EUR 850.00 For Business Accounts Only

Morningstar | Veolia Maintains FY Targets; Positive Settlement of a Tax Litigation to Be Highly Accretive

We reiterate our fair value estimate of EUR 20.50 per share along with our no-moat, stable trend ratings after Veolia released first-quarter results slightly above consensus expectations and confirmed its full-year targets. Shares look fairly valued.

Revenue came in at EUR 6.8 billion, up by 3.5% organically, in line with our full-year estimate. Waste volumes increased by 2.6%, in line with the 2.5% growth delivered in fourth-quarter 2018. Waste service price increases rose by 2.7%, accelerating from the 2.2% of 2018, reflecting pricing power. On the negative side, mild weather in Central Europe had a negative impact of 1.2% on revenue.

EBITDA came in at EUR 1.03 billion, up by 4.2% excluding the IFRS 16 impact, slightly below our 4.9% growth estimate. The main positive driver was EUR 60 million of cost-cutting, above the EUR 220 million guidance for the full-year. Increased volumes and commercial gains brought EUR 20 million of incremental EBITDA, in line with our full-year estimate. On the negative side, mild weather shaved 2.4% off EBITDA, versus our neutral estimate for the full year. This headwind should wane in the second quarter as April was colder than last year in Central Europe. Structural pricing pressure had a negative impact of EUR 21 million, below our full-year estimate of EUR 100 million because of better indexation in the French water business. In all, Veolia reiterated its 2019 guidance of an EBITDA in a EUR 3.9 billion-EUR 4 billion range including IFRS 16, in line with our EUR 3.96 billion forecast, which we are maintaining.

Veolia announced the favorable resolution of a tax litigation in the U.S., which should drive $460 million of tax savings by 2026. All else being equal and assuming these savings are evenly achieved through 2026 points to an average accretive impact of around 7% on our net income estimates through 2023. The valuation impact would amount to EUR 0.5 per share or 2.4% of our fair value estimate, on our calculations.

During the conference call, the management confirmed that its U.S. district heating activities are up for sale and that the EUR 1 billion transaction price reported by the media is not irrelevant. That implies an attractive 11.6 times EV/EBITDA and potential value-accretion of EUR 0.7 per share, or 3.4% of our fair value estimate, on our calculations.

Net debt including IFRS 16 increased by around EUR 0.5 billion to EUR 11.96 billion during the first quarter, above consensus expectations of EUR 11.5 billion. Key to that was a seasonal working capital deterioration of EUR 760 million, in line with the first quarter of 2018. Net income excluding capital gains increased by 13% to EUR 190 million, 7% above consensus' expectations.