Buy into Veolia’s green credentials

Broker Berenberg views Veolia as “one of the world’s most important circular economy stocks”. With a mission to “resource the world”, it aims to increase access to natural resources while ensuring they are used efficiently amid the strains of rising urbanisation and climate change. This approach has attracted the attention of sustainability-focused fund managers. Veolia is a top 10 holding of Pictet Asset Management’s Water Fund (LU0448836600) and also features in Janus Henderson's UK Responsible Income Fund (GB0005027338) and European Growth Fund (GB0030617707). Andrew Jones, director of global equity income at Janus Henderson, points to the group’s “clear long-term strategy to increase investments in areas that aid the environmental transformation and reduce exposure to areas that have less of a positive impact”.

That’s the crux of Veolia’s ‘Impact 2023’ plan, which is targeting €3bn of asset sales to redirect capital into higher-value opportunities such as plastics recycling and hazardous waste treatment. Capitalising on regulation, Veolia is the only global player in the hazardous waste market, estimated to be worth €25bn-€30bn. Revenue from these activities rose 14 per cent to €2.5bn last year, with a target to reach €4bn in 2023.

Covid-19 could delay its 2023 ambitions. A €192m hit from the pandemic meant revenue was largely flat at €6.7bn in the first quarter of 2020. In the water division – which provides drinking water and wastewater services and accounted for around two-fifths of turnover last year – volumes held steady, but revenue was hit by disruption to construction activity in France. The country also experienced a 32 per cent drop in industrial and commercial waste volumes in March, weighing on the ‘waste’ business. Responding to the crisis, Veolia halved its 2019 dividend, is cutting 2020 capital expenditure by a fifth to €2bn and trimming €200m of costs – that’s in addition to existing plans for €250m of annual savings between 2020 and 2023.

Net debt (including lease liabilities) came down 8 per cent to €10.7bn in 2019, equivalent to 2.7 times cash profits. Meanwhile, Veolia generated €868m of net free cash flow, up from €536m in 2018. At the end of March, net debt had risen to €11.5bn, which the group attributes to seasonal working capital movements and the €225m acquisition of Alcoa’s (US:AA) hazardous waste business. Still, it had €5.4bn of cash on hand and access to €4.2bn of undrawn credit. Despite coronavirus pressures, Berenberg expects net debt to remain below three times cash profits this year.