We recently downgraded our rating for Companhia de Saneamento Basico do Estado de São Paulo, or SABESP (SBS), a public water and sewage services provider in the State of São Paulo, Brazil, from Outperform to a Neutral recommendation. The rising debt level resulting in increasing financial burden is the prime reason behind the recommendation revision.
At the end of the first quarter of 2010, SABESP had loan and financing totaling R$5,610.1 million (US$3,116.7 million), compared with R$5,549.4 million in the previous quarter. For the fiscal year 2010, SABESP plans to invest roughly $1.8 billion in water and sewage and to fund this huge capex program, it intends to use internal resource as well as borrow from financial institutions.
Additionally, weak cash generation in the first quarter 2010 and the company’s huge dependence on weather conditions add to the concern. Electricity being a prime source of power for pumping stations, exposes SBS to the risk of rise in cost of electricity.
Despite these negatives, the company over the past few quarters has been posting good financial results. In the first quarter of 2010, reported net income grew 13.4% to R$290.6 million (US$160.6 million), compared with R$256.2 million in the year-ago quarter. Reported EPS was R$1.28 (US$1.41) versus R$1.12 in the first quarter of 2009 and above the Zacks Consensus Estimate of $1.31.
At the end of the first quarter of 2010, SABESP had loan and financing totaling R$5,610.1 million (US$3,116.7 million), compared with R$5,549.4 million in the previous quarter. For the fiscal year 2010, SABESP plans to invest roughly $1.8 billion in water and sewage and to fund this huge capex program, it intends to use internal resource as well as borrow from financial institutions.
Additionally, weak cash generation in the first quarter 2010 and the company’s huge dependence on weather conditions add to the concern. Electricity being a prime source of power for pumping stations, exposes SBS to the risk of rise in cost of electricity.
Despite these negatives, the company over the past few quarters has been posting good financial results. In the first quarter of 2010, reported net income grew 13.4% to R$290.6 million (US$160.6 million), compared with R$256.2 million in the year-ago quarter. Reported EPS was R$1.28 (US$1.41) versus R$1.12 in the first quarter of 2009 and above the Zacks Consensus Estimate of $1.31.
Finally, the company stands well-positioned to benefit from the September 2009 tariff adjustment, a more relaxed Brazilian monetary policy and non-cyclical and relatively low risk business model of the company.
Hence, we downgrade SABESP from Outperform to a Neutral recommendation, in line with the short-term Zacks Rank of #3 (Hold).
Read the full analyst report on “SBS”
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