We recently downgraded our recommendation on
Saneamento Basico do Estado de São Paulo
or SABESP (
) from Outperform to Neutral, anticipating the company's
performance to be in line with the broader market, going forward.
The company is considered to be one of the largest water and
sewage service providers in Brazil. It primarily serves the State
of São Paulo, the industrial and economic hub of the Brazilian
economy that solely accounts for about one third of Brazil's GDP.
The company's non-cyclical and regulated utility business
positions it well for the long term. It is making constant
endeavors to improve its services and reach 1.3 million new water
connections and 1.7 million sewage connections by 2019. An amount
equal to R$7.9 billion has been allocated, setting aside roughly
40% for Sewage collection, 32% for Water supply and 28% for
Collected sewage treatment for the 2012-2015 time frame.
Despite these long-term positive aspects, we have some near-term
concerns that override our positive sentiments for the stock.
Financial performance for the third quarter 2012 was below our
expectation with earnings per ADR of US$1.59; falling short of
the Zacks Consensus Estimate of US$2.13.
Moreover, headwinds emanating from escalating cost of sales and
services (roughly 59% of total revenue), political interference,
mounting debt levels and risk of foreign exchange losses cannot
Hence, we preferred to remain on the sidelines on the stock. The
current Zacks Consensus Estimate for the fourth quarter of 2012
is $2.73, representing a year-over-year increase of 15.2%.
Estimates for 2012 and 2013 are $8.40 and $9.26, reflecting
annual growth of 42.4% and 10.1%, respectively.
The stock currently has a Zacks #3 Rank, implying a short-term
(1-3 months) Hold rating while its nearest competitor
Veolia Environnement S.A.
) also bears the same Zacks #3 (Hold) Rank.
SABESP -ADR (SBS): Free Stock Analysis Report
VEOLIA ENVIRON (VE): Free Stock Analysis
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