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Sabesp Drops as Profit Outlook Dimmed by Falling Dam Levels

Cia. de Saneamento Basico do Estado de Sao Paulo, Brazil’s biggest water utility, fell the most since 2011 on concern the worst drought in at least four decades will crimp profit.

Shares of Sabesp, as the company is known, lost 7.5 percent to 19.61 reais at the close of trading in Sao Paulo, the biggest one-day drop since August 2011. Trading volume was 3.3 times the three-month daily average. That was the worst performance on the benchmark equity gauge Ibovespa, which added 1.5 percent.

Water levels in the Cantareira basin, which supplies almost half of the 20 million residents of metropolitan Sao Paulo, fell to 14.6 percent of capacity yesterday, the lowest since the data series began in 1982, according to the National Water Agency’s website. The drought means Sabesp’s net income may fall 59 percent to 742 million reais ($318.2 million) this year from 2013, according to a research note today from UBS AG analysts Lilyanna Yang and Carlos Herrera.

“This is a result of extremely poor rainfall,” Yang and Herrera wrote as they cut their recommendation on the stock to sell from the equivalent of hold. “We are pessimistic in the near-term.”

Sabesp has been forced to ration water as the reservoir levels at the Cantareira water system have sunk. The utility is offering business and residential clients in the greater Sao Paulo area a 30 percent discount through August if they cut their monthly usage 20 percent below their average between February 2013 and January 2014, the Sao Paulo-based company said on Feb. 1.

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