image-Mytilineos

Funded energy transition activities drive profitability

Mytilineos 14 December 2021 Update
Download PDF

Mytilineos

Funded energy transition activities drive profitability

Carbon emissions analysis

Industrials

14 December 2021

Price

€15.31

Market cap

€2,068m

Net debt (€m) at end Q321

804

Number of shares (excluding buybacks)

135.1m

Free float

73.5%

Code

MYTIL

Primary exchange

ASE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

1.5

(2.0)

34.2

Rel (local)

3.7

(1.7)

15.6

52-week high/low

€16.19

€11.36

Business description

Mytilineos is a leading industrial company with an international presence in all five continents. The company is active in Metallurgy, Power and Gas, Sustainable Engineering Solutions and renewables & storage development, operating via a unique synergistic business model.

Next events

FY21 results

February 2022

Analyst

James Magness

+44 (0)20 3077 5756

Mytilineos is a research client of Edison Investment Research Limited

Mytilineos’ emissions reduction targets are more aggressive than any pure-play listed aluminium producer. From 2025, we estimate that Mytilineos will qualify for S&P Global Platts’ ‘low-carbon’ classification for its aluminium. This could potentially support above average long-term pricing premiums as customers are increasingly willing to pay a premium for low-carbon products and services. Mytilineos is well funded to support its investment in the energy transition, with financial flexibility of over €1.4bn, augmented by strong operating cash flow. We estimate earnings (EBITDA) derived from energy transition activities will increase from 25% in 2020 to 60% in 2025, which will help drive EPS growth of 16% pa.

Year end

EBITDA (€m)

EPS
(€)

DPS*
(€)

P/E
(x)

Dividend yield
(%)

12/20

315

0.9

0.38

16.8

2.5

12/21e

345

1.2

0.42

12.8

2.7

12/22e

488

1.9

0.67

8.1

4.4

12/23e

560

2.3

0.79

6.7

5.2

Note: *Final distributed dividend per share.

Earnings upside from emissions reduction

Mytilineos has proactively set emissions reduction targets, including reducing specific emissions by 75%, per tonne of aluminium produced by 2030. Based on our analysis in this report, these are more aggressive targets than any pure-play listed aluminium producer. Its strategy for meeting these targets includes sourcing cleaner electricity and increasing its recycling capabilities. From 2025, we estimate that Mytilineos will qualify for S&P Global Platts’ ‘low-carbon’ classification for its entire aluminium production. This could potentially support above average long-term pricing premiums as customers are increasingly willing to pay a premium for low-carbon products and services (not included in our valuation). We expect most aluminium producers will struggle to decarbonise in the coming decade or so.

Strong operating cash flow generation

Mytilineos is well funded to support its investment in the energy transition. It has a strong balance sheet with financial flexibility of over €1.4bn, having raised €500m in ‘green’ bonds in April. This is augmented by strong operating cash flow across all areas of the business, including the fast-growing renewables and storage development (RSD) business. RSD undertakes engineering, procurement and construction (EPC) projects for third parties along with its own renewables and energy storage developments, which are higher margin. It has the flexibility to sell its own development projects, opportunistically, at the right price, generating significant cash flow for recycling back into the development portfolio, which includes expanding its renewables operating asset base.

Valuation: Attractive upside

Our per-share valuation of €24.0 (57% above the current share price) is based on a 10-year discounted cash flow (DCF) methodology, which reflects Mytilineos’s growth prospects under the energy transition. We cross-check with a sum-of-the-parts (SOTP) peer valuation (€24.0/share).

Energy transition drives business transformation

Mytilineos is a diversified industrial company operating in four main business areas: power generation/supply (Power & Gas division, or P&G); alumina/aluminium production (Metallurgy division); EPC for power and sustainability projects (Sustainable Engineering Solutions division, or SES); and renewables/energy storage development (RDS division). A majority of its operations are in Greece, although it has been increasing international exposure, particularly through its SES and RSD businesses. EBITDA from SES and RSD increases from a combined 8% in 2020 to 26% by 2030.

