update 2018 v2 · 2019. 9. 6. · suez sell fair value eur11.5 share price historical entreprise...

6th September 2019

SUEZ SELL initiation of coverage

Fair Value EUR11.5

Share price EUR14.20

Bloomberg / Reuters SEV FP/SEVI.PA

Technology Green tech & Smart energy

Suez 2030: a complicated corner to take

Since its flotation in 2008, Suez has increased its revenue by

3.4% a year on average in a very respectable performance.

However, this growth has not been profitable for

shareholders.

In recent years, revenue has become more capital-intensive,

margins have eroded and net profit (group share) has been

virtually halved. Operating performances have deteriorated

constantly to the extent that the company no longer creates

value and is even tending to destroy some (ROCE close to if

not lower than WACC).

At end-October, Suez is set to present its new strategic plan.

We hope the company will be capable of announcing strong

measures to turn around its performances. The arrival of

Bertrand Camus at the helm of the group is an opportunity to

take a new corner and place the group on a genuinely value-

creating path.

Unfortunately, room to manoeuvre is tight in view of the

substantial debt pile and a cash-consuming dividend policy.

Furthermore, we fear that the arrival of Bertrand Camus may

not rhyme with change. Indeed, Jean-Louis Chaussade (CEO

from 2008 to 2019) remains Chairman and will continue to

influence the group's policy.

A not very ambitious Suez 2030 plan or a strategy similar to

that of recent years would prove disappointing. An ambitious

plan would be a good start but in our view, execution risk is

not negligible.

A recovery in operating performances is not guaranteed and

the risk/reward profile does not seem sufficiently attractive.

We prefer to remain cautious on the case.

We are initiating coverage of Suez at SELL with a Fair

Value of EUR11.5 per share.

Xavier Regnard |33(0) 1 56 68 75 06| [email protected]

SUEZ

SELL

Fair Value EUR11.5

Share price EUR14.20

Market Cap. EUR8,823m

EPS 3Y CAGR 6.3%

Shareholders

Xavier Regnard

33(0) 1 56 68 75 06

[email protected]

Fiscal year end 31/12 2017 2018 2019e 2020e 2021e 2022e Financial Summary EPS (EUR) 0.66 0.47 0.66 0.52 0.58 0.62 Restated EPS (EUR) 0.73 0.54 0.74 0.59 0.65 0.69 % change 5.0% 10.4% 36.4% -19.8% 9.8% 6.9% FCF (EUR) 1.10 0.68 0.76 0.85 0.92 1.01 Net dividend (EUR) 0.65 0.65 0.65 0.65 0.65 0.65 Average yearly Price 13.98 12.20 13.98 13.98 13.98 13.98 Avg. Number of shares, diluted (m) 621 621 621 621 621 621 Historical Entreprise value (EURm) 17,585 16,722 17,585 17,585 17,585 17,585 Valuation (x) EV/Sales 0.97x 1.0x 1.07x 1.05x 1.02x 1.00x EV/EBITDA 5.60x 6.5x 6.54x 6.29x 6.05x 5.83x EV/EBIT 12.74x 15.5x 14.77x 15.70x 14.56x 13.60x P/E 19.53x 22.6x 19.31x 24.07x 21.92x 20.51x FCF yield (%) 7.73% 5.6% 5.35% 5.95% 6.51% 7.08% Net dividend yield (%) 4.6% 5.3% 4.6% 4.6% 4.6% 4.6% Profit & Loss Account (EURm) Revenues 19,879 17,331 17,833 18,360 18,866 19,368 Change (%) 2.6% 9.8% 2.9% 3.0% 2.8% 2.7% Organic change (%) 2.6% 3.6% 2.9% 3.0% 2.8% 2.7% Adjusted EBITDA 3439.5 2575.4 2927.2 3062.8 3191.2 3313.6 EBIT 1512.9 1082.3 1296.2 1226.5 1326.6 1420.5 Change (%) 6.5% 12.4% 19.8% -5.4% 8.2% 7.1% Financial results -481.9 -465.4 -480.6 -480.7 -482.2 -482.5 Pre-Tax profits 1221.0 809.8 995.6 935.7 1034.4 1128.0 Exceptionals -60.0 -60.1 93.0 -60.0 -60.0 -60.0 Tax -366.3 -244.0 -278.8 -280.7 -310.3 -338.4 Profits from associates 190.0 192.9 180.0 190.0 190.0 190.0 Minority interests -402.8 -230.9 -260.0 -288.5 -321.5 -359.4 Net profit 451.9 334.9 456.8 366.5 402.6 430.2 Restated net profit 451.9 334.9 456.8 366.5 402.6 430.2 Change (%) 5.0% 11.0% 36.4% -19.8% 9.8% 6.9% Cash Flow Statement (EURm) Operating cash flows 2175.0 1607.5 1811.5 1903.9 1991.4 2079.0 Change in working capital 110.4 303.9 7.5 113.9 109.5 108.3 Capex, net -1492.7 -1185.0 -1339.1 -1378.6 -1416.7 -1454.3 Free Cash flow 1222.9 422.5 957.4 1024.6 1087.8 1151.4 Financial investments, net -10.0 -45.3 0.0 -10.0 -10.0 -10.0 Dividends -403.9 -446.7 -403.9 -403.9 -403.9 -403.9 Capital increase 0.0 0.0 0.1 0.0 0.0 0.0 Other -760.0 -411.5 -1921.8 -720.0 -732.2 -745.4 Change in net debt -49.0 481.0 1368.2 109.3 58.2 7.8 Net debt (+)/cash (-) 10448.5 8954.0 10322.2 10431.4 10489.7 10497.5 Balance Sheet (EURm) Tangible fixed assets 8,481 8,774 8,704 8,636 8,577 8,525 Intangibles assets 9,966 10,206 10,160 10,103 10,052 10,008 Cash & equivalents 3,836 3,424 3,799 3,732 3,714 3,746 current assets 12,374 10,872 11,458 11,617 11,817 12,064 Other assets 1,264 276 1,261 1,338 1,366 1,344 Total assets 35,921 33,553 35,381 35,425 35,525 35,687 L & ST Debt 14,285 12,565 14,121 14,163 14,204 14,244 Provisions 2,062 2,004 2,062 2,062 2,062 2,062 Others liabilities 9,751 9,991 10,068 9,998 9,916 9,830 Minority interests 3,340 2,601 2,682 2,792 2,935 3,116 Shareholders' funds 9,824 8,993 9,130 9,203 9,344 9,552 Total Liabilities 26,097 24,560 26,251 26,223 26,181 26,136 Ratios Gross margin 79.0% 78.9% 79.0% 79.0% 79.0% 79.0% EBITDA margin 17.3% 14.9% 16.4% 16.7% 16.9% 17.1% Net debt/EBITDA (x) 3.0 3.5 3.5 3.4 3.3 3.2 Operating margin 7.6% 6.2% 7.3% 6.7% 7.0% 7.3% Tax rate 30.0% 30.1% 28.0% 30.0% 30.0% 30.0% Net margin 2.3% 1.9% 2.6% 2.0% 2.1% 2.2% ROE 7.0% 5.2% 7.1% 5.7% 6.3% 6.7% ROCE 5.1% 4.1% 5.0% 4.4% 4.7% 4.9% Gearing 106.4% 99.6% 113.1% 113.3% 112.3% 109.9% FCF/EBIT 80.8% 39.0% 73.9% 83.5% 82.0% 81.1% Dividend payout 89.4% 120.6% 88.4% 110.2% 100.3% 93.9%

Source: Company Data; Bryan, Garnier & Co ests.

Treasury shares

1%

Caltagirone3% Employees

4% Criteria Caixa

6%Individual

6%

Engie32%

Institutional48%

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EXECUTIVE SUMMARY

Suez and Veolia have seen their profiles change in recent years. Unfortunately for Suez, this has not been for the better.

While revenue has grown by 3.4% a year since the flotation in 2008, its make-up has not been good. In recent years, growth has been too capitalistic. The revenue per unit of additional capital employed has dropped from 1.26 in 2013 to 0.62 in 2018 ( 51%). In other words, in 2013, each additional euro of capital employed generated EUR1.26 in additional revenue. In 2018, this figure only stood at EUR0.62.

As well as being capitalistic, growth has diluted margins. Suez' EBITDA margin narrowed from 18.5% in 2014 to 16% in 2018. At the EBIT level, the margin narrowed from 8.8% to 7.7% over the same period. In absolute terms, EBITDA and EBIT nevertheless grew but the result has struggled to reach shareholders. The main obstacles are i/ financial expenses (EUR465m in 2018), and ii/ the tax rate (39.6% in 2018). As such, between 2014 and 2018, EPS has dropped from EUR0.71 to EUR0.47.

Shareholder returns in the form of dividends are attractive at EUR0.65 per share since 2008, with a yield of around 5%, but this looks difficult to sustain over the long term. Indeed, the pay-out ratio is higher than 100% and cash generation too limited to satisfy this cash-consuming policy.

While Suez has not been capable of generating virtuous growth, this growth has also destroyed value. ROCE, as published by Suez, fell from 7.8% in 2014 to 6.2% in 2018, or a level more or less equal to that of WACC. If we reason with an ROCE calculated on the basis of adjusted EBIT, by booking net profit from equity associates under EBIT and not under EBITDA, and by normalising the tax rate, then we note that Suez destroys value. Adjusted ROCE therefore fell from 5.1% in 2014 to 4.1% in 2018, or a level lower than WACC.

Suez is set to try and get a grip on things and reverse the trend with its new strategic plan: Suez 2030, which is due to be presented in October 2019. The targets and measures to be presented are obviously not known yet, but the subjects of debt, cash generation and portfolio rotation will probably be central.

We estimate that Suez will have to implement strong and structural measures to turn around its performances. However, execution of the plan is not without risk and we already see two obstacles.

The first lies in the lack of room to manoeuvre. Financial expenses associated with high debt and a greedy pay-out policy, consume a large share of the cash generated by business. After capex, there is virtually nothing left for deleveraging. To restore room to manoeuvre, Suez will have to work on rotating its portfolio and better allocating capex.

