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SBS' 2Q down Y/Y, Misses Est.

SBS VE

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Sao Paulo, Brazil-based Companhia de Saneamento Basico do Estado de Sao Paulo, or SABESP’s (SBS - Analyst Report) bottom-line results in the second quarter 2012 weakened compared with the year-ago period. The water and sewage service provider reported a 39% decline in net income that settled at R$292.8 million (US$149.4 million) compared with R$479.6 million (US$301.6 million) in the year-ago quarter.

Earnings per share came in at R$1.29 (US$1.31 per ADR), down from R$2.11 (US$2.65 per ADR) in the year-ago quarter. Results also lagged behind the Zacks Consensus Estimate of US$1.43 per ADR.

Revenue

Net revenue in the second quarter increased 5.8% to R$2,478.3 million (US$1,264.4 million), driven by higher water supply, sewage collection and treatment, and construction revenue. Results, however, failed to surpass the Zacks Consensus Estimate of US$1,281 million.

Billed water and sewage volume in the quarter went up by 1.4% year over year to 886.8 million cubic meters. Of the total volume reported, roughly 57.7% represented water variation and about 42.3% came from sewage. The increase in billed water and sewage volume was due to higher number of connections and acceleration in consumption.

Water loss rate in the second quarter 2012 was at 25.9% versus 26.0% in the year-ago quarter. Water volume produced increased 2.1% year over year; water connections soared 2.6% and sewage connections rose by 3.5%.

Margins

SABESP’s cost of sales and services, as a percentage of revenue, hiked 180 basis points to 63.6% in the quarter. Gross margin came in at 36.7%. Operating expenses, including selling, administrative and other expenses in the quarter plummeted 10 basis points in the quarter to 10.8% of total revenue.

EBITDA in the quarter was around R$798.5 million (US$407.4 million), up 2.9% year over year with a margin of 32.2%.

Balance Sheet

Exiting the second quarter 2012, SABESP’s cash and cash equivalents stood at R$1,752.5 million (US$842.5 million), down 13.2% from R$2,019.3 million (US$1,109.5 million) in the previous quarter. Loans and financing, net of current portion decreased 0.7% to R$7,244.4 million (US$3,482.9 million).

Cash Flow

Net cash flow from operating activities increased by 9.6% year over year to R$878.5 million (US$448.2 million). Capital spending on property, plant and equipment together with intangible assets declined 3.6% year over year to R$466.1 million (US$237.8 million).

Following its second quarter 2012 earnings announcement, SABESP keeps up its position as the largest water and sewage services provider in the world, serving roughly 7.58 million customers for water and 6.02 million for sewage.

The company faces stiff competition from Veolia Environnement S.A. (VE), a privately held Thames Water Holdings plc, and GDF Suez (GDFZY.PK).

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