Veolia Environnement (Buy, FV EUR13) Roadshow - Bryan, Garnier ...

INDEPENDENT RESEARCH
UPDATE
6th March 2013
Veolia Environnement
Roadshow feedback – Speeding up recovery
Utilities Fair Value EUR13 (price EUR10.42) BUY
Bloomberg
Reuters
VIE FP
VIE.PA
12-month High / Low (EUR) 12.8 / 7.4
Market capitalisation (EURm) 5,438
Enterprise Value (BG estimates EURm) 15,437
Avg. 6m daily volume ('000 shares) 3,967
Free Float 76.8%
3y EPS CAGR 37.4%
Gearing (12/12) 124%
Dividend yield (12/13e) 6.72%
YE December 12/12 12/13e 12/14e 12/15e
Revenue (EURm) 29,439 23,708 24,298 24,851
EBIT (EURm) 1,194 999.05 1,093 1,271
Basic EPS (EUR) 0.78 0.57 0.72 0.93
Diluted EPS (EUR) 0.33 0.48 0.63 0.84
EV/Sales 0.6x 0.6x 0.6x 0.6x
EV/EBITDA 6.7x 6.6x 6.4x 6.0x
EV/EBIT 15.3x 15.5x 14.6x 12.7x
P/E 32.0x 21.8x 16.6x 12.3x
ROCE 5.1 5.4 5.7 6.6
120
110
100
90
80
70
6/3/13
60
M A M J J A S O N D J F
VEOLIA ENVIRONNEMENT
STOXX EUROPE 600 E - PRICE INDEX
Source: Thomson Reuters Datastream
We held a roadshow for Veolia’s management team in Paris on
28 February. Our positive opinion remains intact. We continue to see
Veolia as an attractive self-help restructuring story: (i) the target of 3.0x
Adj. Net debt/(Op. CF+OFAs) could be reached a year ahead of
schedule (at YE13); (ii) the upgrade of the cost-savings programme is
likely to be significant; (iii) recurring EPSs are set to grow by 37% p.a.
on average between 2012 and 2015; and (iv) FCF has reached an
inflection point and should cover dividends as of 2014.
• Cost cutting ahead of schedule: One of the main takeaways, according
to us, is the relative confidence expressed by the management team
regarding its ability to cut costs. We believe the size of the cost savings
programme upgrade could positively surprise. In our last note (Feb. 20), we
wrote Veolia had room for extra savings to the magnitude of EUR200m.
We still firmly believe this. We estimate that EUR50m of extra savings
would add ~EUR1.0+ of valuation per share.
• Satisfying deleveraging: Net debt is guided at EUR8-9bn at YE13 and
EUR6-7bn when adjusted for loans to JVs. Note that ND should converge
towards adj. ND as loans to JVs are gradually paid back over time.
Management targets ~3.0x of Adj. ND/(Op. CF+OFA) by YE14; on our
new estimates, we believe this could be achieved as early as YE13 (BGe
3.0x). Only a few questions were about debt reduction and the deleveraging
programme, suggesting the debt level is no longer a major source for
concern for most investors.
• Return to positive FCF: Veolia achieved EUR89m of FCF before
dividend and disposals in 2012. This should also apply in 2013 according to
the management. By 2015, the company targets at least EUR350-400m of
FCF before dividend and disposals (BGe EUR500m), hence fully covering
the EUR0.7 DPS. Generating sustainable positive FCF is, in our opinion, a
key element for the stock to rerate.
• Earnings trajectory well oriented: While there is no official guidance for
2013-15, the company implicitly guides to a net result roughly on par with
the dividend in 2014 and a potential return to historic pay-out levels in
2015. Our understanding is that EPS could be close to EUR0.70 in 2014
and close to EUR1.0 in 2015 vs. BGe EUR0.63 and EUR0.84.
• Adjusting our estimates for new perimeter: We adjusted our estimates
for the new perimeter (new IFRS rules + disposals). This explains why we
stand ~23% below EBITDA consensus. Our operational assumptions
remain unchanged (notably 0% GDP growth for 2013-16).
Analyst:
Julien Desmaretz
33(0) 1 56 68 75 92
jdesmaretz@bryangarnier.com
r
r

