Business
Morgan Stanley backs Sabesp as top pick in Brazil’s water sector
Morgan Stanley backs Sabesp as top pick in Brazil’s water sector
About this update from Companhia De Saneamento Basico Do Estado De Sao Paulo Sabesp
Morgan Stanley reaffirmed its positive stance and preference for Sabesp by maintaining its buy recommendation and increasing the target price from R$128 to R$145, assessing that there is room for growth given the large investment opportunity in the sanitation sector.Analysts observe that Brazil’s water and sewerage industries are undergoing structural changes. The government’s objective of universal access—99% of the population having access to clean water and 90% to sewage collection by 2033—remains a significant issue. According to local media news outlet InfoMoney, decades of underinvestment and skewed incentives have resulted in significant gaps: more than 30 million Brazilians still lack access to water, and over 90 million need sewage collection.A massive investment pipelineThe outlook predicts an investment boom. Approximately R$100 billion in projects are likely to be auctioned in the near future. However, this number is only a fraction of the estimated R$900 billion needed by 2033 to satisfy universal access goals.Against this backdrop, Morgan Stanley anticipates private operators taking the lead. Inorganic growth prospects, such as acquisitions or concessions, are expected to attract robust bids from private entities, with Sabesp and Equatorial (EQTL3) leading the way. In contrast, state-owned utilities are anticipated to fall behind.Even without acquisitions, Sabesp and Equatorial have good fundamentals, including a 20% upside potential, an average real internal rate of return (IRR) of 12%, above-market growth, and strong governance structures. If Sabesp wins the UniversalizaSP initiative, analysts expect an additional R$6.0 per share for SBSP3 and R$1.0 per share for EQTL3, based on R$25 billion in Capex and a return of 200 basis points above the cost of capital.Balanced view on Copasa and SaneparWhile Morgan Stanley sees potential in Sabesp and Equatorial, it is more cautious about Copasa (CSMG3) and Sanepar (SAPR11). The bank maintained an equal-weight rating for both, indicating exposure consistent with market averages, but lifting target prices to R$28 and R$40, respectively.The rationale stems from their risk-reward balance and the lack of identifiable drivers. Despite this, shares have generated substantial gains: price targets have grown by almost 35% on average, and utilities have returned nearly 26% over the last year, exceeding the I...