Earlier last week, Companhia de Saneamento Basico do Estado de São Paulo, or SABESP (SBS), declared that the Sao Paulo State Sanitation and Energy Regulatory Agency (ARSESP) approved the tariff readjustment index of 4.43% over water and sewage tariffs as of Sept 11 from 5.10% in September 2008. The decrease in tariff is expected to have a positive impact on the company in the near term.

SABESP managed to post encouraging results during the second quarter in a very difficult business environment. Compared to the corresponding quarter last year, operating results were positive Incorporatedluding a 3% increase in water and sewage volumes, and a 7.3% increase in net operating revenues.

During the quarter, EBITDA increased 4.8% year over year and net income ballooned 29.1% year over year. Net debt also decreased to R$5,776.3 from R$5,873.0 million in the previous quarter.

Despite an adverse economic environment worldwide, we believe the stock remains attractive as the company will be less affected by the current international crisis. Our belief is based on the company’s continued solid results, attractive valuation, decent dividend yield, and last but not least the very nature of its business, which is inelastic, not cyclical and based on local demand.

The monopolistic nature of business is also helpful. Additionally, the short-term outlook for SABESP remains promising, mainly considering the more positive performance of the Brazilian market compared to difficult economic situations in more developed countries.

SABESP will also benefit from a more stable and clear regulatory framework from the Brazilian Congress, which says that any new municipal companies will have to compensate existing state companies in case they want to become responsible for the service in a specific area.

We believe that this regulation is strong enough to obviate the attempt create new local companies. We understand that after this new legislation private companies can participate in public private partnership with state companies for local projects.

Zacks Investment Research
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