Veolia Environnement
Company description
Former subsidiary of Vivendi
Universal, Veolia Environment is the
leading company in the environmental
services sector. The group operates in
water (35% of sales), waste (27%),
energy services (22%) and
transportation (16%). Amongst the
major shareholders are: Caisse des
Dépôts (9.1%), Dassault familly
(5.6%) and EDF (3.7%).
Income Statement (EURm) 2010 2011 2012 2013e 2014e 2015e 2016e
Revenues 34,787 29,647 29,439 23,708 24,298 24,851 25,471
Change (%) 0.7% -14.8% -0.7% -19.5% 2.5% 2.3% 2.5%
Adjusted EBITDA 3,654 3,152 2,723 2,027 2,159 2,362 2,448
Adjusted EBIT 2,056 1,701 1,194 999 1,093 1,271 1,312
Change (%) 6.4% -17.3% -29.8% -16.3% 9.4% 16.3% 3.2%
o/w JVs net result 0.0 0.0 0.0 122 141 172 184
Financial results (907) (805) (822) (535) (513) (530) (540)
Pre-Tax profits 1,213 213 273 464 580 741 772
Exceptionals (23.6) (2.4) 386 0.0 0.0 0.0 0.0
Tax 336 539 159 120 154 199 206
Profits from associates 18.5 12.3 30.0 20.0 20.0 20.0 20.0
Minority interests 291 173 136 119 121 124 127
Net profit 581 (490) 394 296 375 488 509
Adjusted net profit 579 290 165 249 328 441 462
Change (%) 7.7% -49.9% -43.1% 51.0% 31.7% 34.4% 4.9%
Cash flow Statement (EURm)
Operating cash flows 3,742 3,353 3,085 2,199 2,350 2,584 2,682
Change in working capital (83.0) 40.7 (103) 53.4 (5.5) (5.2) (5.8)
Income tax paid 368 368 336 120 154 199 206
Capex, net 1,879 2,089 2,128 1,700 1,700 1,700 1,700
Financial investments, net (61.3) (952) (2,556) (975) (275) (275) (275)
Dividends 736 547 547 555 565 565 565
Other 651 772 (715) (2,015) 641 610 639
Net debt 15,218 14,730 11,283 8,522 8,952 9,162 9,310
Adjusted net debt (ex-loans to JVs) NM NM NM 6,522 6,952 7,162 7,310
Free cash flow 1,152 483 555 151 326 515 607
Balance Sheet (EURm)
Tangible fixed assets 9,707 8,488 6,838 7,388 7,881 8,318 8,698
Intangibles assets 16,133 14,881 13,085 12,085 11,785 11,485 11,185
Cash & equivalents 5,407 5,724 5,548 6,730 6,139 4,474 5,734
current assets 14,204 12,968 12,516 10,312 10,539 10,752 10,990
Other assets 6,061 8,345 6,625 6,650 6,803 6,908 7,033
Total assets 51,511 50,406 44,612 43,165 43,147 41,937 43,640
L & ST Debt 21,110 21,089 17,002 15,423 15,262 13,807 15,215
Others liabilities 19,506 19,481 18,485 16,227 16,459 16,677 16,921
Shareholders' funds 10,895 9,835 9,126 11,515 11,426 11,452 11,503
Total balance sheet 51,511 50,406 44,612 43,165 43,147 41,937 43,640
Capital employed 18,638 17,483 14,142 13,745 13,933 14,064 14,139
Financial Ratios
Operating margin 5.91 5.74 4.05 4.21 4.50 5.11 5.15
Tax rate 27.72 254 58.31 35.00 35.00 35.00 35.00
Net margin 1.66 0.98 0.56 1.05 1.35 1.77 1.82
ROE (after tax) 7.84 -6.48 0.11 3.54 3.95 5.15 5.36
ROCE (after tax) 7.69 6.20 5.11 5.40 5.75 6.63 6.82
Gearing 140 150 124 74.00 78.35 80.00 80.94
Pay out ratio 101 121 215 147 111 82.90 79.04
Number of shares, diluted (000) 481,200 501,644 506,700 522,087 522,087 522,087 522,087
Per Share data (EUR)
EPS 1.21 (0.98) 0.78 0.57 0.72 0.93 0.98
Restated EPS 1.20 0.58 0.33 0.48 0.63 0.84 0.89
% change 5.6% -52.0% -43.7% 46.5% 31.7% 34.4% 4.9%
BVPS 22.64 19.61 18.01 22.06 21.89 21.94 22.03
Operating cash flows 7.78 6.68 6.09 4.21 4.50 4.95 5.14
FCF 2.39 0.96 1.10 0.29 0.63 0.99 1.16
Net dividend 1.21 0.70 0.70 0.70 0.70 0.70 0.70
Source: Company Data; Bryan, Garnier & Co ests.
2