So far, Suez has not been particularly good in terms of capital allocation and M&A. Management itself recognises today that capital is poorly allocated and that certain activities do not create value. Concerning M&A, the last major acquisition of GE Water, proved to be disappointing. The strategic rationale behind the operation made sense but results are not yet up to scratch. The activity is very capital-intensive, with extremely low ROCE (3.2% in 2018) and dilutive margins, 10.4% at the EBITDA level in 2018 vs. 16.9% for the rest of the group. Furthermore, its financing is weighing on the balance sheet (+EUR1.2bn in bond debt and EUR600m in hybrid securities) and is limiting shareholder returns due to the coupon on hybrid bonds (EUR45m in 2018).

The second is that of governance. Bertrand Camus has been CEO since May 2019 and this could be an opportunity for Suez to take a genuine strategic corner. However, we think it could be difficult for him to seize this opportunity. Indeed, Jean-Louis Chaussade (CEO from 2008 to 2019) remains Chairman and will continue to influence the group's policy. In our view, he may find it difficult to stand by and watch the new CEO transform what he considers as his work and undermine the past strategy. In other words, the change in management may not go hand-in-hand with the genuine strategic breakthrough that Suez needs.

In all, operating fundamentals are dismal and a recovery looks complicated. In addition, an uncertain macroeconomic backdrop prompts more caution on our part. In this backdrop, we initiate coverage of Suez at Sell with a Fair Value of EUR11.5/share.

In the short term, growth in the share price will mainly depend on the presentation of the strategic plan. An insufficiently ambitious plan would be disappointing whereas an ambitious plan would be a good start, although execution risk is considerable. We do not consider the risk/reward profile attractive enough.

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EXECUTIVE SUMMARY

Suez et Veolia ont vu leur profil évoluer ces dernières années. Malheureusement pour Suez, le sien n’a pas évolué de la meilleure des manières.

Le chiffre d’affaires a progressé, +3,4%/an depuis l’introduction en Bourse en 2008, mais le profil de cette croissance n’est pas bon. Ces dernières années, la croissance a été trop capitalistique. Le chiffre d’affaire marginal par unité de capital employé est passé de 1,26 en 2013 à 0,62 en 2018 (-51%). Autrement dit, en 2013, chaque euro supplémentaire de capital employé rapportait 1,26 EUR de chiffre d’affaires supplémentaire. En 2018, ce chiffre n’était plus que de 0,62 EUR.

En plus d’être capitalistique, la croissance a été dilutive sur les marges. La marge d’EBITDA de Suez est passée de 18,5% en 2014 à 16% en 2018. Au niveau de l’EBIT, la marge est passée de 8,8% à 7,7%, sur la même période. En absolu, l’EBITDA et l’EBIT ont tout de même progressé mais le résultat a du mal à être transmis jusqu’à l’actionnaire. Les principaux obstacles sont i/ les frais financiers (465 M EUR en 2018) et ii/ le taux d’imposition (39,6% en 2018). Ainsi, entre 2014 et 2018, les BPA sont passés de 0,71 EUR à 0,47 EUR.

Le retour à l’actionnaire sous forme de dividende est attractif, 0,65 EUR/action depuis 2008, avec un rendement de l’ordre de 5%, mais il nous semble difficilement soutenable à long terme. En effet, le taux de distribution est supérieur à 100% et la génération de cash est trop limitée pour satisfaire cette politique gourmande.

Non seulement Suez n’a pas été en mesure de générer une croissance vertueuse, mais en plus cette croissance s’est révélée destructrice de valeur. Le ROCE, tel que publié par Suez, est passé de 7,8% en 2014 à 6,2% en 2018, soit un niveau plus ou moins égal à celui du WACC. Si on raisonne avec un ROCE calculé sur la base d’un EBIT retraité, en comptabilisant le résultat net des sociétés mises en équivalence sous l’EBIT, et non pas dans l’EBITDA, et en normalisant le taux d’impôt, alors on note que Suez détruit de la valeur. Le ROCE ajusté passe ainsi de 5,1% en 2014 à 4,1% en 2018, soit un niveau bien inférieur au WACC.

Suez va tenter de prendre les choses en main et d’inverser la tendance avec son nouveau plan stratégique : Suez 2030, qui sera présenté en octobre 2019. Les objectifs et les mesures qui seront présentés ne sont évidemment pas encore connus mais les sujets de l’endettement, de la génération de cash et de la rotation du portefeuille seront probablement centraux.

Nous estimons que Suez devra mettre en place des mesures fortes et structurelles pour redresser ses performances. Cependant, l’exécution du plan n’est pas sans risque et nous voyons déjà deux obstacles.

Le premier réside dans le manque de marge de manœuvre. Les frais financiers, en lien avec un endettement important, et une politique de distribution gourmande, consomment une grande partie du cash généré par l’activité. Une fois les Capex réalisés, il ne reste quasiment plus de place pour le deleveraging. Pour retrouver des marges de manœuvre, Suez va devoir travailler sur la rotation de son portefeuille et mieux allouer les Capex.

Jusqu’à présent, Suez n’a pas été particulièrement bon en matière d’allocation des capitaux et de M&A. Le management a lui-même reconnu qu’aujourd’hui, le capital est mal alloué et que certaines activités ne créent pas de valeur. Concernant le M&A, la dernière acquisition significative, celle de GE Water, s’est révélée décevante. Le rationnel stratégique de l’opération faisait sens mais les résultats ne sont pour l’instant pas à la hauteur. L’activité est très capitalistique, affiche un ROCE extrêmement faible (3,2% en 2018) et des marges dilutives, 10,4% au niveau de l’EBITDA 2018 vs 16,9% pour le reste du groupe. De plus, son financement pèse sur le bilan (+1,2 Md EUR de dette obligataire et 600 M EUR de titres hybrides) et limite le retour à l’actionnaire du fait du coupon de l’hybride (45 M EUR en 2018).

Le second sera celui de la gouvernance. M. Bertrand Camus est CEO depuis mai 2019 et cela pourrait être l’occasion pour Suez de prendre un véritable virage stratégique. Cependant, nous estimons qu’il lui sera difficile de saisir cette opportunité. En effet, M. Jean-Louis Chaussade (CEO de 2008 à 2019) reste Président et continuera d’influencer la politique du groupe. Nous pensons que ce dernier sera réticent à voir le nouveau CEO transformer ce qu’il peut considérer comme son œuvre et remettre en cause la stratégie passée. Autrement dit, ce changement de management pourrait ne pas s’accompagner de la véritable rupture stratégique dont Suez a besoin.

En résumé, les fondamentaux opérationnels sont mal orientés et un redressement nous semble compliqué. A cela s’ajoute une macroéconomie incertaine qui nous pousse à davantage de prudence. Dans ce contexte, nous initions la couverture de Suez à Vendre avec une fair value de 11,5 EUR/action.

A court terme, l’évolution du titre dépendra principalement de la présentation du plan stratégique. Un plan pas assez ambitieux serait décevant tandis qu’un plan ambitieux serait un bon début mais le risque d’exécution n’est pas négligeable. Nous estimons que le ratio risk/reward n’est pas assez attractif.

Contents EXECUTIVE SUMMARY 3

PART 1: SUEZ AT A GLANCE 7

PART 2: ON A BAD PATH FOR MANY YEARS 8

More capital-intensive 8 Less profitable 8 Less value creating 9 Lost confidence difficult to restore 10 GE Water: a disappointing acquisition 10

PART 3: SUEZ 2030: FOCUS ON CASH GENERATION 12

The need to restore room to manoeuvre 12 Dividend policy not questioned 13 Heading for an asset rotation programme 15 Reviewing the interest of minority holdings 15

PART 4: MANAGEMENT CHANGES AT SUEZ 17

Changes at the top of the group… 17 – CHANGING TO REMAIN THE SAME 17 – NEW CHANGES TO COME? 17

… and the Executive Committee 18

PART 5: BARCELONA, IN FOR MORE OF THE SAME? 19

Agbar and Barcelona, when politics get involved... 19 Heading for a second softer mandate for Suez? 20

PART 6: WILL FUTURE GROWTH REALLY BE PROFITABLE? 21

Further strong operating momentum… 21 – European water division: on the right track but caution required 21 – waste volumes boosted by the Manchester contract 22 – International business: diverse but still dynamic 23 – WTS division: A healthy Topline but still falling short on profitability 24 – 2019 EBIT Guidance within reach 24

… which will not necessarily benefit shareholders 24 – struggling to convert EBIT into net income 24 – rising financial charges 25 – a punishing tax rate 26

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PART 7: TOO EXPENSIVE RELATIVE TO OUTLOOK 27

Fair value of EUR11.5 EUR/share 27 – DCF VALUATION: EUR11.1/SHARE 28 – MULTIPLES VALUATION: EUR11.9/SHare 29

Financial statements 30 Bryan, Garnier & Co vs consensus 32

PART 8: APPENDICES 33

Company presentation 33 – overview 33 – company history 33 – the group’s businesses 34 – Top management 36

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Part 1: Suez at a glance

Fig. 1: Revenue by business (H1 2019)

Fig. 2: Revenue by region (2018)

Sources: Bryan, Garnier & Co, Suez Sources: Bryan, Garnier & Co, Suez

Fig. 3: Revenue and EBIT performance

Fig. 4: Margin performance


Fig. 5: ROCE performance

Fig. 6: Debt performance


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Part 2: On a bad path for many years

More capital-intensive

Between 2012 and 2018, capital employed at Suez increased by a hefty 25%. Revenue and EBIT also increased but to a lesser extent (+14.8% and +16.5% respectively).

Revenue growth at Suez is increasingly capital-intensive. Marginal revenue per unit of capital employed has fallen for several years. In 2013, every additional euro of capital employed increased revenue by EUR1.26. In 2018, this figure had fallen to just EUR0.62. In comparison, in 2018, Veolia succeeded in increasing its revenue by 4.4% with a rise in capital employed of around 2%. Marginal revenue per unit of capital employed therefore stood at 2.27.

The revenue/capital employed ratio confirms the more capital-intensive nature of Suez' business. In 2019, this ratio stood at 0.95% vs. 1.61 for Veolia.

