Environmental Services

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1 INDEPENDENT RESEARCH 19th May 2017 Environmental Services Environmental Services What if we bet on a further macro recovery SUEZ BUY FV EUR17.5 vs Bloomberg SEV FP Reuters SEVI.PA Price EUR High/Low /12.77 Market cap. EUR9,768m Enterprise Val EUR22,977m PE (2017e) 21.1x EV/EBIT (2017e) 16.5x VEOLIA ENVIRONNEMENT NEUTRAL FV EUR19.5 Bloomberg VIE FP Reuters VIE.PA Price EUR High/Low / Market Cap. EUR10,684m Enterprise Val EUR17,582m PE (2017e) 17.8x EV/EBIT (2017e) 12.8x /05/17 Source Thomson Reuters STOXX EUROPE 600 UTILITIES E STOXX EUROPE 600 In this report, we model what would be the impact for both Suez and Veolia of a stronger recovery in European industrial production. Both companies would clearly benefit from such a recovery. If all the planets are aligned across the groups different segments, we computed that our FVs would be positively impacted by up to 11%, according to our estimates. Following the stronger than expected Q1-17 publications of both Suez and Veolia, we decided to model what would be the impact of a further recovery in European industrial production. Clearly, both companies would benefit from such a recovery with Suez likely to benefit the most given 1/ the strong correlation observed between waste s organic growth and industrial output; and 2/ the particular cost structure of the business. Assuming all the planets are aligned across the companies different segments this would be our best case scenario we computed that our FVs, for both Suez and Veolia, could be positively impacted by up to 11% according to our estimates, highlighting therefore that 1/ the regain in investors confidence is not usurped in our view and 2/ there is still potential upside despite the shares recent strong outperformance. Our estimates remain unchanged for Veolia, as do our FV at EUR19.5 and our Neutral rating. For Suez, our EBITDA estimates have been increased by c. 1.0% on average, while our EPS forecasts have been revised upward by c. 6.5% on average on the back of adjustments inherent to the recently unveiled capital increase scheme. Consequently, our FV is increased to EUR17.5 vs. EUR16.5 and our Buy rating confirmed. Veolia s valuation appears attractive at first sight with a still c. 9% discount vs. Suez (P/E ratio level). However, this discount remains justified, in our view, given Suez s higher growth profile (+11.0% EPS growth expected over e vs. +9.0% for Veolia). Looking at PEG ratios, it appears that Suez is actually trading at a c.7.5% discount to Veolia, on average, over the period. Analyst: Pierre-Antoine Chazal 33(0) pachazal@bryangarnier.com r r

2 Table of contents 1. We still prefer Suez to Veolia Macro-indicators appear better oriented for both France and the Eurozone Detailing Suez s and Veolia s respective exposures to the waste segment Sensitivity analysis Recovery in European industrial production could boost Suez s and Veolia s earnings What if all the planets are aligned Estimates change to our Veolia estimates Tweaking our Suez estimates A word on multiples and valuation A quick word on multiples Valuation Price Chart and Rating History Price Chart and Rating History Bryan Garnier stock rating system... 19

3 1. We still prefer Suez to Veolia Since the beginning of Q2-17, the shares of both Suez and Veolia have strongly outperformed the market notably on the back of the enhanced confidence in key Eurozone macro indicators. Both companies Q1-17 results were stronger than expected due to the solid performance in their respective waste businesses activities. Veolia posted 5.6% organic growth in its waste revenues, notably spurred by a 1.2% increase in processed volumes. Suez posted 7.4% organic growth in its recycling & recovery business unit, similarly spurred by a 1.9% increase in processed volumes. Fig. 1: Strong increase in Veolia s and Suez s share prices YTD Dec-16 Jan-17 Jan-17 Jan-17 Jan-17 Feb-17 Feb-17 Feb-17 Feb-17 Mar-17 Mar-17 Mar-17 Mar-17 Mar-17 Apr-17 Apr-17 Apr-17 Apr-17 May-17 May-17 Veolia Suez Source: Thomson Reuters; Bryan, Garnier & Co ests. In this short report, we model what would be the impact of a stronger than expected recovery in European industrial production on Suez s and Veolia s metrics and valuations. According to our estimates, a 1% increase in waste volumes processed would lead to clear earnings growth for both companies with: A c. EUR35m and c. EUR30m positive impact on Suez s and Veolia s respective EBITDA; A c. 5.0% and c. 3.5% positive impact on Suez s and Veolia s respective earnings per share, on average, over 2017e-2019e; A EUR1.0 and a EUR0.9 per share positive impact on our current FV for Suez (c. 5.5% of our current FV) and Veolia (c.4.5% of our current FV), respectively. As a consequence, in our view, we believe Suez would benefit the most from such a recovery as the company has a greater exposure than Veolia to the waste segment and a greater exposure to France within that segment. Assuming all the planets are aligned for both companies (best case scenario) in the waste segment as well as in the water segment, or in their respective ability to integrate new or recently- 3

