SBS 1Q Lags Estimate on Expenses

Sao Paulo, Brazil-based Companhia de Saneamento Basico do Estado de Sao Paulo, or SABESP’s (SBS - Analyst Report) net income for the first quarter 2011 plummeted 38.9% year over year to R$182.8 million (US$110.1 million), or R$0.80 per share (US$0.96 per ADR). Earnings per ADR lagged behind the Zacks Consensus Estimate of US$1.66 per ADR.

The earnings downfall was chiefly due to higher expenditure in the quarter that more than offset a modest revenue increase.

Revenue

In the first quarter, net revenue was R$2,295.7 million (US$1,383.0 million), reflecting an increase of 6.1% year over year and above the Zacks Consensus Estimate of US$1,077 million.

Billed water and sewage volume in the quarter went up by 2.8% year over year to 879.3 million cubic meters. Of the total volume reported, roughly 58.1% represented water variation and 41.9% sewage.

Water loss rate in the first quarter was stable year over year at 26%. Water volume produced in the quarter went up 3.2% year over year; water connections increased 2.4% and sewage connections rose by 3.5%.

Margins

During the first quarter, SABESP’s cost of sales and services soared 18.5% year over year to R$1,368.4 million (US$824.4 million) and represented 59.6% of net revenue. EBITDA at R$654.3 million (US$394.2 million) registered a year-over-year decline of 21.9% with a margin of 28.5%. 

Balance Sheet

Exiting the first quarter, SABESP had cash and cash equivalents of roughly R$2,399.8 million (US$1,463.3 million) versus R$1,989.2 million (US$1,212.9 million) in the previous quarter.  Loans and financing, net of current portion soared 2.6% sequentially to R$7,207.1 million (US$4,341.6 million) versus R$7,022.5 million (US$4,282.0 million) in the previous quarter.

Cash Flow

In the first quarter, net cash flow from operating activities decreased by 10.7% year over year to R$513.3 million (US$309.2 million). Capital spending on property, plant and equipment together with intangible assets were R$361.4 million (US$217.7 million), reflecting a 3.7% year-over- year decline.

Following its first quarter 2011 earnings announcement, SABESP keeps up its position as the largest water and sewage services provider in the world, serving roughly 23.7 million water customers and 20.1 million sewage customers.

The company faces stiff competition from Veolia Environnement S.A. (VE - Snapshot Report), a privately held Thames Water Holdings plc, and GDF Suez (GDFZY.PK). We currently maintain a Neutral recommendation on the stock.

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