* We maintain our Underperform rating: We cut our 2016-18E EPS
forecasts c1-5% on minorities and overheads following FY-15 results on Feb
26th. We cut our TP to €14.3 (from €14.7). Our investment case remains:
1. Landfill to stifle a waste recovery: We see expectations of leverage to a
cyclical recovery as overly optimistic. We think the landfill decline in France
will accelerate following recent policy changes and see c€150-200m of
EBITDA at risk, with c200bp downside to European Waste EBITDA margins.
2. International growth could slow: Our analysis suggests a c40% decline
in reported contract wins in 2015 (annualised €-revenue) in International, the
fastest growing segment. Lower commodity prices may negatively impact
customer demand for new projects, with an indirect impact on Suez.
3. Low growth in municipal Water: Efficiency drives through-cycle volume
declines in Europe. Pricing growth is largely in-line with inflation, which
remains very low. Growth from urbanisation in Chile seems already to have
come through. We see no near-term source of growth in municipal water.
4. A competitive market for M&A: We see up to c€1bn in M&A firepower
over 2016-18E and Suez has said M&A could support growth. But return
requirements are high and competition is high. We see downside risk to
Suez' €3bn 2017E EBITDA ambition absent near-term acquisitions.
* We watch for policy changes. We estimate the current run-rate of landfill
reduction in France will need to rise almost twofold if French and European
targets are to be met. We watch for a potential increase in the landfill tax.
* Valuation: Suez trades at c19x 2017E EPS with a dividend yield of 4.1%.
PEG, and P/B analysis suggest c25-40% downside; our Credit Suisse
HOLT® valuation has >c50% downside. We continue to see a recovery in
returns more than priced into the stock.