Brazil’s Sabesp Tops Bovespa Index on Tariff Outlook

Cia. de Saneamento Basico do Estado de Sao Paulo is the best performing stock on the Bovespa in the first half on speculation the Brazilian utility will win approval to raise rates more than in previous years.

Sabesp, as the world’s largest water utility by market value is known, has climbed 48 percent since the start of the year, the biggest gainer on the Bovespa index, which dropped 4.2 percent in the period. Brazil’s two-biggest utilities by market value, Cia. Energetica de Minas Gerais and CPFL Energia SA, posted a 41 percent gain and a 2.4 percent drop, respectively.

Investors are betting that Sabesp will benefit from a tariff policy change being considered by regulators that may take effect as soon as November, said SLW Corretora analyst Erick Scott Hood and Omar Camargo Investimentos analyst Felipe Rocha. The company is also benefiting as slowing growth in Brazil, the world’s second-largest developing economy, prompts investors to seek refuge in companies whose revenue is not as sensitive to swings in demand, Rocha said.

“There’s a positive outlook for the tariff revision,” said Vicente Koki, a utilities analyst at CGD Securities, who estimates a rate increase of about 8 percent in coming years. “The new tariff structure should bring better increases than in previous years.”

Changes to the model used to set tariffs by the Sao Paulo water and energy regulator, known as Arsesp, will make the rate changes more transparent and will reflect the pace of investments, Mario Azevedo de Arruda Sampaio, Sabesp’s investor relations director, said by telephone. Sabesp raised tariffs by 4.1 percent in 2010 and 6.83 percent in 2011, he said.

‘Ahead of the Curve’

“The market is always trying to get ahead of the curve,” he said, adding that the company is performing better than electricity utilities because slowing growth pares energy demand from manufacturers. “Electric utilities are more dependent on GDP. We depend on population growth.”

Electricity utilities Eletropaulo Metropolitana SA and Centrais Eletricas Brasileiras SA have declined 31 percent and 27 percent this year, respectively. Brazil’s central bank, in its quarterly inflation report yesterday, trimmed its 2012 growth forecast to 2.5 percent from a March estimate of 3.5 percent, citing Europe’s debt crisis and sluggish demand.

Borrowed shares in Sabesp, an indication of short selling, total 0.7 percent of floating equity, the third-lowest of any company in the index, data compiled by Bloomberg show.

‘Moments of Crisis’

“In moments of crisis, these utility shares act as a defensive bet,” Carlos Nielebock at Icap, said in a telephone interview from Sao Paulo. “You know the company may grow slowly, but it’s consistent.”

Sabesp, which serves 27.1 million people, more than doubled first-quarter net income to 491.9 million reais, according to a May 10 regulatory filing. Revenue rose 13 percent to 2.59 billion reais.

Sabesp fell 29 centavos to 77 reais in Sao Paulo trading.

Cielo SA, Brazil’s biggest card-payment processor, is the second-best performer on the index this year with a 47 percent gain.

OGX Petroleo & Gas Participacoes SA, which plunged in the two days after cutting an output forecast at its first two wells, was the worst performing with a 60 percent loss, followed by Usinas Siderurgicas de Minas Gerais SA’s voting stock, which declined 55 percent amid rising debt costs and shrinking demand from carmakers.

“No one is going to stop consuming water or change their sewage service because the economy is slowing,” said Sabesp’s Arruda Sampaio.

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