Suez Environnement : PFI contribution overshadowed by accountingFair Value EUR10 (price EUR8.95) NEUTRAL
The UK represents 14% of Suez Env. Waste division revenues and 13% of EBITDA, a lower exposure than Veolia. Despite a large pipeline of PFI contracts, they will be consolidated as associates (unlike Pennon and Veolia), with a limited impact on the EBITDA (services contracts only), overshadowing their contribution to profits. We struggle to see any clear short-term catalyst for the stock, which remains closely linked to macro developments. We retain our Neutral rating.
- Lower exposure to the UK than Veolia: With UK waste sales in excess of GBP700m (~EUR900m), we estimate that 14% of the revenues of Suez Env.’s waste business is achieved in the UK and 13% of its Waste EBITDA. At the group level, the UK represents ~6% of sales and 5% of EBITDA. The group has 3 operating EfW plants at present. Two other projects located in Suffolk and South Tyne & Wear are under construction; they are set to enter into operation by the end of 2014. Suez Env. is also involved in 6 other projects which are still at the planning phase.
- But UK PFI contracts are consolidated as associates by Suez Env: However, we believe these numbers are underestimated in the accounting method for PFI contracts used by the group, as they are consolidated as associates due to the project finance structure of these projects. As a result, Suez Env. holds 50% of the SPV and does not consolidate the associated net debt, while the earnings contribute to the associates item, at the bottom of the P&L. Even if this method allows the group to diversify risks (as, for the same amount of invested equity, it will be engaged in a larger number of projects) without weighing on the group’s net debt despite high capital intensiveness, we believe this makes the PFI contributions of to profits less apparent. And this will not contribute much to EBITDA growth (services contracts only), whereas management emphasises the UK as one of its growth pillars for its Waste business.
- Too early to play a recovery; remaining Neutral: We struggle to see short-term catalysts unless macro. BGe 2012 net income is 17% lower than consensus, despite being broadly in-line at the EBITDA level. Downwards consensus adjustment, which is required in our view, may weigh on the stock. Lowered net capex guidance to EUR1.2bn could be reached thanks to asset disposals (as most gross capex for 2012 has already been contracted) which would further affect the P&L. Hence, we keep our Neutral and await for a more attractive entry point.