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1、 abc Global Research Transformation in progress: By the end of 2012 we estimate that Veolia will have reduced its debt from EUR14.7bn at the half year to EUR11.6bn through selling UK Water and US solid waste and deconsolidating its transport JV (VTD) and Berlinerwasser debt. This gives it the scope
2、to invest in future growth. An upcoming catalyst is the announcement of the appointment of a new Chief Operating Officer expected imminently. This is important to Veolia: The COO will manage the asset disposal process and reduce costs in France. France challenges to earnings growth: investors are sc
3、eptical that Veolia can deliver cost cutting in France despite managements assurances that staff reductions will largely be achieved through retirement or voluntary redundancies. The market will be looking closely at whether it is able to fulfil its cost cutting promises and also whether contracts w
4、ill be renewed at lower margins and returns. Industrial and Commercial production in Europe remains depressed and low recyclate prices offer little positive news for 2013 earnings. Political risk perception is also much higher than we have seen previously due to the change in taxation charges in Fra
5、nce. Any growth in earnings ex France will restore confidence that Veolia is able to diversify political risk. TP cut to EUR9 from EUR11.5 on the back of revised estimates; rating downgraded to Neutral (V). We use the average of three valuation methods to value Veolia: DCF, DDM and sum-of-parts base
6、d on peer group multiples. Our revised target price is now EUR9 (from EUR11.5), on the back of revised estimates and updated peer group multiples because: In its 1H result, Veolia flagged that weakness in certain industrial sectors affected the business of the Environmental Services division, and we
7、 include new French dividend tax and reduced tax allowances on debt downgrading earnings. Veolia will have to deliver several quarters of recurring operating profit before investors are confident about the investment proposition. Company report Nat Resources lower peer group multiples; higher beta;
8、and higher tax; rating downgraded to Neutral (V) Neutral (V) Target price (EUR) 9.00 Share price (EUR) 8.33 Potential return (%) 8 Note: Potential return equals the percentage difference between the current share price and the target price Dec 2011 a 2012 e 2013 e HSBC EPS 0.58 0.49 0.86 HSBC PE 14.
9、3 17.0 9.7 Performance 1M 3M 12M Absolute (%) -10.1 -7.9 -22.3 Relative (%) -9.0 -15.6 -31.2 Note: (V) = volatile (please see disclosure appendix) 9 October 2012 Verity Mitchell* Analyst HSBC Bank plc +44 20 7991 6840 Adam Dickens* Analyst HSBC Bank plc +44 20 7991 6798 Jos A Lpez* Analyst HSBC Ba
10、nk plc +44 20 7991 6798 View HSBC Global Research at: http:/ *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations Issuer of report: HSBC Bank plc Disclaimer lower peer group multiples; higher beta; and higher tax; rating downgra
11、ded to Neutral (V) 4 Veolia Environnement (VIE FP) Multi-Utilities 9 October 2012 abc and the GDP growth estimates for 2013 in those markets. We note that both Veolia and Suez Environnement have similar exposure to the other European markets, apart from their home country. Revenue split in 1H 2012 a
12、nd GDP growth 2013e 4.8% 2.5% 1.8% 1.3% 1.5% 0% 10% 20% 30% 40% 50% France GermanyUKAsia PacRoW 1% 2% 3% 4% 5% VIESEVIGDP growth 2013e Source: Company data, HSBC estimates Veolia will need to focus in growing its business in higher growth markets in Asia Pacific and UK. UK a growth opportunity: wate
13、r and waste management have been identified by the UK government as being of strategic importance in economic recovery. The UK has an aggressive approach to ensuring a decrease in the volumes of waste sent to landfill through a ratcheting up of the landfill tax from its current level of GBP48 per to
14、nne to GBP80 by 2015. This has allowed the UK divisions of waste management companies under our coverage Viridor Waste (Pennon PNN.L, Neutral, 731p), SITA (Suez Environnement) and Veolia Environnement to increase prices even as volumes in the UK decline. It has also precipitated the signing of a num
15、ber of very significant long-term integrated waste management contracts. These will underpin 2013 earnings for these companies and there are a further significant number of public private partnerships (PPP) waste contracts that will be let in the next two to three years. Veolia may use the proceeds
16、from its UK water sale to reinvest in building new waste facilities with more resilience to waste volumes and with access to renewable subsidies for energy from waste. Low recyclate prices persist We set out below the recent trend in prices of paper and plastic in UK as a proxy for the global trends
