Executive Summary / Key Takeaways

• SABESP is undergoing a profound transformation, driven by a strategic pivot towards privatization, aiming to unlock significant value through enhanced operational efficiency and a bold R$70 billion investment plan through 2030 for universal sanitation coverage.
• Recent financial performance demonstrates strong operational momentum, with Q2 2025 net revenue growing 7.4% year-over-year and EBITDA margin surging from 54.9% to 66.1%, fueled by tariff adjustments, volume growth, and aggressive cost-cutting initiatives including workforce reduction.
• The company is strategically diversifying into new business lines like waste-to-energy and solar power generation, leveraging technological advancements and ESG principles to create additional revenue streams and reduce operational costs.
• Despite a healthy leverage ratio of 1.9x net debt/EBITDA, SABESP faces risks from foreign exchange volatility, regulatory uncertainties, and ongoing legal proceedings, which require careful monitoring.
• SABESP's extensive infrastructure and strong regulatory positioning provide a significant competitive moat, while its focus on client-centricity and data analytics is enhancing service quality and operational effectiveness.

A New Era for Brazil's Sanitation Giant

Companhia de Saneamento Básico do Estado de São Paulo (SABESP), established in 1954, stands as a cornerstone of Brazil's essential utilities sector, providing critical water and sewage services across 375 municipalities in São Paulo State. The company's journey has been marked by significant challenges, including navigating a major water crisis in 2015, which spurred substantial investments to bolster water security. This history has forged a resilient enterprise, now embarking on a transformative path to become more agile, innovative, and client-centric, with a clear mandate to generate value for all stakeholders.

The broader utilities landscape in Brazil is characterized by a growing demand for infrastructure development, driven by urbanization and a national push for universal sanitation coverage. SABESP's strategic evolution is deeply intertwined with these trends, positioning it at the forefront of a sector ripe for modernization and efficiency gains. The company's foundational strengths, including its extensive infrastructure network, established regulatory licenses, and strong brand presence, provide a robust platform for its ambitious growth objectives.

Competitive Dynamics in a Critical Sector

SABESP operates within a competitive yet highly regulated environment, primarily contending with other state-owned utilities like Companhia de Saneamento do Paraná (Sanepar) (SAPR11) and Companhia de Saneamento de Minas Gerais (Copasa) (CSMG3), as well as global players such as Veolia Environnement (VEOEY). SABESP's operational scale, serving 9.5 million water connections and 8.2 million sewage connections as of December 31, 2024, provides a distinct advantage, potentially enabling greater efficiency in service delivery across a broader geographic area compared to its regional Brazilian peers. Its integrated water and sewage management offerings, coupled with deep local market knowledge and regulatory expertise, differentiate it as a stable and adaptable player.

However, SABESP's state-owned nature has historically imposed certain limitations, particularly concerning workforce management and outsourcing, which can impact cost efficiency. While direct quantitative comparisons with all private competitors are challenging to ascertain, qualitative factors indicate that SABESP's extensive network and regulatory advantages create high barriers to entry, helping to defend its market position against both direct and indirect competitors. The company's disciplined capital expenditure strategy is actively building a strong and sustainable competitive moat, with focused investments in infrastructure improving service quality and creating high barriers to entry.

Technological Edge and Innovation Driving Efficiency

While not a traditional technology company, SABESP is strategically leveraging innovation to enhance its operational efficiency, service quality, and environmental stewardship. A new invoicing system, implemented in October 2021, and ongoing heavy investments in IT systems are designed to improve customer service, streamline operations, and restore doubtful account (PCLD) rates. The company is also deploying data analytics, sensors, and system automation to capture intelligence, optimize processes, and detect fraud, aiming for a more centralized decision-making strategy.

Beyond core operations, SABESP is pioneering new technologies in environmental services:

• Waste-to-Energy: Through a 20% stake in Foxx URE-BA, SABESP is involved in the URE Barueri project, which will be Brazil's first power generation plant from urban solid waste incineration. This facility is designed with an installed capacity of 20 megawatts, capable of selling approximately 60 megawatts, and treating 300,000 tons of urban solid waste annually. This initiative directly addresses increasing landfill costs and contributes to ESG goals by reducing greenhouse gases.
• Renewable Energy Generation: SABESP holds a 49% stake in Katerra SP Energia SA, focusing on photovoltaic energy. Plans include constructing four floating generation plants, with the first 5-megawatt plant on the Jaguari reservoir scheduled to begin operations by 2023. The company aims to generate its own energy by 2026, expecting a significant positive impact on expense reduction.
• Infrastructure Materials: A 45% stake in SP SA, a paving company, involves a R$40 million investment by 2023 to produce cold asphalt. This technology will be used in SABESP's asphalt recomposition services, particularly in smaller cities, improving service quality and addressing public perception issues related to road damage.

These technological advancements and strategic investments are not merely operational enhancements; they are critical components of SABESP's competitive strategy, contributing to cost reduction, revenue diversification, ESG alignment, and strengthening its overall market positioning.

