Brazilian utility service provider Companhia de Saneamento Basico do Estado de Sao Paulo SBS or SABESP recently announced its 20th issuance of simple, unsecured and non-convertible debentures worth approximately R$500 million.
As disclosed, the single-series debenture offer, approved by SABESP’s board of directors on Nov 27, will be presented to a maximum of 75 professional investors. Of these, up to 50 investors will be entitled for subscription. The proceeds from the debenture issue will be used to strengthen the company’s cash position as well as meet near-term financial obligations.
Notwithstanding the positive impact of this debenture issue, it will escalate SABESP’s long-term debt position, which stood at R$11.7 billion at the end of third-quarter 2015. We believe such high debt levels will lead to increased financial obligations, posing serious threats to the company’s financial health.
With a $3.4-billion market capitalization, SABESP currently carries a Zacks Rank #3 (Hold). We believe the company’s long-term prospects remain bright, as the country’s growing population calls for higher demand for water and sewage services. By 2020, the company targets to achieve 95% sewage coverage ratio as well as add nearly 1 million water and 1.4 million sewage connections.
However, SABESP is not immune to risks from near-term headwinds such as rising expenses, foreign currency translation, governmental interference and dependence on electricity as a source of energy. Moreover, unfavorable climatic conditions in Sao Paulo, like prolonged drought or rain, raise our concerns. At the same time, the company’s high debt levels, if unchecked, will inflate its financial obligations, adversely affecting its profitability.
Better-ranked stocks in the utility industry include American Water Works Company, Inc. AWK, Artesian Resources Corp. ARTNA and The York Water Company YORW. All three stocks carry a Zacks Rank #2 (Buy).
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