On Monday, Citi updated its financial outlook for Cia de Saneamento Basico do Estado de Sao Paulo (SBSP3:BZ) (NYSE: SBS) shares, commonly known as Sabesp, increasing the price target to R$137.00, up from R$97.00. The firm maintained a Buy rating on the stock of the Brazilian utility company.
The revision of the price target comes in response to new regulatory and concession contract models that have recently been implemented. According to Citi, the updated valuation reflects these changes, which are expected to impact Sabesp's financial performance.
The report from Citi highlights that Sabesp is currently trading with an estimated 14% real Internal Rate of Return (IRR) under the new regulatory framework.
This IRR is considered to be lower than the valuation of other comparable companies within the sector, which Citi notes as generally undervalued.
Citi's analysis suggests that if Sabesp were to trade with a real IRR of 11%—which would represent a 200 basis points premium to the firm's estimated 9% real cost of equity (kE)—the stock would have an approximate value of R$106 per share. Despite this, Citi continues to recommend Sabesp as a Buy and selects it as one of their top picks in the industry.
The price target upgrade signifies a positive outlook for Sabesp's shares in light of the new regulatory environment, reinforcing Citi's confidence in the company's potential for growth and performance in the market.
InvestingPro Insights
As Citi expresses confidence in Sabesp's growth potential, real-time data from InvestingPro aligns with this optimistic view. The company, with a solid market capitalization of $9.62 billion, is trading at a compelling P/E ratio of 14.07, indicating that its stock could be undervalued relative to its near-term earnings growth. Adding to the attractiveness, Sabesp's PEG ratio stands at a low 0.57, suggesting that the stock's price is reasonable in relation to its expected earnings growth.
From an investment standpoint, Sabesp has demonstrated a commitment to shareholder returns, having raised its dividend for 3 consecutive years. Moreover, the company has maintained dividend payments for 13 consecutive years, with a current dividend yield of 1.6%, which is particularly appealing to income-focused investors. Additionally, the InvestingPro Tips highlight that Sabesp's liquid assets exceed its short-term obligations, providing a cushion for operational flexibility and financial stability.
For those seeking further insights and analysis, InvestingPro offers more tips on Sabesp, including the company's profitability over the last twelve months and its position as a prominent player in the Water Utilities industry. Readers interested in a deeper dive into Sabesp's investment profile can use the promo code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, gaining access to a total of 9 InvestingPro Tips that can guide investment decisions.
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