We have recently downgraded
Companhia de Saneamento Basico do Estado de Sao Paulo, or
) 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
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
Consolidated Water Co. Ltd.
Middlesex Water Co.
), each with a Zacks Rank #2 (Buy).
AMER STATES WTR (AWR): Free Stock Analysis
CONSOLTD WATER (CWCO): Free Stock Analysis
MIDDLESEX WATER (MSEX): Free Stock Analysis
SABESP -ADR (SBS): Free Stock Analysis Report
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