Fig. 7: Change in capital employed ratios at Suez

Fig. 8: Change in capital employed ratios at Veolia

Source: Bryan, Garnier & Co Source: Bryan, Garnier & Co

Less profitable

The rise in the business's capital intensity has gone hand-in-hand with a deterioration in EBITDA and EBIT margin. EBITDA margin narrowed from 18.5% in 2014 to 16% in 2018 (-200bp). At the EBIT level, profitability narrowed from 8.8% in 2014 to 7.7% in 2018 (-110bp). At the same time, Veolia's margins tended to improve.

To make Veolia and Suez' figures comparable, we have made a few adjustments. Indeed, Suez books the share of net profit from equity associates above EBITDA whereas Veolia books it below. In this way, EBITDA and profitability at Suez are inflated relative to the figures presented by Veolia. Adjusted for this factor, Suez remains more profitable than Veolia but the difference is reduced. This difference stems primarily from a business mix more focused on municipal and regulated assets for Suez. According to this same logic, we have adjusted EBIT figures for comparison purposes.

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Fig. 9: Change in margins at Suez

Fig. 10: Change in comparable margins at Suez vs Veolia (excl. IFRS 16)

Sources: Bryan, Garnier & Co, Suez Sources: Bryan, Garnier & Co, Suez, Veolia

Less value creating

ROCE as published by Suez or adjusted according to our methodology has deteriorated in recent years. It stood at 6.2% in 2018 vs. virtually 8% in 2014 and 2015. On our calculations, ROCE was even lower than WACC in 2017 and 2018, therefore showing value destruction. Note that on our calculations, we used the same base of capital employed as the company. In contrast, we adjusted EBIT and tax.

Management itself recognised during the H1 2019 earnings presentation that capital is currently poorly and too widely allocated and that certain businesses do not reach their WACC.

Following the same methodology, we note that Veolia followed a better trajectory. ROCE was very close to WACC when the group's CEO Antoine Frérot launched its restructuring at the end of 2011. Very gradually, the portfolio rotation strategy paid off. Between 2012 and 2018, capital employed has not increased much (+7% vs +25% for Suez), but operating profit has risen sharply.

Fig. 11: Change in Suez ROCE

Fig. 12: Change in Veolia ROCE

Sources: Bryan, Garnier & Co, Suez Sources: Bryan, Garnier & Co, Veolia

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Lost confidence difficult to restore

In early, 2018, Suez issued a profit warning on 2017 EBIT growth. The company indicated that it would be affected by an additional charge of EUR45m, causing a 2% organic decline. Adjusted for this factor, EBIT would have risen 1.4%. The costs in question were primarily related to the situation in Spain and the end to two services contracts in Morocco and India.

This profit warning damaged investor confidence especially in view of its timing in January 2018, less than a year after the announcement of the acquisition of GE Water (March 2017) and the capital increase necessary for its financing (May 2017).

The situation in Spain was not a new factor, with pressure having started as of 2016 with the election of Ada Colau as mayor of Barcelona.

The termination of the Casablanca waste collection contract, as well as the penalties incurred, were only made known in September 2017, but the situation had already been complicated for several years.

In other words, these factors had already been more or less known for some time, prompting investors to question management's operating visibility.

Confidence is gradually being restored but we estimate that management will still have to deliver convincing results to fully reassure. The share price is now at levels below the price retained for the capital increase (EUR15.80) and just at the level pre-profit warning (EUR14.08). This suggests that confidence has not fully returned.

Fig. 13: Change in Suez share price since early 2017

Sources: Bryan, Garnier & Co, Reuters

GE Water: a disappointing acquisition

In early 2017, Suez acquired GE Water from General Electric for EUR3.2bn. The rationale behind the operation was to enable Suez to cover the entire industrial water value chain while improving the group's growth profile. The operation was supposed to boost earnings and FCF as of the first year (2017). Earnings were even set to be enhanced in double digits over the full year thanks to cost synergies.

Page - 11

However, the operation has not delivered the gains hoped for in good time. We would note the following in particular:

• The group's post-acquisition ROCE is lower than the pre-acquisition level, in a sign that capital was poorly allocated;

• Net debt increased to above the group's guidance for 3.0x EBITDA. At the time of the announcement, management stated the operation would respect the group's financial discipline;

• Profitability of the WTS division is still well below that of the rest of the group.

Fig. 14: Change in main operating performance indicators

Sources: Bryan, Garnier & Co, Suez

In strategic terms, the operation should make sense, but the complexity and the difference in profile between the two companies made the roll-out of synergies difficult. On the one hand, Suez is a more defensive company, thanks to its municipal water concessions whose duration can extend over several decades. On the other hand, GE Water is a more cyclical company, even though it was presented as having 65% of recurring sales. This cyclical nature is due to its customer types. GE Water is primarily exposed to the oil & gas sector, chemicals and energy. In addition to being cyclical, these sectors are highly dependent on changes in raw materials prices. The cyclical aspect is also due to the duration of contracts. What is considered as recurring business actually corresponds to one or two-year service contracts. Even though management states that the retention rate is good, this remains very different to a municipal concession.

Furthermore, we estimate the price paid by Suez was a bit high at 12.5x 2016 EBIDTA and 17.4x 2017 operating CF before synergies. When the operation was announced, the European utilities sector was valued at 7.4x 2017e EBITDA and 7.2x the 2018e figure. Comparison with peers in industrial water is more relevant and more reasonable: 11.7x 2017e EBITDA and 10.8x 2018e. Our feeling that the price was slightly too high is confirmed by the booking of goodwill of EUR2.2bn, which is pretty high relative to the size of the operation.

2016 2017 2018

Revenues (EURm) 15 322 15 871 17 331

ow/WTS 515 972 2 396

EBITDA margin excl. WTS 17,8% 17,1% 16,9%

EBITDA margin WTS 2,6% 9,5% 10,4%

ROCE Group 7,0% 6,6% 6,2%

ROCE Water Europe 7,5% 7,3% 7,0%

ROCE Waste Europe 5,3% 7,3% 6,4%

ROCE International 7,7% 6,5% 7,1%

ROCE WTS -2,0% 2,8%

ND/EBITDA 3x 3,2x 3,2x

Net Income SOG (EURm) 420,3 301,8 334,9

EPS (EUR) 0,75 0,49 0,54 chg. -0,9% -34,7% 10,4%

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Part 3: Suez 2030: focus on cash generation

The need to restore room to manoeuvre

Contrary to what was planned, the acquisition of GE Water caused a slip in the group's debt level. The net debt/EBITDA multiple (excluding IFRS 16) as published by Suez, rose from 3.0x in 2016 to 3.2x in 2017 and 2018. Based on our adjusted EBITDA estimate, this multiple rose from 3.3x in 2016 to 3.5x in 2017 and 2018.

Note that in 2014, Suez' debt level was slightly lower than that of Veolia. However Veolia managed to improve its balance sheet whereas Suez' has gradually deteriorated.

Fig. 15: Change in Suez and Veolia ND/EBITDA multiples (BG def. and excl. IFRS 16)

Sources: Bryan, Garnier & Co, Suez, Veolia

In absolute terms, the level of debt at Suez is not alarming, but greater balance sheet rigour is needed to restore room to manoeuvre, better allocate capital and thereby turn around operating performance.

Management's message at the H1 2019 results presentation suggested that Suez did not necessarily intend to significantly reduce its debt ratio. While no figures were provided, the CFO nevertheless stated that the target ratio would probably not be far from the current level. We understand that a target ND/EBITDA of 3x seems likely but that the focus will be more on cash generation.

In our view, it would be better if Suez could work on both subjects at the same time in order to restore greater leeway more quickly. Furthermore, if interest rates were to pick up substantially (which is theoretically not the case) this would offset the efforts made elsewhere.

The current situation at Suez does not enable debt reduction without structural measures. Indeed, cash generation after capex, dividends and interest payments is virtually zero. Suez generates around EUR2bn in operating cash flow and invests at least EUR1bn in capex. Around EUR400m is then spent on dividends and slightly more than EUR300m on interest repayments. In the end, Suez does not generate enough cash to pay down its debt.

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Fig. 16: Operating cash flow and cash consumption


The question therefore remains as to what solutions Suez can adopt to restore room to manoeuvre. We have identified several: i/ improving cash generation through earnings growth, ii/ becoming more selective in capex, iii/ implementing an asset disposal programme and then better allocating capital, and iv/ reducing the dividend to free up cash and focus on reducing debt.

The balance between cash generation, debt and dividend payments is today very precarious and probably unsustainable over the long-term. Suez will have to take structural measures. We estimate that the company will opt for a mix of the first three solutions, while the last seems to be ruled out.

Dividend policy not questioned

Since the IPO in 2008, Suez has systematically maintained a dividend of EUR0.65/share. The pay-out rate was quite sustainable over the first years, at around 70%, and then gradually increased in line with the deterioration in earnings. In 2017 and 2018, Suez even paid out more than its net profit. In our view, given the lack of cash generation and the group's balance sheet, this dividend policy is now becoming untenable.

The presentation of a new strategic plan as well as the arrival of Bertrand Camus as CEO could provide an opportunity to review the subject. Maintaining a dividend at EUR0.65 per share is a symbol that potentially needs to be got over to enable the group to free up room to manoeuvre.

However, the nomination of Jean-Louis Chaussade as Chairman could well prevent Bertrand Camus from implementing a solution in our view. Indeed, an overhaul could be viewed as a failure of the policy pursued by Mr Chaussade over the past 10 years as CEO. Above all, our simulations on the subject show that the benefit for the ND/EBITDA ratio is not enough to make up for the "political" price of such a decision.

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Fig. 17: Change in EPS, dividend and payout ratio


As such, despite the cash-consuming nature of the dividend policy, a change seems fairly unlikely.

In a simulation, we estimate the impact of a cut in the dividend on the group's debt reduction. A dividend policy based on a 50% pay-out ratio would enable Suez to save more than EUR250m on the 2019 dividend (paid in 2020). The 2019 dividend would then stand at EUR0.37 a share. This policy would enable Suez to save more than EUR1.3bn over five years. If this sum is fully focused on reducing debt, the ND/EBITDA ratio in 2023e (Suez' definition including IFRS16) would be 2.6x vs. 2.9x if the current policy is maintained.

Fig. 18: Change in ND/EBITDA ratio

Source: Bryan, Garnier & Co

The market does not expect a decline in the dividend for the moment. No analyst in the consensus expects any changes for 2019 or 2020 and only one analyst expects a very slight increase in 2021 from EUR0.65 to EUR0.66 per share. A cut in the dividend would therefore come as a surprise and would probably not go down well with the market.

