On Oct 7, we issued an updated research report on water utilities company Companhia de Saneamento Basico do Estado de Sao Paulo (SBS Quick QuoteSBS - Free Report) or “SABESP”.

Bullish Factors

A growing population base in Brazil is driving demand for water and sewage amenities, which bodes well for SABESP’s water utility services. By 2020, the company targets to achieve 95% sewage coverage ratio and add nearly 1.4 million new sewage connections. Also, the company intends to add nearly 1 million water connections by 2021.

SABESP is also making meaningful investments to enhance its services. These investments are backed by the company’s strong liquidity position and adequate credit received from the national and international agencies. The company intends to spend nearly R$12.5 billion for improving its services in the 2016-2020 period, including R$5.6 billion on water, R$4.5 billion on sewage collection and R$2.6 billion on sewage treatment. Of the total planned investments, the company will spend roughly R$1.8 billion in 2016.

Dampeners

The global water utilities industry is highly competitive. Companies like California Water Service Group (CWT Quick QuoteCWT - Free Report) , American Water Works Company, Inc. (AWK Quick QuoteAWK - Free Report) and Veolia Environnement S.A. (VEOEY Quick QuoteVEOEY - Free Report) pose serious competitive threat to SABESP. Hence, in order to stay abreast, SABESP has been forging ahead with its investment plans which again are increasing its debt burden.

Thus, adverse factors like high debt, occurrence of any unwarranted political interference or rise in cost of electricity might mar the company’s prospects in the near term.

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