Brazil's Copasa Q4 2024 net profit drops 23% to $47 million, stock falls over 7%

Brazilian sanitation giant Copasa reported a 23.5% year-on-year decline in net profit for the fourth quarter of 2024, posting R$271.9 million.

The weak earnings triggered a sharp negative reaction in the market, with Copasa’s stock plunging 7.30% to R$21.71 on Tuesday morning, according to InfoMoney.

Mixed reception from analysts

Brandesco BBI reported that Copasa's quarterly results were weak, under both the consensus and market expectations.

Traditionally, Copasa's share prices moved materially in reaction to its earnings, whether outperforming or missing expectations.

Hence, post earnings, Bradesco expects more pain trade for the company in line with the market views presently.

Copasa reported an adjusted EBITDA of R$641 million, a 6% rise over the previous year; however, this result was much below Bradesco's projections and fell short of analysts' consensus.

According to JPMorgan, this underperformance was caused by weak revenue streams, primarily due to negative volume growth from 4Q23, as well as lower average fees, which are thought to be the result of shifts in customer demographics and service utilization patterns.

Higher costs complicate profitability

On this note, JPMorgan said that controllable expenses were the main detractor.

The rise in third-party costs was particularly significant: they were more than 15% higher than the bank's forecast, adding to the bank's woes.

The latest figures show a lower-than-projected default rate of R$25 million compared to JPMorgan's expectations, providing a glimmer of hope amidst financial difficulties.

Copasa's EBITDA fell short of expectations due to lower-than-expected net revenue from volume and tariff pricing concerns, as well as a minor increase in costs, according to Itaú BBA.

High personnel and service expenses contributed to the poor outcome, causing Itaú to forecast further market reaction.

Morgan Stanley and XP Investimentos Weigh in

Morgan Stanley reiterated other banking analysts' concerns, stating that Copasa's EBITDA of R$641 million fell short of their expectations of R$730 million.

The reasons given were the compounded impact of unplanned expenses in service management, combined with unsatisfactory volume numbers.

Interestingly, Copasa's net income of R$272 million met Morgan's forecasts, as higher-than-expected finance expenses offset the drop in segment EBITDA.

The bank maintained a neutral stock recommendation with a target price of R$22.

XP Investimentos, on the other hand, expressed disappointment with Copasa's results, citing lower revenue generation as a result of low measured volumes and lower average tariffs.

The firm stated that operating expenses exceeded expectations, owing primarily to increased personnel and third-party expenses.

Despite the dismal results, XP retained its buy recommendation for the company, with a target price of R$26.

The general tone from financial analysts after Copasa's earnings has been one of moderation, and several experts also predict more bad news for the market.

According to InfoMoney, investors wonder what direction the stock can take under the company's pressures of higher costs and lower revenue streams.

An analysis report from Genial stated that the unsatisfactory results were largely attributed to high manageables and non-manageable costs, which negatively impacted profitability.