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Heading for an asset rotation programme

The main solution for improving return on capital employed, freeing up cash and reducing debt remains the disposal of certain activities. This would help reinvest cash in other more buoyant businesses. Suez is already reviewing of all of its activities. Without providing details, management announced it had already drawn up a list of activities that could be sold off. These are activities for which operating performances are not sufficient, and whose outlook has little chance of improving.

In recent years, Suez has not been particularly active in M&A terms. The group has focused on integration and unlocking synergies with GE Water. Suez should now be more active and implement a genuine portfolio rotation plan.

The only significant disposal has been that of 20% of regulated water assets in the US for USD601m. Suez Water (ex-United Water) was sold to PGGM, a Dutch pension fund. This was a good operation in our view since it helped reduce the capital intensity of the group's businesses (since players own the assets). A business model based on asset operation alone rather than ownership and operation offers greater flexibilty and less capital intensity.

The disposal price was also very attractive at virtually 2x the regulatory asset base (RAB), 15x EBITDA and 30x net profit.

Management insisted on the strategic aspect of this business and its aim to pursue growth over the medium term. However, the reasoning behind the operation was above all to use the proceeds of the sale to pay down debt and we can imagine that Suez could continue with this same logic. Withdrawing from regulated water assets in the US is an attractive option, especially if valuation levels remain attractive.

Fig. 19: Recent acquisitions and disposals


Beyond rotation in the portfolio, the subject of capex allocation is likely to be a specific focus. Management recognises that capital is currently poorly allocated. Capex is not divided well between the varisous businesses and some of them do not reach their WACC levels. Suez will probably announce greater selectiveness in its capex and this should help the group to restore some leeway.

Reviewing the interest of minority holdings

Under the framework of its new plan, Suez is also likely to consider the strategic interest of some of its minority holdings. This point is all the more important in that their contribution to earnings is fairly high. In 2018, equity associates accounted for more than EUR190m of Suez' net earnings. The group could consider that in view of the lack of genuine control over certain

Activity Seller Buyer Price Year CommentEDCO EDCO Suez & Five

Capital Fundn.c. 2019 Hazardous wastes in Saudi Arabia.

65% in partnership with Five Capital Fund

Suez Water resources Suez PGGM USD 601 m 2019 20% stake in the reg. water business in the US

GE Water General Electric

Suez EUR 3.2 bn 2017 Industrial water business with a global footprint

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entities, it could be preferable to sell off the stakes and reallocate the capital towards activities in which the group has genuine leverage.

We have identified the main companies in which Suez has a percentage interest or control of less than or close to 50%. Certain withdrawals seem possible. In contrast, we identify no potential position to be strengthened.

• Aguas Andinas: The company is controlled at 50.1% by Inversiones Aguas Metropolitanas (IAM) itself 50.1% owned by Agbar (100% owned by Suez), such that Suez ultimately only has 25.1%. Exposure to the Chilean market is attractive, the activity is regulated and offers good visibility with dynamic growth rates, positive yet reasonable inflation (between 2 and 3% since 2016) and a RAB of 7% after tax. Selling the stake could generate more than EUR750m for Suez on the basis of the current price (CLP$393). The consensus values Aguas Andinas at 9.5x 2020e EBITDA vs 7.2x for Suez. We expect status quo;

• ACEA: Suez controls 23.3% of ACEA, the main water operator in Italy, also present in energy and public lighting. Suez has strengthened its stake several times, particularly by acquiring GDF Suez' stake in 2014 (3.95% of the capital) and in 2016 by allowing Caltagirone to take a 3.5% stake in its capital for 10.85% of ACEA. This holding in ACEA could be valued at more than EUR850m on the basis of the current share price (EUR17.50). The consensus values ACEA at 6.4x 2020e EBITDA and 12.5x 2020e net profit vs. 7.2x and 21.7x for Suez. A disposal seems possible;

• Aquasure: This is a stake in a public private partnership for the Melbourne desalination station. The contract runs until 2039. At end-2017, Suez had sold 9.1% of Aquasure for EUR99m. We estimate that Suez could sell off its remaming stake (11.7%) for around EUR130m (amount calculated on the basis of the previous transaction);

• Macao Water Supply and Sita Waste: Suez has a 58% stake in these companies and we do not expect the situation to change. China is a strategic market for the group and the trend is more towards a strengthening of positions rather than a reduction;

• Lydec: Bertrand Camus (CEO) has renewed his aim to invest in Africa and use Morocco as the base for this expansion. However, Morocco is not necessarily the market in which Suez is the most successful, having lost its contract with the city of Casablanca in 2017. This followed problems in terms of waste management and an inadequate set of specificications. Suez has 51% of Lydec. An eventual disposal could generate EUR170m based on the current share price (MAD448). The consensus values Lydec at just 2x 2020e EBITDA vs. 7.2x for Suez. A disposal could be considered.

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Part 4: Management changes at Suez

Changes at the top of the group…

CHANGING TO REMAIN THE SAME

In late-2018/early-2019, Suez renewed its management team and Chairman. Jean-Louis Chaussade had been CEO since 2018 and reached the upper age limit set by the company's statutes (68). At the same time, Chairman Gérard Mestrallet had also reached the upper age limit (70) and therefore had to be replaced.

As such, at end-2018, Bertrand Camus was nominated CEO as of 14 May 2019 in replacement of Jean-Louis Chaussade. Bertrand Camus had been executive CEO in charge of Africa, Middle-East and Asia-Pacific since March 2018 after being chosen for his international experience within the group. Indeed, he was head of the Aguas Argentinas subsidiary from 2000 to 2006, North America from 2008 to 2015 and then Water in Europe from 2015 before being nominated head of international business in 2018.

The second change in the group's management was made at end-February, when the then CEO Jean-Louis Chaussade was unanimously nominated Chairman. This nomination had long been backed by Criteria Caxia (6% of capital) and Caltagirone (3.5% of capital) and the move announced a certain continuity in the group's strategy. We consider this could be a negative point since it could halt Bertrand Camus in implementing a radically different strategy. Jean-Louis Chaussade will probably be loathe to see the new CEO transform what he could consider as his work and undermine the past strategy. In other words, we consider that the new plan may not provide the change necessary.

While Bertrand Camus and the Executive Committee are responsible for the strategy to adopt, this takes place in discussion with the group's Chairman, which is quite normal and even vital since Mr Chaussade's contribution is extremely important. He knows the company perfectly having been CEO for 10 years and spending a large share of his career with the group.

Furthermore, Gérard Mestrallet's succession prompted a fresh confrontation between himself and Isabelle Kocher (CEO of Engie). Note that Engie is the leading shareholder in Suez (31.1%) and Mrs Kocher was pushing the candidate of her executive CEO Pierre Mongin for the position of Suez Chairman. Finally, Mrs Kocher ended up voting in favour of the nomination of Mr Chaussade. Mrs Kocher succeeded Mr Mestrallet at the head of Engie and maintains complicated relations with him since this time.

NEW CHANGES TO COME?

The governance of Suez could see fresh changes over the next few months. Indeed, Mr Chaussade's term as board member expires in 2020 and will be subject to a vote by the AGM in May. If the assembly votes in favour of renewing his mandate, he will maintain his chairmanship, otherwise he will have to renounce it. The renewal does not seem to pose a problem apparently. The group's governance will nevertheless have to change over the medium term since Mr Chaussade will be 68 years old at the time of the AGM and the age limit is set at 70. Uncertainty is therefore set to remain concerning the subject of governance.

More generally, governance could have to change before the AGM as part of the future strategic plan.

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In addition, changes in governance could be a new opportunity for Engie and Mrs Kocher to try and impose a candidate at the head of Suez. This will not be Mr Mongin since he has decided to focus on personal projects and will leave Engie at the end of 2019.

We consider that Paulo Almirante could be the eventual candidate from Engie. He is currently deputy CEO and Head of Operations in charge of Northern, Southern and Eastern Europe as well as Brazil, the Middle East, Asia and Turkey at Engie. His profile is interesting since he has long occupied responsibilities in Spain and Portugal. Note that Spain is Suez' third-largest market behind North America and France.

Fig. 20: Overview of governance changes


… and the Executive Committee

Following his election as CEO, Bertrand Camus decided to reorganise his Executive Committee. The aim of this reorganisation was to finalise and roll out the future strategic plan. Under this framework, Julian Waldron joined the company as CFO. He was previously Director of Operations and Executive CEO of TechnipFMC as of 2017 and prior to that CFO of Technip since 2008.

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Part 5: Barcelona, in for more of the same?

Agbar and Barcelona, when politics get involved...

In 2009, Suez increased its stake in Sociedad General de Aguas de Barcelona (Agbar) to 75.23%. In 2014, following the acquisition of the stake in Criteria Caixa, Suez lifted its stake in Agbar to 99.49% and then 100% in 2015. On this occasion, Caxia took a stake of 4.1% in Suez (lifted to 5.97% at end-2018) and became the group's second-largest shareholder behind Engie.

The idea of former CEO Jean-Louis Chaussade at the time was to strengthen the positions of Suez Environnement in waste water in Spain and in Latin America where Agbar is very present. Since 1867, Agbar has notably managed water distribution for the Barcelona agglomeration. This concession provided Suez EUR250m a year. Furthermore, just before the acquisition was completed, Agbar announced it had strengthened its positions and won the water treatment contract for around a EUR100m more a year.

Fig. 21: Companies in the Agbar group

Sources: Bryan, Garnier & Co, Agbar, Suez

At end-2016, the Barcelona municipality voted a motion to "remunicipalise" water management. This was one of the flagship measures of Mrs Ada Colau and the" Barcelona En Comu" coalition policy (Barcelone in commun – far left). Mrs Colau has been mayor of the city since June 2015 following her victory in the municipal elections with the backing of Podemos (extreme left party).

Consequently, under political pressure, Suez had to agree to reduce its prices on several occasions, dropping them for the first time as of the end of 2016 (-2%). During H1 2017 results, management announced it had again been obliged to drop prices in Barcelona by around 2.5% (vs. flat prices in the rest of Spain). This pressure was confirmed over the rest of 2017 and continued into 2018 with a negotiated fall of 1.65%. These renegotiations took a significant toll on earnings given the hefty weight of Spain, which is the third-largest market for Suez accounting for 9.9% of 2018 revenue.

