Utilities. Looking for the Grail INDEPENDENT RESEARCH. Utilities

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1 INDEPENDENT RESEARCH 2nd April 2015 Utilities Utilities Looking for the Grail ALBIOMA BUY FV EUR22 Bloomberg ABIO FP Reuters ABIO.PA Price EUR17.79 High/Low EUR20.96/15.74 Market cap. EUR529m Enterprise Val EUR1,106m PE (2014e) 14.7x EV/EBIT (2014e) 13.9x EDF BUY FV EUR28 vs.27.5 Bloomberg EDF FP Reuters EDF.PA Price EUR22.34 High/Low EUR29.73/ Market Cap. EUR41,553m Enterprise Val EUR105,464m PE (2014e) 11.2x EV/EBIT (2014e) 11.5x GDF SUEZ BUY FV EUR23 Bloomberg GSZ FP Reuters GSZ.PA Price EUR High/Low EUR21.09/ Market Cap. EUR44,821m Enterprise Val EUR87,662m PE (2014e) 16.7x EV/EBIT (2014e) 12.3x SUEZ ENVIRONNEMENT NEUTRAL FV EUR18 vs. 17 Bloomberg SEV FP Reuters SEVI.PA Price EUR High/Low EUR16.94/ Market Cap. EUR8,657m Enterprise Val EUR19,327m PE (2014e) 17.7x EV/EBIT (2014e) 15.5x VEOLIA ENVIRONNEMENT BUY FV EUR20 vs.19 Bloomberg VIE FP Reuters VIE.PA Price EUR High/Low EUR18.07/12.34 Market Cap. EUR9,905m Enterprise Val EUR16,339m PE (2014e) 26.3x EV/EBIT (2014e) 14.5x VOLTALIA BUY FV EUR12 Bloomberg MLVLT FP Reuters MLVLT.PA Price EUR10.48 High/Low EUR10.75/7.1 Market Cap. EUR274m Enterprise Val EUR204,544m PE (2014e) 69.6x EV/EBIT (2014e) 24.2x /04/15 Source Thomson Reuters STOXX EUROPE 600 UTILITIES E STOXX EUROPE 600 In a no inflation environment, attractive and safe returns remain rare commodities and should come back onto investors radar screens once equities reach unattractive valuations. Since January 2015, the SX6P index has strongly lagged other sectors as investors play cyclical stocks exposed to industrial and economical recovery in Europe. While we remain negative on the sector due to poor fundamentals we however believe at some point investors will come back to these lagging stocks which offer both attractive valuations and safe yields. In this report, we identify Veolia, Albioma and GDF Suez as offering this grail, comforting the Buy rating we have on these stocks. A sector lagging behind: The sector, which outperformed other indices in 2014 (+13.3% vs. +4.3% for Stoxx 600), has been lagging the Stoxx 600 (+2.8% for SX6P vs. +16% for Stoxx 600) since the end of 2014 given investors have been playing cyclical stocks exposed to industrial and economical recovery in Europe. At some point investors should come back to attractive and safe yields: This underperformance is logical given utility stocks have limited sensitivity to global consumption especially in Europe where energy demand is structurally in decline. The sector only has to offer attractive yields, which in such a deflationist environment could be seen as interesting once other sectors are fully valued. Veolia, Albioma & GDF Suez amongst the best: We compared all stocks in our coverage on: 1/ their ability to fully finance dividends in cash, 2/ their ability to distribute a higher dividend in 2018 (vs. 2014), and 3/ the potential upside on the yield valuation. We identified three stocks which are out of ordinary: Veolia, Albioma and GDF Suez. Still negative on the sector though: We remain negative on the sector given the fundamentals (power and gas demands, power and gas prices) remain weak, yet we believe attractive yields offered by the stocks could generate an alternative investment for long-term shareholders especially in such a deflationist environment. In this report we took the opportunity to adjust (positively) our FV to reflect the lower risk-free rate and lower risk premium (BG assumptions). Analyst: Xavier Caroen 33(0) xcaroen@bryangarnier.com r r

