Water, which is considered to be the "blue gold", is a dwindling precious resource and there is no substitute for it. According to the World Health Organization, over 1 billion people do not have access to safe and reliable water supply and nearly 2.6 billion lack proper sanitation facilities. The deepening water crisis across the globe offers new opportunities for water related companies, capable of providing clean, safe water, to reap windfalls. One such water technology company that can be expected to ride on the big wave of opportunity is France-based Veolia Environnement SA (VE).
It is no secret that Veolia's stock has been hurt badly and is now nearly 60% down from its 52-week high of $96.16. At last check, the stock was at $38.11, off $1.02. But given the unprecedented opportunity before it, this water stock is good to hold for long term.
Corporate Overview
Founded in 1853, Veolia, a spin-off of entertainment giant Vivendi (VIV.L), is the world's largest publicly traded water company. Veolia's stock was listed on the Paris Stock Exchange in July 2000 and on the New York Stock Exchange in October 2001.
Veolia operates under four divisions -- Water cycle management, Waste recovery and recycling, Energy management and Freight & passenger transportation. The company's clients include local public authorities contending with expanding cities, and industrial and tertiary companies, looking to reduce their resource consumption and environmental impacts.
Financial performance
Though Veolia's topline and bottomline were erratic for the first four years since going public in 2000, the company's profits and revenue have been increasing at a healthy rate since 2004. From 2004 through 2007, the company's earnings have grown at a compounded annual growth rate, or CAGR of 18.65%, while revenues have improved at a CAGR of 9.71%.
Riding a tight ship, Veolia posted net income of 927.9 million euros for the year ended December 31, 2007, compared to 758.7 million euros in 2006. The company's per share earnings for the year were 2.16 euro, up 13.7% over 2006. Consolidated recurring net income, which excludes non-recurring items, rose 22.5% to 933.2 million euros in 2007 from 762.0 million euros in 2006.
Despite rough weather conditions in Europe that had a negative impact on the water and energy services, the company's revenue increased by 14.9% to 32.6 billion euros in 2007, compared to 2006.
For the first-half of 2008, Veolia Environnement's net income increased to 500.5 million euros from 493.0 million euros in the year-ago period. However, due to dilution effect, the company's per share earnings for the recent six-month period dropped to 1.09 euro from 1.21 euro in the year-ago period.The consolidated recurring net income for the six months ended June 30, 2008 was 497.5 million euros, an increase of 3.2% over the comparable period last year. The company's consolidated revenue for the first-half of 2008 was 18.09 billion euros, up 17.0% over 15.46 billion euros in the year-ago period.
The operating income margin for the first-half of 2008 declined to 10% from 11% at June 30, 2007. According to the company, the decline in operating income margin reflected the rapid growth of engineering and construction activities, which carry lower margin than some of its other activities.
Long-term contracts
Local public authorities, who are Veolia's clients, account for over two-thirds of the company's revenue, while the industrial and tertiary companies account for the rest. The company provides utility or utility-type services to its clients under long-term contracts. Veolia's contracts numbering more than 4,400 have a maturity of not less than 10 - 15 years and some even run up to 50 years.
The rapid growth in urban population in Asia, especially China, and in the Middle East continues to fuel the demand for water infrastructure. Veolia made its debut in China in 1997, securing a 20-year water management contract for the renovation, operations and maintenance of a water plant in the city of Tianjin. Another water service contract inked by Veolia Water in 2002 for Shanghai's Pudong business runs for a term of 50 years.
Yet another full service key contract awarded to Veolia Water division in September 2007 is for a term of 30 years and it covers the water production, distribution and customer services in the city of Tianjin.
The contract awarded to Veolia Environmental Services unit in Asia on April 10, 2008, is a 20-year operation and maintenance contract for the YongKang municipal waste-to-energy plant. Similarly, an integrated PFI (Private Finance Initiative) waste contract secured by Veolia Environmental Services in the U.K in March of this year runs for a term of 25 years.
The long-term contracts generate recurring revenue and also improve visibility of future income streams.
Gushing demand
The demand for water infrastructure is on the rise in both developed and developing countries. While developed countries need to upgrade or replace existing - often ageing infrastructures, developing countries, pressured by population growth and rapid urbanization, focus on storing, treating and disinfecting water and developing sanitation systems. With nearly 700,000 miles of aging water pipeline and pumping stations, the U.S spending on new water infrastructure alone could exceed $1 trillion by 2015, according to Merrill Lynch analysts.
More than $128 billion has been committed by the Chinese government to water infrastructure spending over the next five years. In China, Veolia has 25 water projects for municipal and industrial partners in 19 cities in China. Therefore, both developed and developing countries offer tremendous opportunities for water technology firms.
The shrinking lakes and accelerating shoreline erosion are dark realities that cannot be overlooked. As pointed out by Fortune Magazine, "Water will be to the 21st century what oil was to the 20th century." Growing demand and depletion of water resources call for recycling and reuse of wastewater.