4 acquired companies we computed that our fair values would be positively impacted by between 8% and 11%, highlighting then that 1/ the regain in investors confidence is not usurped in our view and 2/ there is still upside despite the shares strong outperformance over the past few weeks. In all, our estimates remain unchanged for Veolia following our recent post-q1-17 results update (see our morning mail: Stronger than expected top-line growth drives slightly up our estimates). Our FV at EUR19.5 per share as well as our Neutral recommendation are maintained. We were positively surprised by the higher than expected top-line growth in Q1-17 but we are still struggling to find more upside in our SOTP valuation. Moreover, the operating leverage remains rather weak at this stage, mainly due to increased commercial charges, still strong downsizing of construction activities and the poor EBITDA impact coming from the recovery in recycled prices. As for Suez, our estimates have been slightly revised upward at the EBITDA level (+1.0% on average over 2017e-2020e). Our EPS post-hybrid coupons forecasts have been significantly increased (+6.5% on average over the same period) on the back of the previously mentioned EBITDA increase as well as the adjustments inherent to the recently unveiled capital increase scheme. As a consequence, our FV is revised upward to EUR17.5 per share. Our Buy recommendation is confirmed. Veolia s valuation appears attractive at first sight with, still, a c. 9% discount (P/E ratio level) vs. Suez. However, this discount remains justified, in our view, given Suez s higher growth profile (+11.0% EPS growth expected e vs. +9.0% for Veolia). Looking at PEG ratios, it appears that Suez is actually trading at a 7.5% discount to Veolia, on average, over the period. 4

5 2. Macro-indicators appear better oriented for both France and the Eurozone Eurozone macro indicators appear well oriented since the beginning of the year. In April 2017, the Eurozone manufacturing PMI reached 56.7 up c. 10% yoy a level which had not been reached since mid Similarly, in France, the manufacturing PMI reached 55.1 in April 2017, the highest level since December This partly explains, in our view, why Veolia and Suez have regained investors confidence over the past few months. Fig. 2: Highest PMI levels in France and the Eurozone since 2010/2011 Eurozone PMI ( ) France PMI ( ) Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Oct-09 Feb-10 Jun-10 Oct-10 Feb-11 Jun-11 Oct-11 Feb-12 Jun-12 Oct-12 Feb-13 Jun-13 Oct-13 Feb-14 Jun-14 Oct-14 Feb-15 Jun-15 Oct-15 Feb-16 Jun-16 Oct-16 Feb Aug-08 Dec-08 Apr-09 Aug-09 Dec-09 Apr-10 Aug-10 Dec-10 Apr-11 Aug-11 Dec-11 Apr-12 Aug-12 Dec-12 Apr-13 Aug-13 Dec-13 Apr-14 Aug-14 Dec-14 Apr-15 Aug-15 Dec-15 Apr-16 Aug-16 Dec-16 Apr-17 Source: Markit, Bloomberg, Bryan, Garnier & Co ests. As a reminder, we already highlighted in the past that both GDP and industrial production can be perceived as good proxies to the waste segment. Historically, we observed a strong correlation between the evolution of industrial production and the organic growth of Veolia s and Suez s respective waste segments (correlation estimated at between 0.7 and 0.8). Fig. 3: Strong correlation observed between waste organic growth and industrial production indices 5

6 Source: Veolia (Q1-17 presentation). Weighted average industrial production indices for 4 key countries (France, UK, Germany and rth America) with January and February 2017 figures being OECD figures for all countries The latest consensus forecasts for both Eurozone GDP and industrial production currently stand at +1.7% and +1.85%, respectively, for Forecasts have been consistently revised upward over the past few months (+1.4% in December 2016 to 1.7% today for 2017 GDP and +1.3% in December 2016 to +1.85% today for 2017 industrial production). Fig. 4: Evolution of GDP and industrial production consensus forecasts for the Eurozone GDP (%) Industrial production (%) Eurozone 2017e 2018e 2017e 2018e Current 1.7% 1.6% 1.85% 1.8% April % 1.5% 1.8% 1.7% March % 1.5% 1.6% 1.6% February % 1.5% 1.5% 1.6% December % - 1.3% - Source: Bloomberg; Bryan, Garnier & Co ests. 6

