shanks group plc - credit suisse

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

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22 September 2014

Europe/United Kingdom

Equity Research

Environmental Services

Shanks Group PLC (SKS.L) SMALL & MID CAP RESEARCH

Risk-reward no longer attractive

■ We downgrade SKS to Neutral (from Outperform) and reduce our TP to

105p (from 115p). We reduce our EPS forecasts c8-16% for FYmar15-17E

on lowered solid waste expectations and a strong sterling vs euro. The stock

has performed well but we see risk of further end-market deterioration.

■ 1. Little scope for further outperformance: Shanks has outperformed the

FTSE 250 c12% over the past four months and now trades at a c6%

premium on P/E (previously a c6% discount), while consensus earnings

expectations have fallen. We no longer see a compelling value proposition. 2.

No respite in end-markets: Recyclate prices have fallen further ytd and a

key Dutch competitor has cautioned on intense margin pressure this year.

Dutch construction remains at historical lows (c50% SKS' volume). We see

risk of further near-term pressure. 3. Strong sterling affects reported

earnings: c78% of sales are in euro and CAD but SKS reports in sterling,

exposing it to translation risk (sterling up c6% on average in FYmar15).

■ Catalysts: CMD on Sept. 29-30th,

which will include an update on Solid

Waste markets. We do not expect any improvement and are cautious on

potential for further deterioration. We look for clarity on growth potential.

■ Valuation: Shanks trades at c22.3x FYmar15E P/E, c8.3x EV/EBITDA and

yields only c3.2%. We see the valuation as full, given near-term uncertainty.

Shanks Group is a holding company with

waste management subsidiaries operating in

the Netherlands, Belgium, the UK and

Canada.

The Group has gour key business segments.

Solid Waste (c36% of EV) is the sorting,

transfer, and processing of residual waste in

Belgium and the Netherlands. Hazardous

Waste (c40% of EV) is primarily

contaminated soil and wastewater treatment

and industrial cleaning in the Netherlands.

Organics (c8% of EV) includes anaerobic

digestion and composting of green and food

waste in Belgium, the Netherlands, Canada

and the UK. UK Municipal (c16% of EV)

includes long-term integrated contracts iwth

local authorities for the design, build,

finance, and operation of facilities for

municipal solid waste.

Rating (from Outperform) NEUTRAL*

Price (18 Sep 14, p) 109.00

Target price (p) (from 115.00) 105.00¹

Market cap. (£ m) 433.59

Enterprise value (£ m) 679.9

*Stock ratings are relative to the coverage universe in each analyst's or each team's respective sector.

¹Target price is for 12 months.

Financial and valuation metrics

Year 03/14A 03/15E 03/16E 03/17E

EBITDA (£ m) 88 82 88 93

EBIT (£ m) 46 42 46 51

Pre-tax Profit Adjusted (£ m) 30 26 29 33

CS adj. EPS (p) 5.73 4.89 5.42 6.30

Prev. EPS (p) — 5.32 6.05 7.50

Dividend (03/15E, p) 3.45 3.45 3.45 3.45

P/E (adj., x) 19.0 22.3 20.1 17.3

Dividend yield (%) 3.2 3.2 3.2 3.2

Dividend cover (x) 2 1 2 2

Net Debt /EBITDA (x) 1.8 2.3 2.4 2.3

Current WACC (%) 7.58 Free float (%) 99.24

Number of shares (m) 397.79

Source: Company data, Credit Suisse estimates

Research Analysts

Guy MacKenzie, CFA

44 20 7883 9534

[email protected]

Mark Freshney

44 20 7888 0887

[email protected]

Vincent Gilles

44 20 7888 1926

[email protected]

Specialist Sales: Mark Whitfeld

44 20 7888 8038

[email protected]

22 September 2014

Shanks Group PLC (SKS.L) 2

Shanks Group PLC SKS.L Price (18 Sep 14): 109.50p, Rating: (from Outperform) NEUTRAL*, Target Price: (from 115.00) 105.00p

Income statement (£ m) 03/14A 03/15E 03/16E 03/17E

Revenue (£ m) 636.4 614.0 640.4 662.0 EBITDA 88 82 88 93 Depr. & amort. (44) (41) (43) (42) EBIT (£) 46 42 46 51 Net interest exp. (16) (16) (18) (18) Associates 0.30 0.30 0.30 0.30 Other adj, — — — — PBT (£) 30 26 29 33 Income taxes (4) (5) (7) (8) Profit after tax 23 20 22 25 Minorities — — — — Preferred dividends — — — — Associates & other (0.10) — — — Net profit (£) 23 20 22 25 Other NPAT adjustments (19) (5) (1) (0) Reported net income 3 14 20 25