In June 2007, Veolia Water was awarded a 702 million euros contract to build one of the world's largest desalination plants in Saudi Arabia, a desert region facing massive industrialization and a growing population. The project is expected to be completed by 2010. The desalination plant under construction by Veolia in Sydney is expected to go operational by 2009/2010. Veolia Water, which will operate the plant for 20 years, expects a consolidated turnover of about 570 million euros from the desalination plant in Sydney. Veolia Water has various significant seawater desalination projects across the world, including the world's largest reverse osmosis desalination plant in Ashkelon, Israel.
Built-in advantages
The company enjoys some built-in advantages like diverse revenue stream and global presence. A diverse revenue stream can provide less volatile earnings. The company will not be affected by the fluctuations in the economic cycle of any one country because of its global presence.
(a) Revenue break-up - By Division
A big chunk of revenue comes from Veolia Water, the water cycle management and core business of the company. Last year, Veolia Water accounted for 34% of the company's total revenue of 32.6 billion euros (US$44.65 billion), while Veolia Environmental service, which caters to waste recovery and recycling, contributed 28% to the total revenue. In 2007, Veolia Energy and Veolia Transport, which rolls out commuter rail services, accounted for 21% and 17% of total revenues, respectively.
(b) Revenue break-up - By Geography
Veolia operates in 68 countries. Last year, the company derived 44% of its revenue from France, 36% from Europe (excluding France), 8% from the U.S., 7% from the Asia-Pacific region and 5% from rest of the world.
Balance sheet
The company's cash flow from operations continues to increase year-over-year. At the end of 2007, cash flow from operations was 4.22 billion euros, up 9.8% over 3.85 billion euros in 2006. Cash flow from operations at the end of 2005 was 3.54 billion euros. Cash flow from operations for the first-half of 2008 was 2.16 billion euros, up 7.7% from the comparable period last year. The company expects its cash flow from operations to increase by 6% in 2008.
The company's net financial debt increased to 16.3 billion euros at June 30, 2008 from 15.1 billion euros at December 31, 2007. The debt coverage ratio was 3.4 times at June 30, 2008, compared with 3.3 times at December 31, 2007. A debt coverage ratio of more than 1.5 times implies that the company is financially flexible and should have no difficulty in meeting its debt obligations.
Veolia's capital position has been strengthened with its last year's launch of a 2.6 billion euros cash capital increase with preferential subscription rights. A strong capital position is the hallmark of a company's financial strength and stability.
Outlook
Despite the unfavorable impact from depreciation in most currencies versus the euro, Veolia remains optimistic of exceeding its revenue growth objective for 2008, initially expected at 10% growth. Veolia's optimism stems from the continued strong level of organic growth and the acquisitions completed in 2007 and at the beginning of 2008. However, the company believes that its net income growth objective of 10% could be difficult to achieve in 2008.
Acquisitions
Defying the doomsday predictions of critics who doubted the survival of Veolia, which was saddled with heavy debt when it was spun-off from Vivendi, the company has expanded its footprint through a combination of organic growth initiatives and targeted acquisitions and still continues to do so. The company has set an investment target of 15-20 billion euros between 2007 and 2009. Of the total amount, Veolia plans to invest 3-8 billion euros in acquisitions and the remaining for organic growth.
Some notable acquisition deals include:
The acquisition of Cleanaway UK Ltd in September 2006 for 859 million euros, positioned Veolia at the forefront of the UK waste management marketplace. French ferry operator SNCM and SuperShuttle, a provider of airport shared ride ground transportation are the other notable acquisitions made in 2006.
In July 2007, Veolia snapped up German waste treatment company Sulo for 1.45 billion euros and three months later, purchased a 75% stake in Italy's TMT, a waste management and treatment firm, for 338 million euros.
Veolia acquired some of the unregulated business activities of Thames Water in November, 2007 and a month later purchased Thermal North America, Inc., or TNAI, the largest American private portfolio of heating and cooling networks.
On February 20, 2008 Veolia agreed to acquire Rail4Chem, a company that specializes in international rail freight transportation. The acquisition is expected to boost Veolia Cargo's* revenue by 60% in 2008 to over 200 million euros from 122 million euros reported in 2007. (*Veolia Cargo, an independent private European freight transportation company is a subsidiary of Veolia Transport).
Conclusion
The increasing demand for water supply and treatment more particularly in China, Veolia's strong capital position and strategic acquisitions, are some of the long-term catalysts that could drive the stock price higher. However, currency exchange rate fluctuations, the company's declining margin and any termination or modification of its contracts could negatively impact the share price.
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June 05, 2026 16:18 ET A busy week for economic news flow saw a slew of reports being released that reflected the trends in the U.S. labor market. In Europe, economic growth and inflation data gained attention as the European Central Bank and Bank of England head for policy session later in the month. In Asia, the monetary policy session of the Indian central bank was in focus as the country, a major oil importer, reels under the pressures of a weaker rupee and rising inflation.