2 Table of contents 1. Looking for the grail All dividends are not fully covered Veolia Suez Environnement GDF Suez EDF Albioma Which stocks offer stronger dividend rise? Are yields more attractive than in the past? Veolia Suez Environnement GDF Suez EDF Albioma What to retain from analysis? Change in FV due to new BG valuation assumptions Price Chart and Rating History Bryan Garnier stock rating system... 19

3 1. Looking for the grail The sector, which strongly performed in 2014 (one of the top performers with +13.3% vs. +4.3% for the Stoxx 600) due to the decline in sovereign rates in Europe, is now lagging the ytd rally observed on European stock exchanges (+2.8% for SX6P vs. +16% for Stoxx 600) as: 1/ earnings growth potential from an economic recovery in Europe remains limited for utilities (as utility stocks are not played by investors since their preferences for cyclical stocks remain stronger); and 2/ incremental impacts on the groups P&Ls and balance sheets from further falls in sovereign rates are now more limited. While we are not surprised by such underperformance, we however believe that, at some point, once cyclical stocks and other stocks played as a proxy to Europe are fully valued by the market (following a strong rally in the market), then investors will progressively come back to neglected stocks which offer attractive and secure yields. The Utilities sector will then come back onto investors radar screens we believe, with underperforming (for no specific reasons) stocks becoming potential favourites. Fig. 1: SX6P performance vs. French OAT 10Y SX6P vs. French OAT 10Y (2014) SX6P vs. French OAT 10Y (2015 YTD) STOXX EUROPE 600 UTILITIES E - PRICE INDEX FRANCE BENCHMARK BOND 10 YR (DS) - RED. YIELD STOXX EUROPE 600 UTILITIES E - PRICE INDEX FRANCE BENCHMARK BOND 10 YR (DS) - RED. YIELD Fig. 2: SX6P performance vs. SXXP SX6P vs. SXXP (2014) SX6P vs. SXXP (2015 YTD) SX6P SXXP SX6P SXXP 3

4 Fig. 3: Indexes performance in Europe since 31/12/2014 Auto & Parts Chemicals Financial Services Health Care Insurance Construction & Building Media Real Estate Retail Industrial Goods Stoxx 600 Travel & Leisure Personnal Goods Technology Telecom Food & Beverages Banks Oil & Gas Basic Resources Utilities 2.8% 7.7% 6.2% 21.9% 20.3% 19.8% 19.5% 19.4% 18.7% 18.5% 18.2% 17.0% 16.0% 15.8% 15.7% 15.2% 14.7% 14.5% 13.5% 31.8% 0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% ; Datastream Fig. 4: 2015e Yield by sector Utilities Insurance Telecommunications Financial Services Real Estate Oil & Gas Media Basic Resources Stoxx 600 Personal & Household Goods Banks Travel & Leisure Construction & Materials Industrial Goods & Services Retail Chemicals Automobiles & Parts Food & Beverage Technology Health Care 1.8% 1.7% 3.4% 3.2% 3.1% 3.0% 2.9% 2.9% 2.8% 2.7% 2.7% 2.6% 2.5% 2.5% 2.4% 2.3% 3.9% 3.9% 4.5% 4.5% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% Datastream 4

