Sabesp Q2: Stretched Valuation Overshadows The Great Result (NYSE:SBS)

Funding Thesis

I like to recommend holding Sabesp (NYSE:SBS) shares after 2Q24 outcomes. Sabesp reported robust leads to 2Q24, even beating market estimates in each income and earnings per share. As well as, the corporate may have far more freedom to make assertive choices as a result of privatization.

Nonetheless, the valuation is extraordinarily stretched after we analyze the corporate’s EV/EBITDA in opposition to its personal historical past. As an analyst who adheres to the worth investing philosophy, I proceed to advocate holding the shares, requiring a better margin of security to advocate a purchase.

Overview Of Sabesp’s 2Q24 Outcomes

Sabesp launched its 2nd quarter outcomes on August 9, and the corporate beat market estimates for income by 21.7% and revenue estimates by 25%, as we will see under.

Subsequent, I’ll make a whole report on every section of the outcomes. It is very important spotlight that the corporate discloses the leads to BRL, and I’ll convert them to {dollars} utilizing the ratio 1 USD = 5.59 BRL, which was the greenback trade fee in Brazil on the final day of the 2nd quarter. Take pleasure in your studying!

Revenues – Above Expectations

Sabesp achieved an excellent 11.9% annual income development, reaching BRL 5.4 billion ($979 million). The expansion was as a result of 6.4% tariff adjustment in Could 2024, and likewise as a result of 3.2% y/y enhance in billed quantity.

In my opinion, privatization ought to present better freedom for administration to make enhancements to the corporate. Subsequently, I imagine that the income outlook is for continued development as a result of stability of tariff costs and the extension of strategic concessions till 2060.

Prices, Bills and Margins – Good value management

The corporate achieved a pleasant 15.5% y/y discount in prices and bills. Nonetheless, this was potential as a result of larger base in 2Q23, when the corporate carried out its voluntary redundancy plan.

With this, the corporate achieved an EBITDA margin of 54% in opposition to 44.8% in 2Q23. It’s believed that the superb observe report of the most recent shareholder, Equatorial (which has a superb observe report of capital allocation), will assist Sabesp proceed to extend revenues, cut back bills and enhance margins.

Debt – Wholesome Leverage

Sabesp ended 2Q24 with internet debt near BRL 16 billion ($2.9 billion) and a money place of BRL 5.2 billion ($930 million). Because of this, the corporate reached leverage of 1.6x, properly under covenants.

As for views, I imagine that new tariff repricing, along with the deal with effectivity, can additional enhance the corporate’s debt profile sooner or later.

Capex – Sturdy Funding Forward

The corporate reported capex of BRL 1.3 billion ($232 million) in 2Q24. The corporate is predicted to considerably enhance investments as a result of New Sanitation Framework, and projections level to whole investments of BRL 70 billion ($12.5 billion) for the whole universalization of providers.

Subsequently, I imagine that the subsequent outcomes ought to present excessive capex, simply because the distribution of dividends ought to cut back, which is why I imagine that the corporate ought to have a dividend yield near 2% for the subsequent 12 months.

Web Earnings – Common End result Issues

With income development and value containment partially offset by larger monetary bills, the corporate achieved a 62% annual enhance in earnings to BRL 1.2 billion ($216 million).

It’s price noting that this enlargement in earnings was additionally impacted by a weaker base in 2Q23. Nonetheless, I imagine that the corporate will proceed to develop its working margins as a result of privatization. But when the outlook is so good, why is there no purchase advice?

Valuation – Very Stretched

One of the vital assertive methods I discover to research an organization is to check its EV/EBITDA a number of in opposition to its personal historical past, and that’s what we are going to do subsequent:

Within the final 3 years, the corporate has traded at a most of seven.6x EBITDA and is presently buying and selling at 7.3x EBITDA. Nonetheless, if it returns to buying and selling on the historic common of the final 3 years of 6.1x EBITDA, this represents a draw back of 16%, which corroborates my advice to carry the shares and watch for a extra opportune second to put money into Sabesp.

And earlier than speaking concerning the dangers of the thesis, it is very important spotlight that Looking for Alpha’s highly effective instruments corroborate my thesis of holding the corporate’s shares.

Potential Dangers To The Thesis

When an analyst recommends holding a inventory, because of this if the inventory goes up, he is not going to take part within the rise. Subsequently, one of many dangers of not shopping for Sabesp shares is that the corporate is now personal, so it’s potential that it’ll expertise an enlargement of multiples by the market.

As well as, the corporate’s principal shareholder can be Equatorial Energia (OTCPK:EQUEY), an organization with a superb historical past of capital allocation in Brazil and one of many largest compounders on the Brazilian inventory trade.

Sabesp’s funding thesis is complicated, and buyers ought to conduct a practical and diligent evaluation earlier than selecting to put money into the corporate.

The Backside Line

My thesis of not investing in Sabesp by no means took under consideration the corporate’s operational elements. In my opinion, Sabesp was among the finest state-owned firms, and now as a privatized firm, it has much more freedom to make higher choices.

Regardless of seeing an organization with glorious margins, an excellent debt state of affairs, and good prospects forward, I don’t really feel assured in seeing that its EV/EBITDA a number of is at its highest ranges within the final 3 years.

Based mostly on this evaluation, I like to recommend holding Sabesp shares. In my opinion, buyers ought to watch for a chance to purchase the corporate’s shares at a extra enticing value, such because the potential 16% draw back. In my opinion, the chance/return ratio isn’t enticing.