Companhia de Saneamento Basico do Estado de Sao Paulo or SABESP SBS reported impressive results for fourth-quarter 2015, with net earnings amounting to R$460.9 million (US$119.7 million). The bottom line improved from the year-ago tally of R$31.4 million (US$8.2 million) by a wide margin.
Earnings per share came in at R$0.67 against R$0.05 in the year-ago quarter. The quarter’s earnings were equivalent to 17 cents per American Depository Receipt (“ADR”), which surpassed the Zacks Consensus Estimate of 11 cents.
In 2015, SABESP’s earnings were R$0.78 per share or 23 cents per ADR. The results were below R$1.32 per share or 56 cents per ADR earned in 2015.
Revenues
In the quarter, SABESP’s net operating revenue totaled R$3,223.1 million (US$837.2 million), reflecting year-over-year growth of 13.3%. The top line was driven by tariff hike but was partially offset by an adverse financial impact from the Water Consumption Reduction Incentive Program and a decline in billed water and sewage volumes.
Billed water and sewage volumes decreased 2% year over year to 862.8 million cubic meters. Of the total volume reported, roughly 56.1% represented water variation and about 43.9% came from sewage.
In 2015, SABESP generated net revenue of R$11,711.6 million (US$3,517 million), up roughly 4.4% year over year. The company’s water connections grew 2.6% and sewage connections rose 3% year over year. Its client base included 25.5 million customers for water and 22.8 million for sewage at the end of the year.
Margins
In 2015, SABESP recorded an 8.2% year-over-year increase in operating costs, representing 70.5% of net operating revenue versus 68.1% in 2014. Increase in operating costs offset the revenue improvement, causing gross margin to fall by 240 basis points (bps) to 29.5%. Selling and administrative expenses represented 4.7% of net revenue.
Adjusted earnings before interest, tax, depreciation and amortization (“EBITDA”) in the quarter increased 91.9% year over year to R$957.2 million (US$248.6 million), while EBITDA margin grew 1,220 bps to 29.7%.
Balance Sheet & Cash Flow
Exiting fourth-quarter 2015, SABESP had cash and cash equivalents of R$1,639.2 million (US$413.9 million), up from R$889.9 million (US$217 million) at the prior-quarter end. Loans and financing decreased 0.6% sequentially to R$11,595.3 million (US$2,928.1 million).
In the 12 months ended Dec 2015, SABESP generated net cash of R$2,641.4 million (US$793.2 million), up 6.5% year over year. Capital spent on purchasing tangible assets decreased 38.7% year over year to R$54.8 million (US$16.5 million).
Events to Consider: On Mar 24, 2016, SABESP announced that it intends to discontinue with its Water Consumption Reduction Incentive Program and the Contingency Tariff. The company has filed a request to ARSESP for the cancellation of these programs.
On the same day, the company announced that its board of directors have approved the payment of interest on own capital amounting to R$149.9 million or R$0.2193 per share.
Outlook: SABESP plans to spend nearly R$12.5 billion on improving its services, including R$5.6 billion on water, R$4.5 billion on sewage collection and R$2.6 billion on sewage treatment during 2016−2020. Of the total planned investment, the company will spend roughly R$1.8 billion in 2016.
With market capitalization of $4.2 billion, SABESP currently carries a Zacks Rank #2 (Buy). Some other stocks worth considering in the utility-water supply industry include SJW Corp. SJW, The York Water Company YORW and Connecticut Water Service Inc. CTWS. While SJW Corp. sports a Zacks Rank #1 (Strong Buy), both The York Water Company and Connecticut Water Service carry a Zacks Rank #2.
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