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.