Tuesday 26 September 2017

Patience could really pay off with Veolia

Dr John Lynch

ALL the way up to the 2016 centenary commemoration and beyond, we are going to have a lot of traffic chaos in Dublin. O'Connell Street, the focus of the commemoration, will be busy accommodating the linking of the two Luas lines – but by then, the remarkable French firm Veolia, which for the best part of a decade has run the Luas, will have checked out. It is still not clear who we will be able to blame for the traffic problems, but I'm sure we will find someone.

Despite its decent spell as a feature of the Dublin transport system, Veolia is still a relatively little known corporation in this country, yet has been operating in Ireland for over 20 years.

It doesn't just run the Luas (for the moment). It is also a significant player in Irish energy, waste-collection and water-treatment markets.

The origins of Veolia can be traced back to an imperial decree of Napoleon III in 1853 for the setting up of a water company. CGE obtained a concession to supply water to the good citizens of Lyon. Over time, the company expanded into waste services, energy, water, transport, construction, communications and property.

In 1998, the company changed its name to Vivendi, selling off its property and construction divisions.

Shortly after, it acquired Universal Studios in the US, the home of countless blockbusters.

Hollywood glitz and the mundanity of waste collection did not mix, especially in the confines of the stock market. The company was split into Vivendi Universal and ultimately Veolia Environment.

Today, Veolia concentrates primarily on water management, energy services, waste management and, to a lesser extent, transportation. The company's revenue is €29bn, has a net income of €400m, 220,000 employees and is quoted on the Paris Bourse.

The biggest part of Veolia is the water division with sales of €12bn, two-thirds of sales coming from Europe and 9pc from Asia.

The company provides drinking water and industrial process water, which includes recycling and wastewater treatment.

In Ireland, it operates over 45 water treatment plants and supplies drinking water to Limerick city.

It will be interesting to see the impact the newly formed Irish Water will have on the company.

The environment division is the second-largest waste company in the world. It has sales of €9bn, with 80pc of its sales coming from Europe.

Activities range from waste collection to waste treatment, including incineration. In Ireland, the company operates an EPA-licensed hazardous waste facility in Fermoy, Co Cork.

The energy division, also known as Dalkia, accounts for 26pc of group revenue. It manages 133,000 energy facilities worldwide and operates district heating systems. In Ireland, Dalkia has been operating successfully in all sectors and recently received an energy award in partnership with Stewarts Hospital.

Veolia Transport became Veolia Transdev in 2011, following a merger between Veolia Transport and Transdev.

In 2012, Veolia announced that it would divest itself of Veolia Transport and exit the transport business by 2014, so its present Luas contract is the final one.

In late 2011, the company announced a new transformation plan with a focus on debt reduction; a target of 26pc increase in revenue and savings of €450m, all by 2015.

It has also announced the shrinking of its global footprint by pulling out of half of the 77 countries in which it operates.

The transformation plan is challenging, and while debt is aided by disposals and retrenchment, it should achieve its target of €10bn. It is possible the 'high-growth' markets (China/Middle East) can grow to meet the revenue target demanded. The question is will it be by 2015?

Unfortunately, confidence has been dented by the recent announcement of a small drop in profits, and the company has reported that market conditions for its water and waste business are 'challenging' – a word I dislike as an investor because it usually spells trouble.

The objective set for savings has been increased to €750m, which, while positive, in the opinion of some analysts is small relative to its overall cost base.

Veolia's share price has fallen from €22 in early 2010 to €9 today. In my opinion, the shares are still looking expensive.

However, if you believe the company will deliver on its transformation plan, the shares could be tempting – but you will need patience.

Dr John Lynch is a former chairman of CIE. Nothing published in this section should be taken as a recommendation, either implicit or explicit, to buy or sell any of the shares.

Irish Independent

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