Company Reports

No-moat Veolia held a presentation of its US business in New York on April 18, a field trip to its largest water treatment facility in New Jersey and to its largest US hazardous waste facility on April 19 in Port Arthur. We attended all of those, along with a few investors and another sell-side analyst. We confirm our EUR 32.50 per share fair value estimate. Shares are undervalued as the market neglects Veolia’s structural growth drivers.

Veolia Environnement is the world's largest water company. Treatment and distribution of water accounts for about 40% of the turnover. It comprises water concessions in France and regulated water businesses in the US, Chile, and Catalonia. The water activity is uncyclical and indexed to inflation.

European utilities have reversed their outperformance in the fourth quarter of 2023 because of a fall in wholesale power prices in the wake of gas prices after a very mild winter, and a pickup in interest rates due to inflation receding more slowly than expected. The former led to some of the companies, most exposed to power prices, cutting their guidance for 2024.

We confirm our EUR 31 fair value estimate after no-moat Veolia released 2023 results in line with the company-compiled consensus and our expectations and disclosed its new three-year strategic plan that includes 2024 and 2027 financial targets also roughly in line with expectations. The firm will pay a dividend of EUR 1.25 on 2023 results, 12% above last year and implying a 4.2% yield, lower than the sector's average. However, Veolia intends to grow the dividend in line with EPS through 2027, involving a high-single-digit growth rate, higher than most utilities. Shares appear fairly valued.

No-moat Veolia announced an acceleration of investments in its energy business to leverage energy transition opportunities. The group will release its full-year 2023 results and hold its triennial capital markets day on Feb. 29. We anticipate a 10% rise in the synergies target from the Suez integration due to the advance already taken. Nonetheless, this seems to be priced in as shares now trade in 3-star territory. We recommend waiting for a pullback to buy the shares. We maintain our fair value estimate of EUR 31.

European utilities are up by 14% year to date, slightly underperforming the broader European markets. Since the end of September, the sector strongly outperformed thanks to the rally in government bonds and solid third-quarter results that drove multiple guidance upgrades although growth slowed down from the second quarter due to higher comps. All in all, companies that are the most exposed to commodity prices are set to exceed their 2022 record profits in 2023. Meanwhile, firms with big retail businesses that were hit by a margin squeeze because of the energy crisis in 2022 will post a significant rebound in earnings.

We confirm our EUR 31 fair value estimate after no-moat Veolia released solid 9-month results and confirmed its 2023 earnings guidance. Veolia also indicated that its net debt position will be lower than it previously expected at year-end, but in line with our expectations. Shares have slipped recently owing to concerns over the impact of the economic slowdown on the group. This offers an entry point for investors as the group has proved in the past that it can increase cost savings in such a situation. Also, the weight of cyclical activities is lower than in the past at 15% of turnover. We forecast a 2023 dividend of EUR 1.22, 9% above 2022, implying a 4.6% yield.

Veolia Environnement SA is the world's largest water company. Treatment and distribution of water accounts for about 40% of the turnover. In France, where Veolia is the historical leader, the business has been affected by a wave of contract renewals since 2010, which reduced profitability, but the bulk of those renewals is over.

We don't plan to materially change our EUR 30.50 fair value estimate after no-moat Veolia released solid first-half results, though they were in line with the company-compiled consensus and management increased its 2023 EBITDA guidance. Shares are trading in 3-star territory.

Veolia Environnement SA is the world's largest water company. Treatment and distribution of water accounts for about 40% of the turnover. In France, where Veolia is the historical leader, the business has been affected by a wave of contract renewals since 2010, which reduced profitability, but the bulk of those renewals is over.

We don't plan to materially change our EUR 30.50 fair value estimate after no-moat Veolia released solid first-quarter results albeit in line with the consensus it polled at the EBITDA level and maintained its 2023 guidance. Shares are in 3-star territory.

We don't expect to materially change our EUR 30.5 fair value estimate after Veolia released 2022 results above consensus it polled for the bottom line, set 2023 guidance in line with consensus, and confirmed its 2024 target. The group will pay a dividend of EUR 1.12 on 2022 results, 12% higher than the previous one and implying a 4% yield. Shares are in 3-star territory.

