SABESP (SBS) Q1 Earnings Up Y/Y On Sales & Margin Growth

Companhia de Saneamento Basico do Estado de Sao Paulo or SABESP (NYSE:SBS) reported impressive first-quarter 2017 results, with net earnings increasing 7.3% year over year to R$674.4 million ($214.8 million).

Earnings per share were R$0.99 or 32 cents per American Depository Receipt (ADR). This compared favorably with the year-ago tally of R$0.92 per share or 24 cents per ADR.

Revenues

SABESP generated net operating revenues of R$3,558.8 million ($1,133.4 million), increasing 17.5% year over year. The top-line growth was driven by tariff hike and rise in billed water and sewage volumes. Also, absence of bonus granted under the company’s Water Consumption Reduction Incentive Program contributed to the year-over-year growth.

The company’s billed water and sewage volumes increased 6% year over year to 924.6 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 24.8 million customers for water and 21.3 million for sewage at the end of the first quarter.

Margins

In the quarter, SABESP recorded a 5.5% year-over-year increase in costs, administrative, selling and construction expenses, representing 71.3% of net operating revenues compared with 79.5% in the year-ago quarter.

Adjusted earnings before interest, tax, depreciation and amortization (“EBITDA”) was R$1,353.4 million ($431 million), up 49.1% year over year. EBITDA margin grew 800 basis points to 38%.

Balance Sheet & Cash Flow

Exiting the first quarter, SABESP’s cash and cash equivalents increased 5.2% sequentially to R$1,983.8 million ($633.8 million) from R$1,886.2 million ($580.4 million) at the prior-quarter end. Borrowings and financing was R$10,296.5 million ($3,289.6 million), down 3.9% year over year.

In the quarter, the company’s net cash generated from operating activities increased 4.2% year over year to R$763.6 million ($243.2 million). Capital spent on the purchase of tangible assets totaled R$10.6 million ($3.4 million), down 17.9% 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 the period 2017−2021.

For 2017, capital spending planned is approximately R$2.3 billion.

Zacks Rank & Keys Pick

With market capitalization of $6.8 billion, SABESP currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the utility industry include Veolia Environnement (PA:VIE) SA (OTC:VEOEY) , Pure Cycle Corporation (NASDAQ:PCYO) and ONE Gas, Inc. (NYSE:OGS) . While Veolia Environnement sports a Zacks Rank #1 (Strong Buy), both Pure Cycle and ONE Gas carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Veolia Environnement’s earnings estimates for 2017 and 2018 were revised upward over the last 60 days.

Pure Cycle Corporation’s average earnings surprise for the last two quarters was a positive 25%.

ONE Gas’ financial performance in the last four quarters was impressive, with an average positive earnings surprise of 13.38%. Also, its earnings estimates for 2018 were revised upward in the last 60 days.

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