7 3. Detailing Suez s and Veolia s respective exposures to the waste segment We believe that both Suez and Veolia would benefit from a clear recovery in European industrial production on the back of their respective strong exposures to the previously mentioned waste segment. But, in all, we consider that Suez will benefit the most from such a recovery as: Suez has a stronger exposure than Veolia in the waste segment; Suez has a stronger exposure than Veolia in the French waste sub-segment. We indeed estimated that Suez generates around EUR7.5bn of revenues in the waste segment, i.e. around 43% of the group s revenues, following the recent acquisition of GE Water. This appears to be higher than Veolia (34% of FY-16 revenues) with this latter also being exposed to the energy segment (20% of Veolia s FY-16 revenues) following the Dalkia operation back in We estimated that Veolia generates around EUR8.5bn of revenues in the waste segment. The EBITDA margins of these waste segments are not fully disclosed by the companies as Suez only unveiled EBITDA for its Recycling & Recovery (R&R) segment (c. 16% of the group s waste revenues are reported in the company s International division) and Veolia now reports by geography. R&R EBITDA margins are usually to the tune of 12%, which is close to what Veolia used to report in its waste segment before the changes in reporting. This 12.0% EBITDA margin could then appear as a good proxy in order to assess respective EBITDA exposures to the waste segment. This would imply that Suez and Veolia have a respective c. EUR900m and c. EUR1bn EBITDA in the waste segment, i.e. c 35% and 33% of the overall groups EBITDA. The strong discrepancy observed for Suez (43% exposure at the top-line level vs. a 35% exposure at the EBITDA level) actually highlights that waste margins are lower than the group s ones with, as a reminder, Suez being notably exposed to regulated activities (46% EBITDA margin for US regulated water activities and c. 58% EBITDA margin for Chilean regulated water activities). Fig. 5: Suez s and Veolia s respective revenue exposure to the waste segment Suez s revenue breakdown inc. GE Water (2016 data) Veolia s revenue breakdown (2016 data) Energy 20% Waste 43% Water 46% Water 57% Waste 34% Source: Suez, Veolia, Bryan, Garnier & Co ests. 7

8 On the basis of the different figures unveiled by both companies, we tried to reconstitute in detail Suez and Veolia s respective geographical breakdown of their waste businesses. We estimated that around 30% of Veolia s waste revenues is generated in France, 21% in the UK, 11% and Germany, 8% in the USA and 9% in Australia. In the end, we estimated that around 65% of Veolia s waste revenues is generated in Europe. Fig. 6: Geographical breakdown of Veolia s estimated waste revenues Others Asia 2% Others 13% Latam 5% China 1% France 30% Australia 9% USA 8% Germany 11% UK 21% As for Suez, we estimated that around 44% of the company s waste revenues is generated in France, 20% in Benelux and in Germany, 17% in the UK and in Scandinavia and around 10% in Australia. In the end, we estimated that around 85% of Veolia s waste revenues is generated in Europe. Fig. 7: Geographical breakdown of Suez s estimated waste revenues Australia 10% Others 6% Central Europe 3% France 44% Benelux/Germany 20% UK/Scandinavia 17% 8

9 4. Sensitivity analysis 4.1. Recovery in European industrial production could boost Suez s and Veolia s earnings We estimated that a +/- 1% change in European waste volumes has a c. EUR30-35m impact on Suez s and Veolia s EBITDA, on an annual basis. This is mainly due to the particular cost structure of the waste business with fixed costs usually representing between 50% and 60% of overall costs. We estimated the impact should be slightly higher for Suez (c. EUR35m) than for Veolia (c. EUR30m). This is based on the following assumptions: 1/ the EBITDA margin of waste businesses at 12.0%; 2/ fixed costs representing 50% of the overall business costs; 3/ we estimated that about 65% and 85% of Veolia s and Suez s respective waste revenues are generated in Europe (cf. pie chart above). Fig. 8: +1% change in European waste volumes estimated EBITDA impact for Suez Estimated current +1% in European Waste metrics waste volumes Estimated waste revenues (EURm) P&L impact % generated in Europe (%) 85.0% - European waste revenues (EURm) 6,382 6, Fixed costs (EURm) (2,808) (2,808) 0 Variable costs (EURm) (2,808) (2,836) (28) EBITDA (EURm) EBITDA margin (%) 12.0% 12.4% - Fig. 9: +1% change in European waste volumes estimated EBITDA impact for Veolia Estimated current +1% in European Waste metrics waste volumes Estimated waste revenues (EURm) P&L impact % generated in Europe (%) 65% - European waste revenues (EURm) 5,461 5, Fixed costs (EURm) (2,403) (2,403) 0 Variable costs (EURm) (2,403) (2,427) (24) EBITDA (EURm) EBITDA margin (%) 12.0% 12.4% - As a consequence, we estimated this tailwind coming from a 1.0% increase in European processed volumes would have a c. 5.0% positive impact on Suez s EPS (post-hybrid coupons, on average over our 2017e-2019e estimates, based on a 30% normative tax rate) and a c. 3.5% 9