Note that these price cuts come in a context whereby several mayors of other major Spanish cities are considering or actually taking measures to remunicipalise water services (Madrid, Valence, Saragossa, Cordua, Valladolid etc.).

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Heading for a second softer mandate for Suez?

In 2019, Mrs Colau was re-elected for a second term as mayor of Barcelona with an absolute majority as for her previous term. She obtained the votes of the 10 representatives on her list as well as eight from socialist respresentatives and three out of the six members on the Manuel Valls list (including himself). Note nevertheless that the absolute majority was only just obtained, contrary to the first mandate (21/41 vs 23/41 in 2015).

This victory came as a surprise for political observers and was only possible thanks to the backing of Manuel Valls, which was fairly unexpected but vital for reaching the absolute majority. We understand that Mr Valls' backing stemmed from his aim to not let the municipality fall into the hands of Catalan independists. This was clearly a default choice since during the campaign Manuel Valls qualified Mrs Colau as populist. Mrs Colau's opponent, the pro-independence candidate from the Republican Left of Catalonia (ERC) announced that he would place the city at the service of the cause for an nonexistant Republic.

In her campaign programme for 2019, the mayor of Barcelona renewed her aim to remunicipalise water services. Mrs Colau also intends to strengthen the coordination with 36 other municipalities in order to provide more weight to the municipal council and promote municipal management throughout Catalonia.

Despite her renewed aim, we consider Mrs Colau currently has less room to manoeuvre to implement her programme. She will potentially be less aggressive and will have to govern with a majority that will probably demand more concessions. As such, we consider that relative to her first term in office, Agbar should be under less pressure, even though some is likely to remain. The agreement on stable prices for 2019 does not necessarily mean the end to price cuts. Other negotiations will take place and price pressure will still be an issue.

Fig. 22: Make-up of Barcelona municipal council, 2015 vs 2019


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Part 6: Will future growth really be profitable?

Further strong operating momentum…

EUROPEAN WATER DIVISION: ON THE RIGHT TRACK BUT CAUTION REQUIRED

The European water division represents around EUR4.7bn, i.e. just over 25% of group revenue. It includes France, Spain and Chile (via its stake in Aguas Andinas).

In France, growth in water volumes was promising in H1 2019 (+1%), especially Q1 (+1.6%), but this performance cannot be extrapolated to the rest of the year or over the long-term. Q1 is a minor quarter in the water business. The summer, i.e. Q3, is the crucial period, during which weather conditions are a determining factor. At this stage, the summer does not seem to have been particularly rainy, but management still anticipates a 1% fall-off in water volumes for 2019. Taking a long-term view, volumes show a structural decline due to water saving policies. We estimate this downturn at around -0.8%/year.

Tariffs are performing favourably (+1.8% in H1), but we believe that the inflation slowdown could gradually take a toll on indexation mechanisms. In addition, water companies’ tariffs are still under pressure from municipal authorities. For example, in order to win the sanitation contract for Toulouse, Suez had to offer a historically low rate (EUR1.37/m3). The contract will take effect in 2020 for a 12-year term and a total amount of EUR520m (EUR43m/year).

In Spain, volumes were also promising in H1 2019 (+1.7%), but tariffs declined (-0.8%). The impact of the tariff reduction negotiated in Barcelona in May 2018 could still be felt during the first four months of 2019. Tariffs in Barcelona, as in the rest of Spain, are renegotiated every year. For the rest of 2019 tariffs should be stable, but they are likely to be reduced again next year. For a more detailed look at the Barcelona situation, please refer to the specific section in this report.

Lastly, in Chile, volumes (+1.3%) and tariffs (+1.8%) were favourable in H1, despite a challenging base effect after the hot, dry summer of 2018. In Chile, tariffs are currently under renegotiation and the outcome will only be known at the start of 2020. The process seems to be well underway and management has not made any particular comments on the subject. We understand that the talks are focusing mainly on investments in drinking water production, whereas the previous agreement largely concentrated on waste water treatment.

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Fig. 23: European water division revenues


WASTE VOLUMES BOOSTED BY THE MANCHESTER CONTRACT

The European waste management division represents around EUR6.3bn, i.e. slightly over 35% of the group’s revenues.

At end-May 2019, Suez announced a contract win that could potentially amount to over GBP1bn for waste management in Manchester. The contract represents GBP100m a year for a minimum term of seven years, which can be extended by three then five years. This is a major contract, as it represents almost a million tonnes annually, which is around 4% of the division’s total volumes and 2% of its annual revenues. Suez has not disclosed the contract’s profitability but says that it is in line with its financial criteria. In addition, it is relatively capex-light since Suez will simply be operating the existing assets.

This contract with Manchester (effective as of 1st June) should significantly boost the waste volumes treated by the European waste division in the second half of the year. In H1, volumes were up just 0.2%, following the decision to limit the group’s exposure to paper and certain plastics in the wake of regulatory developments in Asia. However, management anticipates 1.5% volume growth for the year, implying an increase of around 2.9% in H2. H1 2020 revenues will continue to reflect the Manchester contract coming into effect. We expect volume growth of 1.6% in 2020.

The contract with Manchester will also pick up the slack as growth fuelled by work on the Grand Paris project eases off. In 2018, volume growth accelerated (+2.4%), largely (0.9%) thanks to this project, but the impact has now run its course and volumes are levelling off.

As well as favourable momentum in volumes, Suez will also enjoy a positive price effect. With incinerators operating at full capacity and landfill sites full, the group has greater pricing power. Put simply, waste recycling facilities across Europe have reached saturation point, so it is easier to push through tariff increases, especially for industrial customers. For example, Suez can easily pass on petrol price increases to its industrial customers. In the municipal market, Suez’s margins were squeezed in H1 as its indexation mechanisms were outpaced. The group will not necessarily have to wait until the start of 2020 to renegotiate these mechanisms and we are very likely to see an agreement on tariff increases during the course of H2.

EURm 2016 2017 2018 H1 2019 2019E 2020E 2021E 2022E 2023E

France 2 273,5 2 253,0 2 195,0 1 016,0 2 183,7 2 187,9 2 192,1 2 196,3 2 200,5

chg. (%) -0,9% -2,6% -3,6% -0,5% 0,2% 0,2% 0,2% 0,2%

Spain 1 600,6 1 575,0 1 521,0 736,0 1 543,7 1 535,9 1 528,3 1 520,6 1 513,0

chg. (%) -1,6% 0,5% 2,8% 1,5% -0,5% -0,5% -0,5% -0,5%

Chile 828,9 852,0 913,0 476,0 936,0 969,0 1 003,1 1 038,5 1 075,1

chg. (%) 7,1% 7,1% 3,4% 2,5% 3,5% 3,5% 3,5% 3,5%

Total 4 703,0 4 680,0 4 629,0 2 227,9 4 663,3 4 692,8 4 723,5 4 755,4 4 788,6

chg. (%) 0,5% 0,2% 0,2% -0,1% 0,7% 0,6% 0,7% 0,7% 0,7%

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Fig. 24: European waste management division revenues


INTERNATIONAL BUSINESS: DIVERSE BUT STILL DYNAMIC

International business represents around EUR4bn, or slightly under 25% of group revenues. The division includes North America, Asia, Africa and the Middle East, Australia, Central Europe and Italy.

In H1 2019, business was driven by the Asia region (+36.9% vs +6.5% for the division as a whole), thanks to construction projects in Macau and Zhuhai. In the other regions, business is unlikely to be as robust as in 2018, which brought an exceptionally strong performance, especially in Australia due to a construction contract. Australia reported 11% growth in 2018, but is unlikely to match that level in 2019 due to the very high base effect. Central Europe also benefited from a one-off contract in 2018. Lastly, the Africa and the Middle East region was penalised at the start of the year by a major contract in Oman, “Barka”, coming to an end, but the base effect is relatively unchallenging, and Suez should be able to achieve growth of around 5-6% for 2019.

For the division as a whole, we expect growth of around 4% for the year, versus 6.5% in H1, due to the more challenging H2 base effect for Asia.

Fig. 25: International division revenues


2016 2017 2018 H1 2019 2019E 2020E 2021E 2022E 2023E

Revenues 6 302,0 6 165,0 6 206,0 3 213,0 6 376,0 6 596,8 6 793,9 6 984,5 7 185,4

chg. (%) -0,9% 1,0% 1,1% 3,0% 2,7% 3,5% 3,0% 2,8% 2,9%

Processed volumes (Mt) 25,1 24,5 25,2 13,0 25,6 26,0 26,3 26,6 26,9

chg. (%) 1,4% 1,4% 2,4% 0,2% 1,5% 1,6% 1,3% 1,1% 1,2%

ow/ Valorisation 16,9 17,1 17,3 9,2 17,6 18,0 18,5 19,1 19,6

chg. (%) 4,3% 3,1% 0,7% 0,7% 1,6% 2,7% 2,7% 2,8% 2,8%

inc. Energy from Waste 8,5 8,5 9,3 4,6 9,4 9,6 9,9 10,1 10,4

chg. (%) 4,8% 5,6% 3,9% -1,1% 1,0% 2,5% 2,5% 2,5% 2,5%

inc. Sorting & Recycling 8,3 8,1 7,9 4,6 8,2 8,4 8,7 9,0 9,2

chg. (%) 3,8% 0,4% -2,7% 2,5% 3,5% 3,0% 3,0% 3,2% 3,2%

ow/ Elimination 8,2 7,5 7,9 3,9 8,0 7,9 7,8 7,5 7,3

chg. (%) -4,0% -2,3% 6,3% -1,0% 1,5% -1,0% -2,0% -3,0% -3,0%

EURm 2016 2017 2018 H1 2019 2019E 2020E 2021E 2022E 2023E

Australia 1 021,0 1 036,0 1 085,0 490,0 1 041,6 1 062,4 1 083,7 1 105,4 1 127,5

chg. (%) 4,6% 5,7% 4,7% -5,7% -4,0% 2,0% 2,0% 2,0% 2,0%

Africa, Middle East & India 1 173,0 1 130,0 1 029,0 510,0 1 090,7 1 123,5 1 157,2 1 191,9 1 227,6

chg. (%) 16,2% 0,6% -9,0% 8,1% 6,0% 3,0% 3,0% 3,0% 3,0%

North America 962,0 940,0 917,0 458,0 972,0 1 001,2 1 031,2 1 062,2 1 094,0

chg. (%) 0,4% -5,6% -2,4% 9,2% 6,0% 3,0% 3,0% 3,0% 3,0%

Asia 472,0 426,0 463,0 258,0 546,3 601,0 649,1 694,5 736,2

chg. (%) 20,4% -5,1% 8,7% 36,9% 18,0% 10,0% 8,0% 7,0% 6,0%

Italy & CEE 589,0 420,0 498,0 247,0 505,5 515,6 525,9 536,4 547,1

chg. (%) -11,0% 12,7% 18,6% 1,4% 1,5% 2,0% 2,0% 2,0% 2,0%

Total 4 217,0 3 952,0 3 990,0 1 962,0 4 156,2 4 303,6 4 447,0 4 590,3 4 732,4

chg. (%) 5,5% 0,5% 1,0% 6,5% 4,2% 3,5% 3,3% 3,2% 3,1%

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WTS DIVISION: A HEALTHY TOPLINE BUT STILL FALLING SHORT ON PROFITABILITY