Exhibit 1: Mytilineos – 2020 EBITDA split by division

Exhibit 2: Mytilineos – 2030e EBITDA split by division

Source: Mytilineos

Source: Edison Investment Research

Exhibit 1: Mytilineos – 2020 EBITDA split by division

Source: Mytilineos

Exhibit 2: Mytilineos – 2030e EBITDA split by division

Source: Edison Investment Research

It has been investing heavily to benefit from the energy transition. It has invested c €1bn over five years (2017–21), including our estimated capex for 2021 of c €0.5bn equating to 5x depreciation, and we expect high returns (ROCE averaging 11% over our 10-year forecast period). Investments have been made in renewables, including 206MW owned renewable generation assets, mostly wind farms, and we expect a further 1.5GW of solar plants to be developed and kept (in P&G); renewable development assets (mostly solar photovoltaic, PV) of over 4.3GW at various stages of development and construction (in RSD); improving aluminium production efficiency; expanding its recycled aluminium capacity; and a high-efficiency 826MW combined cycle gas turbine (CCGT) plant, which is scheduled for commissioning during H122.

Exhibit 3: EBITDA (LHS, €m) and percentage energy transition (RHS)

Source: Mytilineos, Edison Investment Research

We forecast that Mytilineos increases its earnings (EBITDA) from energy transition activities from 25% in 2020 to c 60% in 2025 (and c 65% in 2030), with a significant portion of the increase over 2024–25 due to Mytilineos’s primary aluminium production qualifying as ‘low carbon’ from 2025 (see section below). This translates into a five-year EBITDA CAGR of 32% in energy transition-related activities (from c €80m in 2020 to c €320m in 2025), and a five-year group EPS CAGR of 16%. EPS CAGR is even higher over 2020–23, as by 2025 we taper down our pricing assumption for aluminium (LME price + premium) to more normalised long-term levels (we assume $2,200/t). As discussed in our decarbonisation of aluminium section below, normalising long-term aluminium prices for Mytilineos may be a conservative approach as the aluminium industry decarbonises and as customers increasingly require supply chain accountability, and may be willing to pay a premium for ‘low carbon’ aluminium. Our sensitivity analysis (Exhibit 4) shows that for every $100/t (real) increase in our long-term aluminium price assumption, our valuation increases by $2/share. Our valuation of €24.0/share is based on a normalised long-term aluminium price assumption of $2,200/t, which we keep flat (in real terms) from 2025.

Exhibit 4: Sensitivities of our valuation to changes in long-term aluminium price

Aluminium price from 2025 ($/t)

2,000

2,100

2,200

2,300

2,400

2,500

2,600

Valuation (€/share)

20.0

22.0

24.0

26.0

28.0

30.0

32.0

Source: Edison Investment Research

Q3 results were roughly in line with expectations

Net income (after minorities) for Q321 was €38m, which is 17% above Q320 (€32m), with EPS growth over the same period even higher (we estimate at c 20%) due to the ongoing share buyback programme. EBITDA for Q321 was €86m, which is slightly (4%) below Q320 (€89m). This is mainly due to very strong prior year figures for P&G (€51m in Q320, which was an all-time high, versus €34m in Q321). Nevertheless, we are encouraged by P&G’s performance as it had the best quarter since Q320, assisted by a higher (combined) load factor at the gas thermal plants, which we estimate at 60% in Q321 compared to an estimated 39–58% over the previous three quarters (Q420 to Q221), with H121 affected by maintenance at the Korinthos Power plant.

RSD and SES both continued to show strong results in Q321, with revenue more than tripling compared to Q320 (Q321 revenue of €127m for RSD and €99m for SES). For RSD, EBITDA increased to €8m in Q321 from -€1m in Q320 driven by continued strong project delivery. The EBITDA margin for Q321 was 6%, which is slightly below our full year margin estimate of 7%. However, we expect quarterly results to be lumpy and a higher portion of full development (rather than EPC) projects in Q4 could result in a significantly higher margin. For SES, EBITDA increased to €5m from a loss of €6m, again driven by an increase in project execution. However, the EBITDA margin was just 5% for the quarter, which is lower than the previous two quarters (12% and 14% in Q121 and Q221 respectively). Similar to RSD, the delivery of a small number of large projects can make earnings for SES lumpy; we expect margins for Q421 to be notably higher.

At end Q321, net debt was €804m (as reported by management), which implies net debt to EBITDA of 2.5x. Mytilineos has a strong balance sheet with our forecast net debt to EBITDA falling below 2.0x from 2023. Furthermore, it successfully raised €500m in ‘green’ bonds in April at an interest rate of 2.25%, demonstrating investor confidence in Mytilineos’s ability to deploy capital into value accretive renewable and sustainability projects. Including the bond issue, we estimate it has financial flexibility of more than c €1.4bn (we estimate €0.5bn cash and a €0.9bn credit facility as of end Q321).

