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Enersis Is A Defensive LatAm Play With Attractive Yield And Significant Growth Potential

Enersis S.A. (NYSE: ENI ) Fundamentals (FYE- Dec. 31 st ) Enersis S.A. is a Chilean integrated electricity holding company and a subsidiary of Italy-based multinational energy group Enel (60.6% stake). Enersis is the largest private power platform in Latin America owning 17.3 GW of installed generation capacity spread between Chile, Argentina, Brazil, Colombia and Peru. Enersis controls six distribution companies that service 15.1 million clients: Chilectra (Chile), Ampla and Coelce (Brazil), Edesur (Argentina), Edelnor (Peru) and Codensa (Colombia). Enersis’ main subsidiary is listed generation company Endesa Chile (60% stake). Enersis corporate restructuring – The spinoffs will become effective in 1Q16, creating six companies: ENI Chile and Americas, EOC Chile and Americas, Chilectra Chile and Americas. ENI Americas will launch a tender offer for EOC Americas’ minority shareholders in 2Q16. The second EGMs to vote the merger of the Americas entities to create ENI Americas will occur 90 days after the split – 60 days of trading plus 30 days prior to the session. Minority shareholders will have a withdrawal right period of up to 30 days after the second round of EGMs. The merger of Enersis Americas is expected to complete in 3Q16 (around July/August). In order to persuade the AFPs (Chilean managers of pension funds) to vote in favor of the restructuring, which proved successful, ENI’s Board of Directors resolved to amend the proposal for the tender offer for EOC Americas’ shareholders (post-split), raising the price from CLP (Chilean Peso) 236/sh to CLP285/sh. Financials FYE- Dec. 31 FY10 FY11 FY12 FY13 FY14 In US$ mn Revenue 9,393.9 9,352.9 9,297.20 8,965.86 10,381.96 Revenue growth (%) 1.41 (0.44) (0.60) (3.56) 15.79 Gross profit 3,817.4 3,746.8 3,492.8 3,966.7 4,113.4 Gross profit margin (%) 40.6 40.1 37.6 44.2 39.6 Operating profit 2,439.2 2,241.7 2,105.0 2,491.9 2,562.5 Operating profit margin (%) 25.9 23.9 22.6 27.8 24.7 Net profit 695.9 537.4 540.1 942.5 873.3 Net profit margin (%) 7.4 5.7 5.8 10.5 8.4 EPS (GAAP) 1.04 0.80 0.83 0.96 0.89 Dividends per Share 0.33 0.53 0.41 0.30 0.48 Capital Expenditures 1,003.5 978.7 1,008.2 1,106.0 1,554.9 Cash & ST Investments 1,387.1 1,747.3 1,445.9 3,375.1 2,570.1 Total Assets 18,614.4 19,656.3 18,958.8 21,722.7 22,787.1 Total Debt 5,269.3 5,643.9 4,778.7 4,971.8 5,132.7 Total Equity 5,346.4 5,575.7 5,572.9 8,828.6 8,876.4 ROA 8.40 6.53 6.62 7.83 6.62 ROE 13.41 9.84 9.69 13.09 9.86 No. of Employees 12,264 10,844 11,087 11,574 12,275 Competitive Advantage The company owns a difficult-to-replicate network of transmission and distribution assets providing essential electricity to its customers. Its hydroelectric generating plants, around 50% of its generating fleet, are some of the lowest cost power-generation sources and have extremely long operating lives. Chile represents almost 25% of consolidated EBITDA net of minority interest and is widely recognized as the most stable market in Latin America. It also has the region’s most predictable and reliable regulatory framework. Enersis’ true earnings power has been masked by recent droughts in several countries and hence gross margins are expected to improve once normal rainfall returns. Major Risks Hydrology risks – In a scenario of continued scarce rainfall, lower hydro load factors would be compensated by higher thermal load factors leading to higher expenses and lower margins Deteriorating Brazilian economics and utility sector fundamentals – Further deterioration in macroeconomic conditions in Brazil, power rationing and unfavorable regulatory changes are some of the risks that could negatively impact and may lead to substantially lower demand Rationing in Chile – A scenario of extremely low rainfall and thermal shutdown (due to unavailability of fuel) could lead to power rationing which would negatively impact the company Corporate restructuring remains an overhang Outlook Targeting growth in Brazil – Enersis has US$1.2B left from the 2012 capital increase to be used in M&A in Brazil, and the company’s priority is to grow in the distribution business. Its holding is targeting distressed distribution concessions from Eletrobras (NYSE: EBR ) that is likely to be privatized in 2016. The first in the pipeline is Goiás-based disCo Celg whose lengthy privatization process has just kicked off. Brazil is expected to be the main growth platform for the future Enersis Americas, as Colombia and Peru impose market share restrictions for the company which restrict growth potential while Brazil doesn’t have such restrictions. Colombia and Peru forbid Endesa Chile from having a market share in generation of more than 25%. Enersis has a market share of 22% in the Colombian generation sector and 24% in the Peruvian sector, and hence, Enersis could add no more than ~470 MW in Colombia and ~100 MW in Peru, while in Brazil, the growth potential is hypothetically unlimited. Environmental and social issues in Chile limit the approval and construction of new generation projects while Argentinean macroeconomics remained as an impediment to new investments in the past several years. Sound dividend stream in the near future – Post the conclusion of El Quimbo (late 2015), the only Greenfield project under construction will be Los Cóndores which is expected to start-up in late 2018/early 2019 with a capex budget of US$662M to be spent over four years. Hence, a boost in cash flow generation that should allow Endesa Chile to pay higher dividends, with an estimated dividend yield of 3-4% from 2016 onwards, could be attractive to defensive investors searching for yield. Investment Rationale & Conclusion LatAm consolidator poised to grow – Post the ongoing corporate reorganization, Enersis will focus on growth in Latin America and will prioritize Brazil which is hiking return rates for new investments. Low levered at 0.9x net debt/EBITDA, and with US$1.7B cash left from the 2012 capital increase, Enersis will also look for growth outside Chile and has declared interest in acquiring Brazilian distribution assets. Argentina is an important optionality for Enersis – The Argentine generation units El Chocón, Endesa Costanera and Dock Sud represent 26% of Enersis’ generation capacity but only 6% of the genCo business EBITDA. The distribution company Edesur accounts for 24% of Enersis’ distribution sales volumes but contributed with only 10% of consolidated disCo EBITDA in 9M15, and hence, its margins in Argentina are expected to significantly improve over the next few years. Enersis’ stock provides an attractive valuation and, most importantly, offers the greatest upside potential coming from regulatory improvements in Argentina and growth in Brazil (Greenfield and brownfield projects). It provides a direct exposure to the benefits of El Niño and recovering hydrology in Chilean utilities. Colombia and Peru are expected to outperform their South American peers in terms of GDP and power demand growth, offering opportunities for Endesa Chile which is the most relevant player in both countries behind the local players. Enersis currently trades at $12.77 (closing price as of Feb. 22, P/E TTM of 11.76), with its 52-week range of $10.33-$18.72, and looks attractive with strong potential to outperform over the medium to long term for reasons outlined below – The impact of a stronger El Nino phenomenon will results in normal rains and will decrease operational expenses, resulting in higher margins. Margin gains resulting from lower fuel prices to drive profitability. Significant potential from Brazil and Argentina markets to drive growth. Endesa’s experience and track record in Peru and Colombia will be key drivers for capturing growth opportunities in those markets. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: References : Company Annual Reports, Company Press Releases, Investor presentations, SEC Filings -Form 20-F and 6-K, Morningstar, BNamericas, Yahoo Finance

Time To Invest In Emerging Markets? 5 Mutual Fund Picks