Veolia Environnement
Confident of exceeding cost
cutting targets...
New targets to be presented
on May 3 rd
Cost cutting
One of the main takeaways of our roadshow with Veolia, according to us, is the relative confidence
expressed by the management team regarding its ability to cut costs. With EUR100m of gross savings
(EUR20m net) initially targeted in 2012 as part of its Convergence 1 plan, Veolia ended the year well
above targets with EUR142m of gross savings (i.e. EUR60m net). We note this over-performance
(EUR42m) was achieved with costs of implementation in line with initial projections (EUR82m
achieved vs. EUR80m budgeted). This implies that the benefits of the implemented measures were
42% higher than anticipations. Hence, while the plan may “only” be in line with the plan, positive
impacts are much higher than expected.
While the current target is to reduce costs by EUR470m (net impact on EBIT) by 2015, management
fixed an appointment with investors on 3 rd May in order to present an increased cost-cutting
programme. We believe that by then Veolia will have been able to show further good progress on the
current plan with a meaningful impact on Q1 2013 numbers. The guidance of EUR170m of net
savings in 2013 was reiterated.
Fig. 1: Cost-cutting implementation (phase 1) Fig. 2: Net savings impact on EBIT
150
500
100
400
300
50
200
0
100
0
-50
-100
Mar-12 Jun-12 Sep-12 Dec-12 2012 target
Gross cost savings Implementation costs Net savings
-100
Phase 1 Phase 2 Phase 1 Phase 2 Phase 1 Phase 2 Phase 1 Phase 2
2012 2013 2014 2015
Gross savings Costs Net savings Total net savings
Source: Company data
Source: Company data; Bryan, Garnier & Co ests
Improving the overall
performance of Veolia
Newly-appointed COO François Bertreau presented his ambitions for Veolia. His aim is to improve
Veolia’s overall performance. This includes: (i) the marketing performance, thanks to the clear
determination of what it wants to sell and to whom and the appointment of key account managers; (ii)
the operational performance, by setting up division-by-division benchmarks; and (iii) the geographic
mutualisation.
Of the many credible examples that were provided, we list the following:
• Geographic mutualisation of support functions: Bertreau said that the geographic
mutualisation (on a country-to-country basis) could help Veolia to reduce significantly its cost
base in the short- to medium-term. The initial target provided at the December 2011 capital
market day only includes EUR80m of contribution from this side. A Chief Administrative
Officer will be appointed in order to keep an eye on these related activities.
• Purchases: While Veolia has EUR14.0bn of purchases per year, only 20% are centralised. The
COO thinks there is a lack of discipline in this segment. Systematically resorting to wholesalers
and centralising purchases on a country-to-country level should help the company to make
substantial savings. Of the EUR14bn of purchases per year, Veolia believes EUR9.0bn is
3

Veolia Environnement
addressable. We think this could be reduced by at least 5.0%. This would mean EUR450m of
gross savings for the group. According to the management team, this new plan was tested in
Poland where purchases were reduced by 8%. Even if we believe it is far too early and
optimistic to extrapolate this to the whole group, this would equate to EUR720m of savings on
a group basis.
A profound cultural change
EUR200m room for
manoeuvre in our view
One of the main difficulties in Veolia’s restructuring story is the implementation of a significant
cultural change. Ensuring all managers are committed to delivering is not an easy task. However,
management says 70% of the bonus of the top 400 managers is based on clear quantitative targets
(50% EBIT and 50% cash-flow generation).
We have long supported Veolia’s current cost-cutting programme, believing official targets were
relatively conservative and cautious. In our last research note (cf. February 20 th – “’New Veolia’ emerging
with improved risk-profile”), we wrote that we believed Veolia had at least EUR200m of room for
manoeuvre. We still firmly believe this. As Veolia did not want to increase its cost-savings targets at
the FY12 results, we believe this translates the relative significant size of the upgrade. Otherwise, we
do not believe management would have raised market expectations if this is set to be a limited
increase. This should also help to make credible the future target as the management team will have
had time to back it up.
The table below shows the sensitivity of our 2015 EPS estimates to different assumptions for
achieved cost-cutting targets, all else being equal.
Fig. 3:
BG 2015e EPS sensitivity to cost savings
Achieved savings [Eurm] 350 400 450 470 500 550 600 650 700 750 800
2015 EPS ests. [EUR] 0.69 0.76 0.82 0.84 0.88 0.94 1.01 1.07 1.13 1.19 1.26
vs. BGe -17.8% -10.4% -3.0% 0.0% 4.4% 11.8% 19.3% 26.7% 34.1% 41.5% 48.9%
2015e PER 14.9 13.7 12.6 12.3 11.7 11.0 10.3 9.7 9.1 8.7 8.2
Fair value @ 15x 2015e EPS 10.4 11.4 12.3 12.7 13.2 14.2 15.1 16.0 17.0 17.9 18.9
Source: Company Data; Bryan, Garnier & Co ests.
High debt no longer a
concern
Disposals, deleveraging and new IFRS rules
Apart from investors’ questions aiming at a better understanding the new IFRS rules, we noticed that
few were directed to the debt reduction and deleveraging programme, implying this no longer a major
concern for most French investors.
4

