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SABESP's (SBS) Growth Potential Solid, Runs Near-Term Risks

Zacks Equity Research

We issued an updated research report on Companhia de Saneamento Basico do Estado de Sao Paulo SBS or SABESP on Mar 31. The company provides public water and sewage services in the state of Sao Paulo, Brazil. It currently has a market capitalization of $7 billion.

Over the last three months, SABESP’s American Depository Receipt (ADR) yielded 18.3% return, outperforming roughly 5.62% gain recorded by the Zacks categorized Utility Water Supply industry.

We believe SABESP’s long-term growth prospects are bright, especially with growing demand for better water and sewage facilities in Sao Paulo. The company covers approximately 66% of the urban population in the state and serves 365 out of total 645 municipalities. Exiting 2016, the company served nearly 24.7 million customers for water and 21.3 million for sewage, representing year-over-year growth of 1.2% and 1.4%, respectively. By 2022, the company aims to add nearly 1.0 million new water connections and 1.3 million new sewage connections.

In addition, SABESP aims at improving its services through investment of nearly R$13.9 billion over the period 2017−2021. Of the total, roughly R$7.1 billion will be spend on water, R$5.4 billion on sewage collection and R$1.4 billion on sewage treatment.

In the recently reported fourth-quarter 2016 results, the company reported earnings of R$1.39 per share or 42 cents per ADR. The bottom line increased roughly 107.5% over the year-ago quarter. Net operating revenue grew 20.6% year over year. In the quarter, the company’s billed water and sewage volumes increased 5.5% year over year to 910.1 million cubic meters. Of the total volume reported, roughly 56.2% represented water variation and about 43.8% came from sewage.

Despite these long-term growth drivers, SABESP is exposed to risks arising from higher expenses, foreign currency translation, governmental interference and dependence on electricity as a source of energy. Moreover, the company’s higher debt levels, if unchecked, will inflate its financial obligations, posing serious threats to its profitability.

Zacks Rank & Stocks to Consider

SABESP currently carries a Zacks Rank #3 (Hold).

Some better-ranked stocks in the utility industry include Artesian Resources Corporation ARTNA, SJW Corp. SJW and Alliant Energy Corporation LNT. While Artesian Resources sports a Zacks Rank #1 (Strong Buy), both SJW Corp. and Alliant Energy carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Artesian Resources’ earnings estimates were revised upward for 2017, over the last 60 days.
SJW Corp. reported a positive average earnings surprise of 36.17% for the trailing four quarters. Also, earnings expectations for 2017 and 2018 improved over the past 60 days.

Alliant Energy’s earnings estimates for 2017 and 2018 were revised upward over the last 60 days.

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