Slowdown in the Chinese economy, wild swings in currencies and tumbling commodity prices are dragging emerging markets down. Brazil and Russia have already entered recession. Most of the investors fear that the financial crisis in emerging economies is a bigger issue than Eurozone concerns and a hike in interest rates in the U.S. Emerging markets witnessed capital outflows faster than ever in the fourth quarter of 2015. They are now facing a wide range of risks that might weigh on their sovereign, corporate and bank ratings. However, in the face of insurmountable odds, emerging countries have remained relatively resilient for the last couple of years. What protected them from a full-blown crisis was perhaps their beefed up foreign exchange reserves. Macroeconomic headwinds notwithstanding, emerging countries are also projected to grow at a steady rate in the near term. Moreover, fears that have resulted in selling, deleveraging and down-sizing emerging economies also now work in their favor. Bargain-hunting investors should look for investing in this oversold market. Hence, if an investor is willing to stay invested for the long term, then emerging market funds can be a good bet. Investors Pull Money from Emerging Markets Investors pulled $270 billion from emerging markets last quarter that surpassed withdrawals during the financial crisis of 2008. China led the outflows, with about $159 billion pulled out of its economy in December alone. Barring China’s outflows, the emerging markets could have witnessed inflows in the quarter, according to Capital Economics Ltd.’s economist William Jackson. Concerns about weakness in China’s currency led investors to dump riskier assets. Last year, China surprised investors by devaluing its currency, which eventually led to a rout of $5 trillion in the nation’s equity markets. Subsequently, China plunged into bear market territory last month, with its manufacturing activity contracting at the fastest pace in January since August 2012. Separately, according to the Institute of International Finance, investors pulled $735 billion from emerging economies in 2015, the first year of net outflows since 1988. Emerging Markets Risk Intensifies Higher interest rates in the U.S., a stronger dollar, declining commodity prices and a rise in geopolitical tension are adversely affecting credit ratings in emerging countries. Fitch Ratings downgraded Brazil’s and South Africa’s sovereign ratings in December. These macroeconomic headwinds are also negatively impacting emerging markets’ corporate and bank outlook. Meanwhile, private sector debt turned out to be a key challenge in emerging markets. Private sector debt has surged in emerging markets in the last 10 years. Seven large emerging nations including Brazil, India, Indonesia, Mexico, Russia, South Africa and Turkey witnessed a collective rise in their private sector debt to an estimated 77% of their GDP in 2014, significantly up from 46% in 2005, according to Fitch’s analysis. Is It All Over for Emerging Markets? On an individual basis, however, most of these emerging economies haven’t added much debt compared to the size of their economies. India’s and South Africa’s private debt-to-GDP ratio increased by 17 and 11 percentage points, respectively, according to Capital Economic Ltd. The private debt-to-GDP ratio for Malaysia and Indonesia also came in at 18.5 and 12.5 percentage points, respectively. Meanwhile, growth in emerging market economies slowed down to a pace of 3.7% in 2015, according to the World Bank. A year earlier, the pace was around 4.5%. However, the World Bank expects growth in emerging economies to rise by 4.2% this year followed by a steady increase of 4.8% and 4.9% in 2017 and 2018, respectively. Moreover, Russia’s GDP, which constitutes a major part of emerging market GDPs, is also positioned to contract less, eventually having a positive impact on the overall growth of the developing nations. Russia’s GDP of around $1.2 trillion is about 4% of emerging markets’ $28 trillion economy. According to Alberto Ades, head of global economic research at Bank of America Corporation (NYSE: BAC ), the pace of contraction in Russia’s GDP this year will slow down to 0.5% from last year’s contraction of 3.7%. In 2015, Russia was responsible for reducing about 15 basis points from overall emerging markets’ economic growth. This year, it is expected to shave only 2 basis points. Separately, Daniel Hewitt, a senior emerging-markets economist at Barclays PLC (NYSE: BCS ) said that emerging economies will expand at an average rate of 4.3% in 2016, higher than 4.1% last year. He believes easing of economic contractions in Russia along with Brazil and Venezuela will help emerging markets to grow in 2016. 