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Resilient margins protect profitability

Mytilineos 23 October 2020 Update
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Mytilineos

Resilient margins protect profitability

Financial and operating update

Industrials

23 October 2020

Price

€9.7

Market cap

€1,390m

Net debt (€m) at 30 June 2020

477

Shares in issue

142.9m

Free float

73.4%

Code

MYTI

Primary exchange

ASE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

9.6

23.5

(4.4)

Rel (local)

12.4

31.4

37.2

52-week high/low

€10.33

€5.01

Business description

Mytilineos is a leading industrial company with international presence in all five continents. The company is active in metallurgy, power and gas, sustainable engineering solutions and in renewables & storage development, operating via a unique synergistic business model.

Next events

9 months trading update

4 November 2020

Analyst

Carlos Gomes

+44 (0)20 3077 5700

Mytilineos is a research client of Edison Investment Research Limited

Mytilineos’s H120 results proved that despite the challenging environment the metallurgy, power and gas industries are facing, the company’s strategy is resilient and capable of withstanding current headwinds. While H120 EBITDA fell by 17% versus H119 to €145m, the power and gas business EBITDA increased by 41% to €71m. This business segment was a key driver in offsetting the impacts of COVID-19 on results. Net debt was also reduced to €477m, despite Mytilineos's ongoing investment programme, which is in full deployment, and the company keeping its dividend distribution. Beyond 2020, growth of the renewable and supply businesses as well as the commissioning of a new CCGT plant should provide a boost to profits. Our updated blended valuation is €13.0/share.

Year end

EBITDA*
(€m)

Net income**
(€m)

EPS*
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/18

284

141

0.99

0.36

9.6

3.7

12/19

313

145

1.01

0.36

9.4

3.7

12/20e

310

139

0.97

0.34

10.0

3.5

12/21e

332

164

1.15

0.40

8.5

4.1

Note: *EBITDA and EPS are normalised, excluding amortisation of acquired intangibles,

exceptional items and share-based payments. **Net income is shown after minorities.

Power and gas contributed 49% of group EBITDA

In H120 the power and gas business unit proved the importance of an integrated business strategy. As electricity demand decreased due to lockdown measures implemented as a response to COVID-19, the business unit increased its profitability by 41% compared to H119, generating EBITDA of €71m. This was possible due to Mytilineos’s ability to acquire low spot price natural gas volumes and supply it at highly competitive prices.

Synergies from integrated business proving valuable

COVID-19 had a serious impact on economic activity and brought instability and uncertainty to global markets. However, the pandemic brought to light Mytilineos’s structural advantages and natural hedges. Mytilineos managed to mitigate the unprecedented turbulence brought by this pandemic with turnover hit, but margins remaining resilient. The metallurgy business unit saw weaker prices; however, it benefited from lower operating costs. Metallurgy’s new cost optimisation and refinery improvement programme Hephaestus is also in progress and scheduled to be completed by the end of 2021. At the same time, the new 826MW H-Class CCGT, high efficiency plant is expected to be commissioned in Q421.

Valuation: Blended valuation of €13.0/share

Following the H120 trading update, we have revised our forecasts with FY20 EBITDA increasing by 10% to €310m. Based on our updated FY20 estimates, the median result of our analysis indicates a value of €13.0/share. Our DCF-based valuation currently stands at €14.0/share and the EV/EBITDA multiple valuation has increased to €12.0/share due to higher profitability estimates and market valuations of Mytilineos’s wind power and RSD + SES peers. Our valuation implies c 30% upside from current levels.