Financial Performance: A Trajectory of Growth and Efficiency

SABESP's financial performance reflects a company in transition, demonstrating robust growth in revenue and profitability, particularly in recent periods. In Q2 2025, net revenue grew 7.4% year-over-year, driven by higher volumes and significant tariff adjustments, including a notable 20% increase for industrial clients. This operational efficiency translated into a substantial improvement in the EBITDA margin, which jumped from 54.9% to 66.1% in Q2 2025, a direct result of ongoing cost cuts and workforce reduction initiatives.

Looking back, Q1 2023 saw revenue increase by 13.5% to R$4.5 billion, primarily due to a 12.8% fee increase in May 2022 and a 1.4% increase in volume. Adjusted EBITDA rose by 18.2%. However, net profit for Q1 2023 experienced a 23.4% drop to R$747 million, largely attributed to foreign exchange variance as the Brazilian Real devalued against the U.S. dollar. This highlights the company's exposure to currency fluctuations, especially given its foreign currency-denominated assets.

Costs and expenses in Q1 2023 increased by 10.3%, with staff costs up 11.4% due to inflation and changes in hired personnel. General materials saw a 21.7% increase, driven by network upkeep and the high cost of chemical products, still impacted by global events. Conversely, electric power costs dropped in Q1 2023, with 50% of services now utilizing the open market, leading to lower fees and stable prices. The allowance for doubtful accounts (PECLD) also saw an 8.4% reduction in Q1 2023, reflecting strong investment and commitment to recovery efforts.

For the full year 2024, SABESP reported impressive financial results, with total revenue reaching R$36.15 billion and a net income of R$9.58 billion. The company's operating cash flow stood at R$7.40 billion, with free cash flow at R$7.30 billion, indicating strong cash generation capabilities. These figures underscore the company's ability to fund its extensive investment plans while maintaining a healthy financial position.

Strategic Outlook and Guidance

SABESP's future is largely defined by its ongoing privatization process, a state government initiative expected to unlock substantial value. The company is pursuing a bold R$70 billion investment plan through 2030, aimed at achieving full sanitation coverage across its service areas. This strategic shift is anticipated to enhance governance, improve operational efficiency, and attract strategic investments, ultimately transforming SABESP into a more powerful player in the sanitation sector.

Management is focused on a "value generation" plan, which includes a comprehensive review of CapEx prioritization to favor investments that directly increase revenue or reduce costs, such as modernization and loss reduction. The company is also actively working to close regulatory revenue gaps, with a R$9.56 correction in the fee structure effective May 2023 expected to contribute to financial resilience. While a target of R$1.8 billion in OpEx reduction has been mentioned post-privatization, management acknowledges current limitations as a state-owned entity but remains committed to significant cost reductions. Initiatives like the voluntary resignation plan (PDI) are expected to yield a payback period of 12 to 15 months.

SABESP's investment plan for 2022 was R$4.7 billion, and for 2023, it is R$4.6 billion. These substantial capital outlays are crucial for meeting regulatory targets and expanding services. The company also plans to fulfill ESG targets and share them with the market within a few months, reinforcing its commitment to sustainable practices.

Risks and Challenges

Despite its strong outlook, SABESP faces several pertinent risks. Regulatory uncertainty remains a key concern, particularly regarding the implementation of the new sanitation legal framework and potential changes to contract structures with municipalities. While the company has demonstrated its economic and financial capacity for universal coverage, ongoing discussions and potential delays in regulatory reviews could impact revenue realization.

Foreign exchange volatility, as evidenced by the Q1 2023 net profit drop, poses a risk to financial results, given the company's debt exposure to foreign currencies. However, SABESP has actively worked to reduce this exposure, structuring new loans in local currency and receiving guidance to prioritize domestic funding.

Legal proceedings also present a risk, with the 10-K amendment filed on September 2, 2025, rectifying total estimated claims to R$24.7 billion and adding a new lawsuit with a "possible" risk of loss. Furthermore, environmental factors, such as drier summer forecasts, could impact water sources and operational costs.

Conclusion

SABESP stands at a pivotal juncture, poised for a significant transformation driven by the impending privatization and a robust strategic agenda. The company's deep-rooted presence in São Paulo, coupled with its extensive infrastructure and a proactive approach to operational efficiency and technological innovation, forms a compelling investment thesis. Recent financial results, marked by strong revenue growth and expanding EBITDA margins, underscore the effectiveness of its strategic initiatives, including tariff adjustments, cost controls, and diversification into new environmental business lines.

The commitment to a R$70 billion investment plan for universal sanitation coverage by 2030, alongside a clear roadmap for cost reduction and client-centric improvements, positions SABESP for sustained long-term growth. While regulatory complexities, foreign exchange fluctuations, and legal challenges warrant careful consideration, the company's strategic alignment with national development goals and its leadership in adopting innovative solutions in waste and energy management suggest a promising trajectory. Investors looking for exposure to a critical utility undergoing a fundamental re-rating, driven by both operational excellence and a transformative privatization event, may find SABESP an attractive opportunity.