EUR 850.00 For Business Accounts Only

Morningstar | Long Way Ahead to Restructure Suez; Shares Rich

We reiterate our fair value estimate our EUR 11 per Suez share along with our no-moat, stable trend ratings after activist fund Amber Capital, which holds 1.9% of the capital, blamed the group for poor track record since the 2008 IPO and claims for strategic overhaul that we see challenging to execute. New CEO Bertrand Camus, appointed in May 2018, is expected to present a strategy update this fall. Shares appear overvalued.

On July 18, Amber Capital shared its recommendations for a strategic overhaul and blamed underperformance of Suez shares on account of poor capital allocation evidenced by ROCE deterioration and EPS fall since the IPO while capital employed nearly doubled. We definitely agree, having highlighted capital allocation much poorer than peer Veolia many times. Furthermore, Amber criticizes poor governance practices reflected by the large board and remuneration policy misaligned with shareholders' interests. Interestingly, Amber emphasizes that the remuneration committee removed the ROCE as a remuneration criteria to replace it with revenue.

To put the group on value creation track, Amber recommends improvement of governance practices and the adoption of an asset-light strategy through a thorough portfolio review driving the disposal of assets with low returns on capital or weak growth. These recommendations are sensible to us, but we view the execution as challenging. First, Amber recommends the sale of Agbar Spain and argues potential value accretion of EUR 1 billion, or EUR 1.8 per share, assuming a transactional EV/ EBITDA multiple of 12 times. We believe this is too optimistic as it neglects increasing political risk in Catalonia that could deter investors. Water tariffs are frozen in 2019 and a vice president of the region threatened to cut tariffs by 5% in 2020. Another hurdle to a strategy u-turn is the fact that Mr. Chaussade, CEO from 2007 to 2019, will remain chairman until at least the May 2020 AGM.

Chaussade could remain chairman until the 2022 AGM as he will reach the age limit of 70 in December 2021. All in all, that could prevent Mr. Camus from genuinely restructuring the group and undoing Mr. Chaussade's legacy, especially the Agbar acquisition. There is a bad precedent at Veolia where former CEO Henri Proglio, a notorious top-liner, remained chairman of Veolia during the first year of tenure of his successor Antoine Frérot in 2010. The latter was able to start the restructuring of the group only in late 2011 after a profit warning the summer before. Last but not least, M. Frérot faced the opposition of pro-Proglio board members until 2014, including several attempts to replace him.