5 Given the strong attractiveness of the sector (in terms of yield), we clearly believe that at some point investors will come back on either regulated assets offering attractive and safe yields, or on stocks offering interesting dividend growth helped by restructuring efforts, or by solid exposure to high growth potential markets. The SX6P sector currently offers a 4.5% yield for 2015 vs. 2.95% for the Stoxx 600 and offers a 4.6% yield for 2016 vs. 3.3% for the Stoxx600, logical when looking at the Stoxx600 performance since the end of In this report we try to identify which stocks in our Utilities coverage offer the most attractive reward for investors interested in solid and safe yields in such a no inflation environment. We then compare different cash metrics within our coverage and identified Veolia (Buy, EUR20), Albioma (Buy, EUR22) and GDF Suez (Buy, EUR23) as the most interesting stocks for investors All dividends are not fully covered In this section, we compare dividends (excluding dividends to minorities and hybrid coupons) to yield vs. FCF after capex (including disposals and M&A) yields to see which stocks distribute fully-covered dividends. For 2015 and 2016, none of our stocks distribute fully-covered dividend except Veolia. In 2017 Suez Environnement covers it as well as Veolia. On the 2018 dividends, EDF joins Veolia the VIP square (fully covered and attractive yield) while Suez Environnement is still expected to cover it (yield unattractive vs. sector tough). We show below the detailed formula for the dividend coverage ratio: Dividend coverage ratio: (operating cash flow (including financial interests) total investments (growth capex + maintenance capex + acquisitions + disposals))/market capitalisation dividend yield (dividend to shareholders / share price) Fig. 5: 2015e/2016 Div. yield vs. Div. coverage (FCF before capex yield / Div yield) Dividend coverage 200% 100% 0% -100% -200% COVERED NOT COVERED 2015e Veolia Suez Environnement UNATTRACTIVE ATTRACTIVE GDF Suez -300% Albioma -400% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 2015e Dividend yield Source.Bryan, Garnier & Co ests; Datastream EDF Dividend coverage 200% 100% 0% -100% -200% -300% -400% -500% -600% COVERED NOT COVERED 2016e UNATTRACTIVE Suez Environnement Albioma Veolia ATTRACTIVE GDF Suez -700% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% Source.Bryan, Garnier & Co ests; Datastream 2016e Dividend yield EDF 5

6 Fig. 6: 2017e/2018 Div. yield vs. Div. coverage (FCF before capex yield / Div yield) 2017e 150% Suez COVERED Environnement Veolia 100% GDF Suez NOT COVERED 50% EDF 0% -50% -100% UNATTRACTIVE ATTRACTIVE -150% -200% -250% -300% Albioma -350% 0.0% 1.0% 2.0% 3.0% 4.0% 5.0% 6.0% 7.0% Source.Bryan, Garnier & Co ests; Datastream 2017e Dividend yield Dividend coverage Dividend coverage 140% 120% 100% 80% 60% 40% 20% COVERED NOT COVERED 2018e Suez Environnement UNATTRACTIVE Veolia ATTRACTIVE EDF GDF Suez 0% -20% Albioma 0.00% 2.00% 4.00% 6.00% 8.00% Source.Bryan, Garnier & Co ests; Datastream 2018e Dividend yield Veolia 2015 will be the first year the dividend will be almost fully covered (97% excluding disposals for 2015, 161% if including it) by the FCF thanks to solid net income growth (+83% in reported net income expected in 2015e vs. 2014); and despite higher capex spending (+14%) following the integration of Dalkia Int. Management reaffirmed its confident tone on the group s ability to increase the margin further thanks to restructuring efforts during its latest conference call (on new debt launch). Management is fully committed to distributing a minimum of EUR0.7 per share dividend (3.87%). Fig. 7: Veolia Cash-Flow statement evolution (EURm) 2015e 2016e 2017e 2018e 2019e 2020e EBITDA % of sales 11.9% 12.4% 12.9% 13.3% 13.5% 13.7% CF from operating activities Capex (1 576) (1 658) (1 701) (1 745) (1 790) (1 838) % of sales -6.6% -6.8% -6.8% -6.8% -6.8% -6.8% o/w growth capex (949) (999) (1 024) (1 051) (1 078) (1 107) o/w maintenance capex (627) (660) (677) (694) (712) (731) CF post capex Disposals M&A CF post capex & Disposals/M&A Dividends & Hybrid coupons (524) (524) (524) (572) (614) (661) o/w Dividends to shareholders (394) (394) (394) (442) (484) (531) o/w Dividends to minorities (60) (60) (60) (60) (60) (60) o/w Hybrid coupons (70) (70) (70) (70) (70) (70) CF post dividends & Hybrid coupons 49 (41) (8) Net debt change (17) (42) (83) Net debt Net debt / EBITDA 2.9x 2.8x 2.6x 2.5x 2.4x 2.2x 6

