Veolia Environnement : PFIs to add EUR100m of EBITDA by 2015
Fair Value EUR12.9 vs. EUR14.3 (price EUR8.42) BUY
Veolia is the leader in the UK waste market, which represents 20% of the Waste division revenues and 25% of EBITDA, a relatively higher exposure than Suez Env. We think the group is on track to reach its targets of increasing EBITDA in PFI contracts by ~EUR100m by 2015. While we estimate EfW facilities under construction will only contribute ~EUR45m by 2014, Veolia also has several other projects at the planning stage. In broader terms, we remain attracted by the company’s self-help story and believe the first large disposals at excellent prices should give credit to management in terms of commitment and ability to deliver according to plan.
- Relatively high exposure to the UK: Veolia Waste sales in UK are close to ~GBP1.5bn. This represents ~6% of group’s sales and 20% of the Waste division’s revenues. We believe the exposure is higher (~25%) at the EBITDA level due to relatively stronger margins. Veolia operates 7 EfW facilities in the UK. Two more plants located in Staffordshire and Shropshire are under construction, combining 380k tonnes of treatment capacity. At least 4 other projects are at the planning stage, totalling 950k tonnes of capacity.
- UK PFIs targeted as one of the four growth pillars: The PFI business contributed EUR567m to sales and EUR135m to EBITDA in 2011 (up from EUR370m and EUR102m in 2009). Veolia pointed out that the UK PFI market is one of its investment priorities (along with (i) water in China, (ii) Water in East and Central Europe, and (iii) Energy Services in East and Central Europe), which could add ~EUR100m to EBITDA by 2015. We estimate that the 2 EfW plants under construction will contribute an additional ~GBP35m (~EUR45m) to EBITDA in the first full year of operation (by 2015). While the group will manage the cash allocation at the group level, dealing with deleveraging targets, dividends and development capex, the group targets EUR100-150m of growth capex pa in the UK (GBP80-120m).
- Factoring in H1 one-offs and lower GDP growth prospects: Following the H1 2012 release, we adjusted our 2012 estimates for the one-off items. In addition, we updated our macro scenario and factor in prospects for a lower GDP growth profile in the medium term, in-line with assumptions for Suez Env. This lowers our 2012-15 EBITDA estimates by ~5% in average – recall our 2013 numbers do not take into account any small unidentified disposals.
- FV per share down to EUR12.9 from EUR14.3: As a consequence of our lowered estimates, our FV goes to EUR12.9/share, down from EUR14.3. This still provides an attractive risk/reward profile with upside potential of 53%.