Brazilian water and sewage services company,
Saneamento Basico do Estado de Sao Paulo or SABESP (
SBS
)
remains in our Neutral zone.
The company, over time, has retained its position as one of the
largest water and sewage services provider in the world, serving
primarily the State of São Paulo. Fiscal year ending 2011, the
company distributed water to approximately 23.9 million people and
provided sewage services to more than 20.5 million people while its
water and sewage connections were around 7.5 million and 5.9
million, respectively.
SABESP's non-cyclical regulated utility business in the
Brazilian emerging market is an attractive and relatively low-risk
investment opportunity. We appreciate the company's constant
endeavor and steady focus on the improvement of its services which
in turn will help in improvising its business portfolio through
strategic investments. In the recently announced 2012-2015
investment plan of roughly R$7.9 billion, the company allocated 40%
for sewage collection, 32% for Water supply, and 28% for Collected
sewage treatment.
However, mention may be made of the adversaries that the company
has been facing over the last few quarters. Moreover, SABESP has
been witnessing a steady rise in cost of sales and services, which
has been impacting its margins. Since the company relies heavily on
electricity as a source of energy for its pumping stations, rising
electric power cost places SABESP in great difficulty. Further, the
prolonged drought dampens our outlook on the company.
SABESP posted lackluster fourth quarter results, with net income
plummeting 14% year over year on the back of roughly an 11%
increase in revenue. Expenses soared as a percentage of revenue
hitting gross margin by 4.4%. Moreover, the company's mounting debt
and forex losses remain a cause of concern. Political interference,
regulatory uncertainty along with governmental delays also added to
the peril.
The company faces stiff competition from its peer
Veolia Environnement S.A.
(
VE
). The company has Zacks #1 Rank, implying a Strong Buy short-term
(1-3 months) rating.
SABESP -ADR (
SBS
): Free Stock Analysis Report
VEOLIA ENVIRON (
VE
): Free Stock Analysis Report
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