Decarbonisation of aluminium

Mytilineos is among the low-carbon leaders

Mytilineos owns Europe’s only vertically integrated aluminium production facility (from bauxite to final aluminium products), with aluminium capacity of 250ktpa (including primary aluminium capacity of 190kt), alumina capacity of 875ktpa and nominal bauxite capacity of 570–580ktpa. It has proactively set emissions reduction targets to reduce total CO2 (scope 1 and 2) emissions in the Metallurgy division by 65% and reduce specific emissions by 75%, per tonne of aluminium produced, by 2030 (relative to 2019 emission levels). These are the most aggressive targets of any pure-play listed aluminium producer (see later in this section). Its strategy for meeting these targets includes sourcing cleaner electricity and increasing its recycling capabilities.

From 2025, we estimate that Mytilineos will qualify for S&P Global Platts’ ‘low-carbon’ classification for its entire aluminium production. This is due to an estimated 70% of electricity sourced from renewables from 2024, which results in less than four tonnes of CO2e (t CO2e) per tonne of primary aluminium produced, the threshold for a ‘low-carbon’ aluminium classification. We allow one year of ‘low-carbon’ production data to be gathered during 2024 before the aluminium is classified as ‘low carbon’ in 2025. This differs from our September report, where we made the simplification that the classification would be achieved during 2024 without significant production data being obtained.

A ‘low-carbon’ aluminium classification could potentially support above average long-term pricing premiums as customers are increasingly willing to pay a premium for low-carbon products and services, which can in turn help them achieve their own emissions reduction targets and/or make their products more attractive to environmentally conscious consumers. Furthermore, as cheap coal plants are replaced by more expensive low carbon power generation sources (not all countries have such favourable solar PV conditions as Greece), the cost curve for aluminium could steepen.

Due to its sustainability efforts, Mytilineos has achieved the Aluminium Stewardship Initiative (ASI) certification ahead of time. This requires various sustainability standards to be met, including an emission intensity for aluminium smelting of less than 8t CO2e per tonne of aluminium produced. In 2020, Mytilineos achieved 7.0t CO2e per tonne of primary aluminium produced, or 5.8t CO2e per tonne of aluminium produced (primary and secondary). We also note that Mytilineos is committed to the Science Based Targets initiative and plans to be aligned with the Task Force on Climate-Related Financial Disclosures (TCFD) recommendations in 2022. In 2021, it joined the CDP climate change initiative and also the official supporters of the TCFD initiative.

An enormous challenge for a majority of global supply

Aluminium production is one of the most carbon-intensive industries, due to the high levels of electricity required for aluminium smelting. It emits nearly 1.1bn tonnes of CO2e (t CO2e) globally (with more than 75% of this from aluminium smelting) and is not helped by China accounting for c 55% of global production. To put it into context, China used 485TWh of electricity in aluminium production in 2020, of which 80% (c 390TWh) was from coal-fired plants, and a majority of these are subcritical (low efficiency). This resulted in 667Mt of CO2e emissions from Chinese aluminium production, which is almost double the UK’s entire CO2e emissions (c 370Mt) and higher than all but the top seven CO2-emitting countries globally.

Exhibit 5: Primary aluminium smelting power consumption by source in 2020 (GWh)

Source: Edison Investment Research analysis of data from International Aluminium Institute (IAI), international-aluminium.org/statistics

The rest of Asia, which is mostly India, produces nearly all its aluminium using coal-fired power generation, and Oceania, which is mostly Australia, produces roughly two-thirds from coal-fired power. China, India and Australia were notably absent from the coal phase-out commitments made at the recent COP26 in Glasgow. On the other hand, Europe, North America and South America (which account for c 20% of global output) produce more than 80% of their primary aluminium using low-carbon (hydro, renewable energy or nuclear) power generation. We estimate that roughly a third of global primary aluminium production uses low-carbon power sources and could potentially be classified as ‘low-carbon’ aluminium according to S&P Global Platts’ pricing classification. S&P Global Platts’ ‘low-carbon’ aluminium classification applies to primary aluminium, with maximum emissions from smelting of four tonnes of CO2e per tonne of aluminium. Excluding China, where supply chain verification is sometimes more challenging, potential ‘green’ aluminium accounts for a quarter of global production.