Cash flow (£) 03/14A 03/15E 03/16E 03/17E

EBIT 46 42 46 51 Net interest (13) (14) (15) (15) Cash taxes paid (4) (5) (7) (8) Change in working capital 9 (1) 0 (1) Other cash & non-cash items 32 46 57 57 Cash flow from operations 69 69 81 84 CAPEX (40) (63) (54) (49) Free cashflow adj. — — — — Free cash flow to the firm 50 44 59 71 Acquisitions — — — — Divestments 12 3 — — Other investment/(outflows) (19) (19) (16) (15) Cash flow from investments (47) (79) (70) (64) Net share issue/(repurchase) — — — — Dividends paid (14) (14) (14) (14) Issuance (retirement) of debt — — — — Other 13 (12) (15) (15) Cash flow from financing activities

(1) (26) (29) (29) Effect of exchange rates — — — — Changes in Net Cash/Debt 21 (36) (18) (9) . Net debt at start 177 156 192 209 Change in net debt (21) 36 18 9 Net debt at end 156 192 209 218

Balance sheet (£ m) 03/14A 03/15E 03/16E 03/17E

Assets Cash and cash equivalents 105 105 105 105 Accounts receivable 144 144 144 144 Inventory 9 10 10 11 Other current assets 3 3 3 3 Total current assets 261 262 262 262 Total fixed assets 327 348 361 368 Intangible assets and goodwill 213 210 208 208 Investment securities — — — — Other assets 214 337 438 510 Total assets 1,015 1,157 1,269 1,348 Liabilities Accounts payable 204 204 204 204 Short-term debt 17 17 17 18 Other short term liabilities 96 92 92 93 Total current liabilities 318 313 313 315 Long-term debt 243 279 296 304 Other liabilities 180 283 369 425 Total liabilities 742 876 978 1,045 Shareholders' equity 274 281 291 304 Minority interest (0) (1) (1) (1) Total equity & liabilities 1,015 1,156 1,268 1,347 Net debt (£ m) 156 192 209 218

Per share data 03/14A 03/15E 03/16E 03/17E

No. of shares (wtd avg) 398 399 399 399 CS adj. EPS (p) 5.73 4.89 5.42 6.30 Prev. EPS (p) — 5.32 6.05 7.50 Dividend (p) 3.45 3.45 3.45 3.45 Div yield 3.15 3.15 3.15 3.15 Dividend payout ratio 60.16 70.54 63.63 54.76 Free cash flow per share (p)

7.42 1.54 6.81 8.88

Key ratios and valuation

03/14A 03/15E 03/16E 03/17E

Growth(%) Sales (5.0) (3.5) 4.3 3.4 EBIT 11.1 (8.8) 9.8 10.7 Net profit 15.7 (14.3) 10.9 16.2 EPS 7.6 (16.5) 8.8 10.1 Margins (%) EBITDA margin 13.8 13.3 13.7 14.1 EBIT margin 7.2 6.8 7.2 7.7 Pretax margin 4.7 4.2 4.5 5.0 Net margin 3.6 3.2 3.4 3.8 Valuation metrics (x) EV/sales 1.0 1.1 1.1 1.1 EV/EBITDA 7.4 8.4 8.0 7.6 EV/EBIT 14.2 16.3 15.2 13.9 P/E 19.1 22.4 20.2 17.4 P/B 1.6 1.6 1.5 1.4 Asset turnover 0.63 0.53 0.50 0.49 ROE analysis (%) ROE stated-return on equity

1.2 5.1 7.1 8.5 ROIC 8.1 6.7 7.0 7.4 Interest burden 0.66 0.62 0.62 0.65 Tax rate 55.8 24.2 25.3 24.2 Financial leverage 1.0 1.1 1.1 1.1 Credit ratios (%) Net debt/equity 57.1 68.4 72.2 72.0 Net debt/EBITDA 1.8 2.3 2.4 2.3 Interest coverage ratio 2.9 2.6 2.6 2.8

Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities

(EUROPE) LTD. Estimates.

