Companhia de Saneamento Basico do Estado de Sao Paulo or SABESP (SBS) has been recently upgraded by us from Neutral to an Outperform recommendation.
The company, over time, has retained its position as one of the largest water and sewage services providers in the world, serving primarily the State of São Paulo. Its non-cyclical regulated utility business in the Brazilian emerging market is an attractive and relatively low-risk investment opportunity.
We, therefore, appreciate the company’s constant endeavor and steady focus on the improvement of its services, which in turn will help SABESP in improvising its business portfolio through strategic investments.
The company has allocated approximately R$7.9 billion for up gradation/maintenance of its services. Of the total, 40% has been set aside for Sewage collection, 32% for Water supply and 28% for Collected sewage treatment for the 2012-2015 time frame.
Moreover, financial results have been impressive for the company, as in the first quarter 2012 SABESP posted a 169% year-over-year increase in net income. EPADR settled at $2.44, much above 96 cents in the year-ago quarter and the Zacks Consensus Estimate of $1.62. Revenue improved 13% as billed water and sewage volume rose by 3% due to an increase in the number of connections and acceleration in consumption.
We believe the company will further grow and work assiduously to achieve its long-term target of 1.3 million new water connections and 1.7 million sewage connections by 2019.
However, risks arising from escalating cost of sales and services, adverse weather conditions, political interference and governmental delays, mounting debt levels and risk of forex losses cannot be ignored. Moreover, competition remains intense from other industry players including Veolia Environnement S.A. (VE).
The stock has a Zacks #2 Rank, implying a short-term (1-3 months) Buy rating.
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