7 Suez Environnement Compared with Veolia, Suez Environnement already covers 100% of its dividend by its FCF for 2015, yet given we integrate EUR500m of M&A in our model for (equally split) the cover ratio in 2016 goes below the 100% level but comes back to positive territory in We note the yield is below the sector s level for following the strong share price performance since end 2014 (+11% vs. SX6P at +2.8%). Fig. 8: Suez Environnement Cash-Flow statement evolution (EURm) 2015e 2016e 2017e 2018e 2019e 2020e EBITDA % of sales 17.9% 18.3% 18.8% 19.0% 19.1% 19.3% CF from operating activities Capex (1 126) (1 158) (1 225) (1 293) (1 329) (1 368) % of sales -7.7% -7.7% -7.9% -8.1% -8.1% -8.1% o/w growth capex (504) (519) (549) (579) (595) (613) o/w maintenance capex (622) (639) (676) (714) (734) (755) CF post capex Disposals M&A (250) (250) CF post capex & Disposals/M&A Dividends & Hybrid coupons (565) (541) (545) (549) (556) (578) o/w Dividends to shareholders (337) (337) (337) (337) (339) (357) o/w Dividends to minorities (200) (204) (208) (212) (216) (221) o/w Hybrid coupons (28) (28) (28) (28) (28) (28) CF post dividends & Hybrid coupons (471) (459) (152) (179) (162) (164) Net debt change Net debt Net debt / EBITDA 3.0x 3.0x 3.0x 3.0x 3.0x 2.9x 7

8 GDF Suez Dividend distribution policy was always seen as an issue for GDF Suez which revised down its EUR1.5 dividend in 2014 to EUR1 following group s margin deterioration in Europe and strong increase in payout ratio. The current EUR1 per share dividend is seen as a floor by management yet is only financed at 23% by FCF in 2015 despite capex stability. As for we expect the group to finance it at +90% through cash generation. Fig. 9: GDF Suez Cash-Flow statement evolution (EURm) 2015e 2016e 2017e 2018e 2019e 2020e EBITDA % of sales 15.2% 15.3% 15.3% 15.4% 15.4% 15.1% CF from operating activities Capex (7 800) (7 800) (6 500) (6 565) (6 631) (6 697) % of sales -9.6% -9.2% -7.5% -7.5% -7.4% -7.4% o/w growth capex (5 100) (5 100) (4 250) (4 292) (4 335) (4 379) o/w maintenance capex (2 700) (2 700) (2 250) (2 273) (2 295) (2 318) CF post capex Disposals M&A CF post capex & Disposals/M&A Dividends & Hybrid coupons (3 260) (3 359) (3 389) (3 486) (3 559) (3 574) o/w Dividends to shareholders (2 357) (2 456) (2 486) (2 583) (2 656) (2 671) o/w Dividends to minorities (760) (760) (760) (760) (760) (760) o/w Hybrid coupons (143) (143) (143) (143) (143) (143) CF post dividends & Hybrid coupons (2 681) (2 309) (960) (937) (969) (1 097) Net debt change Net debt Net debt / EBITDA 2.5x 2.6x 2.6x 2.7x 2.7x 2.8x 8

9 EDF Management has not yet officially committed itself to a minimum dividend, but given the French government is the main shareholder and given the latter s strong cash need to close budgets, we assume the EUR1.25 dividend is guaranteed. The strong capex amount the group spends every year combined with limited EBITDA growth does not allow EDF to generate sufficient cash to finance its dividend before 2018 (the group s 2018 target is to pay its dividend in cash). The yield is one of the most attractive in the sector (5.55%) for 2015e and 2016e and is the most attractive in our coverage. Fig. 10: EDF Cash-Flow statement evolution (EURm) 2015e 2016e 2017e 2018e 2019e 2020e EBITDA % of sales 22.6% 23.1% 24.1% 24.5% 24.9% 25.3% CF from operating activities Capex (14 000) (13 500) (13 500) (12 500) (12 500) (12 500) % of sales -18.5% -17.5% -17.3% -15.8% -15.5% -15.4% o/w growth capex (2 853) (2 963) (3 178) (3 421) (2 820) (3 130) o/w maintenance capex (11 147) (10 537) (10 322) (9 079) (9 680) (9 370) CF post capex (1 821) (546) Disposals M&A CF post capex & Disposals/M&A (1 821) (546) Dividends & Hybrid coupons (3 231) (3 231) (3 231) (3 231) (3 231) (3 371) o/w Dividends to shareholders (2 323) (2 323) (2 323) (2 323) (2 323) (2 464) o/w Dividends to minorities (320) (320) (320) (320) (320) (320) o/w Hybrid coupons (588) (588) (588) (588) (588) (588) CF post dividends & Hybrid coupons (5 051) (3 777) (2 410) (815) (181) 85 Net debt change (9) Net debt Net debt / EBITDA 2.3x 2.4x 2.4x 2.4x 2.3x 2.3x 9