17、. We see the deterioration in H1 has not continued so this may stabilise H2 revenues. We expect margin stability for H2. 2012 response from the company We look to Veolia to update the market at Q3 on the progress of the accelerated programme of cost cutting announced at H1. Reduction of investments
18、by EUR500m in 2012-2013. EUR50m in additional targeted net cost reductions, with an increase to EUR170m Asia: IP growth Europe: IP growth China HK Australia India -4% 0% 4% 8% 12% 16% 1Q 12a2Q 12e3Q 12e4Q 12e1Q13e2Q 13e ChinaHKAustraliaIndia Germany France UK -4% -2% 0% 2% 4% 6% 1Q 12a2Q 12e3Q 12e4Q
19、 12e1Q13e2Q 13e EurozoneGermany FranceUK Source: HSBC estimates Source: HSBC estimates 5 Veolia Environnement (VIE FP) Multi-Utilities 9 October 2012 abc (from EUR120m) in 2013 and to EUR470m (from EUR420m) in 2015. Other objectives for 2012-13 Asset disposals of EUR5bn. 60% of this is already signe
20、d or completed. Reduce the group net financial debt below EUR12bn. Dividend payment of EUR0.70 for FY2012. Other objectives post-2013 Organic revenue growth of over 3% p.a. Growth in adjusted operating cash flow of over 5% p.a. Debt leverage ratio (net financial debt/(operating cash flow before chan
21、ges in working capital +principal payments on operating financial assets) of 3.0x. Return to a dividend payout ratio in line with the Companys historical average. French taxation Recent share price weakness of Veolia relative to our European universe has been exacerbated in our view by increases in
22、taxation of corporates in France. We have increased the taxation on dividends in line with the governments policy of 3%, representing a EUR16m hit to net income. There are also proposed reductions in tax allowances on interest which may have more of a material effect on Veolia in the future. Change
23、in estimates We have revised our estimates based upon a much more pessimistic view of earnings growth in Veolias businesses after the H1 results. In addition we have incorporated the increase in number of shares outstanding as a result of the option of scrip dividend for 2011 diluting EPS. There are
24、 three permutations of changes in estimates: Those that are a function of reduced underlying profits from the deteriorating economic conditions we highlight above. This is clearly indicated in the reduction in EBITDA. Change in scope we are removing the contribution from Berlinerwasser from EBITDA a
25、nd EBIT as Veolia post RWEs sale will hold only a 25% stake. This however is equity accounted. The change in scope also reduces net debt as we assume the debt from VTD and Berlinerwasser is now deconsolidated, thus reducing the interest charge. We also assume a further cEUR900m proceeds from non-cor
26、e disposals in 2013 which we net off against our EUR2.5bn investment assumption. UK domestic mill prices (GBP per tonne) Plastic film (GBP per tonne) 30 45 60 75 90 105 120 Apr-12May-12Jun-12Jul-12Aug-12Sep-12 Sorted office wasteNews and pams Mixed papersOld kls (cardboard) 30 55 80 105 130 155 180
27、Apr-12May-12Jun-12Jul-12Aug-12Sep-12 Export 80:20Export 90:10Export 95:5 Source: L Source: L 6 Veolia Environnement (VIE FP) Multi-Utilities 9 October 2012 abc French corporate tax changes. We include the 3% tax on dividends in our estimates. We are also assuming a lower tax allowance for interest f
28、or 2013 and 2014. In our SoP we are using a lower waste peer group EBITDA multiple as we have removed US Waste given that Veolia has sold its solid waste business in the US. US waste traded at over 6x compared to the European peers at c4.9x. Veolias observed adjusted beta according to Bloomberg has
29、increased from 1.1 to 1.2 in our view this reflects increased political risk Change in estimates (EURm) 2012e new 2012e old % change 2013e new 2013e old % change EBITDA 2,567 3,028 -15% 2,729 3,088 -12% EBIT 1,494 1,681 -11% 1,564 1,564 0% Net income 256 322 -21% 453 422 7% EPS (EUR) 0.49 0.63 -22%
30、0.86 0.83 4% Source: HSBC estimates Target EUR9 from EUR11.5, rating cut to Neutral (V) We use the average of three valuation methods to value Veolia: DCF, DDM and sum-of-parts based on peer group multiples. Our revised target price is EUR9, down from EUR11.5 previously, on the back of updated peer
31、group multiples and revised estimates. We have cut our EBITDA estimates for underlying business performance but also because we are deconsolidating Belinerwasser from 2013. This has affected our sum-of-parts valuation. In addition our sum-of-parts is negatively affected by updated peer group multipl
32、es and revised estimates. We have cut our dividend growth assumption of 5% in 2013e to zero to keep it constant at EUR0.70. With the additional tax incidence of 3% on dividend distribution, Veolia will have to be more prudent about dividend growth. We have also cut our terminal dividend growth rate