The aluminium industry must reduce its emissions by 77% by 2050 to meet global climate targets. This will largely be met through shifting to green electricity and assisted by increasing recycling capacity and efficiency (recycled aluminium uses c 5% of the electricity required for primary aluminium production). The International Energy Agency has called for all subcritical coal plants to be shut by 2030; this equates to the removal of c 60% of China’s aluminium production (c 30% of global supply) in less than 10 years. China has put caps on production but will need to take drastic measures to comply with global climate targets.

Carbon emissions analysis for listed aluminium companies

The challenge for the aluminium industry to decarbonise is exacerbated by only c 41% of global aluminium production residing with 11 pure-play listed aluminium producers, as well as Rio Tinto (a diversified miner), Hindalco (an aluminium and copper producer) and Mytilineos (diversified industrials). These are the companies most accountable to investors (and other stakeholders) for reducing their carbon emissions. Of the 14 companies, only eight provide emission-related data and only six of these, accounting for c 21% of global production (13.6Mt in 2020), provide carbon emissions reduction targets.

Exhibit 6: Listed aluminium producers that set a CO2e emissions target

Company

Ticker

Headquarters

Primary aluminium production in 2020 (Mt)

% global production

% renewables
in 2020

Provides emissions-related data?

CO2e reduction target set?

Rusal

0486.HK

Russia

3.93

6.0%

98%

Yes

Yes

Rio Tinto

RIO.LN

London

3.20

4.9%

N/A

Yes

Yes

Alcoa

AA.N

United States

3.00

4.6%

78%

Yes

Yes

Norsk Hydro

NHY.OL

Norway

2.09

3.2%

70%

Yes

Yes

Hindalco

HALC.NS

India

1.23

1.9%

0%

Yes

Yes

Mytilineos

0.19

0.3%

28%

Yes

Yes

Total - targets

13.64

20.9%

Century Aluminum

CENX.OQ

United States

0.80

1.2%

N/A

Yes

No

Alumina

AWC.AX

Australia

0.16

0.2%

33%

Yes

No

Total – emissions data

14.41

22.1%

Six remaining listed companies

12.24

18.4%

No

No

Total – listed

26.83

40.8%

Source: Company data, Edison Investment Research

Exhibit 7: CO2 emissions intensity and targets analysis

Company

2020 CO2 emissions intensity*

2025 emissions intensity reduction target**

Estimated 2025 CO2 emissions intensity*

2030 emissions intensity reduction target**

Estimated 2030 CO2 emissions intensity*

Rusal

< 4

15%

< 4

35%

< 4

Rio Tinto***

>4

No target

>4

30%

< 4

Alcoa

>4

30%

>4

50%

< 4

Norsk Hydro

< 4

10%

< 4

30%

< 4

Hindalco

>>4

25%

>>4

No target

>>4

Mytilineos****

>4

No target

< 4

75%

< 4

Century Aluminum

>4

No target

>4

No target

>4

Alumina

>>4

No target

>>4

No target

>>4

Rio Tinto can be split as:

- Atlantic aluminium

< 4

< 4

< 4

- Pacific aluminium

>4

>4

?

Total group aluminium

>4

No target

>4

30%

< 4

Source: Company data, Edison Investment Research. Note: *From aluminium smelting in t CO2 per tonnes of primary aluminium produced (see paragraph below for explanation on <4t, >4t and >>4t classifications and limitations). **From various baseline years. ***Equity basis. ****Mytilineos's target is per tonne of aluminium produced (primary & secondary).

Exhibit 7 is intended as a rough guide for assessing the ambitions of those listed companies that provide emission-related data. These include many of the best-in-class aluminium producers. The remaining listed companies and other non-listed companies, comprising almost 80% of global production, typically do not provide relevant emissions-related data and emissions reduction targets. There are nuances relating to data consistency for the reported emissions intensities and corresponding emissions reduction targets. Thus, in Exhibit 7, we classify CO2e emissions intensity from aluminium smelting (normalised by primary aluminium production) according to three buckets: 1) <4t CO2e/t, which potentially equates to ‘low-carbon’ aluminium; 2) >4t CO2e/t, which indicates average emissions intensity above that required for ‘low-carbon’ aluminium; and 3) >>4t CO2e/t, which indicates average emissions intensity significantly above that required for ‘low-carbon’ aluminium and would apply to companies reliant mostly on coal-fired generation, which can equate to emissions intensities of above 15t CO2e/t. We note that even within these buckets, an averaging effect over the entire company can distort the fact that some production facilities are below 4t CO2e/t and others are above 4t CO2e/t. For example, Rio Tinto provides enough information for us to infer that its aluminium business is split between Atlantic, mostly Canada, where emission intensities at production plants are below 4t CO2e/t, and Asia-pacific, where emissions intensities are on average above 4t CO2e/t. Other large aluminium producers, with production plants split across geographies, do not provide this level of detail. Alcoa’s production facilities are based in areas including Canada, Iceland and Norway (as well as the US and Australia), so we believe some of this production is likely to be below 4t CO2e/t despite its average emissions intensity currently being above 4t CO2e/t.

