Enel Generación Costanera (CECO2): Huge potential, higher risks
The unexpected defeat of the ruling party (Juntos por el Cambio) in the primary elections hit deeply in investor’s confidence due to a dramatically changed economic outlook towards 2020.
The peso fell 25% against the dollar and risk spreads widened to more than 2,000bps. In order to control economic damage, the government set capital controls, “postponed” short term debt payments and moved forward to expansionary fiscal policies that compromised the deal reached with the IMF.
Despite the selloff in domestic assets has been across the board, utilities and bank stocks have been hit harder.
The opposition candidate with the greatest chance of winning October 27 elections, Alberto Fernandez, expressed his intention about de-dollarizing energy tariffs. The most vulnerable sector to this change is energy generation. Both transport and electrical distribution are already pesified
In the case of a Fernandez victory, we believe that tariffs "will be stepped upon" as much as possible during 2020, in order to control inflation and let real wages recover.
Enel Generacion Costanera (CECO2) could face two constraints: “pesification” of the prices they receive for GW/h and the VOSA credit payments they receive from CAMMESA that are in dollar terms.
Considering the described distress, we contemplate various events for our valuation.