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Mark Vickery

SBS' 3Q Gains 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) results in the third quarter 2012 were impressive compared with the year-ago quarter as earnings per share came in at R$1.59 or US$1.59 per ADR as compared with the year-ago earnings of R$0.30 per share or US$0.37 per ADR. The results were, however, below the Zacks Consensus Estimate of US$2.13 per ADR.

Net income of the water and sewage service provider was roughly R$361.8 million (US$180.9 million) compared with R$68.0 million (US$41.7 million) in the year-ago quarter.

Revenue

Net revenue in the third quarter increased 4.5% to R$2,710.7 million (US$1,355.4 million), driven by higher water supply, sewage collection and treatment, and construction revenue. Results, however, failed to surpass the Zacks Consensus Estimate of US$1,374 million.

Billed water and sewage volume in the quarter went up by 3.2% year over year to 907.2 million cubic meters. Of the total volume reported, roughly 57.6% represented water variation and about 42.4% 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 third quarter 2012 was at 25.8% versus 25.7% in the year-ago quarter. Water volume produced increased 2.0% year over year; water connections soared 2.5% and sewage connections rose by 3.3%.

Margins

SABESP’s cost of sales and services, as a percentage of revenue, plummeted 440 basis points to 58.7% in the quarter. Gross margin came in at 41.3%. Operating expenses, including selling, administrative and other expenses in the quarter jumped 5 percentage points in the quarter to 16.8% of total revenue.

EBITDA in the quarter was around R$901.8 million (US$450.9 million), up 10.6% year over year with a margin of 33.3%.

Balance Sheet

Exiting the third quarter 2012, SABESP’s cash and cash equivalents stood at R$1,777.7 million (US$888.9 million), up 1.4% from R$1,752.5 million (US$842.5 million) in the previous quarter. Loans and financing, net of current portion increased 0.3% to R$7,269.6 million (US$3,634.8 million).

Cash Flow

Net cash flow from operating activities fell by 3.6% year over year to R$565.1 million (US$282.6 million). Capital spending on property, plant and equipment together with intangible assets declined 16.7% year over year to R$495.3 million (US$247.7 million).

Following its third quarter 2012 earnings announcement, SABESP keeps up its position as the largest water and sewage services provider in the world, serving roughly 7.63 million customers for water and 6.07 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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