We have recently maintained our Underperform recommendation on
Companhia de Saneamento Basico do Estado de Sao Paulo, or
), anticipating its performance to lag behind the broader market.
SABESP is among the leading water and sewage service providers in
Brazil. Long-term growth prospects are bright for the company,
which targets serving roughly 1.3 million new water connections
and 1.7 million new sewage connections by 2019. Earnest efforts
are being made by the company to improve its services. An amount
of $9.9 billion has been allocated for the improvement of water
supply coverage, for sewage collection and for treatment of
collected sewage during 2013-2016.
Despite these endeavors of the company, we have currently
maintained an Underperform recommendation on SABESP. Year-to-date
return of negative 39.5% also supports our negative
recommendation along with the reasons mentioned below:
Continuous increase in costs and expenses has over time proved
detrimental to SABESP's profitability. Cost of sales and services
accounted for 61.9% of total revenue in the second quarter 2013,
up from 58% recorded in the first quarter 2013 and representing
year-over-year increase of 10.5%. Also operating expenses,
including selling, administrative and other expenses, in the
quarter increased by 30.8% year over year. Steady rise in costs
will impact margins of the company.
Moreover, risks arising from increased political interference
pose potential threats to growth. The government of São Paulo
owns part of SABESP's outstanding shares, which gives it the
power to control the election of the majority of the members of
the board of directors and the senior management. Under such
circumstances, the possibility of regulatory uncertainty or delay
by the government to make important decisions remains a major
The Zacks Consensus Estimate for SABESP is at US$1.38 per ADR for
2013 and US$1.55 for 2014, representing year-over-year decline of
1.9% for 2013 and growth of 12.0% for 2014.
Other Stocks to Consider
SABESP currently has a $5.7 billion market capitalization. Other
companies to watch out for in the industry are
Connecticut Water Service Inc.
), with Zacks Rank #1 (Strong Buy) while
Consolidated Water Co. Ltd.
), each come with a Zacks Rank #2 (Buy).
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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