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Companhia de Saneamento Basico do Estado de Sao Paulo-SABESP 01 July 2008

Update Report – 1Q 08 Results

Outlook remains positive; margins expected to improve from cost-cutting measures

Common BUY Fundamental research indicates a 22% upside in the common stock over the next 6-12 months. We
Direct
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calculated to theprice
the target fullbased
report free of charge
on fundamental at a weighted average of target
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Stock prices obtained by using DCF and comparative valuation methodologies.
Ticker: SBSP3.SA http://www.iirgroup.com/researchoracle/viewreport/show/20147
Target price: BRL49.84
We upgrade the SABESP common stock from a HOLD to a BUY with a 6-12 month target price of
Current price: BRL41.00 BRL49.84 per share.

ADR BUY The ADR is expected to appreciate 50% over the next 6-12 months as the 22% fundamental upside is
augmented by 28 percentage points upside attributable to the depreciation of the US dollar against
the Brazilian Real over the same period. We continue to take a 6-12 month investment horizon for
this stock as we expect a significant currency impact on the ADR over the medium term1.
Ticker: SBS
Target price: US$76.68 We reiterate the ADR (1 ADR= 2 shares) a BUY with a 6-12 month target price of US$76.68.
Current price: US$51.16

Supervisor: Nirav Shah
Analyst: Gaurav Gupta
Editor: Matthew Bridle
Global Research Director:
Satish Betadpur, CFA
Next news due: 2Q 08, 09 August
2008
Investment horizon - short term actionable trading strategies
This report addresses the needs of strategic investors with a long term investment horizon of 6-12 months. If
this report is provided to you by your broker under the Global Settlement, you may now also access (free of
charge) the short term trading outlook that we publish from time to time for this issuer, looking at the coming
5-30 days for readers with a shorter trading horizon. These are available on-line only at
www.researchoracle.com.
Report Summary
Companhia de Saneamento Basico do Estado de Sao Paulo - (SABESP) reported healthy results in 1Q
08. While revenues were marginally below our expectation, margins exceeded our expectation on
account of lower than expected operating and financial expenses during 1Q 08. Going forward, we
expect the company’s top-line to benefit from significant capital expenditure plans to increase the
number of water connections and its sewage coverage ratio in Sao Paulo between FY 2007-FY 2010.
In addition, SABESP’s margins will be aided by cost cutting initiatives which the company estimates will
save approximately BRL600 mn between FY 2007 and FY 2010. As a result, we maintain our positive
outlook for the company and continue to view the SABESP common stock as an attractive investment
opportunity at current levels.

Currency impact for US investors

The impact by itself of the anticipated currency movements on the ADR (now US$51.16), without
considering changes in the share price, is positive and is expected to be:

Over 6 months: US$51.25

Over 12 months: US$63.08

Page 1 Refer to page 4 for all footnotes