10 positive impact on Veolia s EPS (post-hybrid coupons, on average over our 2017e-2019e estimates, based on a 30% normative tax rate). Fig. 10: +1% change in European waste volumes estimated EPS impact for Suez Suez 2017e 2018e 2019e Average Additional Profit Before Taxes Taxes (based on a 30% normative tax rate) (10.8) (10.8) (10.8) - Additional Net Income Current Net Income (BG estimates) # shares Current EPS (BG estimates, post hybrid coupon) New EPS (inc. additional NI contribution) Estimated impact on EPS (%) 5.7% 4.6% 4.2% 4.9% Fig. 11: +1% change in European waste volumes estimated EPS impact for Veolia Veolia 2017e 2018e 2019e Average Additional Profit Before Taxes Taxes (based on a 30% normative tax rate) (9.3) (9.3) (9,3) - Additional Net Income Current Net Income (BG estimates) # shares Current EPS (BG estimates, post-hybrid coupon) New EPS (inc. additional NI contribution) Estimated impact on EPS (%) 4.1% 3.3% 3.0% 3.5% As our assumptions for waste volumes processed are built on a mark-to-market basis, we estimated that a similar + 1.0% increase in volumes would have an EUR1.0 per share positive impact on our FV for Suez (c. 5.5% of our current FV) and an EUR0.9 per share positive impact on our FV for Veolia (4.6% of our current FV). This is based on a DCF-proxy basis with a 5.9% WACC (notably based on a 1.6% risk-free rate, on a 7.0% market premium and a 1.0 beta). Fig. 12: Suez Impact on our FV coming from a +1% increase in waste volumes Year TV Additional EBITDA % WACC Present Value 267 Terminal Value 327 Enterprise Value 594 # shares 611 Impact Equity Value/sh

11 Fig. 13: Veolia Impact on our FV coming from a +1% increase in waste volumes Year TV Additional EBITDA % WACC Present Value 230 Terminal Value 280 Enterprise Value 510 # shares 569 Impact Equity Value/sh What if all the planets are aligned We tried to assess what would be the impact on our current FV (for both Veolia and Suez) of various particular items across Veolia s and Suez s different business divisions. These include the following assumptions: For Veolia: Increase in processed waste volumes of +2.0% and +2.5% on the back of a stronger recovery in European industrial production vs. +1.2% currently in our model (mark-to-market); Stronger than expected tariff increases in the French water segment (+1.5% vs. +1.0% in our model) as from 2018 on the back of higher inflation and a stronger increase in energy prices; Faster than expected recovery of the company s construction and engineering activities (VWT and SADE subsidiaries) with BG targeted EBITDA margins being reached one year ahead of schedule; More bolt-on acquisitions than in our current expectations (we currently expect Veolia to acquire new assets for c. EUR500m at an 9.0x EV/EBITDA multiple). According to our computations, these new assumptions could raise our FV by between EUR1.55 and EUR2.0 per share which would lead to a FV between EUR21 and EUR21.5. Fig. 14: Veolia Base case vs. best case scenario Base case Best case Impact FV +1.2% mark-to-market volumes' increase in line with Q1-17 figures French water: +1.0% average tariff increase in 2018 & beyond Bolt-on acquisitions: 500m over 9.0x EV/EBITDA VWT: 5.3% EBITDA margin in 2019 & SADE: 4.0% in %-+2.5% increase in processed volumes +0.70/ % average tariff increase Acquisitions x2: EUR1bn, 9.0x EV/EBITDA multiple Target margins reached one year ahead of BG schedule Potential impact on our FV /+2.00 Current FV vs. potential new FV

12 For Suez: Increase in processed waste volumes of +2.0% and +2.5% on the back of a stronger recovery in European industrial production vs. +1.2% currently in our model (mark-to-market); Stronger than expected tariff increases in the French water segment (+1.5% vs. +1.0% in our model) as from 2018 on the back of higher inflation and a stronger increase in energy prices; EBITDA s organic growth of GE Water at 5.0% over 2018e-2021e, in line with Suez s initial expectations (vs. +3.5% currently in our model) According to our computations, these new assumptions could raise our FV by between EUR1.45 and EUR1.9 per share which would lead to a FV between EUR19.0 and EUR19.5. Fig. 15: Suez Base case vs. best case scenario Base case Best case Impact FV +1.2% mark-to-market volumes' increase +2.0%-+2.5% increase in processed volumes +0.80/+1.25 French water: +1.0% average tariff increase in 2018 & beyond +1.5% average tariff increase GE Water: 3.5% EBITDA organic growth over 2018e-2021e 5.0% EBITDA organic growth over 2018e-2021e in line with Suez s initial expectations Potential impact on our FV /+1.90 Current FV vs. potential new FV

