We currently maintain our Neutral recommendation on Companhia de Saneamento Basico do Estado de Sao Paulo, or SABESP (SBS), expecting the company to perform in line with the broader market.
Why Maintained at Neutral?
SABESP is one of the well-known water utilities in the State of São Paulo, Brazil. The long-term growth prospects of the water utility industry in Brazil appear bright as the government is taking initiatives to improve its sanitation, energy, logistics, tourism, steel and electricity industries for the upcoming 2014 FIFA World Cup and 2016 Olympics.
SABESP is also making earnest efforts and investing to improve its services. Investments worth R$9.9 billion have been planned for the 2013-2016 time frame. The company targets to achieve over 1.3 million new water connections and 1.7 million new sewage connections by 2019. The company moved a step towards its goal when it signed a 30-year agreement to control the water and sewage services of Diadema.
As far as SABESP’s financial performance is concerned, third quarter 2013 results were impressive as net earnings increased 31.3% while earnings per ADR grew 30.2% year over year to 30 cents. Higher water supply, sewage collection and treatment, as well as benefits of tariff revision led to a 2.3% increase in revenues.
Partially offsetting the top-line increase was a 3.1% rise in cost of sales and services that led to a roughly 50 basis point decline in gross margin. Besides the risk from higher costs, we believe mounting debt levels and political interference, as well as unfavorable weather conditions are major causes of concern for SABESP.
Other Stocks to Consider
SABESP currently has a $7.0 billion market capitalization and carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the water utilities industry include Middlesex Water Co. (MSEX), California Water Service Group (CWT) and Connecticut Water Service Inc. (CTWS). While Middlesex carries a Zacks Rank #1 (Strong Buy), California Water Service and Connecticut Water Service both hold a Zacks Rank #2 (Buy).
Read the Full Research Report on CTWS
Read the Full Research Report on MSEX
Read the Full Research Report on CWT
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