this 6.6 trillion of revenue gain (1).
“Although 2016 has undoubtedly been a complex year, full of challenges, changes and big demands, we have faced all of them with the responsibility and professionalism that characterizes us as a business group. Thus, achieving extraordinary results.” -Bernardo Vargas Gibsone, CEO
Â
(Resultados Financieros)
Outlook
In fiscal 2012, Interconexion Electrica had profits of 272.9 billion pesos. In fiscal 2016, the company had 764 billion pesos in profits—in line with its 2020 vision. The latter figure excluded the RBSE recognition mentioned earlier.
(Resultados Financieros)
Total returns
According to Morningstar data, Interconexion Electrica ADR shares outperformed the S&P 500 index in the past year with 31.2% total gains versus the index’s 17.9%. Nonetheless, the electrical company underperformed the broader index in the past five years with 4% total gains versus the index’s 13.7%.
Valuations
Despite the recent outperformancem, Interconexion Electrica remained undervalued compared to its peers in terms of market capitalization value to its trailing earnings. According to GuruFocus data, the Colombia-based company had a trailing price-earnings ratio of 5.9 times versus an industry median of 17.3 times.
Interconexion Electrica also had price-book value of 1.35 times versus an industry median of 1.68 times, and a price-sales ratio of 1.04 times versus an industry median of 1.65 times.
The company also had trailing dividend yield of 2.4% with a 15% payout ratio.
Interconexion Electrica would have 2017 average sales and earnings multiples of 2.14 times and 15.9 times based on its current local share price of 11,660 Colombian pesos (at the time of writing).
(Annual Report)
Interconexion Electrica
According to company filings, Interconexion Electrica is a parent company with a registered office in the city of Medellin in Colombia. The company was incorporated as a joint stock company by public deed No. 3057 granted by the Eighth Notary Public of Bogota on Sept. 14, 1967.
The company has both state and private investors.
As of December 2016, La Nación—the Colombian State—owned 51.4% of the company, while Empresas Públicas de Medellàn—another state—owned 10.17%.
Directly and through its 33 affiliates and subsidiaries, Iterconexion is currently implementing important infrastructure projects that boost the continent progress and contribute to the advancement of the inhabitants of Colombia, Brazil, Peru, Chile, Bolivia, Ecuador, Argentina, Panama and Central America.
(Integrated Annual Report)
Interconexion operates four business units: Energy Transmission, Information and Telecommunications Technology, Road Concessions and Real-Time Systems Management.
(Annual Report)
Energy transmission
The company’s energy transmission segment is responsible for the design, construction, operation and maintenance of high-voltage energy transmission systems in the corresponding countries it serves.
In 2016, sales in the segment grew 181% secondary to the RBSE recognition to 10.4 trillion pesos—85.9% of total sales excluding any adjustments. Energy transmission also delivered an EBITDA margin of 76% compared to 51.4% in fiscal 2015.
(Annual Report)
Information and telecommunications technology
This segment provides a platform for operators, companies and governments to accelerate the digitalization of their businesses.
In 2016, sales in the division grew 18.7% to 337 billion pesos or 2.8% of total unadjusted company sales and delivered an EBITDA margin of 33.5% compared to 32% in fiscal 2015.
(Annual Report)
Road concessions
The segment is responsible for road infrastructure that contributes to the competitiveness of countries (it serves) and ensures high-quality standards, safety and connectivity to users. Interconexion’s road concessions division designs, constructs, operates and maintains road infrastructures.
In 2016, sales in road concessions grew 15.7% to 1.27 billion pesos or 10.5% of total unadjusted company sales. It delivered an EBITDA margin of 69.1% compared to 72.4% the year prior.
(Annual Report)
Real-time systems management
The division develops, operates and manages technology that involves added-value information exchange.
In 2016, sales in the segment grew 8.9% to 110 billion pesos or 0.9% of total unadjusted company sales and delivered an EBITDA margin of 34.5% versus 35.6% in fiscal 2015.
Total revenue and net income
(Morningstar data)
In the past three years, Interconexion Electrica had a sales growth average of 22.95%, profit growth average of 44.7% and profit margin average of 15.4%.
Cash, debt and book value
As of December 2016, the company had 1.17 trillion pesos in cash and cash equivalents and 12.5 billion pesos in financial liabilities with a debt to total equity ratio of 0.74 times versus 0.96 times in fiscal 2015. Interconexion also kept the same number of outstanding shares at 1.1 billion for the recent year compared to 2015.
Of the company's 38.5 billion pesos in assets, 16% were identified as intangibles while having a book value of 16.9 billion pesos versus 11.4 billion pesos in 2015.
Cash flow
(Annual Report)
In 2016, cash flow from operations declined 21.4% to 2.19 billion pesos. The decline was made possible despite record profit intake by the company. As observed, significant cash (out)flow was related to "Debtors" with 7.28 trillion pesos being allocated by Interconexion in 2016.
Capital expenditures including purchase of intangibles were 2.4 billion pesos, leaving Interconexión Eléctrica with 177.7 billion in free cash (out)flow compared to 1.04 billion in free cash flow in 2015.
(Annual Report)
Regardless of the negative free cash flow, the company still allocated 319 billion pesos in dividends (2). Interconexion also took in 354.2 billion pesos in financial obligations net payments in 2016.
Conclusion
Interconexión Eléctrica’s financials, specifically its corresponding business units, could have been further understood if not for the jumble and mixing found in its company filings. Nonetheless, the utility company provided better overall business growth in fiscal 2016 despite deducting the trillions in gains provided by an accounting application.
Also, the company does not have any customers with whom it records sales representing 10% or more of its ordinary revenues for the recent fiscal years.
Meanwhile, the company seemed active in reducing its financial liabilities whenever possible, as exhibited in fiscal 2015 operations.
(Interconexion Electrica ADR shares and price-sales ratio, GuruFocus)
Having excluded the RBSE revenue recognition and using five-year sales growth and price-sales multiples followed by applying a 30% margin would indicate a value of 12 billion Colombian pesos, 7.8% downside from today’s market cap of 12.9 billion Colombian pesos.
Applying the same principles on the company’s earnings per share, meanwhile, would indicate a value of 13.3 billion pesos.
In summary, Interconexion Electrica ADR shares are a hold with a value of 13 billion Colombian pesos.
Notes
1. Integrated Management Report:
Results for 2016 were positive and favored by the recognition to the subsidiary in Brazil – (CTEEP) – of the value regarding the Basic Network of the Existing System (RBSE). However, if such effect was discounted, then results will exceed the budgetary goals.
After Technical Note was published and public clarifying hearings started in Brazil, related to the issue of recognition of the value of the Basic Network of the Existing System –RBSE– the company stated there are enough conditions to execute in this quarter its recognition in CTEEP, ISA subsidiary.
(Resultados Financieros)
Interconexion Electrica entered the Brazil market in 2006 with the creation of CTEEP as a subsidiary, according to filings.
2. Annual report
Disclosure: I do not have shares in any of the companies mentioned.
Start a free 7-day trial of Premium Membership to GuruFocus.