Veolia Environnement
17
15
13
11
9
7
5
2008-2013e deleveraging
Source: Company data; Bryan, Garnier &
Co.ests.
Deleveraging
In 2012, Veolia sold EUR3.7bn of assets. This represents 74% of the EUR5.0bn programme covering
2012 and 2013. 68% of the proceeds contributed to the debt reduction. As a result, net debt decreased
EUR3.4bn to EUR11.3bn at YE12 from (EUR14.7bn at YE11). The net debt positively benefited
from the deconsolidation of EUR1.4bn of debt linked to the Berlin water contract (BWB) following
the change of the shareholders’ structure in Q4 2012. As a consequence, leverage reached 3.26x at
YE12 down from 3.88x at YE11.
The company still expects to exit from 40 countries between 2011 and 2013 and operate in
40 countries only at YE13 (down from 48 at YE12). This is being done by selling profitable assets and
exiting from unprofitable countries (Morocco, Egypt and Italy...).
New IFRS rules
New IFRS rules (JVs no longer proportionally consolidated) have strong implications for Veolia’s
financial statements. In 2012, the JVs contributed EUR6.3bn of sales, EUR801m of EBITDA,
EUR394m of EBIT and EUR49m of net income. They also represented EUR866m of gross capex.
These numbers include BWB for the first 10 months of 2012 (BGe ~EUR120m) but also the
EUR82m one-off charge related to Dalkia in Italy (through Dalkia International). As a consequence,
EUR2.3bn of net debt is removed from Veolia’s balance sheet (including EUR1.4bn for BWB).
Despite removing the related EBITDA, ~EUR2.0bn of net debt remains on Veolia’s balance sheet
are they are inter-company loans. In the table below we present our estimates of 2012 pro forma
factoring in new IFRS rules.
Fig. 4:
2012 key metrics pro forma
Sales EBITDA D&A EBIT
Water 10,005 802 381 445
Waste 7,960 917 564 300
Energy 4,911 284 109 187
Others 243 (113) 19 (165)
Total 23,118 1,889 1,073 767
Source: Company Data; Bryan, Garnier & Co ests.
Factoring in these impacts, Veolia translated its initial target in order to comply with the new IFRS
rules. Hence, net debt is now guided to EUR8-9bn by YE13. Veolia also introduced an adjusted net
debt metric excluding the EUR2.0bn of loans to JVs. Hence, Veolia expects to reach EUR6-7bn of
adjusted net debt by YE13. It is important to understand that net debt will convergence towards the
adjusted net debt in the future, as loans to JVs will be repaid. So, we believe there is an economic
reason why Veolia has introduced this “adjusted net debt” concept. The adjusted ND/(Op. CF +
OFA) is targeted at 3.0x by YE14. Barring a strong macro impact on EBITDA, we believe this target
could be achieved as soon as 2013. Indeed, on our estimates, Veolia’s leverage will reach 2.99x at
YE13, down from an estimated 3.06x in 2012 (BGe).
5