Veolia Environment is the world's largest water company. Treatment and distribution of water accounts for about 40% of the group's revenue. In France, where Veolia is the historical leader, the business has been affected by a wave of contract renewals since 2010, which reduced profitability, but the bulk of those renewals is over.

We maintain our EUR 30.50 fair value estimate after no-moat Veolia released strong third-quarter results (slightly above consensus it polled) and said it will reach the upper end of its 2022 guidance, in line with our estimates. Undervaluation of the shares reflect the market's overdone concerns about the impact of the upcoming recession on the group. Cyclical activities account for only 15% of turnover and the group has demonstrated in the past it's able to increase cost savings to cope with the economic slowdown.

We maintain our fair value estimate of EUR 30.50 after no-moat Veolia announced that it agreed to sell Suez's U.K. waste business to Macquarie at an attractive price of EUR 2.4 billion, roughly in line with our EUR 2.25 billion estimate. This deal confirms our initial view that the acquisition of Suez would be significantly value-accretive thanks to synergies and antitrust-driven asset sales at multiples higher than the one paid by Veolia to acquire Suez. Veolia shares appear undervalued as the market overestimates the impact of the economic slowdown on the group.

Veolia Environment is the world's largest water company. Treatment and distribution of water accounts for about 40% of the group's revenue. In France, where Veolia is the historical leader, the business has been affected by a wave of contract renewals since 2010, which reduced profitability, but the bulk of those renewals is over.

No-moat Veolia released good first-half results, slightly above consensus it polled and confirmed its 2022 guidance. Still, we should tweak our EUR 34.20 fair value estimate downward by a high-single-digit rate on the net debt increase from the Suez acquisition, above our expectations, and higher cost pressures than we expected. This will leave good upside to the current share price.

No-moat Veolia announced on June 16 that it intends to sell all of Suez's U.K. waste business. After completion of the acquisition of Suez in January, the U.K. was the last market where Veolia did not get the antitrust clearance. The competition and market authority's decision was due by July 17. Given the combined market share of Veolia's and Suez's U.K. waste businesses of more than 30%, it was largely expected that Veolia would have to sell part of Suez's U.K. waste business but not all of it. Veolia claims its drastic move is driven by the intransigence of the Competition and Markets Authority. As Suez's U.K. waste activity was among Suez's assets deemed strategic by Veolia, one might see the sale as a setback. However, given strong interest for these assets and limited impact on synergies, we estimate the disposal could be slightly value-accretive. For now, we reiterate our EUR 34.20 fair value estimate. Shares appear grossly undervalued as investors fret over the impact of the economic slowdown on Veolia. Yet, activities that can be deemed cyclical—that is, commercial and industrial waste—account for only 17% of the firm's turnover. On the other hand, the current environment offers significant tailwinds like positive pricing, thanks to indexation of most contracts to inflation and positive foreign-exchange effects.

Amid the war in Ukraine and the energy crisis, inflation in the eurozone reached 7.5% in April 2022. Unlike U.S. peers, European utilities have been outperforming in times of high inflation since 2000. This prevails as the sector is flat year to date, outperforming the market by 7%. We think this is fundamentally justified though the impact of inflation varies across the value chain. Power production boasts the best exposure given skyrocketing power prices. Inflation could hit the returns of some renewables projects but does not affect significant long-term growth potential. Energy networks' revenue is mostly indexed to inflation. Energy supply is the weakest spot against high inflation due to political risk and weak competitive advantages.

We maintain our fair value estimate of EUR 34.20 after no-moat Veolia released first-quarter results in line with consensus it polled at the EBITDA level and confirmed its 2022 guidance. Shares are significantly undervalued after the broad market selloff and as investors get the jitters about the impact of the economic slowdown on the group. Yet, activities which can be deemed cyclical, that is commercial and industrial waste, account for only 17% of the group's turnover. On the other hand, the current environment offers significant tailwinds like positive pricing thanks to indexation of most contracts to inflation and positive foreign-exchange effects. Last, synergies from the integration of Suez and permanent cost-cutting efforts will support earnings in 2022 and beyond.