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SABESP (SBS) Q3 Earnings Top on Improved Sales & Margins

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Companhia de Saneamento Basico do Estado de Sao Paulo or SABESP (SBS - Free Report) reported impressive results for third-quarter 2016. The company’s net income totaling R$573.9 million ($177.1 million) improved over net loss of R$580.1 million ($164.8 million) recorded in the year-ago quarter.

Earnings per share came in at R$0.84 as against loss per share of R$0.85 in the year-ago quarter. The third quarter’s earnings were equivalent to 26 cents per American Depository Receipt which surpassed the Zacks Consensus Estimate of 17 cents.


In the quarter, SABESP generated net operating revenue of R$3,745.8 million ($1,156.1 million), increasing 17.2% year over year and also surpassing the Zacks Consensus Estimate of $1.06 billion. The top line was driven by tariff hike, absence of bonus granted under the company’s Water Consumption Reduction Incentive Program and increase in billed water and sewage volumes.

The company’s billed water and sewage volumes increased 4.7% year over year to 880.4 million cubic meters. Of the total volume reported, roughly 56.2% represented water variation and about 43.8% came from sewage.

SABESP’s water connections grew 2.7% and sewage connections rose 3.4% year over year. Its client base included 25.7 million customers for water and 23.2 million for sewage at the end of the third quarter.


In the quarter, SABESP recorded a 1.1% year-over-year decrease in operating costs, representing 59.7% of net operating revenue compared with 70.7% in the year-ago quarter. Gross margin improved by 1100 basis points (bps) to 40.3%. Selling and administrative expenses represented 12.1% of net revenue.

Adjusted earnings before interest, tax, depreciation and amortization (“EBITDA”) in the quarter increased 48.1% year over year to R$1,337.5 million ($412.8 million), while EBITDA margin grew 750 bps to 35.7%.

Balance Sheet & Cash Flow

Exiting the third quarter, SABESP had cash and cash equivalents of R$1,415.5 million ($435.5 million), above R$1,374.4 ($425.5 million) at the prior-quarter end. Borrowings and financing grew 0.8% sequentially to R$10,274.6 million ($3,161.4 million).

In the first nine months of 2016, SABESP generated net cash of R$2,028.8 million, up 9.5% year over year. Capital spent on the purchase of tangible assets increased 6.4% year over year to R$23.3 million.

Outlook: SABESP plans to spend nearly R$12.5 billion for improving its services, including approximately R$5.4 billion on water, R$4.5 billion on sewage collection and R$2.6 billion on sewage treatment during 2016−2020.

SABESP -ADR Price, Consensus and EPS Surprise


SABESP -ADR Price, Consensus and EPS Surprise | SABESP -ADR Quote

Zacks Rank & Other Stocks to Consider

With market capitalization of $6 billion, SABESP currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the utility industry include SJW Corp. (SJW - Free Report) , American Water Works Company, Inc. (AWK - Free Report) and Connecticut Water Service Inc. (CTWS - Free Report) . While SJW Corp. sports a Zacks Rank #1 (Strong Buy), both American Water Works and Connecticut Water Service carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

SJW Corp.’s earnings estimates for 2016 and 2017 have been revised upward over the last 60 days. Average earnings surprise for the last four quarters is a positive 78.51%.
American Water Works Company has a positive average earnings surprise of 2.11%. Also, earnings expectations for 2016 have improved over the past 60 days.

Connecticut Water Service’s earnings estimates for 2017 have been revised upward over the last 60 days.

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