We have recently upgraded our recommendation on
Companhia de Saneamento Basico do Estado de Sao Paulo, or
) from Underperform to Neutral, anticipating the company to
perform in-line with the broader market.
Why the Upgrade?
In Brazil, industries like tourism, steel, electricity, among
others offer promising growth especially as the country is
gearing up to host the upcoming 2014 Soccer World Cup and 2016
Olympics sporting events. The Brazilian government, under its
Growth Acceleration Program or PAC - phase II, has major
investments planned for development of ports, railroads,
airports, wind farms and roads. Other areas of focus are
sanitation, energy, logistics etc.
SABESP is a well renowned water and sewage service provider in
Brazil operating in the State of São Paulo. At the end of the
second quarter of 2013, the company's water and sewage
connections were approximately 7.8 million and 6.2 million,
For the long-term, SABESP is making earnest efforts and
investments to achieve both targets of over 1.3 million new water
connections and 1.7 million new sewage connections by 2019.
Further to service improvement, the company has allocated
approximately R$9.9 billion to finance its capital investment
plans for the 2013-2016 timeframe. Recently, the company signed
an agreement to control the water and sewage services of Diadema
for the next 30 years.
Talking of SABESP's financial performance, second quarter 2013
results were quite impressive. Earnings per ADR at US$0.26
registered 18.2% increase and revenue grew 13.0% on higher water
supply, sewage collection and treatment in the quarter.
CONN WATER SVC (CTWS): Free Stock Analysis
CONSOLTD WATER (CWCO): Free Stock Analysis
SABESP -ADR (SBS): Free Stock Analysis Report
SJW CORP (SJW): Free Stock Analysis Report
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All the above discussions were the prime reason for the
recommendation upgrade for SABESP. The upgrade has been
restricted to a neutral view due to near-term concerns arising
out of factors such as rising cost of sales and services as well
as operating expenses, debt levels and political interference
among others. In the second quarter 2013, cost of sales and
services increased 10.5%, operating expenses rose by 30.8% and
loans and financings reflected 3.4% sequential increase.
Other Stocks to Consider
SABESP currently has a $6.9 billion market capitalization. Other
companies to watch out for in the industry are
Connecticut Water Service Inc.
Consolidated Water Co. Ltd.
), each with Zacks Rank #1 (Strong Buy) while
) has a Zacks Rank #2 (Buy).