Veolia Environnement
Fig. 5:
Leverage could be one year ahead of schedule
8,000
7,000
6,000
5,000
4,000
3,000
2,000
2012 2013e 2014e 2015e 2016e
3.10
3.05
3.00
2.95
2.90
2.85
2.80
Adj. Net debt
Adj. ND/(Op. CF+OFA)
Source: Company Data; Bryan, Garnier & Co ests.
Credit rating
The question mark is whether these changes will affect credit ratings. Management said that following
first informal contacts rating agencies have not said that this changes everything. While Veolia’s rating
at Moody’s benefits from a leeway there is more pressure on the S&P side, where Veolia struggles to
meet the FFO/ND ratio of 20%. Next reviews are not planned before May.
BWB, Dalkia International and VTD
Veolia deconsolidated EUR1.4bn of net debt from the Berlin water contract and EUR140m of
EBITDA. However, it has retained its 25% stake, while Berlin’s regional government owns the
remaining 75%. If Veolia does not manage to keep the operation of the Berlin water network, we
understand the group will seek to divest its stake to Berlin’s regional government. The value would be
close to EUR600-650m and is not part of the asset disposal programme.
The exit trajectory from VTD has been clearly defined co-jointly with the CDC, the financial arm of
the French government. CDC and Veolia will convert EUR520m and EUR280m of debt into equity,
respectively. Once done, Veolia’s net debt will have a EUR500m exposure to VTD. Simultaneously to
this recapitalisation, financial debt is expected to be raised. Moreover, proceeds from disposals at
VTD’s level (assets in Central and Eastern Europe as well as in Asia...) will serve to repay Veolia. The
EUR500m exposure is included in the 2013 EUR1bn divestment target. At a later stage, probably in
2014, Veolia will seek to sell its remaining 40% stake in VTD; this should be a two-step exit.
The management team clarified its positioning vis-à-vis Dalkia International (DKI). This subsidiary
amounts to EUR370m of EBITDA at 100%. The 2012 performance of DKI was very satisfying, with
11% EBITDA growth (excluding the EUR82m charge in Italy) which was improved by the changes
in scope. Veolia is seeking a way out of the EUR1.7bn debt consolidated in its balance sheet related to
DKI while the EUR300m of EBITDA is removed. However, any rational solutions tend to be
avoided by one of the party. While Veolia does not want to divest from this strongly growing JV (25%
EDF/75% Dalkia leading EDF and Veolia to own 50% each of DKI), the group will keep seeking by
all means to at least keep the control of DKI and at best take full ownership.
6

Veolia Environnement
Cash management
2012 was also the occasion for the group to proactively manage its debt in order to not increase its
cash level despite the significant disposals. Net of new issuance, Veolia bought back EUR1.7bn and
USD0.56m for a one-off cost of EUR47m in 2012. As a result, the repayment schedule is relatively
smooth with no important peak. The company is likely to continue managing quite proactively its
debts in 2013. An important condition is that the NPV of such moves must remain positive.
Hybrid bonds
Management clarified the rationale of the issuance of a EUR1.5bn (EUR1.0bn at 4.5% and GBP0.4m
at 4.875%) at the start of 2013 although Veolia has a relatively strong liquidity position. The aim of
the group was to benefit from attractive rates and spreads in order to: (i) increase its room for
manoeuvre vis-à-vis rating agencies during the execution of the restructuring programme; (ii) be
prompt to react if it has the opportunity to buy-back partners (if earnings accretive). While this will be
treated as 100% equity under IFRS rules, and 50% equity by rating agencies (until it is repaid for
Moody’s and until April 2018 for S&P). According to the CFO, this has no vocation to remain long
on the balance-sheet and it is highly likely to be paid back when callable (April 2018).
7

Veolia Environnement
EUR1.4bn of net capex p.a.
down from EUR2.1bn
Capex, FCF generation and dividends
Capex targets
New IFRS rules were also the occasion for the group to reset its capex guidance as of 2013. At the
2011 capital markets day, Veolia guided for gross capex of EUR2.5bn per year as well as disposals of
EUR0.4m per annum. The new target is now gross capex of EUR1.7bn and net capex of EUR1.4bn
p.a. The difference comes from new IFRs rules (EUR500m less), the deconsolidation of Berlin (BGe
EUR150m of capex p.a.) and capex reduction as announced last summer.
New gross capex target represents ~7% of sales. The company intends to keep a bit of leeway here as
it wants to be able to have the opportunity to buy-out partners in JVs, either for synergies (if earnings
accretive; for instance in Proactiva or Northern Europe) or accelerating the exit from this asset.
2012 quarterly performance
3,500
103
371
-2,023
3,000
2,748
2,500
2,000
1,500
-1,110
1,000
FCF
Adding new capex guidance to cost savings should allow Veolia to continue to improve its FCF
profile. Veolia achieved EUR89m of FCF before dividend and disposals in 2012 and this should also
apply in 2013 according to the management. The company targets EUR350-400m of FCF before
dividend and disposals by 2015. This will be enough to pay the dividend of EUR0.7 per share, which
represents EUR365m p.a. if fully paid in cash.
500
0
Op. CF OFA Working
cap.
Source: Company data
89
Capex Others FCF
Generating sustainable positive FCF is, in our opinion, a key element for the stock to be rerated.
Investors had long been pessimistic about the ability of the group to contain its debt and/or pay the
dividend. The return to positive FCF before dividend in 2012 and the target of positive FCF for 2013
as well should help make credible both: (i) the positive impact of cost-cutting measures; and (more
importantly to us) (ii) the sustainability of the EUR0.7 dividend.
Fig. 6:
FCF trajectory over 2013-16e [EURm]
800
600
400
200
0
-200
-400
2013 2014 2015 2016
FCF before didivends
FCF after didivends
Source: Company Data; Bryan, Garnier & Co ests.
Dividend secured as long as
earnings’ trajectory improves
Dividend
Management has extended the EUR0.7 dividend per share for at least an extra year (up to 2014).
From a cash management point of view, there is no issue here. We believe Veolia’s dividend policy is
based upon the development of underlying earnings. As long as the group is on track to achieve its
restructuring, the EUR0.7 DPS will be guaranteed. While there is no official guidance for 2013-15, the
company implicitly guides for a net result roughly on par with the dividend in 2014 and a potential
8