In summary, Rusal is likely to be the only company whose entire aluminium production currently qualifies as ‘low-carbon’ as it uses 98% renewable energy. A significant portion of Norsk Hydro’s and Alcoa’s production also likely qualifies, as they use 70% and 78% renewable energy, respectively, although there might be potential to increase the portion as they deliver on their emission reduction targets. In particular, we note that Alcoa has production facilities in the US and Australia which run on coal. Likewise, Rio Tinto has further scope to increase its portion of ‘low-carbon’ aluminium as it delivers on its emission reduction targets, potentially reducing the carbon exposure of its Pacific aluminium business. Hindalco has significant potential to decarbonise as it is currently fully exposed to coal. However, its 25% emissions reduction target is from a 2012 base year, and it has already achieved an 18% reduction since 2012 (without moving away from coal, through measures including efficiency saving).

Mytilineos sets by far the most aggressive target of 75% reduction in emissions intensity (normalised by primary and secondary aluminium production) by 2030. Based on our review of sustainability reports for emissions reduction targets, Mytilineos appears to be the only company that is planning a material increase in secondary aluminium production. We estimate that its secondary aluminium production increases from c 20% of total production in 2020 to 40% in 2030. We estimate that Mytilineos could still achieve a 65% emissions intensity reduction based on its plans to decarbonise primary aluminium production alone (ie if secondary aluminium production were constant over the period). We estimate that Mytilineos’s emissions intensity for aluminium production falls below 4t CO2e per tonne of product in 2024 for primary aluminium production (3.2t CO2e per tonne of primary aluminium in 2024).

Exhibit 8: Estimated emission intensity from aluminium production (t CO2e per tonne of product)*

Source: Mytilineos, Edison Investment Research. Note: *We estimate that Mytilineos’s carbon intensity could be less than four t CO2e per tonne of primary aluminium in 2024. However, we allow one year of ‘low-carbon’ production data to be gathered during 2024 before the aluminium is classified as ‘low carbon’ in 2025.

Increasing demand exacerbates challenge of decarbonisation

This enormous challenge for the supply side, which the International Aluminium Institute (IAI) estimates could cost $0.5–1.5tn, is exacerbated by strong demand for aluminium due to the energy transition. It is a lightweight material used in electric vehicles, for ‘green buildings’ and power cabling. Based on the IAI’s projections for a sub-two degrees global warming scenario, consistent with the Paris Agreement (Beyond 2°C Scenario or B2DS), demand (including recycled aluminium scrap) could increase by 80% to c 170Mt by 2050 (from 95Mt in 2018). The IAI suggests that secondary aluminium (including recycled scrap) production will increase its share from a third in 2018 (31Mt) to nearly 50% (c 80Mt) by 2050, and that up to a 40% increase in primary aluminium production is required (from 64Mt in 2018 to 90Mt in 2050), albeit produced using green electricity sources.

Valuation

We use a 10-year DCF analysis (on a SOTP basis) which, we feel, considers the longer-term impact of the energy transition. We place less emphasis on peer valuation, using it only as a cross-check. Our DCF approach suggests a per-share valuation of €24.0 (rounded), which implies c 57% upside to the current share price (€15.31) and is in line with our last published valuation (in September 2021).

25BDCF

The key assumptions and drivers for our cash flow model are as follows:

2% pa inflation applies to forecasts made in real terms over a 10-year explicit cash flow period.

A 1% terminal growth rate for Metallurgy, P&G and SES, and 2% for RSD, which is conservative, particularly for businesses that should benefit from strong long-term growth rates associated with the energy transition.

