We revise earnings upwards, not downwards
Our FY16-18e EPS are upped +3% to +5% on deeper cost cutting (Veolia) and new assets (Suez). Veolia offers c.+20% EPS CAGR16-18e and 8% upside to consensus EPS. We are in line for Suez on an underlying basis (10% EPS CAGR16-18e). M&A should be a catalyst, with potential sizeable acquisitions at Suez (ACS’s Urbaser for instance, which we analyse) and bolt-ons at Veolia.
Slowing global growth perfectly manageable
International (ex-Europe) demand for environmental services should remain largely de-correlated from GDP. European waste could suffer from a slower economy but trends look supportive in the UK and Benedelux, due to new asset commissioning and to pricing, including recyclates. The impact of a negative mix effect in France looks highly manageable.
Shrugging off low inflation with continued cost cuts
Veolia and Suez shares have performed relatively well over the last four years despite receding inflation expectations, in large part due to accelerated self-help. We foresee a squeeze from subdued inflation at -EUR70m p.a. in FY16-18e for both companies (1-1.5% of the cost base of the concerned activities), but this should be more than offset by cost cutting of EUR150m p.a. at Suez. We raise our cost-saving assumption at Veolia to EUR220m p.a., above the EUR200m guidance.
Valuations appealing
Thanks to sound FCF generation, Veolia’s balance sheet should provide increasing flexibility –– for instance to exceed the +10% pa DPS guidance. By FY18e, Veolia should trade at a steep -25% EV/EBITDA discount to the utilities sector versus its -7% historical average. Suez’s longer duration asset portfolio vs Veolia’s deserves a premium, as reflected in our unchanged target prices.