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SBS' Outperform Rating Reiterated

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We recently maintained our Outperform rating on Saneamento Basico do Estado de Sao Paulo or SABESP (SBS - Free Report) , considered to be one of the largest water and sewage service providers in Brazil.

The $9.7 billion company primarily serves the State of São Paulo, the industrial and economic hub of the Brazilian economy that solely accounts for about one third of Brazil’s GDP. We believe the company’s non-cyclical, regulated utility business in this emerging market is an attractive and relatively low-risk investment opportunity.

The company to maintain its leading position is ever relentlessly focused, trying to improve its services through strategic investments. SABESP has allocated approximately R$7.9 billion for upgradation/maintenance of its services. Of the total, 40% has been set aside for Sewage collection, 32% for Water supply and 28% for Collected sewage treatment for the 2012-2015 time frame.

We believe the company will work assiduously to achieve its long-term target of 1.3 million new water connections and 1.7 million sewage connections by 2019.

Despite these long-term positive aspects, the company’s performance in the second quarter 2012 was weak. Net income plummeted 39% while EPADR declined 51% to US$1.31 and lagged behind the Zacks Consensus Estimate of US$1.43. Although revenues jumped 5.8%; the improvement was negated by higher costs and expenses.

The current Zacks Consensus Estimate for the third quarter of 2012 is $2.13, representing a year-over-year increase of 493.06%. Estimates for 2012 and 2013 are $7.85 and $9.26, reflecting annual growth of 33.05% and 17.90%, respectively.

The stock currently has a Zacks #1 Rank, implying a short-term (1-3 months) Strong Buy rating while its nearest competitor Veolia Environnement S.A. holds a Zacks #4 Rank, indicating a short-term Sell rating.

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