13 5. Estimates 5.1. change to our Veolia estimates On Veolia, our estimates as well as our valuation remain unchanged at this stage. As a reminder, we recently revised upward both our forecasts and our FV (from EUR18.5 to EUR19.5 per share) following, notably, stronger than expected top-line growth observed in Q1-17 (see our morning mail: Stronger than expected top-line growth drives slightly up our estimates). For 2017e, we still expect FY 2017 EBITDA to grow c. 1.3% organically (excluding the impact of Vilnius, flat including Vilnius) and at c. 2.7% at constant FX (excluding Vilnius, +1.6% including Vilnius). EBITDA should still be negatively impacted by negative tariff indexations in the French water business and increased commercial charges, while the recovery in recycled prices is likely to have a fairly marginal impact on the group s EBITDA. We, however, expect EBITDA growth to speed up in both FY 2018e and FY 2019e with our FY 2019e EBITDA estimate standing at EUR3,441m (excluding IFRIC 12 adjustment), at the high-end of the company s guidance of EUR bn (excluding IFRIC 12 adjustment). Fig. 16: BG s current estimates for Veolia (2017e-2019e) Key BG estimates 2017e 2018e 2019e Revenues 24,916 25,483 26,152 EBITDA (exc. IFRIC 12) 3,106 3,301 3,441 EBITDA margin % 12.5% 13.0% 13.2% EBITDA (inc. IFRIC 12) 3,306 3,501 3,641 EBITDA margin % 13.3% 13.7% 13.9% Current EBIT (exc. IFRIC 12) 1,373 1,537 1,639 Current Net Income Current EPS DPS Tweaking our Suez estimates Just like Veolia at the beginning of the month, Suez reported strong growth in revenues in its waste business division in Q1-17 (+7.4% on an organic basis). This was the consequence of the substantial rebound in recycled prices yoy but principally of the stronger than expected increase in processed volumes (+1.9% yoy vs. +1.2% for Veolia). As a consequence, our assumptions for volume growth are raised by c. 50bps on average over the period. As a reminder, in order to be conservative, we initially modelled the EUR750m capital increase needed to partly fund the acquisition of GE Water via a rights issue with a c. 20% discount TERP (based on Suez s closing price as of 03/28/2017). Few days ago, Suez finally announced the launch of its capital increase with the operation being carried in two stages: 1/the company s existing shareholders will be granted a three-day priority subscription period on an irreducible basis which will run from 17 th -19 th May, and 2/the new shares not subscribed for during the subscription period are to be offered in a global offering (private placement executed through ABB on 16 th May). The subscription price has been set at EUR15.8 per share in the low-end of the initial guidance of EUR per share which implies a 2.8% discount vs. Suez s last closing price before the operation. Such an operation implies the creation of about 47m new shares, well below our initial 13

14 conservative assumptions (c. 69m new shares). As a consequence, this operation has a c. 3.0% positive impact, on average, on our initial 2017e-2020e EPS estimates as well as a EUR0.6 per share positive impact on our FV, all being equal. In all, the adjustments we made in the waste business division as well as the integration of the previously mentioned capital increase scheme led us to revised upward our EBITDA estimates by 1.0% on average over 2017e-2020e and our EPS post-hybrid coupons forecasts by 6.5% on average over the same period. te that our EPS estimates are also positively impacted by the lower than expected coupons related to both hybrid (EUR600m at 2.875% vs. 4% initially in our model) and LT senior (EUR500m at 1.0% and EUR700m at 1.5% vs. EUR1.1bn at 1.5% initially in our model) debts Suez issued a few weeks ago. Fig. 17: Key changes in our Suez estimates (2017e-2020e) New BG estimates (2017e-2020e) 2017e 2018e 2019e 2020e Average change in our estimates (2017e- Revenues 16,743 18,357 18,864 19, % EBITDA 2,863 3,158 3,287 3, % EBIT 1,395 1,621 1,720 1, % EPS pre hybrid % EPS post hybrid % 2020e) 14