10 Albioma Contrary to the other Utility stocks we cover, Albioma is the sole one in our coverage to enter into such a big capex programme (EUR1bn over ten years); implying FCF generation is likely to suffer in the short term (as the EBITDA contribution from new projects will come years later). This big capex programme explains why Albioma never enters into the VIP square; even in Yet given most of the debts are projects, the debt leverage of the group can easily absorb such a financial gap in the period. We then do not see dividends at risk. Fig. 11: Albioma Cash-Flow statement evolution (EURm) 2015e 2016e 2017e 2018e 2019e 2020e EBITDA % of sales 34.4% 36.1% 37.8% 39.1% 40.9% 42.6% CF from operating activities Capex (150) (211) (189) (132) (106) (61) % of sales -40.0% -53.5% -42.3% -26.0% -20.4% -11.5% o/w growth capex (135) (196) (174) (117) (91) (46) o/w maintenance capex (15) (15) (15) (15) (15) (15) CF post capex (62) (117) (78) (2) Disposals M&A CF post capex & Disposals/M&A (62) (117) (78) (2) Dividends & Hybrid coupons (23) (22) (24) (31) (40) (43) o/w Dividends to shareholders (19) (18) (20) (26) (35) (38) o/w Dividends to minorities (4) (4) (5) (5) (5) (5) o/w Hybrid coupons CF post dividends & Hybrid coupons (85) (139) (102) (33) (0) 51 Net debt change (48) Net debt Net debt / EBITDA 4.0x 4.6x 4.5x 4.0x 3.8x 3.4x 10

11 1.2. Which stocks offer stronger dividend rise? In this section we identify stocks which offer the strongest potential dividend rise over the period. Veolia and Albioma offer today the strongest upside (respectively +23% and +87% in YoY change at end 2018 vs. 2014) due to their stronger earnings growth potential. As for EDF, we do not expect any dividend growth over the period, or for Suez Environnement for which the payout is already above the sector average (at 80% in vs % on average for the sector). For GDF Suez, we forecast 13% growth over the period in line with consensus estimates. Fig. 12: Dividend growth potential BG estimates Dividend growth BG Consensus Average Payout (on NRI group's def.) Albioma 87.0% na 50.0% EDF 0.0% -1.6% 59.6% GDF Suez 12.7% 13.0% 75.0% Suez Environnement 0.7% 7.7% 72.4% Veolia 23.2% 32.9% 71.3% Fig. 13: Dividend evolution (per share and yield) BG estimates Dividend per share evolution - EUR Dividend yield evolution - % % 6.50% 6.00% 5.50% % % e 2016e 2017e 2018e Albioma EDF GDF Suez Suez Environnement Veolia 4.00% 3.50% 3.00% 2015e 2016e 2017e 2018e Albioma EDF GDF Suez Suez Environnement Veolia 11