69

89

109

Sep-12 Jan-13 May-13 Sep-13 Jan-14 May-14

Price Price relative

The price relative chart measures performance against the FTSE 100 IDX which

closed at 6789.76 on 15/09/14

On 15/09/14 the spot exchange rate was £.8/Eu 1. - Eu .77/US$1

22 September 2014


Key charts Figure 1: Shanks has outperformed the FTSE 250 c12%

over the past four months

Figure 2: …and now trades at a c6% premium to the

market on P//E, up from a c6% discount

90

95

100

105

110

115

May-14 Jun-14 Jun-14 Jul-14 Aug-14 Aug-14 Sep-14

SKS FTSE250

17.0

17.5

18.0

18.5

19.0

19.5

20.0

May-14 Jun-14 Jun-14 Jul-14 Aug-14 Aug-14

Forw

ard

P/E

mul

tiple

(con

sens

us)

SKS FTSE 250

Source: Thomson Reuters. *Total return index, rebased to 100. Source: Thomson Reuters

Figure 3: Recyclate prices are on average 6-12% lower ytd

than in FYmar14; which all else equal is c8% of PBT

Figure 4: Construction (c50% SKS volume) is late-cycle,

and construction output remains depressed

80

85

90

95

100

105

110

115

Apr-2013 Jul-2013 Oct-2013 Jan-2014 Apr-2014 Jul-2014

Rec

ycla

te p

rices

, reb

ased

to 1

00 a

t Apr

il 1s

t, 20

13

Waste paper Scrap metal Plastic

-60

-50

-40

-30

-20

-10

0

10

20

30

40

80

85

90

95

100

105

110

115

120

125

2000 2001 2002 2003 2004 2005 2007 2008 2009 2010 2011 2012 2014

Construction IP (left axis) Construction confidence index (right axis)

Source: Thomson Reuters, www.letsrecycle.com Source: Thomson Reuters, Eurostat

Figure 5: The sterling has strengthened against the euro

and the CAD, which could affect reported earnings

Figure 6: And Shanks no longer trades at a material

discount to peers on EV/EBITDA

0.70

0.72

0.74

0.76

0.78

0.80

0.82

0.84

0.86

0.88

0.90

0.50

0.52

0.54

0.56

0.58

0.60

0.62

0.64

0.66

Apr-13 Jun-13 Aug-13 Oct-13 Dec-13 Feb-14 Apr-14 Jun-14 Aug-14

CAD / GBP (spot) CAD / GBP (FY average)

Eur/GBP (spot, RHS) Eur/GBP (FY average, RHS)

0x

2x

4x

6x

8x

10x

12x

14x

16x

18x

2014 2015 2016 2017

SEVI Veolia PNN SKS

Source: Thomson Reuters+ Source: Thomson Reuters, Credit Suisse estimates

22 September 2014


Risk-reward no longer attractive No respite in Solid Waste

Shanks has outperformed the FTSE 250 c12% on a total returns basis over the past four

months despite weakening consensus expectations on earnings. We now see the stock

trading at a premium to the market on P/E (Figure 8).

Figure 7: Shanks has outperformed the market on a total

returns basis by c12%

Figure 8: Shanks now trades at a c6% premium to the

market on P/E, up from a c6% discount in May

90

95

100

105

110

115

May-14 Jun-14 Jun-14 Jul-14 Aug-14 Aug-14 Sep-14

SKS FTSE250

17.0

17.5

18.0

18.5

19.0

19.5

20.0

May-14 Jun-14 Jun-14 Jul-14 Aug-14 Aug-14

For

war

d P

/E m

ultip

le (

cons

ensu

s)

SKS FTSE 250

Source: Thomson Reuters Source: Thomson Reuters

We have not yet seen any evidence of a material improvement in Shanks' end markets

and see little scope for further outperformance. We have seen evidence that pricing

remains weak in the Netherlands and do not see near-term upside in the Solid Waste

business.

We expect pricing remains weak

Waste pricing varies depending on composition (e.g. varying disposal costs) and we have

limited visibility on Dutch gate fees. But we have not seen any signs of encouraging trends

and expect pricing remains under pressure.

Recall that Shanks' Q1mar15 IMS cited 'further deterioration in market conditions' but that

it had taken decisive action and expected full year results in-line with expectations

'provided there is no material deterioration in the Benelux solid waste markets'.

Van Gansewinkel Groep, the largest player in the Dutch solid waste market (unlisted), has

more recently guided that conditions near-term are likely to remain challenging.

Specifically, the company has stated the following:

'Van Gansewinkel expects market conditions to remain unchanged in 2014 with

ongoing pressure on volumes and especially margins' (bold added)1

This is consistent with the competitive pressure SEVI mentioned in its H1 results

('strengthening of local competition, especially in Poland and the Netherlands').

With waste being late cycle and what appears to be considerable competitive pressure in

the market, we expect any improvement in Dutch economic activity will take time to

translate into improved margins. We see a risk of further near-term deterioration.

