We set our target price at R$34.0/share for NEOE3 based on a sum-of-the-parts analysis of its businesses. Generation and transmission are valued through a FCFF methodology for 2025-2060 period, which entails a real WACC (in R$) of 6.9% (post-Sudene) and real kE at 9.0%. On distribution arm, we value through a FCFF methodology as well, assuming a real WACC (in R$) of 6.4% (post-Sudene) and real kE at 10.0%.

The key risks to achieving our target price for Neoenergia include:

(i) Distribution Segment Exposure: High reliance on distribution may face regulatory margin compression.

(ii) Project Execution Risks: Delays in greenfield projects could affect returns. 

(iii) Macroeconomic Risks: Interest rate and currency volatility may increase financing costs.

Positive or adverse developments in these risk factors could cause the share price to remain above or fall below our target price.