A WACC of 7.0%, based on a beta of 1.0x, cost of equity of 10.7% and gross cost of debt of 2.5% (with total debt at an assumed 40% of capital).

Terminal capex (included in the terminal cash flow) for the P&G and Metallurgy divisions representing 1.5x depreciation.

RSD and SES are not capex-intensive businesses; however, we adopt capex assumptions equating to 2.5x and 1.5x depreciation respectively throughout our forecast periods.

We use the number of shares excluding share repurchases (135.3m) in arriving at our value per share of €24. This is consistent with using the number of shares in issue (142.9m), but with adding Mytilineos’s investment in its own shares (c 7.7m shares repurchased) to the equity valuation.

Exhibit 9: DCF-based SOTP valuation

Components

EV (€m)

Per share (€)

EBITDA 2022e (€m)

Implied EV/EBITDA (x)

P&G

1,327

9.8

149

8.9x

Metallurgy

1,697

12.5

249

6.8x

RSD

907

6.7

42

21.7x

SES

529

3.9

54

9.8x

Other*

(6)

Enterprise value

4,460

33.0

494

9.0x

Net cash/(debt)**

(829)

(6.1)

Other adjustments*

(370)

(2.7)

Total equity value

3,260

24.1

Number of shares (m)

135.1

Value per share (€) (rounded)

24.0

Current share price (€)

15.3

% upside/(downside)

57%

Source: Edison Investment Research. Note: Priced at 3 December 2021. *Includes associates, minority interests, employment benefits liability and an adjustment for c €14m pa of post-tax cash flow (which includes other items of €6m pa) not included in divisional forecasts. **Pro rated net debt between start and end of year (adjusted for estimated dividend and share repurchase payments), as the first period of our DCF is based on pro rated (for remaining days in the year) FY21 free cash flow.

Exhibit 10: Sensitivities of DCF valuation to WACC and terminal growth rates

Share valuation (€/share)

WACC

5.50%

6.00%

6.50%

7.00%

7.50%

8.00%

8.50%

0.0%

29.1

26.1

23.6

21.4

19.6

18.0

16.5

0.5%

31.5

28.0

25.1

22.7

20.6

18.8

17.3

1.0%

34.4

30.3

26.9

24.0

21.8

19.8

18.1

Terminal growth rate

1.5%

38.2

33.1

29.1

25.8

23.2

20.9

19.0

2.0%

43.2

36.7

31.8

28.0

24.8

22.3

20.1

2.5%

50.2

41.5

35.3

30.6

26.9

23.9

21.4

3.0%

60.8

48.3

39.9

33.9

29.4

25.8

23.0

Source: Edison Investment Research. Note: Stated terminal growth rate (TGR) applies to all divisions, expect RSD; TGR for RSD is stated TGR + 1%.

Peer valuation: Divisional SOTP

We use peer valuation as a cross-check, rather than driving our valuation, as we believe near-term earnings multiples do not accurately reflect Mytilineos’s long-term growth prospects. In our approach, we use EV/EBITDA multiples (using current EV) applied to peers for each division. We use 2022e EBITDA given that 2021 has nearly ended.

On first impression, the peer valuation suggests €18.5/share, which is €5.5/share below our valuation of €24.0. However, we do not believe the multiples adequately reflect the competitive strengths or the growth prospects of Mytilineos’s divisions versus their peers:

The SES division benefits from superior margins and growth compared to its peer group, EBITDA 2022 margin of 12% versus 8% for peers and EBITDA CAGR of 163% in 2020-23e (from a restated low 2020 base) versus 15% for peers.

The RSD division enjoys significantly higher growth prospects compared to its peers (EBITDA CAGR of 56% in 2020–23e versus 15% for its peers).

The Metallurgy division benefits from superior margins (EBITDA 2022 margin of 32% versus 20% for its peers) and is an early mover in the transition to green and sustainable aluminium. Many of its peers are Asian, operating production facilities using captive coal plants; they will need to invest heavily as they come under increasing pressure to decarbonise.

The renewable energy sources (RES) power generation business (within the P&G business unit) has significantly higher long-term growth prospects than its peers, with an EBITDA CAGR of 20% in 2020–23e vs 2% for its peers, and we expect growth beyond 2023 will also be higher than its peers as we estimate that it adds solar capacity of 300MW pa in 2022–26. In addition, margins are higher (EBITDA 2022 margin of 76% vs 53% for its peers).

