Sao Paulo, Brazil-based Companhia de Saneamento Basico do Estado de Sao Paulo, or SABESP’s (SBS) net income for the third quarter 2011 fell drastically by 84.4% year over year to R$68.0 million (US$41.7 million). Earnings per share in the quarter were R$0.30 per share (US$0.37 per ADR). Earnings per ADR lagged behind the Zacks Consensus Estimate of US$2.13 per ADR by a wide margin.
The year over year results were hurt due to higher cost of sales and services and higher exchange losses, which more than offset revenue growth in the quarter.
Revenue
In the third quarter, consolidated net revenue improved 10.1% year over year to R$2,592.8 million (US$1,590.7 million) and fared well exceeding the Zacks Consensus Estimate of US$1,478 million.
Billed water and sewage volume in the quarter went up by 3.5% year over year to 879.0 million cubic meters. Of the total volume reported, roughly 57.8% represented water variation and 42.2% of sewage. The increase in billed water and sewage volume was due to higher number of connections and acceleration in consumption.
Water loss rate in the third quarter was roughly stable year over year at 25.7%. Water volume produced in the quarter went up 1.6% year over year; water connections increased 2.6% and sewage connections rose by 3.7%.
Margins
SABESP’s cost of sales and services, as a percentage of revenue, soared to 63.1% from 54.6% in the year-ago quarter, thus hitting the gross margin by 8.5%. Operating expenses, including selling, administrative and other expenses improved in the quarter and settled at 12.4% of total revenue versus 14.9% in the year-ago comparable quarter.
EBITDA in the quarter was around R$815.3 million (US$500.2 million), up 5.0% year over year with a margin of 31.4%.
Balance Sheet
Exiting the third quarter, SABESP had cash and cash equivalents of roughly R$2,265.9 million (US$1,238.2 million) versus R$2,174.5 million (US$1,385.0 million) in the previous quarter. Loans and financing, net of current portion increased 7.6% sequentially to R$7,646.6 million (US$4,178.5 million) compared with R$7,105.9 million in the previous quarter.
In the third quarter, net cash flow from operating activities jumped by 18.8% year over year to R$585.7 million (US$320.1 million). Capital spending on property, plant and equipment together with intangible assets were R$594.1 million (US$364.5 million).
Following its third quarter 2011 earnings announcement, SABESP keeps up its position as the largest water and sewage services provider in the world, serving roughly 23.8 million customers for water and 20.4 million for sewage.
The company faces stiff competition from Veolia Environnement S.A. (VE), a privately held Thames Water Holdings plc, and GDF Suez (GDFZY.PK). We currently maintain an Underperform recommendation on the stock.
