EUR 850.00 For Business Accounts Only

Morningstar | Veolia's Nine-Month Results in Line With Expectations and Guidance Is Maintained; Shares Undervalued

We reiterate our fair value estimate of EUR 19.6 per share, along with our no-moat and stable moat trend ratings, after Veolia released nine-month results in line with our full-year expectations and reaffirmed its 2018 and 2019 guidance. Shares are undervalued.

Revenue came in at EUR 12.56 billion, up by 4.7% organically, slightly accelerating from from the the first half's 4.1%. Key to that is the Global businesses division due to strong rebound in construction activity after a poor second quarter. Waste volumes grew an encouraging 4% in the third quarter, in line with the first half though below the high 4.9% achieved in the second quarter.

EBITDA grew by 6.9% at constant exchange rates to EUR 2.4 billion (excluding Gabon expropriation), implying an acceleration to 9.4% in the third quarter from 5.8% in the first half. At current exchange rate, EBITDA grew 8.4% in the third quarter versus 3.7% in the first half. Key to this acceleration is the waning of negative drivers that weighed in the first half, especially foreign exchange and weather effect due to improved water volumes in France during the third quarter. In line with the first half and last years, the main growth driver was cost-cutting which amounted to EUR 228 million, of which EUR 80 million in the third quarter, in line with the full-year target of EUR 300 million. Also organic growth impact contributed EUR 89 million to EBITDA growth of which EUR 30 million in the third quarter. Organic growth was notably boosted by increasing waste volumes in France and internationally. Apart from structural pricing pressure, the main negative driver was energy & recycled prices, in line with the first half. The main negative drivers in the third quarter were a fall in recycled paper prices and higher fuel costs. Altogether, nine-month EBITDA is in line with our full-year estimate of EUR 3.39 billion, itself in line with consensus that management stated to be comfortable with during the conference call.

During the conference call, the CEO gave for the first time some hints regarding the future cost-cutting plan after completion of the ongoing 2016-18 one. He highlighted ''deep reservoir'' of cost-cutting potential for the future and mentioned that in the past years, annual cost savings was always above EUR 200 million and that should continue in coming years. When asked to be more precise, he added that the EUR 300 million to be achieved in 2018 was a maximum and will not be replicated. We assume EUR 200 million of annual cost savings as of 2019. All else being equal, if we added EUR 50 million annually through 2022, namely the end of our forecast period, that would add EUR 3.5, our 18% to our fair value estimate. In any cases, this potential increase in cost-cutting versus our estimates gives us some buffer against an economic slowdown driving lower organic growth than we anticipate.

Current net income came in at EUR 457 million, in line with consensus expectations. During the conference call, management stated to be ''in the race'' to meet the EUR 655 million consensus expectation for the full year. In all, our EUR 600 million might be too conservative due too high financial costs. Reducing them would have no valuation impact. Over the long term, our forecasts point to 10% average annual growth in current net income through 2022.