The earnings benefit from the new CCGT plant, which is expected to be commissioned by end-2021, is only partially included in our 2022 EBITDA forecast (for CCGT plants) as we expect the plant to ramp up production over H122.

We apply a 20% premium to multiples for each of these divisions/business units. Collectively, this would increase the valuation by c €5.5/share to an adjusted €24.0/share, which is consistent with our DCF valuation.

Exhibit 11: Peer group multiple analysis

Implied EV
(€m)

EV/EBITDA
(x)

EBITDA
(€m)

EBITDA
(% CAGR)

EBITDA
(% margin)

2022

2022

2020–23e

2022

Comps – median metrics:

 

 

 

 

 

CCGT power generation

7.9

1,286

12%

20%

RES power generation

12.5

367

2%

53%

Supply

4.5

Power & Gas

Metallurgy

5.4

1,162

23%

20%

RSD (i)

12.4

1,385

15%

27%

SES

8.3

411

15%

8%

Mytilineos:

 

 

 

 

 

CCGT power generation

726

7.9

92

3%

19%

RES power generation

608

12.5

49

20%

76%

Supply

38

4.5

8

Power & Gas

1,372

9.2

149

Metallurgy

1,340

5.4

249

20%

32%

RSD

519

12.4

42

56%

8%

SES

449

8.3

54

163%

12%

3,681

Net debt and other adjustments*

(1,200)

Equity value

2,481

Number of shares (m)

135.1

Value per share (€) (rounded)

18.5

Fair value premium** (€)

5.5

Adjusted value per share (€)

24.0

Source: Refinitiv, Edison Investment Research. Note: Priced at 3 December 2021. *Pro rated net debt between start and end of year (adjusted for estimated dividend and share repurchase payments), as the first period of our DCF is based on pro rated (for remaining days in the year) FY21 free cash flow. **20% premium applied to some business areas to reflect fair value (see commentary in the paragraph above the table).

Financials

Please refer to our September outlook report for detailed financials and assumptions by division. Following the Q321 results, we made the following minor changes:

For Metallurgy, we have increased our aluminium price forecasts to reflect an increase in Bloomberg consensus prices over 2021–23. However, we have reduced both primary aluminium and alumina production margins. From 2024, the net impact of our changes is minimal (c 1%).

For SES, we have decreased the EBITDA margin to 11% from 12% to reflect the lower margins reported in Q321, however, recognising the lumpy nature of the business. Our forecasts remain unchanged from 2022.

For RSD, we have increased our 2021 volume sales forecast to 525MW from 500MW to reflect the strong revenue in Q3. However, we have reduced our EBITDA margin by 0.25pp. Our forecasts remain unchanged from 2022.

For P&G, we increase our 2021 EBITDA forecast for CCGT power generation to reflect an increase in load factor, which is netted off to some extent by a slight decrease in our EBITDA forecast for RES power generation due to a reduction in load factor combined with moving our estimated timing for commissioning a 43MW wind farm from H121 to H122. This also has a small negative impact on our forecast EBITDA for 2022. Our forecasts remain unchanged from 2023.

Exhibit 12: Changes to Edison forecasts

Actual

Edison new

Edison old

Difference (%)

2020

2021e

2022e

2023e

2021e

2022e

2023e

2021e

2022e

2023e

Metallurgy

143

165

249

249

173

247

231

-4%

1%

8%

SES

3

44

54

60

48

54

60

-8%

0%

0%

RSD

15

23

42

57

23

42

57

0%

0%

0%

P&G

157

118

149

200

113

152

200

5%

-2%

0%

Other

(4)

(6)

(6)

(6)

(4)

(4)

(4)

N/M

N/M

N/M

EBITDA

315

345

488

560

353

491

544

-4%

-1%

3%

Net income*

129

163

261

305

170

264

292

-7%

-1%

5%

Source: Edison Investment Research Note: *Adjusted for minorities.

Exhibit 13: Financial summary

€m

2017

2018

2019

2020

2021e

2022e

2023e

31 December

PROFIT & LOSS

Revenue

 

 

1,527

1,527

2,256

1,899

2,418

3,177

3,752

Cost of Sales

(1,209)

(1,229)

(1,922)

(1,559)

(2,046)

(2,645)

(3,140)

Gross Profit

318

297

334

339

372

532

612

EBITDA

 

 

305

283

313

315

345

488

560

Operating Profit (before except.)