1 Source: Company Website

22 September 2014


Lower recyclate prices, depressed construction

Recyclate comprises c10% of Shanks' Solid Waste revenue (c5% of Group revenue). But

with no offsetting variable costs changes in the achieved recyclate price can have a

material impact on the bottom line. We estimate a c6-10% decline in the average price of

recyclate year-to-date, relative to the FYmar14 average.

We have also not yet seen evidence of an improvement in the Dutch construction sector,

noting the construction sub-index of Dutch industrial production is still near historical lows.

Confidence appears to have improved but this is off a low base.

Figure 9: Recyclate prices are down further year-to-date Figure 10: And construction output has yet to improve

80

85

90

95

100

105

110

115

Apr-2013 Jul-2013 Oct-2013 Jan-2014 Apr-2014 Jul-2014

Re

cycl

ate

pric

es,

re

ba

sed

to 1

00

at A

pril

1st

, 20

13

Waste paper Scrap metal Plastic

-60

-50

-40

-30

-20

-10

0

10

20

30

40

80

85

90

95

100

105

110

115

120

125

2000 2001 2002 2003 2004 2005 2007 2008 2009 2010 2011 2012 2014

Construction IP (left axis) Construction confidence index (right axis)

Source: Thomson Reuters, www.letsrecycle.com Source: Thomson Reuters, Eurostat

This is consistent with our concerns on Suez Environnement and Veolia Environnement,

where we see ongoing pressure in the European waste market (link here).

Looking towards consolidation

Large, highly leveraged competitors2 could potentially yield opportunities if conditions

remain challenging and debt burdens become unsustainable. Shanks may see

opportunities to materially increase its market share, albeit this may require Shanks to buy

assets larger than itself.

While accretive acquisitions are possible, even if new equity is needed, we see a risk that

Shanks could overpay as competitors could potentially bid up price to avoid being

marginalised in the market, or if private equity groups bid higher3.

Changes in our estimates

We reduce our EPS estimates by c8-16% on a cut to our expectations of pricing in solid

waste and an update to our currency assumptions.

2 e.g. Delta's c75% stake in Indaver, reported by Bloomberg on Sept. 17th

3 e.g. US energy-from-waste operator, Wheelabrator, was recently sold to private equity for c8.8x EBITDA

https://doc.research-and-analytics.csfb.com/docView?sourceid=em&document_id=x576008&serialid=QlZdVUnADlfBLtgp40IKaCfIm%2bLxn0BP2ecLh4rpXO4%3d

22 September 2014


Figure 11: Changes in our estimates

2014A 2015E 2016E 2017E

PBT

New (£m) 30.2 25.9 28.6 33.2

Old (£m) 30.2 28.0 31.9 39.5

Diff 0% (8%) (10%) (16%)

EPS

New (p/share) 5.7 4.9 5.4 6.3

Old (p/share) 5.7 5.3 6.1 7.5

Diff 0% (8%) (10%) (16%)

DPS

New (p/share) 3.45 3.45 3.45 3.45

Old (p/share) 3.45 3.45 3.45 3.75

Diff - - - (8%)


We reduce our earnings forecasts on the back of:

■ Lower pricing in solid waste: We now expect a further c2% decline in average

pricing in FYmar15E (previous c1.5%), partly reflecting the lower average recyclate

prices; and

■ Stronger sterling: Shanks operates primarily in Europe (c78% revenue), but reports

earnings in sterling. This exposes it to translation risk. There is no material mismatch

in cost/revenue currency but a stronger sterling relative to euro reduces reported

earnings (we use €1.25/£, from €1.21/£).

Our estimates vs. consensus

Figure 12: Our estimates vs. consensus

2014A 2015E 2016E 2017E

PBT

CS (£m) 30.2 25.9 28.6 33.2

Consensus (£m) 30.2 27.1 31.4 36.8

Diff - (5%) (9%) (10%)

EPS

CS (p/share) 5.7 4.9 5.4 6.3

Consensus (p/share) 5.7 5.1 6.1 7.1

Diff - (4%) (11%) (11%)

DPS

CS (p/share) 3.45 3.45 3.45 3.45

Consensus (p/share) 3.45 3.45 3.45 3.6

Diff - - - (4%)

Source: Company data, Credit Suisse estimates, Thomson Reuters

■ We are c5-10% below consensus on FYmar15-17E PBT and c4-11% below

consensus on FYmar15-17E EPS.

■ We think consensus may not reflect current exchange rates and recyclate prices.

■ We look to Shanks' Capital Markets Day on Sept. 29-30th for an update on Solid

Waste Market conditions. We do not expect an encouraging near-term outlook.

