Brazil’s Water Tastes Pretty Good…


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Brian has held positions with a variety of financial services companies, including Cantor Fitzgerald and FTI Consulting. An avid traveler and investor, Brian enjoys scouring emerging and frontier markets for hidden gems (Oxstones). Brian holds an M.B.A. with a concentration in finance from Georgetown University and a B.A. in economics and political science from Rutgers University. He also completed graduate studies in international management at the University of Oxford, Trinity College.

SBS, Companhia de Saneamento Basico do Estado de Sao Paulo – $48.33, 11/22/10 – SBS is a Brazil-based company that provides water and sewage services to a range of residential, commercial, industrial and governmental customers in 366 municipalities in the state of Sao Paulo, including the city of Sao Paulo. The Company also supplies water on a wholesale basis to six municipalities in the Sao Paulo Metropolitan Region.  The Company’s main shareholder is the Government of the State and has its shares traded in the New York and São Paulo Stock Exchanges.

FUNDAMENTALS – As Brazil’s economy continues its rapid expansion, coupled with an aging demographic and a growing middle class (rising from 38% to 50% of the population since 2003), the market for water services is expected to continue to draw considerable investment.  Significant private and State investment will be needed as Brazil modernizes its infrastructure and continues to compete with emerging and developed nations.  This investment timeline will be accelerated in the next 5 years as the country prepares to play host to the world during the 2014 World Cup and 2016 Summer Olympics. From 2009 to 2013 SBS will invest R$ 8.6 billion to continue providing water to the entire population of the cities that the company supplies, as well as widening the sewage collection and treatment rates.  Strong presence and a well-established business with considerable size and scale place the company in a privileged position to expand its coverage through not only Brazil, but also abroad.  Expect SBS to maintain its technological innovation, commitment to expansion, and to retain its dominant presence within the Brazilian water services industry for the foreseeable future.

OPPORTUNITY – SBS is significantly undervalued on a comparative basis.  Currently trading at 7.8x the TTM EPS, its PE ratio is 62.2% below the average of the Water Utilities industry.  With a PE ratio among the lowest in the industry, paired with a 5-year growth rate of 21.6% which is among the highest in the industry, SBS holds considerable hidden value given its premium position in a growing market.  Additionally impressive is the company’s low Debt to Equity ratio (1.20), which points to potential lower risk levels than industry comparables (avg. D/E 10.56).  Finally, SBS faces little to no competition in the municipalities that it currently serves, leaving significant investment to be set aside for expansion.

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