We have recently upgraded Companhia de Saneamento Basico do Estado de Sao Paulo, or SABESP (SBS) from Neutral to an Outperform recommendation, anticipating its performance to be better than the broader market.
Why the Upgrade?
SABESP is a Brazil-based water and sewage service provider serving primarily the State of São Paulo. Long-term growth prospects seem bright as the company is progressing well to achieve a target of roughly 1.3 million new water connections and 1.7 million new sewage connections by 2019. Water and sewage connections in 2012 represented a year-over-year growth of 2.6% and 3.5%, respectively.
To improve its services, SABESP has allocated approximately R$9.9 billion to finance its capital investment plans for the 2013-2016 timeframe. Of the total, 26.2% is meant for spending in 2013, 26.5% in 2014, 24.4% in 2015 and the rest 23.0% for 2016. An amount equal to R$362 million has also been spent in 2012 on a Water Loss Reduction program.
SABESP also posted impressive financial results for the year 2012. Its earnings per share increased 56.2% year over year while revenue inched up 8.2% on the back of higher water supply, sewage collection and treatment, and construction revenue. Fall in cost of sales and services as a percentage of revenue helped push the company’s gross margin.
Solid growth prospects and near-term results have raised optimism for even better results for SABESP in the years ahead. The Zacks Consensus Estimate for 2013 now stands at $4.54 per ADR, up 8.9% from a prior estimate provided 30 days ago while estimate for 2014 has gone up 19.9% to US$5.18. Also, we have an Earnings ESP (Read: Zacks Earnings ESP: A Better Method) of +7.7% for 2013.
Other Stocks to Consider
SABESP currently has a market capitalization of $10.5 billion. Other stocks to watch out for in the industry are Aqua America Inc. (WTR), with a Zacks Rank #1 (Strong Buy) while American States Water Company (AWR) and American Water Works Company, Inc. (AWK), both carry a Zacks Rank #2 (Buy).
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