22 September 2014


Our sum-of-the-parts valuation Figure 13: Our sum-of-the-parts valuation for Shanks Group in millions, unless otherwise stated

Enterprise

value (£m)

EV/share (p) Implied 2015E

EBITDA multiple

Implied 2017E

EBITDA multiple

% core EV Methodology

(+) Benelux Solid Waste 261 66p 6.2x 5.8x 36% DCF @ 7.6% WACC

(+) Hazardous waste 297 75p 10.2x 8.6x 40% DCF @ 7.6% WACC

(+) Organics

Netherlands 26 7p 6.5x 6.7x 4% DCF @ 7.6% WACC

Canada 28 7p 6.1x 5.4x 4% DCF @ 7.6% WACC

Other (UK, Belgium) 3 1p 12.0x 4.5x 0% DCF @ 7.6% WACC

Total Organics 57 14p 6.6x 5.9x 8%

(+) UK Municipal 114 29p 11.7x 9.1x 16% 5% discount to

director's valuation

(+) Central costs (56) (14p) 7.0x 7.0x Multiple of 7x EBITDA

Group Enterprise Value 673 168p 8.2x 7.2x

(-) Non-equity EV

Net debt - core (191) (48p)

Provisions (42) (10p)

Pension liability (13) (3p)

Total non-equity EV (246) (62p)

(=) Equity value 422 107p

Target price 105p

Final dividend 3.5p

Current price 109p

Total return (%) -1%

Implied ratios FYmar15E FYmar16E FYmar17E FYmar18E

EPS 4.9p 5.4p 6.3p 7.7p

P/E 21.3x 19.3x 16.7x 13.6x

EBITDA 81.8 87.6 93.1 100.8

EV/EBITDA 8.2x 7.7x 7.2x 6.7x


■ We value Shanks on a segment-by-segment discounted cash-flow valuation. We apply

a c7.6% post-tax nominal WACC.

■ Our Target Price falls from 115p to 105p, primarily on decrease in our solid waste

forecasts and valuation (c£16m, or c7p/share).

■ For the UK Municipal business we apply a c5% discount to the directors' valuation,

based on a discounted cash-flow, which on our numbers equates to c7x FYmar15E

EBITDA.

■ Our DCF valuation puts the Group at c8.2x FYmar15E EV/EBITDA and 21.8x P/E,

falling to c7.2x EV/EBITDA and c16.9x P/E in FYmar17E, which is broadly in-line with

peers (e.g. Veolia Environnement, Suez Environnement, Seche Environnement).

22 September 2014


Our forecast financials Income statement

Figure 14: Our forecast income statement in millions, unless otherwise stated

y/e 31st March 2010A 2011A 2012A 2013A 2014A 2015E 2016E 2017E 2018E

Revenue 676 712 750 670 636 614 640 662 683

OPEX (573) (612) (644) (583) (549) (532) (553) (569) (583)

EBITDA 103 101 106 87 88 82 88 93 101

Depreciation and amortisation (52) (51) (52) (46) (42) (40) (42) (42) (43)

EBIT 51 50 53 41 46 42 46 51 58

Net finance charge (18) (15) (16) (15) (16) (16) (18) (18) (18)

Associates - 0 0 0 0 0 0 0

PBT 33 35 37 26 30 26 29 33 41

Tax (7) (9) (10) (7) (7) (6) (7) (8) (10)

Net profit 26 26 28 20 23 20 22 25 31

Dividends paid (4) (12) (13) (14) (14) (14) (14) (14) (14)

Other comprehensive (13) 5 (37) 3 14 7 3 2 1

Retained earnings (loss) 10 19 (22) 9 24 13 11 13 17

Underlying EPS 7.9p 6.7p 7.0p 5.0p 5.7p 4.9p 5.4p 6.3p 7.7p

Cash EPS 14.7p 14.4p 11.3p 13.3p 13.1p 6.1p 8.6p 8.6p 9.5p

DPS 3.00p 3.25p 3.45p 3.45p 3.45p 3.45p 3.45p 3.45p 3.86p

Dividend cover 2.6x 2.1x 2.0x 1.4x 1.7x 1.4x 1.6x 1.8x 2.0x

Shares (wtd avg, million) 337 386 397 397 398 399 399 399 399


Cash-flow statement

Figure 15: Our forecast cash-flow statement in millions, unless otherwise stated


EBITDA (reported, pre-restructuring)* 102 99 102 85 84 83 88 93 101

Working capital change 5 5 2 (2) 9 (1) 0 (1) 0

CAPEX - replacement (28) (32) (40) (25) (21) (38) (32) (36) (38)

Interest and tax (25) (13) (21) (10) (15) (20) (22) (23) (25)

