Accelerated Growth In Water Technologies Set To Boost Revenue And Enhance Earnings

Key Takeaways

• Veolia's GreenUp plan and strategic capital allocations aim to enhance growth in water technologies and boost EBITDA margins through selective investments.
  
• Advanced pricing strategies and new pollutant treatments are projected to support top-line growth and improve net margins, driven by legislation and demand.
  
• Exposure to energy price fluctuations, weather impacts, and foreign exchange volatility could negatively impact Veolia's revenue and profitability.

Catalysts

Designs and provides water, waste, and energy management solutions worldwide.

• Veolia's GreenUp strategic plan is expected to drive enhanced growth through expansion in key booster activities like Water Technologies, which aims to grow revenue by 6% to 10% per year, surpassing market growth rates. This will likely contribute to future revenue growth.
  
• The company is achieving synergistic efficiencies faster than planned, with raised synergies targets for 2024. This operational efficiency is anticipated to bolster net margins and overall earnings.
  
• Ongoing capital allocation strategies, such as selective portfolio pruning and accretive investments, are set to enhance Veolia's EBITDA margins, contributing to improved earnings over time.
  
• Advanced pricing strategies, including significant tariff increases in various regions and sectors, particularly in Water operations, are projected to support top-line growth and improve net margins.
  
• Significant revenue growth is expected from PFAS and new pollutant treatments, targeting €1 billion by 2030, driven by new legislation and growing demand, contributing to sustained revenue and earnings growth.

Veolia Environnement Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Veolia Environnement's revenue will grow by 4.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.4% today to 3.6% in 3 years time.
• Analysts expect earnings to reach €1.8 billion (and earnings per share of €2.45) by about November 2027, up from €1.1 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as €1.5 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.9x on those 2027 earnings, down from 19.2x today. This future PE is lower than the current PE for the GB Integrated Utilities industry at 19.6x.
• Analysts expect the number of shares outstanding to grow by 0.33% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 5.29%, as per the Simply Wall St company report.

Veolia Environnement Future Earnings Per Share Growth

Risks

• Veolia's exposure to energy price fluctuations, although mitigated, could still have negative effects on revenue growth, particularly if hedging is improperly managed or if energy prices remain volatile.
  
• Weather impacts have consistently led to negative financial effects, and continued adverse weather conditions, such as mild winters or drier summers, could negatively impact volumes, thereby affecting revenue and EBITDA.
  
• The company's substantial reliance on international markets means that unfavorable foreign exchange movements could negatively impact earnings, as demonstrated by the negative ForEx effects on current results.
  
• The ongoing antitrust-related divestments, such as the sale of SUEZ waste activities in the U.K., might limit future revenue growth and add complexity in terms of scaling operations effectively.
  
• Delays in industrial customer demand in key regions like China indicate potential macroeconomic vulnerabilities, which could slow down volume growth and negatively impact revenue and overall profitability.

Valuation

• The analysts have a consensus price target of €35.41 for Veolia Environnement based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of €45.3, and the most bearish reporting a price target of just €28.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be €50.8 billion, earnings will come to €1.8 billion, and it would be trading on a PE ratio of 16.9x, assuming you use a discount rate of 5.3%.
  
• Given the current share price of €28.55, the analyst's price target of €35.41 is 19.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.