Veolia Environnement
return to historic pay-out levels in 2015. Our understanding is that EPS could be close to EUR0.70 in
2014 and close to EUR1.0 in 2015. This compares to new BG estimates of EUR0.68 and EUR0.95
(before impact from hybrid bonds).
5 growth pillars
Investments in China are
now paying off; FCF>0 in
2012
Growth pillars
Most of the growth capex will be oriented towards the attractive growing markets. While today only
30% of revenues come from these regions, Veolia intends to bring this to 50% by 5 years from now.
The five growth pillars are: (i) Water in Eastern and Central; (ii) Energy services in Eastern and
Central Europe; (iii) Water in China; (iv) Waste in UK; and (v) Hazardous waste. These growth
platforms should add EUR400m of EBITDA between 2011 and 2015. In 2012, they contributed
EUR68m to EBITDA.
China is a good example. For instance, Veolia already successfully grew Water EBITDA in China by
18% p.a. between 1999 and 2012. For the first time, Veolia achieved FCF breakeven in China in 2011.
And in 2012, positive FCF stood at ~EUR30m. China has reached the end of a long capex cycle. The
P&L of the Chinese activities are set to improve meaningfully.
Hazardous waste is an emerging growth platform and was not included in the 2011 CMD. The two
drivers of this division will be: (i) the dismantling of nuclear plants, a market value of EUR200bn over
20 years according to management and EUR30bn in France only; and (ii) water treatment for the oil,
gas and mining businesses.
Price pressure easing
All players are suffering
2012 quarterly performance
6%
4%
2%
0%
-2%
-4%
-6%
1Q12 2Q12 3Q12 4Q12
Reported growth s [y/y %] Organic growth [y/y %]
Source: Company data
French water trends
Price pressure
The French water market represents 10% of Veolia’s revenues and 13% of EBITDA. The group has
not seen degradation in trading conditions recently. It continues to expect a EUR50m p.a. negative
impact from contract renegotiations in 2012-15. According to the company, current price pressure is
less intense than in the past.
Management said that all players are evenly impacted by the trend. However, it thinks Veolia is the
first group to have renegotiated large contracts while peers have only recently started (2011 for Saur
and 2012 for Suez Environnement). Suez’s contract portfolio is most exposed to sewage businesses,
where the price pressure is somewhat lower than the drinking water segment. This makes the negative
impact less clear than for Veolia. Moreover, management believes it will be able to recover 50% of the
profits lost from contract renegotiations endured between 2010 and 2015.
Waste business trends
In 2012, Veolia achieved a stable activity in the Waste division. Despite tough volume conditions,
Veolia managed to grow organically by +3.0% in Q4 2012, vs. a decline in the three other quarters.
This was helped by market share gains in hazardous waste volumes in France. Overall treated volumes
were flat in 2012 vs. -1% at end-September 2012. In Q4 2012, waste volumes of Veolia benefitted
from a deadweight effect, particularly in Australia and in incineration in France.
Whereas it is too early to get a precise indication of the business trends from the beginning of 2013,
the CEO indicated that volumes were in line with Q4, with volumes tending to be declining. There
seems to be no inflection point yet. Remember that for 2013 Q1 will be tough basis of comparison,
which will ease in Q2 and be standard in H2.
9