15 6. A word on multiples and valuation 6.1. A quick word on multiples Suez currently trades at 19.9x and at 17.3x its 2017e and 2018e P/E ratios, respectively. This appears to be bang in line vs. its 3-year historical average for both FY+1 and FY+2 P/E ratios. This also implies a c. 9% premium, on average, vs. Veolia. At first sight, Veolia is therefore trading at a high-single digit discount vs. Suez. Fig. 18: At first sight, Veolia is trading at a strong discount vs. Suez Company 2017 P/E 2018 P/E Premium/Discount vs. Suez/Veolia 2017e Premium/Discount vs. Suez/Veolia 2018e Premium/Discount vs. 3-year P/E Y1 average Premium/Discount vs. 3-year P/E Y2 average Suez 19.9x 17.3x 9.3% 11.6% (1.0%) (0.6%) Veolia 18.2x 15.5x (8.5%) (10.4%) (24.8%) (13.9%) In our view, this premium is, however, justified as Suez is likely to benefit from higher EPS growth, compared to Veolia, over e (+11.0% EPS growth over the period vs. +9.0% for Veolia), notably on the back of the expected accretion inherent to the GE Water acquisition. Looking at PEG ratios (PE/earnings growth) over e, Suez is actually trading at a c. 7.5% discount to Veolia, on average, over the period. Fig. 19: PEG ratio 2017e-2019e for Suez & Veolia EPS CAGR PE ratio PE ratio PE ratio PEG ratio PEG ratio PEG ratio 2019e FY-17e FY-18e FY-19e FY-17e FY-18e FY-19e Suez 11.0% 19.9x 17.3x 16.1x 1.81x 1.57x 1.46x Veolia 9.0% 18.2x 15.5x 13.7x 2.02x 1.72x 1.52x Source : Bryan Garnier & Co. ests Valuation Just like our estimates, our valuation remains unchanged for Veolia. As a consequence, our EUR19.5 per share FV is maintained and still implies a very limited upside to the tune of 3.0%. As for Suez, we revised upward our FV from EUR16.5 to EUR17.5 per share on the back of the increase in our estimates and the adjustments linked to a different capital increase scheme. As a reminder, we used a 9.5x EV/EBITDA multiple to value the company s regulated water assets in the US and a 9.0x EV/EBITDA multiple for the company s regulated water assets in Chile. This 5% discount (9.0x for Chile vs. 9.5x for the US activities) is still due to ongoing regulatory uncertainties in the country (potential downward revision of the assets remuneration). 15

16 Fig. 20: Suez Sum-of-the-parts (SOTP) Suez SOTP valuation Value (EURm) Method Value per share Water Europe - n regulated 5,743 Discounted CF 9.4 Aguas Andinas Regulated water Chile 3, x FY-17e EV/EBITDA multiple 6.1 Recycling & Recovery Europe 6,754 Discounted CF 11.1 International - Excluding United Water Regulated 4,594 Discounted CF 7.5 United Water Regulated Water US 2,316 Others (816) 9.5x FY-17e EV/EBITDA multiple 6.0x FY-17e EV/EBITDA multiple 3.8 (1.3) GE Water 3,607 Discounted CF 5.9 Implied Enterprise Value (EV) 25, Net debt at end 2017e 9,213 - (15.1) Integration of hybrid 100% (1,600) - (2.6) Provisions (2,062) Book Value (3.4) Minority interest (3,147) 14x P/E for non-regulated assets 17x P/E for regulated assets (5.1) New minorities inherent to GE Water s transaction (1,082) 30% of GEW EV (1.8) Financial assets 1,900 Book Value 3.1 o/w Associates (exc. ACEA, already integrated in our EV) 785 Book Value 1.3 o/w other financial assets 1,115 Book Value 1.8 Total implied Equity value 10, Number of shares (m) Equity value per share (rounded)

17 Price Chart and Rating History Veolia Environnement /11/15 18/02/16 18/05/16 18/08/16 18/11/16 18/02/17 18/05/17 VEOLIA ENVIRONNEMENT Fair Value Achat Neutre Vente Ratings Date Ratings Price 06/01/17 NEUTRAL EUR /06/16 BUY EUR /11/15 NEUTRAL EUR /09/14 BUY EUR Target Price Date Target price 09/05/17 EUR /03/17 EUR /01/17 EUR /11/16 EUR22 02/08/16 EUR /06/16 EUR23 20/04/16 EUR22 15/12/15 EUR /07/15 EUR22 02/04/15 EUR20 13/03/15 EUR19 11/02/15 EUR18 30/09/14 EUR17 17

