Morningstar | Suez Releases 9-Month Results in Line With Expectations; Shares Overvalued
Suez released nine-month results in line with expectations while reaffirming its 2018 guidance, which is in line with our estimates. We maintain our fair value estimate of EUR 11.50 per share and our no-moat, stable trend rating. We believe the shares are overvalued.Top-line organic growth came in at 3.8%, accelerating from the 3% posted in the first half. EBIT grew 7.5% organically, in line with the first half. On a reported basis, EBIT after purchase price allocation, or PPA, grew 4.4%, below our 5.3% full-year estimate.
Water Europe's revenue organic growth accelerated to 3.7% in the third quarter from 0.5% in the first half chiefly due to Latin America, with volume in Chile up 3.8%. Notably, volume improved in France due to a positive weather effect. That implies a positive read-across for Veolia. Organic revenue growth also accelerated for WTS at 8.6% in the third quarter versus 6.9% in the first half. Suez has secured $30 million of cost synergies for the full year, above our $20 million estimate. The group reiterated its full-year guidance for WTS of revenue and EBIT before PPA of $2.8 billion and $200 million, respectively, in line with our estimates. That seems conservative since this guidance involves flat revenue in the fourth quarter whereas orders are up 14% versus last year. We are raising our forecast for EBIT before PPA, but the net impact will be limited as we factor in PPA of EUR 30 million versus guidance of EUR 45 million.
On the negative side, the European waste division's organic revenue growth slowed to 3% in the first quarter from 3.6% in the first half. Volume treated was up 2.8% at nine months versus 3.2% in the first half. The reason for this is maintenance of some energy-from-waste units and voluntary reduction of exposure to paper, so the read-across is limited for Veolia. A fall in paper prices and increase in oil prices had a negative impact of EUR 31 million on EBIT. The read-across is negative for Veolia.
Suez delivered EUR 146 million of cost savings at nine months, in line with the EUR 200 million full-year target.
Suez is active in each stage of the water and waste cycles. Co. is organized around three main segments: Water Europe (water distribution and treatment services, particularly under concession contracts, to individuals, local authorities and industrial clients); Waste Europe (waste collection and treatment services for local authorities and industrial clients; these services include collection, sorting, recycling, composting, energy recovery and landfilling for both non-hazardous and hazardous waste) and International (water, waste and engineering services, with a special focus on risk-management resulting from specific local environments by setting up partnerships).
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