EUR 850.00 For Business Accounts Only

Morningstar | Veolia Adjusts 2019 Guidance in Line With Expectations; Shares Fairly Valued

We reiterate our EUR 19.60 fair value estimate and no-moat, stable trend ratings for Veolia after the company released full-year results and adjusted 2019 EBITDA guidance both in line with expectations. The group increased its 2018 dividend by 10% to EUR 0.92, above our EUR 0.89 forecast, implying a dividend yield of 4.7%, slightly below the 5.1% sector average. The shares look fairly valued to us.

Revenue came in at EUR 25.9 billion, up 4.7% organically, in line with the trend of the first nine months. Waste volume growth slowed slightly to 2.5% in the fourth quarter from a high 4% at the end of September. The rest of world segment had the highest revenue growth, notably due to strong momentum in Asia.

EBITDA grew 7.3% at constant exchange rates to EUR 3.39 billion, in line with our estimates and accelerating from the 6.9% delivered in the first nine months. Key to that is the stabilization of energy and recycled materials prices during the fourth quarter. In line with the last year, the main growth driver was cost-cutting, which amounted to EUR 302 million, in line with the EUR 300 million annual target. Organic growth from commerce and volume brought EUR 752 million of revenue and EUR 120 million of EBITDA, implying incremental margin of 16%; this is a sharp improvement from the comparable 8% last year, reflecting a better mix notably due to hazardous waste growth and more selectivity in construction activities, in our view.

For 2019, the group narrowed EBITDA guidance to EUR 3.5 billion-3.6 billion from EUR 3.5 billion-3.7 billion excluding the IFRS 16 impact, in line with our EUR 3.58 billion and consensus' 3.53 billion forecast. The adjustment reflects the exchange rate movements since the guidance was set in early 2017. The group targets EUR 220 million of cost savings in 2019, slightly above our EUR 200 million estimate. We should not materially change our short- or long-term estimates on this publication.

Current net income increased 10% to EUR 675 million, in line with expectations albeit above ours due to a low tax rate of 22% versus 26% in our estimates and higher provisions reversal. This was partially offset by higher minorities than in our estimates.

Net debt was EUR 9.75 billion. Excluding the EUR 1.45 billion hybrid reimbursement, net debt increased by EUR 0.46 billion, implying a manageable 2.9 net debt/EBITDA ratio.