Underlying free cash-flow 54 59 43 49 57 25 34 33 38

Net growth capex (30) (34) (38) (28) (19) (25) (22) (13) (14)

Acquisitions / disposals (9) 17 (7) (7) 12 3 - - -

Restructuring - - - (7) (9) (7) - - -

Dividends 63 (12) (13) (14) (14) (14) (14) (14) (14)

PFI funding and other (6) (7) 5 2 (19) (19) (16) (15) (6)

Other 6 7 0 (7) 3 (3) (3) (3) (3)

Net cash-flow 78 30 (10) (13) 10 (40) (20) (11) 1

Opening net debt (core) (290) (186) (159) (161) (177) (156) (196) (216) (227)

Cash movement in net debt 78 30 (10) (13) 10 (40) (20) (11) 1

Non-cash movements 26 (4) 8 (3) 11 - - - -

Closing net debt (core) (186) (159) (161) (177) (156) (196) (216) (227) (227)

Opening non-recourse debt - (134) (48) (45) (100) (151) (254) (340) (396)

Net investment in SPV's (134) 86 3 (55) (51) (103) (85) (57) (5)

Closing non-recourse debt (134) (48) (45) (100) (151) (254) (340) (396) (401)

Source: Company data, Credit Suisse estimates. *EBITDA is pre

22 September 2014


Segmental income statement

Figure 16: Our forecast segmental income statement in millions, unless otherwise stated


Benelux Solid Waste

Revenue 386 378 388 331 324 304 305 308 312

Operating costs (317) (316) (328) (287) (278) (261) (262) (263) (265)

EBITDA 69 62 60 44 47 42 43 45 47

Depreciation (34) (33) (34) (27) (27) (25) (26) (26) (26)

EBITA 36 30 26 16 20 17 18 19 21

UK Solid Waste

Revenue 77 87 79 60

Operating costs (71) (81) (74) (61)

EBITDA 6 6 5 (1)

Depreciation (3) (3) (3) (2)

EBITA 3 3 2 (3)

Hazardous Waste

Revenue 128 141 150 139 148 147 152 156 161

Operating costs (106) (116) (120) (113) (121) (118) (120) (121) (123)

EBITDA 22 25 30 27 27 29 32 35 38

Depreciation (9) (9) (9) (8) (7) (8) (9) (10) (10)

EBITA 13 16 21 19 20 22 23 25 27

Organics

Revenue 21 28 34 36 36 33 35 36 38

Operating costs (12) (19) (23) (24) (26) (25) (27) (28) (29)

EBITDA 9 8 11 12 10 8 9 9 9

Depreciation (5) (5) (6) (6) (6) (6) (6) (6) (6)

EBITA 4 3 5 5 4 2 3 3 4

UK Municipal

Revenue 69 87 107 111 138 140 158 171 182

Operating costs (70) (85) (102) (101) (128) (130) (147) (158) (167)

EBITDA (1) 2 5 10 10 10 11 13 15

Depreciation (0) - - (0) (0) (0) (0) (0) (0)

EBITA (1) 2 5 9 9 9 11 12 14

Central costs

Revenue (inter-segment) (5) (9) (7) (7) (10) (10) (10) (10) (10)

Operating costs (4) (5) (7) (5) (7) (8) (8) (8) (8)

EBITDA (4) (5) (7) (5) (7) (8) (8) (8) (8)

Depreciation - - - - - - - - -

EBITA (4) (5) (7) (5) (7) (8) (8) (8) (8)


22 September 2014


Balance sheet

Figure 17: Our forecast SKS balance sheet in millions, unless otherwise stated


Cash and equivalents 51 55 60 75 105 105 105 105 105

Goodwill 256 246 232 217 176 176 176 176 176

Other intangible assets 44 44 39 35 36 34 32 32 32

PPE 384 398 391 375 327 348 361 368 377

Investments 6 7 7 6 6 6 7 7 7

Trade and other receivables 172 180 161 154 142 142 142 142 142

PFI/PPP financial assets 165 53 66 126 196 318 419 491 501

Retirement benefit asset - 5 - - - - - - -

Derivative assets - 0 0 - - - - - -

Deferred tax assets 18 15 16 16 13 13 13 13 13

Inventories 10 10 11 11 9 10 10 11 11

Current tax receivable - - 3 2 2 2 2 2 2

Other (held for sale) - - - 3 3 3 3 3 3

Total assets 1,106 1,012 985 1,019 1,015 1,157 1,269 1,348 1,369

Borrowings (237) (214) (221) (253) (261) (296) (314) (322) (319)