232

204

219

225

251

377

442

Exceptionals

(8)

Operating Profit

224

204

219

225

251

377

442

Other

0

0

(12)

(34)

1

1

1

Net Interest

(43)

(38)

(27)

(18)

(47)

(56)

(58)

Profit Before Tax (norm)

 

181

166

180

172

205

323

385

Profit Before Tax (reported)

 

181

166

180

172

205

323

385

Tax

(24)

(23)

(29)

(28)

(31)

(52)

(67)

Profit After Tax (norm)

157

143

150

144

174

271

318

Profit After Tax (FRS 3)

157

143

150

144

174

271

318

Minority interests

(3)

1

(3)

(14)

(11)

(10)

(13)

Discontinued activities

(0)

(4)

(3)

(1)

(1)

(1)

(1)

Average Number of Shares Outstanding (m)

142.9

142.9

142.9

141.2

135.6

135.1

135.1

EPS - normalised (€)

 

 

1.080

1.009

1.033

0.923

1.199

1.931

2.257

EPS - normalised and fully diluted (€)

1.080

1.009

1.033

0.923

1.199

1.931

2.257

EPS - reported (€)

 

 

1.078

0.984

1.014

0.913

1.188

1.920

2.246

Final distributed dividend per share (€

0.32

0.36

0.36

0.38

0.42

0.67

0.79

Gross Margin (%)

20.8

19.5

14.8

17.9

15.4

16.7

16.3

EBITDA Margin (%)

20.0

18.5

13.9

16.6

14.3

15.4

14.9

Operating Margin (before GW and except.) (%)

15.2

13.4

9.7

11.8

10.4

11.9

11.8

BALANCE SHEET

Fixed Assets

 

 

1,864

1,858

1,824

1,881

2,278

2,411

2,534

Intangible Assets

445

445

446

446

445

443

441

Tangible Assets

1,137

1,142

1,121

1,161

1,560

1,695

1,820

Right of use assets

0

0

48

45

45

45

45

Investments/Other

282

272

209

227

227

227

227

Current Assets

 

 

1,354

1,483

2,334

2,111

2,549

3,009

3,418

Stocks

159

184

214

290

339

413

488

Debtors

1,018

1,059

1,405

1,319

1,654

2,039

2,334

Cash

161

208

713

493

547

547

587

Other

16

32

1

9

9

9

9

Current Liabilities

 

 

(890)

(871)

(1,148)

(1,117)

(1,344)

(1,709)

(2,010)

Creditors

(760)

(806)

(1,066)

(1,042)

(1,269)

(1,586)

(1,887)

Short term borrowings

(130)

(64)

(83)

(76)

(75)

(123)

(123)

Long Term Liabilities

 

(897)

(909)

(1,376)

(1,302)

(1,801)

(1,801)

(1,801)

Long term borrowings

(599)

(534)

(1,051)

(955)

(1,454)

(1,454)

(1,454)

Other long term liabilities

(298)

(375)

(325)

(348)

(348)

(348)

(348)

Net Assets (ex minority)

 

1,431

1,561

1,634

1,572

1,681

1,909

2,140

CASH FLOW

Operating Cash Flow

 

253

211

270

316

165

324

467

Net Interest

(28)

(18)

(11)

(27)

(37)

(46)

(48)

Tax

(6)

(18)

(2)

(36)

(21)

(37)

(57)

Capex

(127)

(84)

(127)

(155)

(481)

(235)

(231)

Acquisitions/disposals

1

19

(4)

(20)

0

0

0

Financing

0

0

0

(56)

(20)

0

0

Dividends

(5)

(46)

(52)

(50)

(51)

(56)

(91)

Other

(37)

114

(110)

(41)

1

0

0

Net Cash Flow

50

178

(37)

(69)

(444)

(49)

40

Opening net debt/(cash)

 

618

568

390

421

538

981

1,030

HP finance leases initiated

0

0

6

(48)

0

0

0

Other

0

(0)

(0)

0

(0)

(0)

0

Closing net debt/(cash)

 

568

390

421

538

981

1,030

990

Source: Company accounts, Edison Investment Research

General disclaimer and copyright

This report has been commissioned by Mytilineos and prepared and issued by Edison, in consideration of a fee payable by Mytilineos. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

General disclaimer and copyright

This report has been commissioned by Mytilineos and prepared and issued by Edison, in consideration of a fee payable by Mytilineos. Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Share this with friends and colleagues