We reiterate our Neutral recommendation on
Saneamento Basico do Estado de São Paulo or SABESP
(
SBS
).
Time and again, SABESP has been retaining its position as the
largest water and sewage services provider in the world. SABESP's
non-cyclical regulated utility business in the Brazilian emerging
market is an attractive and relatively low-risk investment
opportunity. We believe the company will continue to make a
constant effort to improve its services and in turn, will keep
improvising its business portfolio through strategic
investments.
However, mention may be made of the adversaries that the company
has been facing over the last few quarters. SABESP has been
witnessing a steady rise in cost of sales and services, which has
been impacting its margins. The company relies heavily on
electricity as a source of energy for its pumping stations, which
continues to suffer from rising electric power cost. Even the
prolonged drought dampens our outlook on the company.
Even under such tender circumstances and operational threats,
SABESP has maintained its position as one of the largest players in
the industry providing public water and sewage services in the
State of São Paulo. The company recorded a rise in billed water and
sewage volume during the third quarter primarily driven by higher
number of connections and acceleration in consumption. The
company's long-term prospects appear bright as it aims to provide
roughly 1.3 million new water connections and 1.7 million new
sewage connections by 2019.
Nevertheless, 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.
On this backdrop, the company's debt load from trustworthy national
and international credit agencies controlled our anxiety to some
extent. Moreover, the company maintains a satisfactory liquidity
position, reporting an 18.8% y/y increase in cash flow from
operating activities in the third quarter of 2011. The effort looks
encouraging and conducive toward further investments.
The company, providing public water and sewage services in the
State of SãoPaulo, Brazil, faces stiff competition from its peer
Veolia Environnement S.A.
(
VE
). Currently, SABESP has a Zacks #4 Rank, implying a short-term
(1-3 months) Sell rating.
SABESP -ADR (
SBS
): Free Stock Analysis Report
VEOLIA ENVIRON (
VE
): Free Stock Analysis Report
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