Oct. 10 (Bloomberg) -- Brazil’s push to cut electricity rates is driving investors out of power companies and into water utilities, making Cia. de Saneamento Basico do Estado de Sao Paulo the second best-performing stock among regional peers.
Sabesp, as the Americas’ largest publicly traded water utility by market value is known, posted a total return of 76 percent this year before today, the second-most among 13 publicly traded water utilities in the Americas with a market value of at least $500 million. Eletropaulo Metropolitana SA, Brazil’s biggest electricity distributor, dropped 44 percent. President Dilma Rousseff on Sept. 11 unveiled a plan to force power companies to cut rates by as much as 28 percent.
Four of 20 analysts that cover Sabesp, including Bradesco Corretora, have shifted to buy ratings this month and Barclays Capital Plc reiterated a buy call, the best improvement in recommendations among regional peers, data compiled by Bloomberg show. Water companies offer protection from Rouseff’s interventionist policies because states have more control over rates than the federal government, attracting investors looking for stable earnings provided by utilities, said Jose Francisco Cataldo, chief strategist at brokerage Agora CTVM SA.
“Water utilities, by presenting solid and predictable revenue and always planning long-term investments, are very similar to electric companies from the perspective of investors, but with the advantage of not being subject to the federal government’s interference,” Cataldo said in a telephone interview from Rio de Janeiro. “That’s why water companies, especially Sabesp, which is the biggest and best known, are viewed as substitutes to electric utilities.”
Sabesp fell 0.3 percent to 87.99 reais at the close of trading in Sao Paulo today, while the benchmark Bovespa index slid 0.8 percent.
Sabesp didn’t respond to a request for comment.
Brazil is forcing power utilities to cut rates that manufacturers say are the fourth-highest in the world in a bid to boost competitiveness. Contracts affecting about 20 percent of Brazil’s energy generation are set to expire by 2017 and will be renewed under new rules that have a goal of cutting power costs by 16 percent for households and as much as 28 percent for businesses and large consumers, Rousseff said.
“The electricity sector has been suffering this year with the rate reset, which was tougher than previous reviews,” Eletropaulo’s press office said in an e-mailed response to questions. The Brazilian distribution unit of AES Corp. “was very impacted by the rate reset, which established a new return level for the company’s investors. Nevertheless, the company still has strong cash generation.”
Low Water Rates
Sao Paulo-based Sabesp, which serves 23.9 million people, plunged the most in a year on Sept. 12 as the MSCI Brazil/Utilities index dropped to a two-year low amid concern the government might extend the plan beyond power companies. The electricity rate reductions are part of broader efforts by Rousseff to boost growth in Latin America’s biggest economy that also include tax cuts.
A Ministry of Energy official who asked not to be identified in accordance with the government’s policy declined to comment.
Sabesp’s stock rebounded as investors looked more closely at water utilities and found that in addition to the more favorable regulatory environment, the already low price of water in Brazil makes intervention unlikely, said Erick Scott Hood, an analyst at Sao Paulo-based brokerage SLW Corretora.
“Water is already so cheap, I don’t see how the federal government could interfere with these utilities to lower prices,” Hood, who has a hold recommendation on Sabesp, said in a phone interview.
The state of Sao Paulo’s regulatory agency, Arsesp, is reviewing Sabesp’s rates, as it does every four years. Its proposed changes are scheduled to be released for public review in 30 days, after being postponed yesterday. The company trades at 12.2 times its estimated earnings for the year, the most expensive water utility in Brazil.
“It’s a defensive stock and, with markets doing so poorly, it attracted a lot of people to the point where it’s now expensive,” Fausto Gouveia, who helps manage 380 million reais ($186.7 million) at Legan Administracao de Recursos, said in a phone interview from Sao Paulo. “Sabesp has already gained a lot this year, and I don’t think it’s attractive at the current price.”
‘Politics Can Change’
Other Brazilian water utilities have gained this year as well. Cia. de Saneamento do Parana, known as Sanepar, posted a total return of 92 percent, the best performance among regional peers. Cia. de Saneamento de Minas Gerais, or Copasa, advanced 48 percent.
“Water utilities can suffer setbacks in negotiations with mayors or governors, but their portfolio of clients is broader than the electric companies, guaranteeing that revenues do not vary so much,” Gesner Oliveira, a former president of Sabesp and the Brazilian antitrust regulator Cade who now works as a consultant at GO Associados, said in a phone interview from Sao Paulo.
Demand for Sabesp’s services will keep expanding because water and sewage are basic needs, Hood said. About 20 percent of the population in Brazilian cities and 75 percent in rural areas have no sewage service, according to IBGE, the national bureau of statistics.
“An international crisis can’t hurt these utilities’ sales,” Hood said. “That’s another reason why they are less risky than the electricity companies and should continue rising.”
Sanepar slid 2.7 percent to 8.21 reais in Sao Paulo today and Copasa rose 0.7 percent to 48.26 reais.
To contact the reporter on this story: Denyse Godoy in Sao Paulo at firstname.lastname@example.org