EUR 850.00 For Business Accounts Only

Morningstar | Suez Releases 2018 Results and 2019 Guidance in Line With Expectations; Shares Fairly Valued

Suez released 2018 results and 2019 guidance in line with expectations and set its dividend at EUR 0.65 per share. We maintain our EUR 11.50 fair value estimate and no-moat, stable trend rating. We believe the shares are fairly valued.

Revenue was EUR 17.3 billion, roughly in line with our estimates; this implies organic growth of 3.6%, slowing from 3.8% in the first nine months. EBIT came in at EUR 1.335 billion, slightly below our EUR 1.35 billion estimate, growing 7.5% organically, in line with the first nine months.

On the positive side, water technologies and solutions EBIT before purchase price allocation grew 43% to $200 million, in line with guidance and our estimates. The group advanced its $90 million synergy target to 2020 from 2021 while reiterating its 2020 revenue target of $3.1 billion, in line with our estimates. International EBIT increased 9.8% organically to EUR 563 million, above our EUR 532 million estimate. Still, on a reported basis, EBIT was flattish due to adverse foreign-exchange impact.

On the negative side, European waste EBIT came in at EUR 287 million, below our EUR 323 million forecast, decreasing 4.8% organically. Key to that is the fall in recycled prices and higher fuel costs, which shaved EUR 30 million off EBIT, implying stabilization in the fourth quarter. Waste volume growth was 2.4% for 2018, slowing from 2.8% at the end of September.

For 2019, Suez expects organic growth of 2%-3% in revenue and 4%-5% in EBIT, assuming 1.5% growth in waste volume versus our 1.2% outlook. Taking the middle of the range points to EBIT of EUR 1.4 billion, in line with consensus though below our EUR 1.45 billion forecast. We will slightly lower our EBIT estimate on higher purchase price allocation than in our estimates and 2018 downside for the European waste business. The valuation impact will be mitigated by the value-accretive sale of 20% of U.S. regulated water activity that we have yet to factor in.

Net income increased 13% to EUR 335 million, in line with our EUR 330 million forecast. During the conference call, the management said it sees the consensus 2019 net income
estimate of EUR 394 million as slightly too high due to low financial expenses estimates that do not take into account the IFRS 16 impact of EUR 25 million. We will lower our EUR 459 million estimate on lower EBIT and higher financial costs.

Net debt increased from EUR 8.47 billion to EUR 8.95 billion, implying net debt/EBITDA of 3.2 times. Cash proceeds of $601 million from the disposal of the stake in U.S. regulated water activity expected in March will lower the ratio by 0.2 times.

Cost-cutting amounted to EUR 210 million, exceeding the EUR 200 million targeted. For 2019, the group reiterates its Compass plan target of EUR 200 million of savings, in line with our estimate.