The WTS (Water Technologies & Solutions) division represents around EUR2.5bn, or around 15% of group revenues. This business unit, set up following the acquisition of GE Water, comprises the industrial water management operations. It is split into two subdivisions: i/ Chemical & Monitoring Solutions (CMS), which rolls out solutions for the chemical treatment of industrial water and processing infrastructures, and ii/ Engineering Systems (ES), which provides equipment and solutions for the treatment of water and waste water.

In H1 2019, the division reported organic growth of +4.8% (+8.1% reported growth), driven by the ES division (+6.4%) thanks to analysis and purification instruments. The backlog also looks promising, with 12% organic growth, standing at EUR1.359bn as of end-June 2019.

Management is targeting revenue of USD3.1bn (around EUR2.8bn based on current exchange rates) by 2020, implying a CAGR of around 5% for the 2018-2020 period. We believe that this target is attainable given the market outlook, together with the group’s current operating momentum and backlog.

The division’s main problem remains its profitability. The H1 2019 margin edged up (+30bp) but remains unsatisfactory, with just 3.7% at the EBIT level. Management says that synergies are being created, but these have yet to show up in the figures.

2019 EBIT GUIDANCE WITHIN REACH

Management has confirmed its guidance for 2019 organic EBIT growth of 4-5%. In the first half of the year, Suez reported growth towards the top of this range (+4.8%) following an acceleration in Q2 versus Q1 (+3.3%). We believe that management’s guidance should be achieved without too much difficulty since revenues will be boosted by the Manchester contract, which only had a moderate impact in H1. In addition, Q1 was penalised by one-off impacts such as the group’s payment of the “Macron bonus” to employees (-EUR7m).

… which will not necessarily benefit shareholders

STRUGGLING TO CONVERT EBIT INTO NET INCOME

On the whole, Suez reported respectable performances across all its divisions, and this is likely to continue. Between 2012 and 2018, average annual growth was 2.3% for revenues and 2.6% for EBIT. The upturn steepened in H1 2019, with revenues up 3.7% and EBIT at +5.3% (excluding IFRS16).

But shareholders are unlikely to feel the benefit of these performances, due to two main hurdles: i/ the struggle to convert operating profit into net income (between 2012 and 2018, EPS rose from EUR0.45 to EUR0.47, a 0.6% CAGR), and ii/ cash generation.

Regarding the first hurdle, conversion of EBIT into net income is unsatisfactory in our view. The group’s EBIT growth fails to boost shareholder returns, especially after coupon payments on its hybrid debt. The ratio of net income (group share) to EBIT (BG def.) declined between 2014 and 2018. This could be interpreted as the group’s diminishing ability to turn its operating profit into shareholder returns. This weaker performance is attributable to: i/ significant financial charges, relating to the swelling debt level, and ii/ a punishing tax rate.

For the second hurdle, cash generation, please refer to the section on this subject, particularly the weight of capex, interest and the dividend policy.

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Fig. 26: Conversion of EBIT into net income


RISING FINANCIAL CHARGES

Between 2012 and 2018, the ND/EBITDA ratio rose from 3.0x (3.0x BG def.) to 3.2x (3.5x BG def.). In H1 2019, it edged up again to 3.4x (3.3x excluding the impact of IFRS16).

Logically, the increase in debt in recent years has also driven up financial charges. From 2012 to 2018, net interest expense rose from EUR419m to EUR465m. In H1 2019, net interest expense rose again to EUR245m, versus EUR237m a year earlier. Gross interest expense rose from EUR189m to EUR196m, to which a EUR13m negative impact can be added relating to IFRS16. In addition, lower interest rates erode returns on the group’s cash, and trade tensions, together with geopolitical uncertainties, are drivng up currency hedging costs.

Since management seems to favour generating cash over reducing debt in absolute terms at present, we do not expect financial expenses to fall. Hence, the gap between EBIT and net income is unlikely to narrow. Shareholder returns are thus only likely to increase if the group’s operating performance improves.

The cost of the group’s hybrid debt also hampers the conversion of EBIT into shareholder returns. Hybrid debt is costly - EUR45m in 2018 (>13% of SOG net income) – but it is a useful instrument for Suez, particularly for its debt ratios, shareholders’ equity and hence its credit rating. Suez had three hybrid bonds for a total of EUR1.6bn (EUR500m at 3%, EUR500m at 2.5% and EUR600m at 2.875%). In the consolidated financial statements, these instruments are recognised as equity instruments rather than debt instruments. If we include them as debt, the group’s debt ratios are even higher. Factoring in the hybrid bonds and based on adjusted EBITDA, in 2018 the ND/EBITDA ratio was 4.1x, versus 3.2x excluding the hybrid debt and taking the EBITDA reported by Suez.

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Fig. 27: Change in debt

Fig. 28: Change in financial expenses and net financial results



A PUNISHING TAX RATE

Suez’s high tax rate is another obstacle for shareholder returns. The group should tackle this problem, but it is highly complex and unlikely to be resolved in just a few months. It will probably take some time for Suez to become proficient in an area, which has never really been one of its strong points.

The high effective tax rate (39.6% at end-2018) reflects the group’s struggle to optimise its taxes. Suez finds it difficult to offset profits in some group companies with losses in others. The non-recognition of deferred tax assets in some of its geographical regions, together with changes in tax regulations, particularly in the US, have driven up the group’s tax rate. In addition, the weight of minority shareholders complicates consolidation, a problem that has been aggravated by the acquisition of GE Water.

At the start of the year, CFO Jean-Marc Bousier said he could reduce the effective tax rate from 39.6% at end-2018 to 38% or 37% in two years’ time. In H1 2019, the effective tax rate improved slightly but still remained relatively high (38.8%).

It is worth noting that, while Suez will be trying to tackle this issue, Veolia will enjoy a much lower tax rate, below 25%, thanks to the tax loss carry forwards accumulated in the US.

Fig. 29: Change in the effective tax rate

Sources: Bryan, Garnier& Co, Suez, Veolia

Page - 27

Part 7: Too expensive relative to outlook

Fair value of EUR11.5 EUR/share

We are initiating coverage of Suez with a Sell recommendation and a Fair Value of EUR11.5, which corresponds to an equi-weighted aveage between a DCF valuation and historical multiples (P/E and NTM EV/EBITDA). Downside potential works out to 20%. We have assumed WACC of 6.2%, a cost of equity of 10.0% and a growth rate to infinity of 1.5%.

In the short term, the share price performance will depend on the presentation of the new strategic plan. An insufficiently ambitious plan or a strategy in line with that of previous years would be be perceived as a disappointment. An ambitious plan would be a good start, but execution risk is high in our view and a turnaround is not guaranteed. We do not consider the risk/reward ratio sufficiently attractive.

Beyond the presentation of the strategic plan, the subject of Engie's stake in Suez is a recurring catalyst. A change does not seem imminent to us. Engie also confirmed at the end of 2018 that it would not sell its stake (32.1% of the capital) and that it would not launch a takeover bid for Suez either. The two groups are cooperating on certain projects but we see no real industrial synergies that could motivate an operation. Playing on a change in the status quo seems premature and there is no speculative appeal.

The share has performed well since the beginning of the year (+23%). We identify no further upside and recommend taking eventual capital gains ahead of the presentation of the strategic plan.

Fig. 30: Overview of our various valuation methods


Fig. 31: Implied valuation multiples


Method FV Weight UpsideMultiples 11,9 € 50,0% -15%Discounted Cash Flow 11,1 € 50,0% -21%FV 11,5 € 100% -18%

2019E 2020E 2021E 2022E 2023EMedian

2012-18EV/Sales 1,2 1,1 1,1 1,1 1,0 1,0EV/EBITDA (BG def.) 7,1 6,8 6,5 6,2 6,0 6,0EV/EBIT (BG def.) 16,0 16,9 15,6 14,6 13,7 15,5PER 15,6 19,5 17,8 16,6 15,8 19,9

Page - 28

DCF VALUATION: EUR11.1/SHARE

Fig. 32: Discounted cash flow model


Fig. 33: Main assumptions

Fig. 34: FV sensitivity

Source: Bryan, Garnier & Co Source: Bryan, Garnier & Co

EURm 2019E 2020E 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E PerpetuitySales 17 833 18 360 18 866 19 368 19 879 20 366 20 826 21 257 21 656 22 022 22 353 Y-o-y growth in % 2,9% 3,0% 2,8% 2,7% 2,6% 2,4% 2,3% 2,1% 1,9% 1,7% 1,5%

Operating costs (16 536) (17 133) (17 540) (17 947) (18 366) (18 838) (19 264) (19 663) (20 032) (20 371) (20 676) Operating profit 1 296 1 226 1 327 1 421 1 513 1 527 1 562 1 594 1 624 1 652 1 676 Operating margin 7,3% 6,7% 7,0% 7,3% 7,6% 7,5% 7,5% 7,5% 7,5% 7,5% 7,5%