12 1.3. Are yields more attractive than in the past? Following the strong performance of the sector in 2014 and the positive performance in 2015 (strong outperformance compared with the Stoxx 600, yet the performance was still positive), some stocks became more expensive implying a negative pressure on dividend yields. In this section, we compare the current dividend yield (2015e) with the historical performance to identify which stocks offer further potential upside based on historical valuations. EDF and Albioma stand out from the list with respectively 22% and 30% potential upside on minimum yield. Fig. 14: 2015e yield vs. lowest yield level since Jan e Yield Lowest yield level since Jan 2010 Implied upside Albioma 3.41% 2.80% 21.8% EDF 5.60% 4.30% 30.1% GDF Suez 5.66% 5% 13.2% Suez Environnement 4.06% 3.80% 6.7% Veolia 3.97% 3.80% 4.6% Veolia Fig. 15: Veolia dividend yield evolution since 2010 Veolia Yield evolution since 2010 Veolia Yield evolution since % 11.5% 10.5% 9.5% 8.5% 7.5% 6.5% 5.5% 4.5% 3.5% Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 VEOLIA ENVIRONNEMENT Yield N+1 VEOLIA ENVIRONNEMENT Max Yield VEOLIA ENVIRONNEMENT Min Yield 6.5% 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% VEOLIA ENVIRONNEMENT Yield N+1 VEOLIA ENVIRONNEMENT Max Yield VEOLIA ENVIRONNEMENT Min Yield Based on valuation the max yield posts out at 11.21% while the minimum yield pops out at 3.8%. Based on valuation the max yield posts out at 6% while the minimum yield pops out at 3.8%. Current share price implies a yield (2015e) of 4%,5% above the lowest level since January

13 Suez Environnement Fig. 16: Suez Environnement dividend yield evolution since 2010 Suez Environnement Yield evolution since 2010 Suez Environnement Yield evolution since % 8.5% 7.5% 6.5% 5.5% 4.5% 3.5% Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 SUEZ ENVIRONNEMENT Yield N+1 SUEZ ENVIRONNEMENT Max Yield SUEZ ENVIRONNEMENT Min Yield Jan-14 Apr-14 Jul-14 Oct-14 Jan % 5.3% 5.1% 4.9% 4.7% 4.5% 4.3% 4.1% 3.9% 3.7% 3.5% SUEZ ENVIRONNEMENT Yield N+1 SUEZ ENVIRONNEMENT Max Yield SUEZ ENVIRONNEMENT Min Yield Based on valuation the max yield posts out at 8.4% while the minimum yield pops out at 3.6%. Based on valuation the max yield posts out at 5.3% while the minimum yield pops out at 3.8%. Current share price implies a yield (2015e) of 4%, 6.7% above the lowest level since January GDF Suez Fig. 17: GDF Suez dividend yield evolution since 2010 GDF Suez Yield evolution since 2010 GDF Suez Yield evolution since % 10.5% 9.5% 8.5% 7.5% 6.5% 5.5% 4.5% 3.5% Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan % 8.5% 7.5% 6.5% 5.5% 4.5% 3.5% GDF SUEZ Yield N+1 GDF SUEZ Max Yield GDF SUEZ Min Yield GDF SUEZ Yield N+1 GDF SUEZ Max Yield GDF SUEZ Min Yield Based on valuation the max yield posts out at 10.2% while the minimum yield pops out at 5.0%. Based on valuation the max yield posts out at 9% while the minimum yield pops out at 5.0%. Current share price implies a yield (2015e) of 5.7%, 13% higher than the lowest level since January

14 EDF Fig. 18: EDF dividend yield evolution since 2010 EDF Yield evolution since 2010 EDF Yield evolution since % 8.5% 7.5% 6.5% 5.5% 4.5% 3.5% 2.5% Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan % 5.8% 5.6% 5.4% 5.2% 5.0% 4.8% 4.6% 4.4% 4.2% 4.0% EDF Yield N+1 EDF Max Yield EDF Min Yield EDF Yield N+1 EDF Max Yield EDF Min Yield Based on valuation the max yield posts out at 8.6% while the minimum yield pops out at 2.8%. Based on valuation the max yield posts out at 5.9% while the minimum yield pops out at 4.3%. Current share price implies a yield (2015e) of 5.6%, 30% higher than the lowest level since January Albioma Fig. 19: Albioma dividend yield evolution since 2010 Albioma Yield evolution since 2010 Albioma Yield evolution since % 7.5% 6.5% 5.5% 4.5% 3.5% 2.5% Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan % 3.7% 3.5% 3.3% 3.1% 2.9% 2.7% 2.5% ALBIOMA Yield N+1 ALBIOMA Max Yield ALBIOMA Min Yield ALBIOMA Yield N+1 ALBIOMA Max Yield ALBIOMA Min Yield Based on valuation the max yield posts out at 7.5% while the minimum yield pops out at 2.8%. Based on valuation the max yield posts out at 3.8% while the minimum yield pops out at 2.8%. Current share price implies a yield (2015e) of 3.4%, 22% higher than the lowest level since January

