Companhia de Saneamento Basico do Estado de Sao Paulo or SABESP’s SBS fourth-quarter 2014 results were disappointing, with net income declining 94.7% year over year to R$31.4 million (US$12.4 million). Earnings were R$0.05 per share or 2 cents per American Depository Receipt (“ADR”). The bottom line came way below the Zacks Consensus Estimate of 15 cents per ADR.
For 2014, the company’s net income was R$903 million (US$384.3 million), down 53.1% year over year, while earnings per share were R$1.32 or 56 cents per ADR. However, the results surpassed the Zacks Consensus Estimate of 53 cents per ADR.
Revenues
SABESP generated net operating revenue of R$2,843.6 million (US$1,119.5 million) in the quarter, reflecting a year-over-year decline of 8.3%. The weak top-line result was due to an adverse financial impact from the Water Consumption Reduction Incentive Program as well as a fall in billed water and sewage volumes.
Billed water and sewage volumes in the quarter decreased 8.4% year over year to 877.5 million cubic meters. Of the total volume reported, roughly 56.7% represented water variation and about 43.3% came from sewage.
In 2014, the company’s net operating revenue totaled R$11,213.2 million (US$4,771.6 million), edging down 0.9% year over year.
The company’s water connections grew 4.2% and sewage connections rose 5% year over year in 2014, while its client base included 25.3 million customers for water and 22.4 million for sewage, exiting the year.
Margins
SABESP’s costs and expenses in the quarter increased 14.4% year over year and represented 61% of net operating revenue versus 48.9% in the year-ago quarter. Construction costs stood at R$888.6 million (US$349.8 million), up 22.4% year over year.
Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) in the quarter dropped 55.9% year over year to R$498.7 million (US$196.3 million), while EBITDA margin fell 1,900 basis points to 17.5%.
Balance Sheet
Exiting fourth-quarter 2014, SABESP had cash and cash equivalents of R$1,723 million (US$642.9 million) versus R$1,859.7 million (US$765.3 million) in the preceding quarter. Loans and financing slid 0.03% sequentially to R$9,578.6 million (US$3,574.1 million).
Cash Flow
In 2014, SABESP generated net cash of R$2,480.3 million (US$1,055.4 million) from its operating activities, down 10.7% year over year. Capital spent on purchasing tangible assets soared a whopping 191% to R$89.5 million (US38.1 million).
Outlook: SABESP plans to spend nearly R$13,518 million on development of its services in 2015−2019. Of the total amount, roughly R$5.6 billion will be spend on water, R$5.1 billion on sewage collection and R$2.8 billion on sewage treatment businesses.
The company, by 2020, aims to add nearly 1.2 million new water connections and 1.7 million new sewage connections.
With a market capitalization of $3.8 billion, SABESP currently carries a Zacks Rank #2 (Buy). Other stocks worth considering in the utility-water supply industry include The York Water Company YORW, American States Water Company AWR and California Water Service Group CWT. While The York Water Company sports a Zacks Rank #1 (Strong Buy), both American States Water and California Water Service carry the same Zacks rank as SABESP.
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