Sao Paulo, Brazil-based Companhia de Saneamento Basico do Estado de Sao Paulo, or SABESP’s (SBS) net income for the third quarter 2010 jumped a 129.8% year over year to R$449.8 million (US$255.6 million), or R$1.97 per share (US$2.24 per ADR). Earnings per ADR fell short of the Zacks Consensus Estimate of US$2.59 per ADR.
The net income rise was attributable to higher revenues and fall in financial expense, offset partially by a slight increase in operating expenses.
Revenue
Considering the top line, net operating revenues (net of COFINS and PASEP taxes) of R$1,835.6 million (US$1,043.0 million above the Zacks Consensus Estimate of US$1,009 million) increased 12.7% year over year. The growth was primarily due to a 5.6% rise in billed water and sewage volume. Of the 849.1 million cubic meter volume reported, roughly 58.1% represented water variation and 41.8% of sewage.
The company’s stringent efforts to restrict water loss were evident from its continued reduction in water loss rates, which decreased from 26.5% to 26.0% year over year. Water volume produced in the quarter went up 3.9% year over year; water connections increased 2.4% and sewage connections rose by 3.5%.
During the quarter, SABESP’s costs and expenses grew modestly by 0.6% year over year to R$1,180.4 million (US$670.7 million). Cost for electric power, for example, escalated by 9.0%, while tax expenses registered a 24.5% hike. Moreover, general expenses grew by 13.9% and credit write-offs increased by 23.9% year over year.
As a percentage of revenue, costs and expenses declined 770 basis points to 64.3%. Major improvements were seen in expenses for supplies (down 8.1% year over year), payrolls and benefits (1.8% decline), services (6.4% decline), depreciation and amortization (10.5% decline), and treatment supplies (5.4% decline).
EBITDA at R$799.6 million (US$454.3 million) registered a 29.6% year over year growth and represented 43.6% of net operating revenues. EBIT was R$655.1 million (US$372.2 million), up 43.8% year over year with a margin of 35.7%.
Financial expenses, net of revenues declined 94.1% year over year to R$15.6 million (US$8.9 million), due primarily to higher financial revenue and a gain in interest over lawsuit.
Balance Sheet
Exiting the third quarter, SABESP had cash and cash equivalents of roughly R$1,367.2 million (US$799.5 million) versus R$1,047.4 million (US$581.9 million) in the previous quarter. Loans and financing, net of current portion soared 7.9% sequentially to R$6,496.3 million (US$3,799.0 million) versus R$6,019.5 million (US$3,344.2 million) in the previous quarter.
Net cash flow from operating activities plummeted 10.8% year over year to R$495.8 million (US$281.7 million). Capital spending was down 19.8% year over year to R$474.6 million (US$269.7 million)
Following its third quarter 2010 earnings announcement, SABESP keeps up its position as the largest water and sewage services provider in the world, serving roughly 23.6 million water customers and 19.9 million sewage customers.
The company faces stiff competition from Veolia Environnement S.A. (VE), a privately held Thames Water Holdings plc, and GDF Suez. We currently maintain an Outperform recommendation on the ADR.
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