Cash operating taxes (363) (368) (398) (426) (454) (458) (469) (478) (487) (496) (503) Tax rate 28,0% 30,0% 30,0% 30,0% 30,0% 30,0% 30,0% 30,0% 30,0% 30,0% 30,0%NOPLAT 933 859 929 994 1 059 1 069 1 093 1 116 1 137 1 156 1 174

Depreciation & amortization 1 456 1 503 1 527 1 550 1 579 1 602 1 623 1 641 1 656 1 668 1 676 Other non-cash items - - - - - - - - - - - Chg. in WCap (226) (45) (43) (42) (43) (3) 1 1 1 1 - Capex (intang. & tang.) (1 339) (1 379) (1 417) (1 454) (1 493) (1 527) (1 562) (1 594) (1 624) (1 652) (1 676) Operating free cash flow 824 939 996 1 048 1 102 1 141 1 156 1 164 1 170 1 173 1 174

WACC 6,2% 6,2% 6,2% 6,2% 6,2% 6,2% 6,2% 6,2% 6,2% 6,5%Cum. WACC 106,2% 112,8% 119,9% 127,3% 135,2% 143,6% 152,6% 162,1% 172,1% 183,3%

PV of operating FCF 776 832 831 823 815 795 757 718 679 640 12 790 % terminal value : 63%

Enterprise Value 20 455

Net Interest-bearing liabilities (8 898) Net Operating lease liabilities (65) Hybrid @100% (@BV) (1 600) Provisions (@BV) (2 062) Minorities(PE - 14x non-regulated, 17x regulated)

(4 072)

Financial assets (@BV) 3 166 ACEA stake valuation ow/ Associates (exc. ACEA) (@BV) 498 Last share price 17,50 € ow/ 23,3% stake in ACEA (@MV) 869 #share 213,0 ow/ JVs (@BV) 940 Stake in ACEA 23,33% ow/ Other financial assets (@BV) 859 Market Value 869,5

Equity value 6 924 Fair value per share 11,10

Risk-free return 1,6%Beta factor 1,2Equity risk premium 7,0%Cost of equity 10,0%Cost of debt 3,7%WACC 6,2%Terminal growth rate 1,5%Forecasts horizon 10

##### 0,0% 0,5% 1,0% 1,5% 2,0% 2,5% 3,0%

6,0% 2,5 3,8 5,2 7,0 9,2 11,9 15,4

6,5% 3,5 4,9 6,5 8,4 10,8 13,7 17,5

7,0% 4,5 6,0 7,7 9,8 12,3 15,5 19,5

7,5% 5,5 7,1 8,9 11,1 13,9 17,2 21,6

8,0% 6,5 8,2 10,1 12,5 15,4 19,0 23,7

8,5% 7,5 9,3 11,4 13,9 17,0 20,8 25,7

9,0% 8,5 10,4 12,6 15,3 18,5 22,6 27,8

Perpetual growth rate

Ope

rati

ng m

argi

n

Page - 29

MULTIPLES VALUATION: EUR11.9/SHARE

Our valuation based on the group's multiples points to a Fair Value of EUR11.9 per share, indicating downside risk of 15%. We have used average NTM P/E and EV/EBITDA multiples over five years. We have normalised 2019 net profit to take account of the exceptional gain generated by the settlement with Argentina.

Fig. 35: Multiples model


Fig. 36: NTM EV/EBITDA over 5 years

Fig. 37: NTM PE over 5 years

Sources: Bryan, Garnier & Co, Reuters Sources: Bryan, Garnier & Co, Reuters

EURm 2018 2019E* 2020E 2021E 2022E 2023EEBITDA 2 768 3 107 3 253 3 381 3 504 3 629 Net income 335 302 366 403 430 452 *net income 2019 is adjusted for the exceptional gain related to the indemnification by Argentina (EUR 220m)

5y average EV/EBITDA NTM ratio 7,1 Premium/Discount on historical multiple 0%Retained EV/EBITDA ratio 7,1 5y average PE NTM ratio 20,7 Premium/Discount on historical multiple 0%Retained PE ratio 20,7

Enterprise Value 20 898

Net Interest-bearing liabilities (8 898) Net Operating lease liabilities (65) Hybrid @100% (@BV) (1 600) Provisions (@BV) (2 062) Minorities(PE - 14x non-regulated, 17x regulated) (4 072) Financial assets (@BV) 3 166 ACEA stake valuation ow/ Associates (exc. ACEA) (@BV) 498 Last share price 17,50 € ow/ 23,3% stake in ACEA (@MV) 869 #share 213,0 ow/ JVs (@BV) 940 Stake in ACEA 23,33% ow/ Other financial assets (@BV) 859 Market Value 869,5Equity value 7 368 Fair value per share 11,90

Page - 30

Financial statements

Fig. 38: Income statement


EURm 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Group revenues 15 102 14 644 14 324 15 135 15 322 15 871 17 331 17 833 18 360 18 866

chg. (%) -3,0% -2,2% 5,7% 1,2% 3,6% 9,2% 2,9% 3,0% 2,8%

Water Europe 4 325 4 437 4 477 4 678 4 703 4 680 4 629 4 663 4 693 4 723

chg. (%) 2,6% 0,9% 4,5% 0,5% -0,5% -1,1% 0,7% 0,6% 0,7%

R&R Europe 6 542 6 551 6 324 6 357 6 302 6 165 6 206 6 376 6 597 6 794

chg. (%) 0,1% -3,5% 0,5% -0,9% -2,2% 0,7% 2,7% 3,5% 3,0%

International 4 220 3 652 3 422 3 998 4 217 3 952 3 990 4 156 4 304 4 447

chg. (%) -13,5% -6,3% 16,8% 5,5% -6,3% 1,0% 4,2% 3,5% 3,3%

WTS - - - - - 971 2 396 2 523 2 650 2 783

chg. (%) 146,8% 5,3% 5,0% 5,0%

Other - - - - - 103 110 114 117 119

chg. (%) 6,8% 4,0% 2,0% 2,0%

COGS (3 487) (2 977) (2 833) (2 946) (2 996) (3 092) (3 649) (3 745) (3 856) (3 962)

SG&A (3 764) (3 708) (3 656) (3 818) (3 990) (4 115) (4 598) (4 940) (5 086) (5 226)

Other op.expenses and income (5 669) (5 801) (5 726) (6 164) (6 143) (6 491) (6 774) (6 489) (6 629) (6 765)

D&A (1 036) (974) (1 098) (1 092) (1 091) (1 100) (1 168) (1 456) (1 503) (1 527)

Other non-operating income (94) (5) (81) (174) 9 (110) (60) 93 (60) (60)

Share in net income of equity-

accounted companies

22 31 249 266 179 212 193 180 190 190

Income from operating activities 1 075 1 210 1 179 1 208 1 290 1 175 1 275 1 476 1 416 1 517

Financial result (419) (402) (406) (422) (424) (429) (465) (481) (481) (482)

Income taxes (186) (205) (173) (173) (244) (225) (244) (279) (281) (310)

Net income 470 602 600 613 623 520 566 717 655 724

Minorities (218) (250) (183) (206) (203) (218) (231) (260) (289) (321)

Net income SOG 251 352 417 408 420 302 335 457 366 403

EBITDA (Suez def.) 2 472 2 551 2 650 2 753 2 650 2 640 2 768 3 107 3 253 3 381

margin 16,4% 17,4% 18,5% 18,2% 17,3% 16,6% 16,0% 17,4% 17,7% 17,9%

EBIT (Suez def.) 1 168 1 215 1 261 1 382 1 281 1 284 1 335 1 383 1 476 1 577

margin 7,7% 8,3% 8,8% 9,1% 8,4% 8,1% 7,7% 7,8% 8,0% 8,4%

EBITDA (BG def.) 2 450 2 520 2 400 2 486 2 471 2 429 2 575 2 927 3 063 3 191

margin 16,2% 17,2% 16,8% 16,4% 16,1% 15,3% 14,9% 16,4% 16,7% 16,9%

c. EBIT (BG def.) 1 146 1 184 1 011 1 115 1 102 1 073 1 142 1 203 1 286 1 387

EBIT (BG def.) 1 052 1 179 930 941 1 111 963 1 082 1 296 1 226 1 327

margin 7,0% 8,0% 6,5% 6,2% 7,2% 6,1% 6,2% 7,3% 6,7% 7,0%

Page - 31

Fig. 39: Balance sheet


Fig. 40: Cash flow statement


EURm 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Other Intangible Fixed Assets 4 061 4 518 4 276 4 214 4 223 4 162 4 982 4 936 4 879 4 828

Goodwill 3 257 3 184 3 262 3 480 3 647 5 587 5 224 5 224 5 224 5 224

PPE 8 882 7 833 8 009 8 275 8 280 8 468 8 774 8 704 8 636 8 577

Financial Assets 2 682 3 016 3 445 3 625 4 048 4 001 3 701 3 701 3 711 3 721

Leased Products - - - - - - - 1 359 1 359 1 359

Fixed Assets 18 881 18 550 18 992 19 593 20 198 22 218 22 681 23 923 23 809 23 709

Inventories 290 286 262 274 263 471 500 520 535 550

Accounts Receivable 3 805 3 629 3 790 3 967 4 041 4 690 4 584 4 706 4 845 4 979

Other Current Assets 1 412 1 737 1 562 1 720 1 857 1 934 2 364 2 433 2 505 2 574

Cash and Cash Equivalents 2 247 2 506 2 249 2 079 2 925 3 058 3 424 3 799 3 732 3 714

Current Assets 7 755 8 158 7 863 8 039 9 086 10 153 10 872 11 458 11 617 11 817

Total Assets 26 637 26 708 26 855 27 632 29 284 32 370 33 553 35 381 35 425 35 525

Shareholders' Equity 6 859 6 910 6 996 6 805 7 366 9 066 8 993 9 130 9 203 9 344

Accounts Payable 2 871 2 770 2 871 2 991 3 064 3 714 3 799 3 715 3 825 3 931

ST Financial Liabilities 1 364 2 770 1 927 1 854 2 500 2 004 2 762 2 762 2 762 2 762

LT Financial Liabilities 8 555 7 229 7 722 8 501 8 666 9 761 9 803 9 935 9 935 9 935