15 1.4. What to retain from analysis? As explained above, we believe the Utilities sector is set at some point to come back on investors radar screens, with underperforming (for no specific reasons) stocks becoming potential favourites. Given yields remain a determinant element for the sector and given solid and attractive yields in equity market became rare commodities, we identified which stocks in our coverage were the best positioned to be played by the market. Veolia, Albioma and GDF Suez are today in our view the stocks offering the most attractive return for shareholders, given they either offer important growth potential or either they offer solid resilience for long term investors. Below is a sum-up of our analysis, with rankings for each three criteria we identified (ranked from 0 as the lowest grade to 5 the highest potential grade). Fig. 20: What to retain from analysis? 5 CF DVD Attractiveness DVD Growth potential Albioma EDF GDF Suez Suez Environnement Veolia This further confirms our positive view on Veolia, Albioma and GDF Suez. 15

16 1.5. Change in FV due to new BG valuation assumptions Following the further decline in sovereign rates and the strong performance of equity indices, we have adjusted our valuation assumptions and now use in our model a risk-free rate of 2% vs. 2.3% previously and a market premium of 6.4% vs. 6.6% previously (BG assumptions). We keep our EPS unchanged for our entire Utilities coverage and do not adjust GDF Suez s Fair Value given we already integrated these latest valuation assumptions in our model last week (see report: Feedback from road-show published on March 24 th ). Below is a summary of our change in FVs following these adjustments. Fig. 21: BG Utilities sector Change in FV New FV Old FV Share price Upside Opinion Comment Albioma % Buy change in FV as we value ABIO through a SOTP using EV/EBITDA multiples EDF % Buy Only EUR0.5 change following BG s macro metrics change as we use three methods to value EDF GDF Suez % Buy change in FV; adjustment already made one week ago Suez Env % Hold EUR1 change following BG s macro metrics change Veolia % Buy EUR1 change following BG s macro metrics change As a conclusion, we remain negative on the sector given the fundamentals (power & gas demands, power and gas prices) remain weak, yet we believe attractive yields from some stocks could offer alternative investment for long-term shareholders especially in such a deflationist environment. We continue to favour Veolia over Suez Environnement and remain positive on GDF Suez and Albioma. 16

17 EDF Price Chart and Rating History Suez Environnement /10/13 01/01/14 01/04/14 01/07/14 01/10/14 01/01/15 EDF Fair Value Achat Neutre Vente Ratings Date Ratings Price 11/02/15 BUY EUR /04/14 end of coverage EUR /01/13 SELL EUR12 Target Price Date Target price 24/02/15 EUR /02/15 EUR28 11/04/14 EUR0 08/01/14 EUR19 31/07/13 EUR17 15/05/13 EUR13 31/01/13 EUR12 Veolia Environnement /10/13 01/01/14 01/04/14 01/07/14 01/10/14 01/01/15 SUEZ ENVIRONNEMENT Fair Value Achat Neutre Vente Ratings Date Ratings Price 30/09/14 NEUTRAL EUR /04/14 end of coverage EUR /03/11 NEUTRAL EUR10.45 Target Price Date Target price 13/03/15 EUR17 09/12/14 EUR16 30/09/14 EUR14 11/04/14 EUR0 08/01/14 EUR12 24/09/13 EUR11 14/01/13 EUR /07/12 EUR10 27/10/11 EUR /10/11 EUR /09/11 26/03/12 26/09/12 26/03/13 26/09/13 26/03/14 26/09/14 VEOLIA ENVIRONNEMENT Source Thomson Reuters Ratings Date Ratings Price 30/09/14 BUY EUR /04/14 end of coverage EUR /10/13 NEUTRAL EUR /03/11 BUY EUR11.07 Target Price Date Target price 13/03/15 EUR19 11/02/15 EUR18 30/09/14 EUR17 11/04/14 EUR0 08/01/14 EUR /11/13 EUR14 21/10/13 EUR /05/13 EUR15 14/01/13 EUR13 04/09/12 EUR /11/11 EUR /10/11 EUR15 17

18 18 Utilities

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