5 Emerging Market Funds to Buy Emerging markets have shown remarkable resilience, banking on adequate foreign exchange reserves. For example, India accumulated reserves of $325 billion by 2014, while its reserves were merely $5.6 billion in 1990, according to the World Bank data. Indonesia and Thailand too piled up $112 billion and $157 billion, respectively, by the end of 2014. As many developing countries are in a much sounder shape than they appear, investors might have a look at emerging market mutual funds, keeping in mind a long-term view. These funds generally tend to do well over the long haul due to their higher risk content. However, they may stand out in the short term as well. Emerging market funds had tanked almost 50% during the global financial crisis in 2008, but quickly recovered, gaining more than 65% in 2009. Also, it will be prudent to invest in such emerging mutual funds that have less exposure to the beleaguered Chinese economy. We have shortlisted the top five emerging market funds. They have an impressive five-year annualized return, a minimum initial investment within $5000, low expense ratio and a Zacks Mutual Fund Rank #1 (Strong Buy) or #2 (Buy). T. Rowe Price Emerging Markets Bond Fund (MUTF: PREMX ) provides current income and capital appreciation. PREMX invests a large portion of its assets in government and corporate debt securities of emerging nations. PREMX’s 5-year annualized return is 3.5%. PREMX carries a Zacks Mutual Fund Rank #1 and the annual expense ratio of 0.93% is lower than the category average of 1.16%. As of the last filing, Argentine Republic 7% was the top holding for PREMX. Fidelity New Markets Income Fund (MUTF: FNMIX ) invests the majority of its assets in debt securities of issuers in emerging markets and other investments that are tied economically to these markets. FNMIX’s 5-year annualized return is 4.7%. FNMIX carries a Zacks Mutual Fund Rank #1 and the annual expense ratio of 0.84% is lower than the category average of 1.16%. As of the last filing, US Treasury Bond 3% was the top holding for FNMIX. JPMorgan Emerging Markets Debt Fund (MUTF: JEMRX ) seeks high total return and normally invests a large portion of its assets in emerging market debt investments. JEMRX’s 5-year annualized return is 4.4%. JEMRX carries a Zacks Mutual Fund Rank #2 and the annual expense ratio of 0.77% is lower than the category average of 1.16%. As of the last filing, Argentina Rep 8.28% was the top holding for JEMRX. Fidelity Advisor Emerging Markets Income Fund (MUTF: FMKIX ) seeks capital appreciation. FMKIX invests a major portion of its assets in securities of issuers in emerging markets and other investments that are linked economically to these markets. FMKIX’s 5-year annualized return is 4.6%. FMKIX carries a Zacks Mutual Fund Rank #2 and the annual expense ratio of 0.88% is lower than the category average of 1.16%. As of the last filing, US Treasury Bond 3% was the top holding for FMKIX. Franklin Emerging Market Debt Opportunities Fund (MUTF: FEMDX ) seeks high total return. FEMDX invests the majority of its assets in debt securities of “emerging market countries” that the World Bank considers to be on the developing curve. FEMDX’s 5-year annualized return is 2.3%. FEMDX carries a Zacks Mutual Fund Rank #2 and the annual expense ratio of 1% is lower than the category average of 1.16%. As of the last filing, United Mexican States 4% was the top holding for FEMDX. Original Post

Time For Buy-Write ETFs?