33、from 3% to 2%. We have increased our adjusted beta from 1.1 to 1.2. In our Stage 2 DCF valuation we have increased our EBITDA margin from 9% to 9.2% reflecting the effect of positive cost cutting measures. Under our research model, the Neutral band for stocks with a volatility indicator is 10ppts ab
34、ove and below the hurdle rate of 9.0% for eurozone stocks. Our target price implies a potential return of 8%, which is within the Neutral band; therefore, we downgrade our rating to Neutral (V). Potential return equals the percentage difference between the current share price and the target price, i
35、ncluding the forecast dividend yield when indicated. Restoring the faith will take time and effort Investors in the Europe and the US we have talked to are nervous about further fiscal measures in France, so Veolia faces an additional risk premium external to its own business. Industrial and Commerc
36、ial production in Europe remains depressed and low recyclate prices offer little positive news for 2013 earnings. We continue to expect that Veolia will have to deliver several quarters of recurring operating profit before investors are confident about the investment proposition. In addition, any gr
37、owth in earnings ex France will restore confidence that Veolia is able to diversify political risk. 7 Veolia Environnement (VIE FP) Multi-Utilities 9 October 2012 abc Risks to our rating Downside risks: A continued cyclical downturn in waste volumes in 2013; falling volumes/prices in this segment ma
38、y not be balanced by growth in other parts of the waste value chain; risk of losing contracts in France to the competition or because of insourcing by municipalities; and margin erosion through price escalation. Also further negative fiscal measures in France. In the medium term the risk is that Veo
39、lia fails to achieve cost cutting and redeploy cash from disposals to drive earnings growth from 2013. Upside risks: There is faster economic recovery than anticipated in Europe; there are no more negative fiscal developments in France; quarterly results show growth in margins. Summary of valuation
40、(EUR) Particulars New Previous Current price as on 05-Oct-12 8.3 NA DCF 8.5 9.8 DDM 8.6 10.5 SOP -By business 10.4 14.2 Target price (average rounded) 9.0 11.5 Potential return 8% NA Rating Neutral (V) Overweight(V) Potential return equals the percentage difference between the current share price an
41、d the target price, including the forecast dividend yield when indicated. Source: Thomson Reuters Datastream, HSBC estimates WACC inputs and DCF valuation WACC inputs Equity Valuation EUR m Cost of debt+ DCF value11,336 Pre-tax cost of debt6.0%+ ST marketable assets 357 Marginal tax rate35.0%+ value
42、 of associates 2,092 Cost of equity+ Other assets5,910 Risk-free rate3.0%EV (asset side)19,695 Equity risk premium6.0%-Net debt (+ if Net cash) -11,510 Additional risk - Quasi debt (pension) -881 Beta was 1.11.20 - value of minorities-2,817 Debt - 83%3.9%Total non-equity claims -15,208 Equity - 17%1
43、0.2%Value of Equity 4,487 Cost of capital5.0%Value per share (EUR) 8.5 Source: HSBC estimates DDM valuation DDM split EUR Explicit 2.2 Terminal6.4 DDM value8.6 Source: HSBC estimates Change in TP (EUR) 9.0 11.5 -0.7 0.7 -1.2 -0.6 -0.4-2 0 2 4 6 8 10 12 Old TPChange in estimates DDM/Dividend growth a
44、ssumptions Beta changeDCF stage2SOTP multiplesNew TP Source: HSBC estimates 8 Veolia Environnement (VIE FP) Multi-Utilities 9 October 2012 abc SOP valuation by business segment (EURm) Business segment 2013 EBITDA EV/EBITDA EUR m Water less concessions (operating financial assets) 1,094 4.9x 5,328 Wa
45、ste less OFA 1,113 4.9x 5,424 Energy Services 623 4.7x 2,952 Total assets 2,829 4.8x 13,704 Financial and other assets 8,359 Less Net debt adjusted for pensions and minorities -15,208 Equity value 6,856 Value per share (EUR) 13.0 Value per share (EUR) after 20% discount 10.4 Source: HSBC estimates P
46、eer group Water peer group 2013e TickerPriceEV/EBITDA EUROPE (EX-UK) SUEZ ENVIRONNEMENT (N, TP EUR10) F:SENV8.554.95x ACEA I:ACE4.614.5x EUROPE (EX-UK) WEIGHTED AVERAGE 4.9x AMERICAS AQUA AMERICA (OW, TP USD30) U:WTR24.9611.0x AMERICAN WATER WORKS (N, TP USD39)U:AWK37.249.6x LATAM WEIGHTED AVERAGE 1
47、0.1x ASIA HYFLUX (N(V), TP SGD1.40) T:HYFL1.3910.0x ASIA WEIGHTED AVERAGE 10.0 GLOBAL WEIGHTED AVERAGE 8.0x Water engineering peer group EV/EBITDA ACCIONA E:ANA46.406.6x PALL U:PLL64.6112.4x SULZER R S:SUN138.008.2x WEIR GROUP WEIR1,852.008.0x WEIGHTED AVERAGE 9.3x WATER and 2) from time to time to
48、identify short-term investment opportunities that are derived from fundamental, quantitative, technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating. HSBC has assigned ratings for its long-term investment opportunities as described
49、below. This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at Details of these short-term investment opportunities can be found under the Reports section of this website. HSBC believes an investors d