Non-recourse debt (134) (48) (45) (100) (151) (254) (340) (396) (401)

Derivative liabilities (19) (6) (17) (31) (16) (16) (16) (16) (16)

Other non-current liabilities (20) (19) (5) (2) (1) (1) (1) (1) (1)

Deferred tax liabilities (69) (51) (42) (42) (39) (39) (39) (39) (39)

Provisions (37) (46) (54) (57) (46) (42) (41) (42) (44)

Retirement benefit obligation (7) - (8) (9) (13) (13) (13) (13) (13)

Trade and other payables (196) (225) (214) (202) (204) (204) (204) (204) (204)

Current tax payable (2) (5) (8) (7) (11) (11) (11) (11) (11)

Other (held for sale) - - - (3) - - - - -

Total liabilities (721) (615) (615) (706) (742) (876) (978) (1,045) (1,048)

Net assets 385 397 371 314 274 281 291 304 321

Book value per share 114.4p 103.1p 93.4p 79.1p 68.7p 70.3p 72.8p 76.1p 80.4p

Net debt (core) (186) (159) (161) (177) (156) (196) (216) (227) (227)

Non-recourse debt (SPVs) (134) (48) (45) (100) (151) (254) (340) (396) (401)

RoE 7% 7% 7% 6% 8% 7% 7% 8% 10%

Core net debt : EBITDA 1.8x 1.6x 1.5x 2.0x 1.8x 2.4x 2.5x 2.4x 2.2x


22 September 2014


Companies Mentioned (Price as of 18-Sep-2014)

Pennon Group (PNN.L, 796.0p) Shanks Group PLC (SKS.L, 109.0p, NEUTRAL, TP 105.0p) Suez Environnement (SEVI.PA, €13.82) Veolia Environnement (VIE.PA, €13.96)

Disclosure Appendix

Important Global Disclosures

Guy MacKenzie, CFA, Mark Freshney and Vincent Gilles each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for Pennon Group (PNN.L)

PNN.L Closing Price Target Price

Date (p) (p) Rating

13-Oct-11 686.00 800.00 O

26-Jul-12 754.50 710.00 U *

31-Aug-12 736.50 690.00

16-Nov-12 599.50 650.00 N

13-Dec-12 620.50 660.00

07-Mar-13 657.00 670.00

13-Sep-13 699.50 610.00 U

23-Jan-14 684.00 630.00

01-Apr-14 740.50 645.00

01-Aug-14 802.00 655.00

* Asterisk signifies initiation or assumption of coverage.

O U T PERFO RM

U N D ERPERFO RM

N EU T RA L

3-Year Price and Rating History for Shanks Group PLC (SKS.L)

SKS.L Closing Price Target Price

Date (p) (p) Rating

22-Jul-13 83.00 105.00 O *

16-Oct-13 100.00 110.00

08-Nov-13 109.25 110.00 N

09-Apr-14 104.75 100.00

30-May-14 107.00 125.00 O

22-Jul-14 106.50 115.00


O U T PERFO RM

N EU T RA L

22 September 2014


3-Year Price and Rating History for Suez Environnement (SEVI.PA)

SEVI.PA Closing Price Target Price

Date (€) (€) Rating

19-Dec-11 8.63 12.00 N

29-Mar-12 11.36 14.00 O

13-Jun-12 8.88 13.00

02-Jul-12 8.40 11.50

07-Mar-13 10.12 11.00 N

01-Jul-13 9.85 9.00

28-Oct-13 12.96 12.50

02-Jul-14 14.05 13.00

* Asterisk signifies initiation or assumption of coverage. N EU T RA L

O U T PERFO RM

3-Year Price and Rating History for Veolia Environnement (VIE.PA)

VIE.PA Closing Price Target Price

Date (€) (€) Rating

11-Nov-11 9.35 11.00 N

01-Mar-12 10.55 R

08-Mar-13 10.62 9.00 U

01-Jul-13 8.77 9.00 N

28-Oct-13 12.85 10.00 U

15-May-14 13.30 11.00


N EU T RA L

REST RICT ED

U N D ERPERFO RM

The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows:

Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark*over the next 12 months.

Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months.

Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months.

*Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ra tings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector , with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investmen t opportunities. For Latin American and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s tot al return potential within an analyst’s coverage universe. For Australian and New Zealand stocks, 12 -month rolling yield is incorporated in the absolute total return calculation and a 15% and a 7.5% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively. The 15% and 7.5% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively. Prior to 10th December 2012, Japanese ratings were based on a stock’s total retur n relative to the average total return of the relevant country or regional benchmark.

Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months.

22 September 2014


Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months.

Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months.

*An analyst’s coverage sector consists of all companies covered by the analyst within the relevant sector. An analyst may cov er multiple sectors.

Credit Suisse's distribution of stock ratings (and banking clients) is:

Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%)

Outperform/Buy* 44% (55% banking clients)

Neutral/Hold* 40% (50% banking clients)

Underperform/Sell* 14% (43% banking clients)

Restricted 3%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, an d Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock r atings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdin gs, and other individual factors.

Credit Suisse’s policy is to update research reports as it deems appropriate, based on developments with the subject company, the sector or the market that may have a material impact on the research views or opinions stated herein.

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Credit Suisse does not provide any tax advice. Any statement herein regarding any US federal tax is not intended or written to be used, and cannot be used, by any taxpayer for the purposes of avoiding any penalties.

Price Target: (12 months) for Shanks Group PLC (SKS.L)

Method: We value Shanks by discounting the cash-flows of each of its core business segments. We convert all cash-flows to pounds sterling then apply our UK post-tax nominal WACC of c7.6%. We then subtract the non-equity components of enterprise value: net debt, provisions, and defined benefit pension obligation, to arrive at our equity value. We value the UK municipal segment separately at £108m (equity value), a c5% discount to the Directors' valuation from a DCF of the SPV cash-flows at c8%. Our target price is attained by dividing this by the total number of shares outstanding, rounded to the nearest 5p.

Risk: Key risks to our target price include (1) a worse than expected deterioration in the Benelux construction sector, or a quicker recovery; (2) further volatility in the prices of recycled paper, plastics, glass, and metal; (3) non-renewal of industrial cleaning or treatment contracts in the hazardous waste business, or an increase in competitive pricing pressure (3) A weaker economy, as Shanks' commercial and construction waste is cyclical business, (4) failure to execute on Management's €20m cumulative structural cost-cutting plan, or conversely, upgrades to cost-cutting; (6) industry consolidation / M&A.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names

The subject company (SEVI.PA, VIE.PA) currently is, or was during the 12-month period preceding the date of distribution of this report, a client of Credit Suisse.

Credit Suisse provided investment banking services to the subject company (SEVI.PA, VIE.PA) within the past 12 months.

Credit Suisse has managed or co-managed a public offering of securities for the subject company (SEVI.PA) within the past 12 months.

Credit Suisse has received investment banking related compensation from the subject company (SEVI.PA, VIE.PA) within the past 12 months

Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (SEVI.PA, VIE.PA) within the next 3 months.

Important Regional Disclosures

Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report.

The analyst(s) involved in the preparation of this report have not visited the material operations of the subject company (SKS.L, SEVI.PA, VIE.PA, PNN.L) within the past 12 months

Restrictions on certain Canadian securities are indicated by the following abbreviations: NVS--Non-Voting shares; RVS--Restricted Voting Shares; SVS--Subordinate Voting Shares.

Individuals receiving this report from a Canadian investment dealer that is not affiliated with Credit Suisse should be advised that this report may not contain regulatory disclosures the non-affiliated Canadian investment dealer would be required to make if this were its own report.

22 September 2014


For Credit Suisse Securities (Canada), Inc.'s policies and procedures regarding the dissemination of equity research, please visit http://www.csfb.com/legal_terms/canada_research_policy.shtml.

Credit Suisse Securities (Europe) Limited (Credit Suisse) acts as broker to (PNN.L).

The following disclosed European company/ies have estimates that comply with IFRS: (VIE.PA, PNN.L).

Credit Suisse has acted as lead manager or syndicate member in a public offering of securities for the subject company (SEVI.PA) within the past 3 years.

As of the date of this report, Credit Suisse acts as a market maker or liquidity provider in the equities securities that are the subject of this report.

Principal is not guaranteed in the case of equities because equity prices are variable.

Commission is the commission rate or the amount agreed with a customer when setting up an account or at any time after that.

To the extent this is a report authored in whole or in part by a non-U.S. analyst and is made available in the U.S., the following are important disclosures regarding any non-U.S. analyst contributors: The non-U.S. research analysts listed below (if any) are not registered/qualified as research analysts with FINRA. The non-U.S. research analysts listed below may not be associated persons of CSSU and therefore may not be subject to the NASD Rule 2711 and NYSE Rule 472 restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

Credit Suisse Securities (Europe) Limited ......................................................................... Guy MacKenzie, CFA ; Mark Freshney ; Vincent Gilles

For Credit Suisse disclosure information on other companies mentioned in this report, please visit the website at https://rave.credit-suisse.com/disclosures or call +1 (877) 291-2683.

22 September 2014


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