New analysis into VIE/SEV waste supports upside potential - SEV to OW
The correlation between waste volumes and IP is still working. Analysis of SEV’s best practice through the cycle implies upside for VIE in terms of FCF / ROCE, and adds credibility to the scope for more cost cutting. We stay OW VIE, upgrade SEV to OW.
We provide an in-depth, through-the-cycle analysis of waste management, which constitutes half of the 2 companies' business. Contrary to concerns around recent headline datapoints, we find evidence that the
historical correlation between industrial production and waste volumes still holds (Exhibits 18-21). Our work shows VIE and SEV still stand to benefit from a rebound in economic growth, in line with our European economists'
expectation of 1.9% GDP growth 2016e in Europe. We stay OW VIE and move SEV to OW.
Valuation multiples: VIE and SEV trade on PE multiples of c15.2 and 16.5x PE17e. Based on a 2-year forward multiple, this means c11-10% further upside to the historical premium to the broader market, and an additional 20% on 3-year forward multiples. Higher growth potential, strength of franchises and scarcity value in Water and Waste justifies a premium, we think.
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