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SABESP's (SBS) Earnings Decline Y/Y on High Costs in Q1

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Companhia de Saneamento Básico do Estado de São Paulo - SABESP (SBS - Free Report) recently reported weaker-than-expected results for the first quarter of 2018.

The Brazilian utility’s net income in the reported quarter declined 13.9% year over year to R$580.4 million ($178.6 million). Earnings per share were R$0.85, down from the year-ago tally of R$0.99, primarily due to rise in operating costs, administrative expenses and exchange loss.

Considering the American Depository Receipt (ADR) equivalent of earnings per share, the reported quarter’s bottom line was 26 cents, lagging the Zacks Consensus Estimate of 29 cents by 10.3%. Also, results marked a 13.3% decline from the year-ago tally of 30 cents.

Revenues Improve Y/Y

In the reported quarter, SABESP’s net operating revenues (including construction revenues) were R$3,699.7 million ($1,138.4 million), up 4% year over year. The figure was in line with the Zacks Consensus Estimate. The improvement was driven by favorable impacts from the tariff-repositioning index and an increase in billed-water and sewage volumes. However, these were partially offset by a decline in construction revenues due to fall in investments in municipalities.

Billed water and sewage volumes in the quarter grew 2.1% year over year to 943.6 million cubic meters. Of the total volume reported, roughly 56.3% represented water variation and 43.7% came from sewage.

The company’s water connections inched up 2.4% and sewage connections rose 2.9% year over year. Its client base included 24.9 million customers for water and 21.6 million for sewage at the end of the first quarter.

Margin Profile Mixed

In the quarter under review, SABESP’s operating costs grew 3.8% year over year to R$2,139.2 million ($658.2 million). It represented 57.8% of net operating revenues versus 57.9% in the year-ago quarter. Gross profit increased 4.2% year over year to R$1,560.4 million ($480.1 million) while gross margin improved 10 basis points (bps) to 42.2%.

Selling expenses totaled R$224.2 million ($69 million), down 6.1% year over year while administrative expenses of R$268 million ($82.5 million) increased 12.1% year over year. These expenses represented 13.3% of net operating revenues.

Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) were R$1,399 million ($430.5 million), up 3.4% year over year. Adjusted EBITDA margin declined 20 bps to 37.8%.

Balance Sheet & Cash Flow

Exiting the first quarter of 2018, SABESP’s cash and cash equivalents were R$2,963.9 million (R$898.2 million), up from R$2,283 million ($689.7 million) at the end of the prior quarter. Borrowings and financing grew 2.4%, sequentially, to R$10,605.7 million ($3,213.8 million).

In the quarter under review, the company generated net cash of R$662 million ($203.7 million), reflecting a year-over-year decline of 13.3%. Capital spent on the purchase of tangible assets was R$2.8 million ($0.9 million), down 73.7% year over year.

Outlook

In the 2018-2022 timeframe, SABESP plans to spend nearly R$17,294 million for improving its services. Of this, approximately R$7,120 million will be spent on water, R$7,732 million on sewage collection and R$2,442 million on sewage treatment.

Companhia de saneamento Basico Do Estado De Sao Paulo - Sabesp Price, Consensus and EPS Surprise
 

Companhia de saneamento Basico Do Estado De Sao Paulo - Sabesp Price, Consensus and EPS Surprise | Companhia de saneamento Basico Do Estado De Sao Paulo - Sabesp Quote

Zacks Rank and Key Players in the Sector

With a market capitalization of $6.2 billion, SABESP currently carries a Zacks Rank #4 (Sell).

Some better-ranked stocks in the Zacks Utilities sector are UGI Corp. (UGI - Free Report) , TerraForm Power, Inc. and Alliant Energy Corp. (LNT - Free Report) . While both UGI Corporation and TerraForm Power sport a Zacks Rank #1 (Strong Buy), Alliant Energy carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

In the last 60 days, bottom-line estimates for all three stocks improved for the current year and the next year. Also, earnings surprise in the last reported quarter was +11.92% for UGI Corporation, 333.33% for TerraForm Power and 1.96% for Alliant Energy.
 
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