Solid cash flow generation should help Veolia

Despite a very disappointing performance over the last year (-19% vs +19% for CAC 40), SocGen’s analysts believe Veolia Environnement outperform in the near term, thanks to a better cash flow generation.

They expect earnings to grow 8% per annum between 2016 and 2019, based on 3.1% EBITDA growth per year.

« We expect VIE to generate an average of c. €1.5bn of free cash flow per annum after maintenance capex over 2017-2020e », they write in a report dated April 19. FCF yield after maintenance capex should reach 10.6% by 2018, which makes the stock very cheap they argue.

The company has strengthened its balance sheet, with a net debt/EBITDA ratio of 2.8x (3.7x incl. provisions). « As we expect EBITDA to grow, with capex fully financed from cash flows, our model points to an increasing amount of capital available for extra capital allocation decisions; over 2017-19e, we estimate the company could allocate c. €1.7bn in capital to extra capex or extra dividends while keeping net debt/EBITDA below 3x. »

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