In 2023, Europe finds itself grappling with a severe drought, a situation exacerbated by heatwaves sweeping across the continent. The impact of this drought is far-reaching, from the agricultural heartlands of France to the iconic canals of Venice in Italy. Water tables are dwindling, agricultural productivity is declining, and entire ecosystems are at risk.
Veolia Environnement SA ENXTPA:VIE, a global pioneer in optimised resource management, is at the forefront of tackling these urgent environmental issues. With a diverse portfolio in water, waste, and energy management solutions, Veolia has been a key player in delivering sustainable and innovative solutions to communities globally. The company’s dedication to environmental stewardship and sustainable development has established it as a significant contributor in the global fight against climate change.
Business model and operations
Veolia’s business model encompasses the management of resources, production and delivery of drinking and industrial process water, wastewater collection, treatment, and recycling. They also undertake the design and construction of treatment and network infrastructure. Veolia’s waste management services include collection, material recovery, waste-to-energy services, organic waste material recovery, hazardous waste treatment, and more.
In the energy sector, Veolia manages heating and cooling networks, develop energy services to reduce energy consumption and CO2 emissions of buildings, optimise industrial utilities, and produce electricity from biomass.
In the face of the current drought, Veolia’s water management expertise could offer crucial solutions. Services such as water conservation, efficient water usage, and alternative water sourcing could be pivotal in maintaining water security. Additionally, the company’s capabilities in wastewater recovery and recycling could turn a crisis into a sustainable development opportunity. Veolia currently holds a 12.4% market share in the fragmented Water Collection, Treatment & Supply sector in the EU, positioning it as a market leader.
Sector analysis
The water industry in Europe, a vital part of the continent’s infrastructure, is undergoing significant change. Despite a projected decrease in revenue over the five years through 2022, the sector is set for a rebound with a growth of 2.8% expected in 2022 as the European economy recovers from the COVID-19-induced downturn. Demand for water remains strong, driven by private households, commercial clients, and the agricultural sector. However, supply dynamics are increasingly being influenced by climate factors, with high temperatures and dry weather conditions posing challenges to water reserves.
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The regulatory landscape is evolving, with the European Union implementing several directives to ensure high-quality drinking water across its member states. These include the Bathing Waters Directive, the Urban Waste Water Treatment Directive, the updated Drinking Water Directive, and the Water Framework Directive.
Concurrently, a trend towards re-municipalisation of water supply, treatment, and distribution is unfolding across Europe, driven by factors such as corruption scandals, lack of transparency, and regulatory oversight.
The industry also grapples with significant challenges, including demographic development, urbanisation, and economic progress. However, these challenges also present opportunities for industry operators to innovate and invest in infrastructure development and efficient water management systems. For investors, the water industry in Europe offers a dynamic and evolving landscape, ripe with opportunities for strategic investments and innovation.
European equity market outlook
The European equity market appears to be in a favourable position for investors, with several factors contributing to its attractiveness. The region’s robust economic recovery, coupled with the ECB’s monetary policy, is expected to support corporate earnings growth.
European equities are also seen as more attractively valued compared to their US counterparts, offering potential opportunities for investors. Moreover, the region’s strong commitment to ESG principles and the ongoing energy transition present additional investment prospects, particularly in sectors related to renewable energy and sustainable technologies. We can see the P/E and P/B ratio between US equities (29.6x and 4.3x respectively) and EU equities (19.5x and 2x respectively).
As a leading company in environmental solutions, Veolia is well-positioned to benefit from Europe’s commitment to sustainability and climate goals. The company’s strong performance in water, waste, and energy management aligns with the increasing demand for these services driven by environmental policies and population growth, and the current drought situation in Europe.
Financials
From the most recent Q1 results published, Veolia has reported a strong start to the year with significant growth. The company’s revenue for Q1 2023 was €12,007 million, up by 19.9% at constant scope and exchange rates. This growth was primarily driven by higher energy prices, tariff reviews, and resilient waste volumes, despite a negative weather effect and lower recyclate prices compared to Q1 2022.
EBITDA has grown 7.9% due to revenue growth and cost savings. Veolia’s financial debt decreased €1,122 million compared to the end of 2022, primarily due to positive cash flows and disposal of non-core assets.
The company’s forward P/E ratio is 19.3x, and the P/B ratio is 1.7x.
We can observe the relative attractiveness in Veolia’s valuation, from both the lower P/B ration compare to the peers and near average forward P/E ratio.
All business lines at Veolia reported growth in the first quarter. Water activities reported organic growth of +9.9%, driven by good activity levels in both water technologies and tariff reviews. Waste activities increased by +3.2%, and +5.7% excluding the change in recyclate prices. The energy businesses grew significantly (+53.9% organic growth), benefiting from further increases in heating tariffs and electricity selling prices, reflecting the higher cost of purchased energy.
The company’s EBITDA for Q1 2023 was €1,574 million, up by 8.0% at constant scope and exchange rates. This growth outpaced revenue growth restated for the increase in energy prices (+6.3%). During the quarter, operating efficiency programs generated €87 million and the Suez integration synergies plan €43 million. Current EBIT is €788 million, up 14.0% at constant scope and exchange rates year-on-year.
Veolia’s net financial debt stood at €18,727 million as of March 31, 2023, with cash and cash equivalents amounting to €9.7 billion, showing a strong balance sheet. The company has syndicated credit facilities totalling €5,436 million, providing it with a robust net liquidity position. Credit rating agencies Standard and Poor’s and Moody’s confirmed Veolia’s credit rating at A-2/BBB and P-2/Baa1 respectively, both with a stable outlook.
Veolia’s stock is trading at the high end of 52-week price range €18.83 – €29.92, with 3.77% dividend yield.
Veolia has demonstrated robust growth in its segmented sectors, particularly in the energy and water industries. The company is strategically positioned to leverage the ongoing energy transition, with its innovative solutions and commitment to decarbonization.
The current drought situation across Europe further underscores the importance of Veolia’s water management services, presenting significant opportunities for growth and expansion. For investors, the strong performance, strategic initiatives, and favourable market conditions, make Veolia a compelling consideration in the current investment landscape.
