California’s move to ration water amid a prolonged drought made national headlines in the US; but for much of the world, tenuous supplies of potable water are old news, suggests Roger Conrad in Conrad's Utility Investor.
These challenges create a major opportunity for a handful of service providers that specialize in solutions for water and wastewater challenges.
Suez Environnement (FP: SEV; OP: SZEVY) traces its origins to a concession granted by Napoleon Bonaparte in the early 19th century to provide water services to Lyon (France’s second-largest city).
The company opened a new chapter in its storied history in July 2008, when gas and electric utility GDF Suez spun-off its waste and water management services as Suez Environnement.
Last year, the spin-off generated 61.7% of its operating profit from its European water (42.2%) and waste management (19.5%) segments.
However, the company continues to expand its presence internationally; in 2014, for example, water-related services in international markets accounted for more than 38% of its net income, a 61% increase over the past two years.
Lower prices for recycled products and a slump in European industrial activity have weighed on Suez Environnement’s waste management division in recent years. Management expects this softness to continue in 2015, despite an improving EU economy.
Fortunately, robust growth in the water business and in international markets more than offset this weakness last year, enabling the company to grow its free cash flow by 12% and its net income by 18.4%.
Cost-cutting efforts at Suez Environnement’s water operations contributed to this impressive performance; the company reduced its overhead by EUR160 million last year, exceeding its target of EUR125 million. And management aims to deliver another EUR400 million in savings over the next three years.
Over the long-term, Suez Environnement stands to profit from opportunities in international markets where potable water is hard to come by.
Recent ventures of this nature include a sludge recovery project in China, the remediation of Long Island’s sewage system in the wake of Hurricane Sandy and desalination projects in India and Morocco. The company has also grown its water utilities in Chile and Italy.
Investors who buy the stock before May 15, 2015, will receive Suez Environnement’s annual dividend of EUR0.65 (US$0.71) per share. The company has maintained this payout for the past nine years.
Management has targeted a payout ratio of 60% to 65%, suggesting that a dividend increase should be in the cards by 2017—assuming that the company hits its conservative guidance. Suez Environnement’s American depositary receipt rates a buy up to US$10 in our Aggressive Income Portfolio.
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