Sabesp Toppling Tractebel as Water Beats Power: Corporate Brazil

Cia. de Saneamento Basico do Estado de Sao Paulo is close to becoming Latin America’s biggest utility by market value after a 67 percent surge in the past year spurred by investors trading power stocks for water.

The state-run water company’s market value rose to a record $11.1 billion at the end of last month, narrowing the gap to generator Tractebel Energia SA to about $360.7 million, data compiled by Bloomberg show. That’s down from $1 billion at the end of last year and $3.89 billion at the start of 2012.

Sabesp, already the world’s largest water utility, is luring investors seeking the safety of utilities as stagnant economic growth and government intervention cause the benchmark Bovespa index to lag behind regional peers. State water companies offer protection because they aren’t regulated by the federal government, which is clamping down on industries from electricity to banks and telecommunications in a bid to hold down inflation and spur the economy.

“We’re living in a moment when the market is very selective and searching for shares that don’t have a lot of volatility,” Henrique Kleine, an analyst at Magliano Corretora, said in a telephone interview from Sao Paulo. “Sabesp fits that bill.”

Sabesp is handing investors the Americas’ second-best return on equity among peers as a swelling middle class in Brazil’s richest and most-populous state fuels a building boom, boosting demand for sewage and water services. The company’s 17 percent return on equity in the fourth quarter was the best after Chile’s Aguas Andinas SA’s 20 percent return.

Tractebel Tops Rivals

Brazilian President Dilma Rousseff last year unveiled a plan to force power companies to either cut prices that manufacturers say are among the highest in the world or return contracts to be re-auctioned when they expire, triggering a selloff in electricity utilities.

Tractebel leapfrogged Cia. Energetica de Minas Gerais, CPFL Energia SA and Centrais Eletricas Brasileiras SA in the fourth quarter to become the biggest utility after sidestepping pressure to cut rates because its contracts don’t expire for at least 14 years. Florianopolis, Brazil-based Tractebel has gained 11 percent in the past year, less than Sabesp’s 36 percent rally, which is the most of any utility on the Bovespa index.

‘Underperforming Peers’

The gauge has declined 16 percent in the period in U.S. dollar terms, while the main benchmarks in Venezuela, Mexico and Argentina all gained. The Bovespa is underperforming peers after gross domestic product expanded 0.9 percent in 2012, the slowest pace since 2009. At the start of last year, Finance Minister Guido Mantega predicted stimulus measures would help the economy grow 4.5 percent, while economists surveyed by the central bank forecast 3.3 percent.

Sabesp, which serves the city of Sao Paulo and 362 municipalities in the state, aims to add 1.9 million new connections through 2020.

“There is a consensus in society -- within Sabesp, within the state and the federal government -- that in order to universalize access to sewage services it’s necessary to invest, and in order to do that, they need higher rates,” Marcio Prado, an analyst at Banco Santander who rates the stock as buy, said by telephone from Sao Paulo. “Opportunities to grow are much better for Sabesp. The sector is much more interesting than electricity.”

Government Pressure

Still, Sabesp may face some of the same pressures to cut costs as power utilities. The Sao Paulo state water regulator, known as Arsesp, approved a 2.4 percent provisional increase in the rate Sabesp charges for water, less than the 13 percent price rise it requested in January. The rate will be revised again in August after Arsesp concludes a study on the company’s assets. Prado says he expected a 7 percent increase.

“The recent tariff increase missed expectations,” Vicente Koki, an analyst at CGD Securities who rates the stock neutral, said in a telephone interview from Sao Paulo. “Sabesp’s shares have already risen so much, but in recent months there are some signs that the stock is stalling.”

Sabesp’s press office declined to comment on the company’s market value and the tariff revision. Tractebel also declined to comment.

Sabesp continues to have a higher overall consensus analyst rating than other Brazilian utilities. There are 10 buy recommendations, 4 hold and 2 sell ratings among 17 analysts that cover the stock. Tractebel has 13 buys, 7 holds and 2 sells, while only one analyst recommends buying state-run utility Eletrobras. Two others say hold and seven say sell.

“I’ve been recommending Sabesp for some time,” Magliano’s Kleine said. “It’s always beating expectations. Their profitability is exceptional. Sabesp is a defensive stock -- it provides a service and people aren’t going to stop consuming water.”

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