We recently upgraded 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 Neutral to an Outperform recommendation.
Second Quarter Highlights
SABESP reported quite dismal financial results for the second quarter 2010 with earnings per share of R$1.46 (US$1.62 per ADR) down 28.4% year over year as compared to R$2.04 (US$1.95) in the second quarter of 2009. Earnings per ADR also fell short of the Zacks Consensus Estimate of $1.65.
Net income plummeted 28.2% year over year to R$333.6 million (US$185.3 million) compared to R$464.7 million (US$222.3 million) in the second quarter of 2009. The fall was chiefly due to higher costs and expenses, and interest expense in the quarter.
Considering the top line, net operating revenues (net of COFINS and PASEP taxes) of R$1,769.8 million (US$983.2 million above the Zacks Consensus Estimate of US$937.0 million) increased 9.0% year over year from R$1,623.7 million (US$776.9 million) in the year-ago quarter. The growth was chiefly because of a 4.0% rise in billed water and sewage volume. Of the 847.9 million cubic meter volume reported, roughly 58.1% represented water variation and 41.8% of sewage.
Upgraded to Outperform
SABESP is a leading public water and sewage services provider in the State of São Paulo, Brazil. We believe the company stands well positioned in the long-term with plans to maintain its water coverage ratio at 100% and improve its sewage coverage ratio to 90% from 80% by 2018.
Also, in the near term, the company benefits from the September 2010 tariff adjustment, a more relaxed monetary policy in Brazil, and its non-cyclical and relatively low risk business model.
We believe these positives more than offset the concerns related to the company’s aggressive investment policy, weaker cash generation, higher debt levels, and huge dependence on weather conditions. With a positive risk/reward profile, we believe the ADR will outperform the broader market going forward. Thus, we upgrade our recommendation from Neutral to Outperform on the ADR.
Second Quarter Highlights
SABESP reported quite dismal financial results for the second quarter 2010 with earnings per share of R$1.46 (US$1.62 per ADR) down 28.4% year over year as compared to R$2.04 (US$1.95) in the second quarter of 2009. Earnings per ADR also fell short of the Zacks Consensus Estimate of $1.65.
Net income plummeted 28.2% year over year to R$333.6 million (US$185.3 million) compared to R$464.7 million (US$222.3 million) in the second quarter of 2009. The fall was chiefly due to higher costs and expenses, and interest expense in the quarter.
Considering the top line, net operating revenues (net of COFINS and PASEP taxes) of R$1,769.8 million (US$983.2 million above the Zacks Consensus Estimate of US$937.0 million) increased 9.0% year over year from R$1,623.7 million (US$776.9 million) in the year-ago quarter. The growth was chiefly because of a 4.0% rise in billed water and sewage volume. Of the 847.9 million cubic meter volume reported, roughly 58.1% represented water variation and 41.8% of sewage.
Upgraded to Outperform
SABESP is a leading public water and sewage services provider in the State of São Paulo, Brazil. We believe the company stands well positioned in the long-term with plans to maintain its water coverage ratio at 100% and improve its sewage coverage ratio to 90% from 80% by 2018.
Also, in the near term, the company benefits from the September 2010 tariff adjustment, a more relaxed monetary policy in Brazil, and its non-cyclical and relatively low risk business model.
We believe these positives more than offset the concerns related to the company’s aggressive investment policy, weaker cash generation, higher debt levels, and huge dependence on weather conditions. With a positive risk/reward profile, we believe the ADR will outperform the broader market going forward. Thus, we upgrade our recommendation from Neutral to Outperform on the ADR.
SABESP -ADR (SBS): Free Stock Analysis Report
Zacks Investment Research
