SABESP Downgraded to Neutral - Analyst Blog


We have recently downgraded Companhia de Saneamento Basico do Estado de Sao Paulo, or SABESP ( SBS ) from Outperform to a Neutral recommendation, anticipating its performance to be in line with the broader market.

Why the Downgrade?

SABESP is a renowned water and sewage service provider in Brazil and offers water and sewage services to roughly 24.3 million and 21.1 million people, respectively. The company has an ambitious long-term target to achieve roughly 1.3 million new water connections and 1.7 million new sewage connections by 2019.

Moreover, investments worth R$9.9 billion have been planned over 2013-2016 to improve the company's water supply coverage, sewage collection and treatment of collected sewage services. SABESP also spent approximately R$362 million in 2012 on its Water Loss Reduction program.

Despite the company having a promising future, we have downgraded SABESP due to the near-term concerns that surround the stock. Rising debts is a major concern for the financial health of the company. Moreover, risks from increase in expenses as well as political interference pose potential threats to growth.

A glimpse into the recently reported first quarter 2013 results justifies all our concerns. Loans and financings grew by 6% sequentially to R$8.0 billion at the end of the first quarter of 2013 while expenses soared as cost of sales and services grew 2.7% and operating expenses registered a 1% increase.

The Zacks Consensus Estimate for SABESP has gone down by a cent to $1.23 for 2013 and increased by 3 cents for 2014.    

Other Stocks to Consider

SABESP currently has an $8.7 billion market capitalization. Other stocks to watch out for in the industry are American States Water Company ( AWR ), Consolidated Water Co. Ltd. ( CWCO ) and Middlesex Water Co. ( MSEX ), each with a Zacks Rank #2 (Buy).

AMER STATES WTR (AWR): Free Stock Analysis Report

CONSOLTD WATER (CWCO): Free Stock Analysis Report

MIDDLESEX WATER (MSEX): Free Stock Analysis Report

SABESP -ADR (SBS): Free Stock Analysis Report

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Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

This article appears in: Investing , Business , Stocks

Referenced Stocks: AWR , CWCO , MSEX , SBS

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