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SABESP (SBS) Q3 Earnings Beat, Rise Y/Y on Falling Costs

Zacks

Companhia de Saneamento Basico do Estado de Sao Paulo or SABESP SBS reported improved year-over-year results in third-quarter 2017. Net income in the quarter surged 56.9% from the year-ago tally to R$900.5 million ($285 million). Earnings per share came in at R$1.32, up from R$0.84 in the year-ago quarter.

Considering the American Depository Receipt equivalent of earnings per share, the bottom line was 42 cents, above 26 cents in the year-ago quarter. The results were driven by lower operating costs, selling expenses and financial expenses as well as gains from exchange variations. These positives offset the negative impact of lower revenues in the quarter.

Also, the bottom line topped the Zacks Consensus Estimate of 26 cents by 61.5%.

Weak Construction Results Drag Revenues

The quarter’s net operating revenues (includes construction revenues) were R$3,536.4 million ($1,119.1 million), down 5.6% from the year-ago tally. However, the top line surpassed the Zacks Consensus Estimate of $1.09 billion.

The year-over-year fall in revenues was due to 35.1% decline in construction revenues as a result of lower investments in municipalities served. These were partially offset by gains from rise in billed water and sewage volumes.

Billed water and sewage volumes in the quarter grew 4.8% year over year to 922.8 million cubic meters. Of the total volume reported, roughly 56.3% represented water variation and about 43.7% came from sewage.

The company’s water connections jumped 2.5% and sewage connections rose 3% year over year. Its client base included 24.9 million customers for water and 21.5 million for sewage at the end of the third quarter.

Lower Costs Boost Margins

SABESP recorded improved margins in the quarter despite weak revenue performance. Operating costs decreased 8.5% year over year and represented 57.9% as a percentage of net operating revenues versus 59.7% in the year-ago quarter. Gross margin improved 180 basis points (bps) to 42.1%.

Selling and administrative expenses represented 10.1% of net operating revenues versus 12.1% in the year-ago quarter.

Adjusted earnings before interest, tax, depreciation and amortization (EBITDA) were R$1,456.3 million ($460.9 million), up 8.9% year over year. EBITDA margin grew 550 bps to 41.2%.

Balance Sheet & Cash Flow

Exiting the third quarter, SABESP’s cash and cash equivalents were R$2,101 million ($664.9 million), up from R$1,367.6 million ($414.4 million) at the prior-quarter end. Borrowings and financing grew 2.1% sequentially to R$10,500 million ($3,322.8 million).

In first nine months of 2017, the company’s net cash generation from operating activities totaled R$2,339.2 million ($737.9 million), representing an increase of 5.3% from the year-ago period. Capital spent on the purchase of tangible assets were R$12.4 million ($3.9 million), down 46.6% year over year.

Outlook

SABESP plans to spend nearly R$13,879 million for improving its services, including approximately R$7,098 million on water, R$5,423 million on sewage collection and R$1,358 million on sewage treatment during 2017-2021.

Companhia de saneamento Basico Do Estado De Sao Paulo – Sabesp Price and Consensus

Companhia de saneamento Basico Do Estado De Sao Paulo – Sabesp Price and Consensus | Companhia de saneamento Basico Do Estado De Sao Paulo – Sabesp Quote

Zacks Rank & Key Picks

With market capitalization of $6.4 billion, SABESP currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the industry include American States Water Company AWR, California Water Service Group Holding CWT and Global Water Resources, Inc. GWRS. All these stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

American States Water’s earnings estimates for 2017 remained stable in the last 60 days while increased for 2018. Also, the company pulled off an average positive earnings surprise of 10.58% in the last four quarters.

California Water Service’s performance was better than expected in three of the last four quarters, with an average positive earnings surprise of 7.98%. Its earnings estimates for 2017 and 2018 improved in the last 60 days.

Global Water Resources’ earnings estimates in 2017 improved in the last 60 days while remained stable for 2018. Its financial performance in the last quarter was impressive, with earnings surpassing estimates by 50%.

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