Goldman Sachs Predicts 50% Upside for Newly Privatized Sabesp

Goldman Sachs has started covering Sabesp with a buy recommendation and a target price of R$134.30 ($24.64). This valuation suggests a potential upside of over 50% for the water utility company.

Sabesp’s privatization in July 2024 sparked investor interest, with shares initially offered at R$67 while trading at R$83. Three months later, Sabesp’s stock price hovers around R$90.

Goldman Sachs analysts believe the company still presents a unique opportunity for investors. They cite Sabesp’s scale, cost-cutting potential, and ability to participate in auctions as key advantages.

The analysts expect Sabesp to reduce its operating expenses by about 30% over the next five years. This cost reduction will likely come from streamlining the workforce and improving efficiency in areas like energy consumption.

Goldman Sachs suggests investments in distributed generation projects to achieve these goals. Sabesp’s new contracts with municipalities require significant infrastructure investments of nearly R$70 billion ($12.84 billion) by 2029.

The analysts believe Sabesp’s engineering expertise, combined with Equatorial’s capital allocation knowledge, will ensure efficient project execution. This partnership aims to meet universal service obligations effectively.

Sabesp’s Financial Outlook

Despite planned expenditures, Goldman Sachs does not foresee issues with Sabesp’s financial leverage. They estimate the net debt to EBITDA ratio will remain around 2.2 times in the coming years.

This stability is attributed to expanded connections and tariff growth resulting from regulatory changes. The analysts project Sabesp‘s EBITDA to grow at a compound annual growth rate of 14% until 2030.

They also anticipate the dividend yield to increase from the current 2% to about 13% during this period. These projections reflect Sabesp’s strong growth potential and financial health.

As of midday, Sabesp’s shares were up 1.90%, trading around R$90. The stock has gained 22.9% year-to-date, bringing the company’s market value to R$61.9 billion ($11.36 billion).

This performance underscores investor confidence in Sabesp’s future prospects and its potential as a lucrative investment opportunity.

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