EUR 850.00 For Business Accounts Only

Morningstar | Suez Reports 1Q Results in Line With Expectations, Reiterates Full-Year Guidance; Shares a Bit Rich

We maintain our fair value estimate of EUR 11.50 per share along with our no-moat, stable trend ratings after Suez released first-quarter results in line with consensus expectations while reiterating its 2019 guidance. Shares look a bit overvalued.

Revenue came in at EUR 4.2 billion, up by 3.7% organically. EBIT came in at EUR 293 billion, up by 3.3% organically. The fastest-growing division was water technology and solutions, which delivered 8.5% organic growth. Still, one must bear in mind that the first quarter's weighting is typically low for this business. The European waste division's revenue grew by 4.7% organically chiefly due to a positive price effect. However, waste volumes declined by 0.8%, well below the 2.4% delivered in 2018 and the 1.5% guided for the full year. The group highlights that this is the result of a voluntary reduction in sorting and recycling activity due to the depressed level of recyclates prices. The new contract to treat the waste of Manchester in the U.K. starting in the second half will help to reach the 1.5% growth target, according to the company. Suez indicates that the division's EBIT slightly increased organically as top-line growth was mitigated by a strong increase in fuel prices whose pass-through will be only partial this year. We see a mixed read-across for peer Veolia's waste business. Water Europe's revenue was flattish organically as lost contracts offset positive volume and price effects, implying a positive read-across for Veolia, in our view. The division's EBIT decreased organically.

The group reiterated its full-year guidance of 2%-3% organic revenue growth and 4%-5% EBIT growth. This is below our estimates that we will likely adjust downward. The valuation impact will, however, be mitigated by the value-accretive sale of 20% of the U.S. regulated water activity and the resolution of arbitration with Argentina, announced yesterday, for which Suez will receive EUR 220 million before tax.