Veolia Environnement
The figures below show the recent recyclates prices. For 2013, we retain the average price year-todate.
If prices were to remain at current levels, this would imply a relatively neutral price effect in
2013.
Fig. 7: Paper prices 1.04 [EUR/t] Fig. 8: Ferrous metal prices E40 [EUR/t]
120
250%
350
60%
100
200%
300
40%
80
60
40
20
-
2005 2006 2007 2008 2009 2010 2011 2012 2013
150%
100%
50%
0%
-50%
-100%
250
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150
100
50
0
1997
1998
1999
2000
2001
2002
2003
2004
2005
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Price [LHS]
y/y % [RHS]
Price [LHS]
y/y % [RHS]
Source: Revipap
Source: Bryan, Garnier & Co ests
Fig. 9: Aluminium prices [USD/t] Fig. 10: PET prices [EUR/t]
3,000
40%
1,600
30%
2,500
2,000
1,500
1,000
500
-
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
30%
20%
10%
0%
-10%
-20%
-30%
-40%
1,400
1,200
1,000
800
600
400
200
-
2009 2010 2011 2012 2013
25%
20%
15%
10%
5%
0%
-5%
-10%
Price [LHS]
y/y % [RHS]
Price [LHS]
y/y % [RHS]
Source: Datastream
Source: Datastream
10

Veolia Environnement
Factoring in new IFRS rules
Changes in estimates
We updated our estimates to reflect the new IFRS rules. This leads us to removing ~EUR6.3bn of
sales and ~EUR800m of EBITDA. This explains why we stand ~23% below EBITDA consensus.
The impact on EPS is broadly neutral. Excluding the impact of the hybrid bonds, our 2013 EPS goes
from EUR0.55 to EUR0.57 and our 2014 EPS is increased to EUR0.72 from EUR0.68. Factoring in
the hybrid bonds (EUR70m charge before taxes) brings our 2013 and 2014 EPS to EUR0.48 and
EUR0.63 respectively. EUR0.63 EPS in 2014 compares to a dividend per share of EUR0.7 and the
implicit guidance of an EPS on par with the dividend by then.
~37% EPS CAGR between
2012 and 2015
Despite modelling a tough macro environment (no GDP growth by 2016), we expect Veolia to
increase its EPS by 37% per annum on average between 2012 and 2015. Hence, we continue to see
Veolia as an attractive self-help story.
The tables below detail our estimates for Veolia between 2013 and 2016..
Fig. 11: Estimates changes summary – BG. vs. consensus
2013e
2014e
Revenue EBITDA EPS Revenue EBITDA EPS
New Old New Old New Old New Old New Old New Old
BG 23,708 28,594 2,027 2,707 0.48 0.55 24,298 29,533 2,159 2,921 0.63 0.68
Cons (IBES) 27,835 2,650 0.57 28,344 2,774 0.76
BGe vs. cons -14.8% -23.5 -0.48% -14.3% -22.2% -17.3%
Source: Company Data; Bryan, Garnier & Co ests.
Fig. 12: Revenues breakdown by division [EURm]
2008 2009 2010 2011 2012 2013e 2014e 2015e 2016e 2013-16
CAGR
Water 12,558 12,556 12,128 12,617 12,078 10,098 10,299 10,448 10,646 1.8%
y/y % 14.9% 0.0% -3.4% 4.0% -4.3% -16.4% 2.0% 1.4% 1.9%
Waste 10,144 9,056 9,312 9,740 9,083 7,942 8,054 8,168 8,282 1.4%
y/y % 10.1% -10.7% 2.8% 4.6% -6.7% -12.6% 1.4% 1.4% 1.4%
Energy 7,449 7,079 7,582 7,290 7,665 5,425 5,696 5,981 6,280 5.0%
y/y % 8.0% -5.0% 7.1% -3.9% 5.1% -29.2% 5.0% 5.0% 5.0%
Transport 6,054 5,860 5,765 - - - - - - n/a
y/y % 8.3% -3.2% -1.6% - - - - - -
Others - - - - 613 243 249 255 261 2.5%
y/y % - - - - - -60.4% 2.5% 2.5% 2.5%
Total 36,205 34,551 34,787 29,647 29,439 23,708 24,298 24,851 25,471 2.4%
y/y % 11.0% -4.6% 0.7% -14.8% -0.7% -19.5% 2.5% 2.3% 2.5%
Source: Company Data; Bryan, Garnier & Co ests.
11

