Sabesp: from the excitement of action with privatization as a priority to caution with long-term privatization

SAO PAULO – Sabesp’s shares (SBSP3), which registered a drop of about 19% in 2021, had a boost last Friday (20th), closing with a spike of 10.86%. However, this Monday (23), the assets came to fall 4.55%, to R$ 13.84, even though it greatly softening the fall and closing at a low of 1.04%, at R$ 36.17.

What caused the actions to soar on Friday was the speech of the former president of the Chamber of Deputies, Rodrigo Maia (No party – RJ), who took office as secretary of Projects and Strategic Actions of the São Paulo government. The new secretary pointed out Sabesp’s privatization as a priority for the São Paulo government. It should be noted that previous statements by members of the São Paulo government indicated that there would be no progress on the agenda, neither on capitalization nor on privatization until 2022 (see more by clicking here).

At the time, Credit Suisse analysts said the statement was positive. Sabesp’s shares are currently traded at 0.70 times the EV/RAB multiple (EV = enterprise value, or market value + net debt”; RAB = regulatory asset base) and its share price in 2021 was negatively pressured by weak results, concerns about pass-throughs and a disappointing message from management in the second quarter of 2021, analysts noted. In other words, Maia’s speech was a positive trigger.

On Saturday (21), the governor of São Paulo, João Doria, reinforced his intention to privatize Sabesp. However, he highlighted that this is a long-term project, as before the future privatization, the company will need to meet targets established in its strategic plan and increase the water and sanitation network in the State of São Paulo. Doria pointed out that Sabesp will be prepared over the years for a privatization program, considering the new sanitation framework and the expansion of its services.

“The government of São Paulo intends to hire the International Finance Corporation (IFC) to carry out the studies of the privatization process. Initially, the options for privatization or capitalization are on the table, without losing control of the State of São Paulo, which holds 51% of the company’s capital”, highlights Levante de Ideias de Investimentos.

Analysts at the research firm point out that Sabesp’s privatization is seen with great expectations by the market. “In fact, this would be very beneficial to the company, which would be expected to improve the efficiency of its operations and encourage cost optimization. The process would also bring better governance to the company, with its management not based on government indications”, they assess.

As a result, expectations were reflected in Sabesp’s share price on Friday, which, with Rodrigo Maia’s statement, reached maximum levels. “With the process advancing, the market should continue to price the increased efficiency of its future operations, in addition to better management of the company as a whole.”

However, with the new declarations that the process could take place in the long term, the shares came to fall sharply, as highlighted above, even though closing down around 1%. Thus, the view that the process will take place in the long term seems to be confirmed.

“We still see some risks and obstacles to Sabesp’s privatization, the main one being the proximity of the electoral calendar (…) In addition, there are doubts about whether the project will be carried out until 2022. In statements, the Infrastructure and Environment secretary , Marcos Penido, stated that, with the approval of the new sanitation law, the priority now would be to guarantee the universalization of basic sanitation services, thus allowing the privatization of the company to take longer than expected”, pointed out the Raise.

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