SABESP (SBS) Q1 Earnings Beat, Up Y/Y On Sales Growth

Companhia de Saneamento Basico do Estado de Sao Paulo or SABESP (NYSE:SBS) reported impressive results for first-quarter 2016. The company’s net income increased 97.6% year over year to R$628.8 million (US$161.2 million).

Earnings per share came in at R$0.92 compared with R$0.47 in the year-ago quarter. The quarter’s earnings were equivalent to 24 cents per American Depository Receipt which surpassed the Zacks Consensus Estimate of 19 cents.

Revenues

SABESP generated net operating revenue of R$3,027.8 million (US$776.4 million), reflecting year-over-year growth of 22.7%. The top line was driven by tariff hike, lower losses due to a bonus grant related to Water Consumption Reduction Incentive Program and increase in billed water and sewage volumes.

In the quarter, SABESP’s billed water and sewage volumes inched up 1.9% year over year to 872.1 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 2.7% and sewage connections rose 3.2% year over year. Its client base included 25.6 million customers for water and 22.9 million for sewage at the end of first-quarter 2016.

Margins

In the quarter, SABESP recorded a 10.4% year-over-year increase in operating costs, representing 64.1% of net operating revenue versus 71.2% in the year-ago quarter. Gross margin improved by 710 basis points (bps) to 35.9%. Selling and administrative expenses represented 15.4% of net revenue.

Adjusted earnings before interest, tax, depreciation and amortization (“EBITDA”) in the quarter decreased 33.1% year over year to R$907.8 million (US$232.8 million), while EBITDA margin declined 2500 bps to 30.0%.

Balance Sheet & Cash Flow

Exiting the first-quarter 2016, SABESP had cash and cash equivalents of R$1,431.9 million (US$398.9 million), down from R$1,639.2 million (US$413.9 million) at the prior-quarter end. Loans and financing decreased 7.6% sequentially to R$10,719.1 million (US$2,985.8 million).

In the first quarter, SABESP generated net cash of R$732.6 million (US$187.8 million), up 53.8% year over year. Capital spent on the purchase of tangible assets increased 53.6% year over year to R$12.9 million (US$3.31 million).

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 $5.4 billion, SABESP currently carries a Zacks Rank #2 (Buy). Some other stocks worth considering in the utility industry include Avangrid, Inc. (NYSE:AGR) , Artesian Resources Corp. (NASDAQ:ARTNA) and The York Water Company (NASDAQ:YORW) . While Avangrid sports a Zacks Rank #1 (Strong Buy), both Artesian Resources and The York Water Company carry a Zacks Rank #2.

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