18 Price Chart and Rating History Suez /11/15 18/02/16 18/05/16 18/08/16 18/11/16 18/02/17 18/05/17 SUEZ Fair Value Achat Neutre Vente Ratings Date Ratings Price 08/09/15 BUY EUR /09/14 NEUTRAL EUR Target Price Date Target price 28/03/17 EUR /03/17 Under review 06/01/17 EUR /06/16 EUR /04/16 EUR /04/16 EUR /07/15 EUR19 02/04/15 EUR18 13/03/15 EUR17 09/12/14 EUR16 30/09/14 EUR14 18

19 BUY NEUTRAL SELL Bryan Garnier stock rating system For the purposes of this Report, the Bryan Garnier stock rating system is defined as follows: Stock rating Positive opinion for a stock where we expect a favourable performance in absolute terms over a period of 6 months from the publication of a recommendation. This opinion is based not only on the FV (the potential upside based on valuation), but also takes into account a number of elements that could include a SWOT analysis, momentum, technical aspects or the sector backdrop. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion. Opinion recommending not to trade in a stock short-term, neither as a BUYER or a SELLER, due to a specific set of factors. This view is intended to be temporary. It may reflect different situations, but in particular those where a fair value shows no significant potential or where an upcoming binary event constitutes a high-risk that is difficult to quantify. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion. Negative opinion for a stock where we expect an unfavourable performance in absolute terms over a period of 6 months from the publication of a recommendation. This opinion is based not only on the FV (the potential downside based on valuation), but also takes into account a number of elements that could include a SWOT analysis, momentum, technical aspects or the sector backdrop. Every subsequent published update on the stock will feature an introduction outlining the key reasons behind the opinion. Distribution of stock ratings BUY ratings 47.9% NEUTRAL ratings 36.2% SELL ratings 16% 1 Bryan Garnier shareholding in Issuer 2 Issuer shareholding in Bryan Garnier Research Disclosure Legend Bryan Garnier & Co Limited or another company in its group (together, the Bryan Garnier Group ) has a shareholding that, individually or combined, exceeds 5% of the paid up and issued share capital of a company that is the subject of this Report (the Issuer ). The Issuer has a shareholding that exceeds 5% of the paid up and issued share capital of one or more members of the Bryan Garnier Group. 3 Financial interest A member of the Bryan Garnier Group holds one or more financial interests in relation to the Issuer which are significant in relation to this report 4 Market maker or liquidity provider A member of the Bryan Garnier Group is a market maker or liquidity provider in the securities of the Issuer or in any related derivatives. 5 Lead/co-lead manager In the past twelve months, a member of the Bryan Garnier Group has been lead manager or co-lead manager of one or more publicly disclosed offers of securities of the Issuer or in any related derivatives. 6 Investment banking agreement A member of the Bryan Garnier Group is or has in the past twelve months been party to an agreement with the Issuer relating to the provision of investment banking services, or has in that period received payment or been promised payment in respect of such services. 7 Research agreement A member of the Bryan Garnier Group is party to an agreement with the Issuer relating to the production of this Report. 8 Analyst receipt or purchase of shares in Issuer The investment analyst or another person involved in the preparation of this Report has received or purchased shares of the Issuer prior to a public offering of those shares. 9 Remuneration of analyst The remuneration of the investment analyst or other persons involved in the preparation of this Report is tied to investment banking transactions performed by the Bryan Garnier Group. 10 Corporate finance client In the past twelve months a member of the Bryan Garnier Group has been remunerated for providing corporate finance services to the issuer or may expect to receive or intend to seek remuneration for corporate finance services from the Issuer in the next six months. 11 Analyst has short position The investment analyst or another person involved in the preparation of this Report has a short position in the securities or derivatives of the Issuer. 12 Analyst has long position The investment analyst or another person involved in the preparation of this Report has a long position in the securities or derivatives of the Issuer. 13 Bryan Garnier executive is an officer A partner, director, officer, employee or agent of the Bryan Garnier Group, or a member of such person s household, is a partner, director, officer or an employee of, or adviser to, the Issuer or one of its parents or subsidiaries. The name of such person or persons is disclosed above. 14 Analyst disclosure The analyst hereby certifies that neither the views expressed in the research, nor the timing of the publication of the research has been influenced by any knowledge of clients positions and that the views expressed in the report accurately reflect his/her personal views about the investment and issuer to which the report relates and that no part of his/her remuneration was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in the report. 15 Other disclosures Other specific disclosures: Report sent to Issuer to verify factual accuracy (with the recommendation/rating, price target/spread and summary of conclusions removed). Yes A copy of the Bryan Garnier & Co Limited conflicts policy in relation to the production of research is available at 19

