SABESP Offers Balanced Risk-Reward - Analyst Blog

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On Apr 10, 2014, we issued an updated research report on Companhia de Saneamento Basico do Estado de São Paulo ( SBS ) or SABESP .

Long-Term Growth Prospects

SABESP's performance in the last 5 years has been impressive as evident by a nearly 194% increase in its share price. The company appears to be a long-term gainer, well positioned to reap benefits from economic developments in Brazil.

Over the 1995−2013 period, the company invested R$9.3 billion to improve its water production capacities and services and plans to spend 31% of the total capital expenditure planned (R$12.8 billion) for the 2014−2018 period. In 2009, the company started a 12-year Corporate Program for Reduction of Water Losses, which aims to achieve a billing water loss ratio of 18% by 2020 on an investment of R$5.9 billion. Until 2013, nearly R$1.5 billion was spent on the program. Additionally, the company intends to spend R$2.2 billion to improve its Sao Lourenco production system.

SABESP targets to achieve 100% water coverage ratio between 2013 and 2020 and add nearly 1.3 million new water connections. For sewage services, the company aims nearly 95% coverage ratio by adding 1.7 million new sewage connections by 2020. SABESP moved a step forward toward its goal after it signed a 30-year agreement to control the water and sewage services of Diadema in Aug 2013.  

Near-Term Headwinds

Rising expenses, potential losses from adverse movement of foreign currencies, governmental interference and dependence on electricity as a source of energy restrict the company's growth momentum.

Over the last 5 years, SABESP has recorded nearly 34% and 3% increase in its cost of sales and services and operating expenses (in local currency) respectively. Also, the company's mounting debt levels cloud our view.

Furthermore, SABESP's fourth-quarter 2013 results were not impressive. Net earnings were down 23% year over year despite a 4% increase in revenues in the quarter. Earnings per American Depository Receipt (ADR) were $0.38.

Conclusion

SABESP offers a balanced risk-reward profile and is expected to perform in line with the broader market in the next 6−12 months.  The water and sewage service provider presently has a $6.5 billion market capitalization and carries a Zacks Rank #4 (Sell).

Investors interested in the water supply utility industry can consider adding American States Water Co. ( AWR ), Middlesex Water Co. ( MSEX ) and Connecticut Water Service Inc. ( CTWS ) to their portfolio. While American States Water and Middlesex Water hold a Zacks Rank #1 (Buy), Connecticut Water Service carries a Zacks Rank #2 (Buy).



AMER STATES WTR (AWR): Free Stock Analysis Report

CONN WATER SVC (CTWS): Free Stock Analysis Report

MIDDLESEX WATER (MSEX): Free Stock Analysis Report

SABESP -ADR (SBS): Free Stock Analysis Report

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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 , CTWS , MSEX , SBS

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