SABESP's (SBS) Q2 Earnings And Revenues Beat Estimates

Companhia de Saneamento Basico do Estado de Sao Paulo or SABESP’s (NYSE:SBS) results for second-quarter 2016 were impressive with earnings and revenues surpassing their respective year-ago tallies. Net income in the quarter surged 136.4% year over year to R$797.5 million (US$227.9 million).

Earnings per share came in at R$1.17 compared with R$0.49 in the year-ago quarter. The quarter’s earnings were equivalent to 33 cents per American Depository Receipt which surpassed the Zacks Consensus Estimate of 12 cents.

Revenues

In the quarter, SABESP generated net operating revenue of R$3,438.6 million (US$982.5 million), increasing 21.8% year over year and also surpassing the Zacks Consensus Estimate of US$777.1 million. The top line was driven by tariff hike, lower bonus granted in relation to Water Consumption Reduction Incentive Program and increase in billed water and sewage volumes.

The company’s billed water and sewage volumes increased 5.4% year over year to 879.8 million cubic meters. Of the total volume reported, roughly 56.2% represented water variation and about 43.8% came from sewage.

The company’s water connections grew 2.6% and sewage connections rose 3.2% year over year. Its client base included 25.7 million customers for water and 23 million for sewage at the end of second-quarter 2016.

Margins

SABESP recorded a 7.7% year-over-year increase in operating costs, representing 65.9% of net operating revenue compared with 74.6% in the year-ago quarter. Gross margin improved by 870 basis points (bps) to 34.1%. Selling and administrative expenses represented 10.1% of net revenue.

Adjusted earnings before interest, tax, depreciation and amortization (“EBITDA”) in the quarter increased 47.7% year over year to R$1,117.1 million (US$319.2 million), while EBITDA margin grew 570 bps to 32.5%.

Balance Sheet & Cash Flow

Exiting the second-quarter 2016, SABESP had cash and cash equivalents of R$1,374.4 (US$425.5 million), down from R$1,431.9 million (US$398.9 million) at the prior-quarter end. Borrowings and financing decreased 4.9% sequentially to R$10,191.1 million (US$3,155.1 million).

In the first half of 2016, SABESP generated net cash of R$1,375 million, up 47% year over year. Capital spent on the purchase of tangible assets increased 28.2% year over year to R$18.9 million.

Outlook: SABESP plans to spend nearly R$12.5 billion for 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.

Zacks Rank & Other Stocks to Consider

With market capitalization of $6.5 billion, SABESP currently carries a Zacks Rank #2 (Buy). Some other stocks worth considering in the utility industry include Korea Electric Power Corp. (NYSE:KEP) , Just Energy Group Inc. (TO:JE) and Veolia Environnement (PA:VIE) S.A. (OTC:VEOEY) . While Clean Energy Fuels sports a Zacks Rank #1 (Strong Buy), both Just Energy Group and Veolia Environnement carry the same ZAcks Rank as SABESP.