20 London Paris Beaufort House 26 Avenue des Champs Elysées 15 St. Botolph Street Paris London EC3A 7BB Tel: +33 (0) Tel: +44 (0) Fax: +33 (0) Fax: +44 (0) Regulated by the Authorised and regulated by the Financial Financial Conduct Authority (FCA) and Conduct Authority (FCA) the Autorité de Contrôle prudential et de resolution (ACPR) New York 750 Lexington Avenue New York, NY Tel: +1 (0) Fax: +1 (0) FINRA and SIPC member Munich Widenmayerstrasse Munich Germany Important information This document is classified under the FCA Handbook as being investment research (independent research). Bryan Garnier & Co Limited has in place the measures and arrangements required for investment research as set out in the FCA s Conduct of Business Sourcebook. This report is prepared by Bryan Garnier & Co Limited, registered in England Number and its MIFID branch registered in France Number Bryan Garnier & Co Limited is authorised and regulated by the Financial Conduct Authority (Firm Reference Number ) and is a member of the London Stock Exchange. Registered address: Beaufort House 15 St. Botolph Street, London EC3A 7BB, United Kingdom This Report is provided for information purposes only and does not constitute an offer, or a solicitation of an offer, to buy or sell relevant securities, including securities mentioned in this Report and options, warrants or rights to or interests in any such securities. This Report is for general circulation to clients of the Firm and as such is not, and should not be construed as, investment advice or a personal recommendation. account is taken of the investment objectives, financial situation or particular needs of any person. The information and opinions contained in this Report have been compiled from and are based upon generally available information which the Firm believes to be reliable but the accuracy of which cannot be guaranteed. All components and estimates given are statements of the Firm, or an associated company s, opinion only and no express representation or warranty is given or should be implied from such statements. All opinions expressed in this Report are subject to change without notice. To the fullest extent permitted by law neither the Firm nor any associated company accept any liability whatsoever for any direct or consequential loss arising from the use of this Report. Information may be available to the Firm and/or associated companies which are not reflected in this Report. The Firm or an associated company may have a consulting relationship with a company which is the subject of this Report. This Report may not be reproduced, distributed or published by you for any purpose except with the Firm s prior written permission. The Firm reserves all rights in relation to this Report. Past performance information contained in this Report is not an indication of future performance. The information in this report has not been audited or verified by an independent party and should not be seen as an indication of returns which might be received by investors. Similarly, where projections, forecasts, targeted or illustrative returns or related statements or expressions of opinion are given ( Forward Looking Information ) they should not be regarded as a guarantee, prediction or definitive statement of fact or probability. Actual events and circumstances are difficult or impossible to predict and will differ from assumptions. A number of factors, in addition to the risk factors stated in this Report, could cause actual results to differ materially from those in any Forward Looking Information. Disclosures specific to clients in the United Kingdom This Report has not been approved by Bryan Garnier & Co Limited for the purposes of section 21 of the Financial Services and Markets Act 2000 because it is being distributed in the United Kingdom only to persons who have been classified by Bryan Garnier & Co Limited as professional clients or eligible counterparties. Any recipient who is not such a person should return the Report to Bryan Garnier & Co Limited immediately and should not rely on it for any purposes whatsoever. tice to US investors This research report (the Report ) was prepared by Bryan Garnier & Co Limited for information purposes only. The Report is intended for distribution in the United States to Major US Institutional Investors as defined in SEC Rule 15a-6 and may not be furnished to any other person in the United States. Each Major US Institutional Investor which receives a copy of this Report by its acceptance hereof represents and agrees that it shall not distribute or provide this Report to any other person. Any US person that desires to effect transactions in any security discussed in this Report should call or write to our US affiliated broker, Bryan Garnier Securities, LLC. 750 Lexington Avenue, New York NY Telephone: This Report is based on information obtained from sources that Bryan Garnier & Co Limited believes to be reliable and, to the best of its knowledge, contains no misleading, untrue or false statements but which it has not independently verified. Neither Bryan Garnier & Co Limited and/or Bryan Garnier Securities LLC make no guarantee, representation or warranty as to its accuracy or completeness. Expressions of opinion herein are subject to change without notice. This Report is not an offer to buy or sell any security. Bryan Garnier Securities, LLC and/or its affiliate, Bryan Garnier & Co Limited may own more than 1% of the securities of the company(ies) which is (are) the subject matter of this Report, may act as a market maker in the securities of the company(ies) discussed herein, may manage or co-manage a public offering of securities for the subject company(ies), may sell such securities to or buy them from customers on a principal basis and may also perform or seek to perform investment banking services for the company(ies). Bryan Garnier Securities, LLC and/or Bryan Garnier & Co Limited are unaware of any actual, material conflict of interest of the research analyst who prepared this Report and are also not aware that the research analyst knew or had reason to know of any actual, material conflict of interest at the time this Report is distributed or made available..