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 pipeline
The 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 Sanepar
While 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 IBOV and IEE indices.
Market reaction to reservoir levels
Sentiment behind Sabesp shares among investors has recently been dragged by the latter water supply issues.
The company’s shares fell nearly 2% yesterday (Tuesday) in the US, and accordingly, JPMorgan considered this to be an exaggerated drop.
Reservoir inflows fell short of expectations amid announcements of water-saving measures, causing capacity to drop to 40%, below the five-year August average of 55%.
In response, Sabesp announced that it would make pressure reductions on the pipeline at specific hours to save more water.
Although such measures could impact supply size, JPMorgan pointed out that water levels in basins remain manageable and well below disaster-linked levels from previous crises.
That’s 40% full, compared to when reservoirs fell to just 10% in 2015.
Limited financial impact
JPMorgan predicts that the water-saving scheme will cost Sabesp just 0.1% of its market value.
Over 90 days, the measures might cut fourth-quarter 2025 EBITDA by around 2%, resulting in approximately R$110 million in lost quarterly revenue from water and sewage.
However, mitigating variables improve the situation. Sabesp consumers are bound to a minimum water bill, which protects revenue.
Pressure reductions also cut energy costs and water losses, saving between R$10 million and R$20 million. In the event of prolonged measures with increased financial burden, Sabesp may request an extraordinary tariff review.
Long-term positioning remains positive
Despite short-term turbulence, economists believe Sabesp remains well-positioned.
Reservoir depletion between late August and November has averaged less than 15 percentage points over the last six years, reducing danger before the rainy season.
Since 2015, the company has diversified supply sources, including the São Lourenço plant, which has increased capacity by 5% since 2018.
With long-term industry investment requirements considerably exceeding current pledges, sanitation remains a key development story.
For the time being, Sabesp is Brazil’s most carefully monitored water utility due to its scale, governance, and possible exposure to significant concession schemes.
The post Morgan Stanley backs Sabesp as top pick in Brazil’s water sector appeared first on Invezz
