Back to top

Analyst Blog

On Apr 10, 2014, we issued an updated research report on Companhia de Saneamento Basico do Estado de São Paulo (SBS - Analyst Report) or SABESP.

Long-Term Growth Prospects

SABESP’s performance in the last 5 years has been impressive as evident by a nearly 194% increase in its share price. The company appears to be a long-term gainer, well positioned to reap benefits from economic developments in Brazil.

Over the 1995−2013 period, the company invested R$9.3 billion to improve its water production capacities and services and plans to spend 31% of the total capital expenditure planned (R$12.8 billion) for the 2014−2018 period. In 2009, the company started a 12-year Corporate Program for Reduction of Water Losses, which aims to achieve a billing water loss ratio of 18% by 2020 on an investment of R$5.9 billion. Until 2013, nearly R$1.5 billion was spent on the program. Additionally, the company intends to spend R$2.2 billion to improve its Sao Lourenco production system.

SABESP targets to achieve 100% water coverage ratio between 2013 and 2020 and add nearly 1.3 million new water connections. For sewage services, the company aims nearly 95% coverage ratio by adding 1.7 million new sewage connections by 2020. SABESP moved a step forward toward its goal after it signed a 30-year agreement to control the water and sewage services of Diadema in Aug 2013.  

Near-Term Headwinds

Rising expenses, potential losses from adverse movement of foreign currencies, governmental interference and dependence on electricity as a source of energy restrict the company’s growth momentum.

Over the last 5 years, SABESP has recorded nearly 34% and 3% increase in its cost of sales and services and operating expenses (in local currency) respectively. Also, the company’s mounting debt levels cloud our view.

Furthermore, SABESP’s fourth-quarter 2013 results were not impressive. Net earnings were down 23% year over year despite a 4% increase in revenues in the quarter. Earnings per American Depository Receipt (ADR) were $0.38.

Conclusion

SABESP offers a balanced risk-reward profile and is expected to perform in line with the broader market in the next 6−12 months.  The water and sewage service provider presently has a $6.5 billion market capitalization and carries a Zacks Rank #4 (Sell).

Investors interested in the water supply utility industry can consider adding American States Water Co. (AWR - Snapshot Report), Middlesex Water Co. (MSEX - Snapshot Report) and Connecticut Water Service Inc. (CTWS - Snapshot Report) to their portfolio. While American States Water and Middlesex Water hold a Zacks Rank #1 (Buy), Connecticut Water Service carries a Zacks Rank #2 (Buy).

Read the Full Research Report on SBS
Read the Full Research Report on CTWS
Read the Full Research Report on MSEX
Read the Full Research Report on AWR


Zacks Investment Research

Please login to Zacks.com or register to post a comment.

New to Zacks?

Start Here

Zacks Investment Research

Close

Are you a new Zacks Member or a visitor to Zacks.com?

Top Zacks Features

My Portfolio Tracker

Is it Time to Sell?

One of the most important steps you can take today is to set up your portfolio tracker on Zacks.com. Once you do, you'll be notified of major events affecting your stocks and/or funds with daily email alerts.

More Zacks Resources

Zacks Rank Home - Evaluate your stocks and use the Zacks Rank to eliminate the losers and keep the winners.

Mutual Fund Rank Home - Evaluate your funds with the Mutual Fund Rank for both your personal and retirement funds.

Stock/Mutual Fund Screening - Find better stocks and mutual funds. The ones most likely to beat the market and provide a positive return.

My Portfolio - Track your Portfolio and find out where your stocks/mutual funds stack up with the Zacks Rank.

Zacks #1 Rank Top Movers for Zacks #1 Rank Top Movers

Company Symbol Price %Chg
SUPER MICRO… SMCI 27.00 +10.25%
CANADIAN SO… CSIQ 38.34 +8.18%
BANCO DO BR… BDORY 16.78 +8.05%
CENTURY ALU… CENX 26.97 +7.97%
WILLDAN GRO… WLDN 11.38 +5.86%