Leasing Liabilities - - - - - - - 1 424 1 466 1 507

Provisions 1 995 1 801 1 995 1 952 2 080 2 081 2 004 2 062 2 062 2 062

Other Liabilities 4 993 5 229 5 344 5 528 5 610 5 745 6 192 6 353 6 173 5 985

Shareholders' Equity and Liabilities 26 637 26 708 26 855 27 632 29 284 32 370 33 553 35 381 35 425 35 525

EURm 2012 2013 2014 2015 2016 2017 2018 2019E 2020E 2021E

Net Income 470 602 601 613 623 520 566 717 655 724

Depreciation 1 118 923 1 122 1 120 1 191 1 100 1 104 1 456 1 503 1 527

Change in Other Assets and

Liabilities & Non-Cash

770 299 251 258 100 342 304 8 114 110

Cash Flow from Operations 2 357 1 824 1 973 1 992 1 913 1 962 1 973 2 180 2 272 2 360

Capital Expenditure (net of

divestiture)

(1 189) (1 013) (1 029) (1 222) (853) (943) (1 185) (1 339) (1 379) (1 417)

LT Financial Investments & other (95) 25 169 (128) 20 (2 646) (45) - (10) (10)

Cash Flow from Investments (1 283) (987) (860) (1 350) (833) (3 589) (1 230) (1 339) (1 389) (1 427)

Issuance/Redemption of Common

Stock

(0) 6 145 - 17 1 593 - 0 - -

Change in LT Financial Liabilities (334) 393 (254) 504 572 1 129 557 132 - -

Dividend Payments (318) (331) (331) (350) (351) (352) (447) (404) (404) (404)

Other & Currency Effects (723) (565) (838) (965) (510) (558) (703) (194) (547) (547)

Cash Flow from Financing (1 375) (498) (1 278) (811) (273) 1 812 (593) (466) (951) (951)

FX effect 55 (80) 22 0 38 (52) 5 - - -

Cash Flow (246) 259 (143) (170) 846 133 155 375 (67) (18)

Page - 32

Bryan, Garnier & Co vs consensus

Comparison of our estimates with those of the consensus shows the following factors:

• For revenue, we are fully in line; • Our estimates are higher for EBITDA and in line for EBIT, probably since the consensus

has yet to integrate the effects of IFRS16 and is therefore not comparable; • Our estimates are higher for 2019 net profit. This is due to the fact that the consensus

has yet to factor in the settling of the dispute with Argentina. In contrast, for 2020 and 2021 net profit, our estimates are lower than those of the consensus. We consider the consensus still overly optimistic on Suez' ability to turn around its earnings.

In our view, this excessive optimism concerning 2020 EPS should gradually disappear with the consensus revising its figures downwards. Over one year, it has already fallen from EUR0.78 to EUR0.66 (-15%). The adjustment is underway and this should continue to converge with our estimate of EUR0.52 (-20%).

Fig. 41: Change in share price and EPS in year N and N+1


Fig. 42: Bryan, Garnier & Co estimates vs consensus


Page - 33

Part 8: Appendices

Company presentation

OVERVIEW

Suez is one of the world leaders in environmental services (no. 2 in water management after Veolia). It is present across the full spectrum of water management (waste water treatment, drinking water production, etc.) and waste management businesses (incineration, recycling, landfill sites, etc.).

In 2018, Suez generated revenues of EUR17.3bn and employed around 89,000 people across the globe. It works with both municipal authorities (57% of 2018 revenues) and private sector companies (43%).

Despite significant barriers to entry (capital investment, technology, regulations, etc.), the environmental services markets are becoming increasingly competitive. They are characterised by major technological challenges, relating to increasingly stringent regulations. Suez’s main rival is Veolia, although the latter also operates in the energy business. A gradual stream of Chinese players is also arriving on the market, expanding through steady acquisitions policies.

Fig. 43: Main competitors


COMPANY HISTORY

When it was founded in 1858, Suez was named Compagnie Universelle du Canal de Suez, after the canal connecting the Mediterranean Sea with the Indian Ocean. The company was in fact created to finance the construction of the Suez Canal.

In 1974, Compagnie Financière de Suez became the leading shareholder in Lyonnaise des Eaux, then in 1997, the two companies merged, creating the world leader in local services: Suez Lyonnaise des Eaux. The group’s water and waste management operations were gradually brought together under the umbrella of Suez Environnement.

In 2008, the Suez group completed the process of grouping its water and waste operations within Suez Environnement, which was then listed on the stock exchange. Suez still retains a 32% stake in Suez Environnement. At the same time, Suez and GDF merged to form GDF Suez, which would later become Engie.

Page - 34

In 2010, Suez Environnement took a controlling stake (75.23%) in Sociedad General de Aguas de Barcelona (AGBAR). In 2014, the company increased its stake to 99.49%, raising it to 100% in 2015 after acquiring Criteria Caixa’s holding. AGBAR specialises in water cycle management, focusing mainly on Spain and Chile.

In 2017, Suez acquired GE Water in partnership with Caisse de Dépôt et Placement du Québec (CDPQ), making Suez a major player in industrial water and increasing its international presence.

Fig. 44: Key dates in Suez’s history


THE GROUP’S BUSINESSES

The water business represented 55% of 2018 revenues (EUR9.5bn). Suez operates drinking water production and pumping services, as well as the collection and treatment of waste water and the recycling of sludge. The ratio of municipal authorities to private companies like Suez varies significantly from country to country. In France, the municipal water system is often handled by the private sector under public service delegation arrangements, with the municipal authority retaining ownership of the assets. In Spain, the situation is roughly the same, with private operators handling 54% of drinking water production and around 85% of wastewater treatment. In the United States, however, municipal authorities often remain in charge of these services themselves. The private sector handles slightly over 10% of drinking water production and 2% of wastewater treatment. On the whole, the municipal water business is a mature market, in which volumes are tending to shrink at a rate of around -0.8%/year due to water saving policies.

Waste management represented 45% of 2018 revenues (EUR7.8bn). Suez operates in the areas of urban cleaning, waste collection and treatment, soil remediation, recycling, incineration and organic waste recycling. As in the water sector, market penetration by private companies varies significantly between countries, on both the recovery and the treatment side. However, there is a strong correlation between a country’s stage of development and the type of service required. In less developed countries, demand is mainly for waste collection and disposal. In more developed countries, the range of services required extends to selective collection and sorting, with mature countries also requiring recycling, organic waste recycling and energy recovery. Like the water business, waste management is generally a mature market, which will be driven by new regulations and the transition to the circular economy.

Page - 35

In geographical terms, France is the group’s main market, representing EUR5.1bn (29.2% of 2018 revenues). North America and Spain are also major contributors, generating 11.9% and 9.9% of revenues, respectively. The importance of Asia is easily overlooked, as a high percentage of the group’s business in the region is obtained via JVs and is not visible in the revenue figures.

Across its various businesses, Suez works with both industrial companies and municipal authorities (43% and 57%, respectively). The municipal market is very mature, with global growth levelling off at 0-2%/year, but it provides excellent visibility, especially in the water business, where concessions are granted for an average term of 20 years. The industrial market is more dynamic, with growth of 5-10%/year, but it doesn’t provide the same visibility, since contracts are signed for 5-6 years. It is also more sensitive to changes in macroeconomic conditions and hence a possible recession.

Fig. 45: Revenues by region (2018)

Fig. 46: Revenues by division (2018)



Page - 36

TOP MANAGEMENT

Jean-Louis Chaussade – Chairman

Mr. Chaussade has been Chairman since May 2019. Previously, he held the office of CEO since 2008, the time of the group’s IPO.

Mr. Chaussade is a graduate of ESTP and the Sorbonne.

Bertrand Camus – CEO

Mr. Camus has been CEO since May 2019. He previously held the position of Group Senior Executive VP in charge of Africa, the Middle East, Asia and Australia from 2018. From 2008 to 2015, he was Senior Executive VP in charge of water operations in North America, then in 2015 he became Deputy CEO of the Water Europe division and CEO of Water France.

M. Camus is a graduate of Ecole Nationale des Ponts et Chaussées.

Julian Waldron – CFO

Mr. Waldron has been CFO since May 2019, having previously been COO and Executive VP of TechnipFMC since 2017. Before that, he was CFO of Technip from 2008 to 2017.

Mr. Waldron is a graduate of the University of Cambridge.

Jean-Marc Boursier – COO

M. Boursier was appointed as COO and Senior Executive VP in charge of Recycling & Recovery in Northern Europe and Industrial Waste Specialties in Europe in May 2019. Previously, he was in charge of Finance and Recycling & Recovery in Norther Europe.

Mr. Boursier is a graduate of Telecom Sud Paris and HEC.

Page - 37

Bryan Garnier stock rating system For the purposes of this Report, the Bryan Garnier stock rating system is defined as follows:

Stock rating BUY

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.

NEUTRAL 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.

SELL 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 49.7% NEUTRAL ratings 42.6% SELL ratings 7.7%

Research Disclosure Legend

1 Bryan Garnier shareholding in Issuer

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”).

No

2 Issuer shareholding in Bryan Garnier

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.

No

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

No

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.

No

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.

No

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.

No

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.

No

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.

No

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.

No

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.

No

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.

No

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.

No

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.

No

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.

Yes

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).

No

Summary of Investment Research Conflict Management Policy is available www.bryangarnier.com

http://www.bryangarnier.com/en/pages/legal/Summary%2Bof%2BInvestment%2BResearch%2BConflict%2BManagement%2BPolicy

London

Bryan, Garnier & Co Ltd

Paris

Bryan, Garnier & Co Ltd

Munich

Bryan, Garnier & Co. GmbH

Zurich

Bryan, Garnier & Co

New York

Bryan Garnier Securities Beaufort House

15 St. Botolph Street

London EC3A 7BB

United Kingdom

26 Avenue des Champs-Elysées

75008 Paris

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+44 207 332 2500 +33 1 56 68 75 20 +49 89 2422 62 11 +41 44 991 3300 +1 212 337 7000

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 03034095 and its MIFID branch

registered in France Number 452 605 512. Bryan, Garnier &

Co Limited is authorized and regulated by the Financial

Conduct Authority (Firm Reference Number 178733) 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

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update 2018 v2 · 2019. 9. 6. · suez sell fair value eur11.5 share price historical entreprise...

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