r/valueinvesting
SBS (Sabesp) seems like a good diversification value play for those seeking non-US non-AI/tech exposure to have
SBS is a compelling value play in Brazilian water utilities, supported by strong financials, privatization benefits, and favorable laws.
- Strong financial growth with 11% revenue and 32% net income YoY growth, alongside a low PE of 11.5 and high 62.9% EBITDA margins.
- Benefiting from Brazil's 2020 New Sanitation Framework law mandating universal coverage by 2033, securing long-term demand.
- Improved operational efficiency post-privatization, evidenced by a 13% reduction in headcount and 86% energy consumption on the free market providing cost tailwinds.
The Brazilian utilities company Sabesp (SBS), Companhia de Saneamento Básico do Estado de São Paulo (good luck pronouncing that). It's a potentially very interesting value play.
It's a former state-owned utility that was privatized roughly 20 months ago
- Revenue: BRL 6B (up 11% YoY)
- EBITDA: BRL 3.8B (up 26% YoY, expected to grow by 27%, margin at 62.9%)
- PE ratio: 11.5
- Net Income: BRL 1.5B (up 32% YoY, growing faster than revenue)
- CapEx: BRL 3.7B in one quarter alone (up 31% YoY)
- Net Debt: BRL 32.5B (leverage at a comfortable 2.4x EBITDA)
- Cash: BRL 19.2B on hand (covers 5+ years of debt service)
- Debt Maturity: 64% maturing in 2031 or later (near-zero refinancing risk)
- ROIC: 11% trailing (ROE at 17%)
- Headcount: Down 13% YoY (structural cost base permanently lower)
- Energy: 86% of consumption now on the free market (cost tailwind ongoing)
Brazil passed the New Sanitation Framework law in 2020, which set a national deadline requiring all water and sewage concessions to achieve universal service coverage by 2033.
As the single largest water and sewage utility in the Western Hemisphere, SBS is positioned quite well to capture this transformation. Its already serving 30 million people in São Paulo, and that customer base is not going anywhere.
I like it as an investment because every dollar I invest goes into a regulated asset base that earns a contractually defined return. Don't need a Brazilian brokerage to buy the stock, since it trades on the NYSE under the ticker SBS.
Did a deep dive on the company, and identified \~21 specific targets and milestones going forward for management's bullish thesis to properly play out. Sharing here for anyone that might find it useful (seems like this sub doesn't allow images, so added a link to it)
Nice AI write-up on SBS. Trademates.co rates this BUY and MEDIUM risk, which is rare for a utility. The analyst consensus is solid with 19 buys and 2 holds. But that 84% drop and -20% revenue growth are scary. The bear case is a liquidity crunch if net debt/EBITDA goes above 4x or a drought hits Sao Paulo. Currency risk on BRL is real too. Entry plan is 50% at 5.80 and 50% at 5.00 with a stop at 5.10. Worth a small position if you believe in the privatization story