Veolia Environnement
Fig. 13: EBITDA breakdown by division [EURm]
2008 2009 2010 2011 2012 2013e 2014e 2015e 2016e 2013-16
CAGR
Water 1,821 1,801 1,479 1,462 1,172 858 877 928 953 3.6%
y/y % -1.1% -17.9% -1.1% -19.8% -26.8% 2.2% 5.8% 2.7%
% of sales 14.5% 14.3% 12.2% 11.6% 9.7% 8.5% 8.5% 8.9% 9.0%
Waste 1,362 1,194 1,297 1,197 1,048 918 975 1,066 1,103 6.3%
y/y % -12.3% 8.6% -7.7% -12.5% -12.4% 6.2% 9.3% 3.5%
% of sales 13.4% 13.2% 13.9% 12.3% 11.5% 11.6% 12.1% 13.0% 13.3%
Energy 755 737 690 598 544 339 376 437 460 10.7%
y/y % -2.4% -6.4% -13.4% -8.9% -37.7% 10.8% 16.3% 5.3%
% of sales 10.1% 10.4% 9.1% 8.2% 7.1% 6.3% 6.6% 7.3% 7.3%
Transport 292 312 329 0 0 0 0 0 0 n/a
y/y % 6.7% 5.7% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
% of sales 4.8% 5.3% 5.7% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%
Holding/Others (94) (105) (141) (105) (42) (89) (69) (69) (69) -7.9%
y/y % 12.0% 34.5% -25.5% -60.0% 110.8% -22.0% 0.0% 0.0%
Total EBITDA 4,137 3,939 3,654 3,152 2,723 2,027 2,159 2,362 2,448 6.5%
y/y % -4.8% -7.2% -13.7% -13.6% -25.6% 6.5% 9.4% 3.6%
% of sales 11.4% 11.4% 10.5% 10.6% 9.4% 8.5% 8.9% 9.5% 9.6%
Source: Company Data; Bryan, Garnier & Co ests.
12

Veolia Environnement
Fig. 14: EBIT breakdown by division [EURm]
2008 2009 2010 2011 2012 2013e 2014e 2015e 2016e 2013-16 CAGR
Water 1,196 1,164 1,020 972 674 452 451 483 488 2.5%
y/y % -5.5% -2.7% -12.4% -4.7% -30.7% -32.9% -0.2% 6.9% 1.0%
% of sales 9.5% 9.3% 8.4% 7.7% 5.6% 4.5% 4.4% 4.6% 4.6%
Waste 641 360 609 508 356 320 348 409 417 9.2%
y/y % -20.3% -43.8% 69.3% -16.6% -29.9% -10.2% 8.7% 17.6% 1.9%
% of sales 6.3% 4.0% 6.5% 5.2% 3.9% 4.0% 4.3% 5.0% 5.0%
Energy 425 416 460 386 299 236 267 323 341 13.2%
y/y % 9.4% -2.0% 10.5% -16.1% -22.7% -21.1% 13.4% 21.1% 5.6%
% of sales 5.7% 5.9% 6.1% 5.3% 3.9% 4.3% 4.7% 5.4% 5.4%
Transport 130 158 146 - - - - - - n/a
y/y % 12.6% 22.1% -7.9% - - - - - -
% of sales 2.1% 2.7% 2.5% - - - - - -
Holding/Others (108) (166) (179) (166) (135) (131) (114) (116) (118) -3.5%
y/y % 4.4% 54.4% 7.6% -7.6% -18.6% -2.7% -13.2% 1.8% 1.8%
Total 2,283 1,932 2,056 1,701 1,194 877 953 1,099 1,128 8.7%
y/y % -7.5% -15.4% 6.4% -17.3% -29.8% -26.5% 8.6% 15.4% 2.6%
% of sales 6.3% 5.6% 5.9% 5.7% 4.1% 3.7% 3.9% 4.4% 4.4%
+ Joint Ventures - - - - - 122 141 172 184 14.7%
EBIT + JVs 2,283 1,932 2,056 1,701 1,194 999 1,093 1,271 1,312 9.5%
y/y % -7.5% -15.4% 6.4% -17.3% -29.8% -16.3% 9.4% 16.3% 3.2%
% of sales 6.3% 5.6% 5.9% 5.7% 4.1% 4.2% 4.5% 5.1% 5.2%
Source: Company Data; Bryan, Garnier & Co ests.
13

Veolia Environnement
Price Chart and Rating History
Veolia Environnement
28
5/3/13
26
24
22
20
18
16
14
12
10
8
6
2010 2011 2012
VEOLIA ENVIRONNEMENT
Source: Thomson Reuters Datastream
Ratings
Date Ratings Price
10-03-11 BUY EUR11.07
Target Price
Date
Target price
14-01-13 EUR13
04-09-12 EUR12.9
23-11-11 EUR14.3
03-10-11 EUR15
14

Veolia Environnement
BUY
NEUTRAL
SELL
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elements including a SWOT analysis, positive momentum, technical aspects and the sector backdrop. Every subsequent published update on the stock
will feature an introduction outlining the key reasons behind the opinion.
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BUY ratings 51.4% NEUTRAL ratings 27.5% SELL ratings 21.1%
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No
No
No
No
No
No
No
No
No
No
No
No
No
Yes
No
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