The year 2016 saw an appalling start on the bourses as last year’s headwinds spilled over this year with deepening woes. This is especially true as the world’s second-largest economy is not showing any sign of reviving anytime soon and the global oil market continues to be overloaded. These two issues have been thwarting global economic growth and raising threats of deflation (read: 5 ETF Plays for a Bear Market ). In fact, both the World Bank and International Monetary Fund (IMF) downgraded their projection for world economic growth. The World Bank cut its growth forecast to 2.9% for this year from 3.3%, while IMF expects the global economy to grow 3.4% this year, down 0.2% from its previous estimate. Moreover, IMF warned that the global economy is on the verge of another financial meltdown. The World Bank stated that persistent weakness in China and a worse-than-expected slowdown in Brazil and Russia have worsened an already bleak global economic outlook. Further, on the domestic front, weak Q4 corporate earnings, a strong dollar, uncertain timing on the next interest rates hike and a spate of weak economic data are weighing heavily on investors’ sentiments. In particular, the U.S. economy grew at a slower pace of 0.7% in the fourth quarter after having advanced 2% in the third quarter and 3.9% in the second. With this, the rate of economic expansion in 2015 is the same as that of 2.4% in 2014. In such a sluggish backdrop, investors are looking to provide capital appreciation opportunities in the equity world with simultaneous downside protection. A gainful option for now could be the ‘Buy-Write’ strategy. Buy-Write Strategy in Focus A buy-write is an option strategy that involves buying a stock or a basket of stocks and then selling or writing call options on those same assets. With this process, the portfolio aims to generate additional monthly income from the call option (premiums collected). If the product stays flat or declines slightly, investors keep the premium and their stock. However, if prices rise, investors only receive the premium and the stocks are sold at the price that was agreed upon on the covered call. As such, the products would probably underperform in bull markets, as this strategy eats away the potential gain especially in a short time frame. However, investors seeking to make a play on the broad U.S. equity indices using this strategy could consider the following ETFs (read: 6 Quality Dividend ETFs for Safety and Income ): PowerShares S&P 500 BuyWrite Portfolio ETF (NYSEARCA: PBP ) This fund tracks the CBOE S&P 500 BuyWrite Index, which measures the performance of a hypothetical buy-write strategy on the S&P 500 Index. This strategy includes holding a long position of the stocks in the S&P 500 and selling a succession of covered call options, each with an exercise price at or above the prevailing price level of the S&P 500 Index. The fund has amassed $314.6 million in AUM and trades in average daily volume of nearly 180,000 shares a day. The product is a bit pricier than the other choices, charging 75 bps in annual fees. The ETF has an annual yield of 2.34% and has shed 5.8% so far this year. Horizons S&P 500 Covered Call ETF (NYSEARCA: HSPX ) This ETF seeks to match the performance of the S&P 500 Stock Covered Call Index, which holds a long position in the stocks of the S&P 500 Index while at the same time, short (write) call options on option-eligible stocks in the S&P 500 Index. The fund has accumulated $57 million in its asset base and charges 65 bps in fees per year from investors. Volume is light as it exchanges less than 5,000 shares in hand on average daily basis. The ETF has 5.43% in annual dividends and has lost 7.7% in the year-to-date timeframe (read: Buy-Ranked Large Cap Value ETFs in Focus ). Recon Capital NASDAQ 100 Covered Call ETF (NASDAQ: QYLD ) This ETF follows the CBOE NASDAQ-100 BuyWrite Index, which is designed to buy a NASDAQ-100 stock index portfolio, and writing (or selling) the near-term NASDAQ-100 Index covered call option, generally on the third Friday of each month. The product has $30.2 million in AUM and trades in light volume of under 18,000 shares a day on average. Expense ratio came in at 0.60% and annual dividend yield is higher at 10.45%. QYLD has lost 9.7% so far this year. AdvisorShares STAR Global Buy-Write ETF (NYSEARCA: VEGA ) This fund is actively managed and looks to provide investors with consistent, repeatable returns across all types of market environments. This may be done by using a proprietary strategy known as Volatility Enhanced Global Appreciation. VEGA is primarily a fund of funds and employs a Buy-Write or Covered Call overlay for its global allocation strategy using ETPs. The ETF has amassed $20.5 million in its asset base, while trades in average daily volumes of 4,000 shares. It charges a higher fee of 2.15% a year from investors and is down 5.7% in the same time period. iPath CBOE S&P 500 BuyWrite Index ETN (NYSEARCA: BWV ) This is an ETN option and tracks the similar index as that of PBP. Unlike PBP, the ETN carries credit risk from the issuing institution – Barclays. The note is less popular and less liquid as depicted by its AUM of $9 million and average volume of under 1,000 shares. The ETN charges 0.75% in fees and expenses and has lost 6.9% in the year-to-date timeframe. Bottom Line Though these products have delivered negative returns from a year-to-date look, yields are impressive, making up for most of the losses incurred so far. As such, these are appropriate for investors seeking high levels of current income and a hedged exposure to the large cap U.S. equities. It is worth noting that the funds will lag significantly during a boom time, but will be an interesting choice in flat or declining markets, especially for investors seeking extra income in a volatile environment. Original Post