UBS has raised its rating on Companhia de Saneamento Basico do Estado de Sao Paulo (Sabesp) from Neutral to Buy, simultaneously lifting the target price to R$169.00 from R$162.00. Currently, Sabesp’s shares trade around $25.53, close to their 52-week peak of $26.46, as analysts broadly maintain a strong Buy consensus.
The Brazilian company specializing in water and waste management has faced stock underperformance, largely attributed to market apprehension about water scarcity. However, data from InvestingPro indicates that Sabesp’s stock has generated a substantial total return of 74.8% over the past year, demonstrating robust performance despite the challenges.
UBS argues that the existing market response does not adequately reflect the company's financial and operational strength, highlighting the present share price as a compelling entry opportunity. Based on InvestingPro’s Fair Value model, Sabesp appears fairly valued and boasts an exceptional financial health rating classified as "GREAT." This underscores the company’s sound fiscal foundation amid a challenging environment.
Further, UBS points to regulatory frameworks that act as mitigating factors. These include the prospect of elevated future tariffs to compensate for low volume years and tariff adjustments intended to rebalance effects from extreme climatic events. Such mechanisms provide a cushion against earnings volatility tied to water scarcity issues.
UBS also identifies the forecasted rainfall over the upcoming three to four months as a potential catalyst for share price movements. The valuation update includes an adjustment to roll the Enterprise Value/Regulatory Asset Base (EV/RAB) multiple forward to the 2027 net RAB, reflecting a longer-term view on asset valuation and returns.
On the operational front, Sabesp reported its earnings for the third quarter of fiscal 2025, revealing a strong increase in earnings per share (EPS). The EPS was recorded at $0.599, exceeding analyst estimates of $0.2971 by over 100%, signaling effective cost management or higher profit margins. Nevertheless, total revenue fell short of projections, registering $1.04 billion against the anticipated $1.3 billion, indicating a mixed financial outcome for the quarter.
This earnings beat, despite revenue pressures, suggests operational resilience, which may contribute positively to investor sentiment. The mixed results highlight challenges in revenue generation but demonstrate the company's ability to maintain profitability.