Companhia de Saneamento Basico do Estado de Sao Paulo or SABESP (SBS) reported disappointing third-quarter 2014 results. Net income plummeted 80.7% year over year to R$91.5 million (US$40.3 million). Earnings came in at R$0.13 per share or 6 cents per American Depository Receipt (ADR).
The bottom line result lagged the Zacks Consensus Estimate of 15 cents per ADR.
Revenues
SABESP’s net operating revenues totaled R$2,823.5 million (US$1,243.8 million), inching up 1.8% year over year. The weak top-line increase can be attributed to healthy construction revenues offsetting lower contributions from water supply and sewage collection and treatment businesses.
Billed water and sewage volumes declined 3.5% year over year to 889.4 million cubic meters. Of the total volume reported, roughly 56.7% represented water variation and about 43.3% came from sewage.
Water connections crept up 4.1% and sewage connections rose 5.2% year over year. Exiting the quarter, the company served 25.2 million customers for water and 22.2 million for sewage.
Margins
SABESP’s operating costs increased 20.9% year over year and represented 70.3% of net operating revenues versus 59.2% in the year-ago quarter. Gross margin decreased by 1,110 basis points (bps) to 29.7%. Selling and administrative expenses rose 13% year over year, representing 11.9% of net operating revenues.
Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) dropped 28.8% year over year to R$742.3 million (US$327 million), while EBITDA margin fell 1,130 bps to 26.3%.
Balance Sheet
Exiting third-quarter 2014, SABESP had cash and cash equivalents of R$1,859.7 million (US$765.3 million) versus R$1,823.7 million (US$829 million) in the preceding quarter. Loans and financing climbed 4.4% sequentially to R$9,581.7 million (US$3,943.1 million).
Cash Flow
In the first nine months of 2014, SABESP generated net cash of R$2,006.9 million (US$872.6 million) from its operating activities, down 7% over the year-ago comparable period. Capital spent on purchasing tangible assets soared a whopping 635.6% to R$85 million (US$37 million).
Outlook: In 2014, SABESP plans to spend nearly R$2,642 million as part of its $12.8 billion investment plan for 2014−2018. Of the $12.8 billion, the company intends to spend roughly 41.4% on water projects and rest on sewage projects.
The company, by 2020, aims to add new water connections of nearly 1.2 million and sewage connections of 1.7 million.
With a market capitalization of $5 billion, SABESP currently carries a Zacks Rank #4 (Sell). Some better-ranked companies in the sector include SJW Corp. (SJW), American States Water Company (AWR) and Aqua America Inc. (WTR). While SJW Corp. and American States Water Company sport a Zacks Rank #1 (Strong Buy), Aqua America carries a Zacks Rank #2 (Buy).
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