On Jan 20, 2015, we issued an updated research report on Companhia de Saneamento Basico do Estado de São Paulo (SBS) or SABESP.
With an increase in the Brazilian population, demand for better water and sewage services is on the rise as well. SABESP, one of the recognized companies in this industry, is well-positioned to benefit from this growing demand. The company is making efforts to expand its coverage area, which included nearly 363 out of the total 645 municipalities in the state of São Paulo, at the end of third-quarter 2014.
SABESP holds a 30-year contract for providing services to the Municipality of São Paulo and the state government. This apart, it possesses another 30-year contract to manage the water and sewage services of Diadema. Investments worth R$12.8 billion has been planned for the 2014−2018 time frame. By 2020, SABESP targets at achieving 100% water and 95% sewage coverage ratio.
Considering these positives, we have upgraded our recommendation on SABESP from Underperform to Neutral. The upgrade was limited to a neutral view due to the presence of near-term headwinds such as rising expenses, potential losses from adverse movement of foreign currencies, governmental interference and dependence on electricity as a source of energy.
The Zacks Consensus Estimate for SABESP is currently pegged at 15 cents and 54 cents per share for fourth-quarter and 2014, respectively. The same is pegged at 70 cents per share for 2015.
With a $4.1 billion market capitalization, SABESP currently carries a Zacks Rank #4 (Sell). Investors interested in the utility industry can consider adding better-ranked stocks like American States Water Company (AWR), Connecticut Water Service Inc. (CTWS) and Atmos Energy Corp. (ATO) to their portfolio. While American States Water sports a Zacks Rank #1 (Strong Buy), both Connecticut Water Service and Atmos Energy carry a Zacks Rank #2 (Buy).
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