Overcoming macroeconomic headwinds

Despite the challenging environment the metallurgy and power and gas industries are facing globally, Mytilineos’s H120 EBITDA only fell by 17.2% compared to H119, to €145.1m. The power and gas business unit was a key driver in offsetting the impact of COVID-19 on overall financial performance, with the business unit’s EBITDA increasing from €50.3m in H119 to €71.0m in H120, mainly due to a higher spark spread (+36.5%). Consolidated net profit stood at €69m versus €81.6m during the same period of 2019. Net debt was reduced from €530m in Q120 to €477m in Q220, while net debt to EBITDA ratio was kept at 1.69x despite the company's ongoing investment programme, which is in full deployment. Cash stood at €606m by the end of the period despite the €300m early bond repayment in June 2020 (originally set to expire in June 2022). The company has no major debt maturities until the end of 2024. Beyond FY20, further growth is expected from the renewable and supply businesses, additional cost reductions and the anticipated commissioning of a new CCGT plant (Q421) should provide a boost to profits.

Exhibit 1: Key financial figures H120 versus H119

H120

H119

H120 vs H119

Turnover (€m)

927

991

-6%

EBITDA (€m)

145

175

-17%

Earning after tax and minorities (€m)

69

82

-15%

EPS (€)

0.485

0.571

-15%

Net debt (€m)

477

422

13%

EBITDA margin (%)

16%

18%

-11%

EATam margin (%)

7%

8%

-9%

Source: Mytilineos, Edison Investment Research

COVID-19 has had a serious impact on economic activity and brought instability and uncertainty to global markets. Despite this, Mytilineos managed to mitigate the unprecedented turbulence brought by the pandemic. The pandemic brought to light Mytilineos’s structural advantages and natural hedges, reinforcing its position as a resilient and flexible operator within its different business units, setting the foundations for further growth in the future. The company is targeting to double EBITDA by 2025 with more than 40% EBITDA contribution to come from energy transition initiatives.

Exhibit 2: H120 turnover breakdown by business unit

Exhibit 3: H120 EBITDA breakdown by business unit

Source: Mytilineos, Edison Investment Research

Source: Mytilineos, Edison Investment Research

Exhibit 2: H120 turnover breakdown by business unit

Source: Mytilineos, Edison Investment Research

Exhibit 3: H120 EBITDA breakdown by business unit

Source: Mytilineos, Edison Investment Research

On the ESG front, the company continues to score highly with industry-leading ESG rating agencies as it maintains its commitment to significant global sustainable development initiatives such as UN Sustainable Development Goals and the CDP (formerly known as the Carbon Disclosure Project).

The MSCI index quarterly review is due in November 2020 and given the current weight of the company in the Athens Stock Exchange, a potential inclusion in the index would allow Mytilineos to access a broader number of investors.

Metallurgy operations remain at full capacity

Despite the weaker pricing environment, the metallurgy business unit has demonstrated strong resilience as operations continued, supported by the cost-optimisation initiatives. These resulted in a production cost decrease of c 25% in alumina and c 20% in aluminium compared to H119. At the same time, the decrease in metals’ prices affected the business unit turnover, which stood at €242m, down 18% versus the same period of 2019, while EBITDA in H120 decreased to €64m compared to €92m in H119.

The new cost and productivity competitiveness programme, Hephaestus, is in progress with some delays due to the effects of the pandemic on logistics and transport of equipment and is scheduled to be completed by the end of 2021. Cost optimisations from Hephaestus target €35m in recurring EBITDA benefits.

Power and gas becoming the highest contributor to profitability

During the first half of 2020 the power and gas business unit proved the importance of an integrated business strategy. As electricity demand decreased versus the same period of 2019 due to COVID-19 and lockdown measures, the business unit gained market share while posting a profitability increase. While the turnover was €444m in H120 versus €461m in H119, EBITDA increased by c 41% from €50m to €71m. The increase was possible due to the ability of Mytilineos’s trading business to acquire natural gas at low spot prices and supply it at highly competitive prices on the domestic market. Mytilineos has a long experience in the supply of natural gas from a wide network of large international suppliers and benefited from current low market prices, accounting for more than 40% of natural gas imports in Greece. As a result, the cost of gas supply for Mytilineos was significantly lower than the average market price in Greece in H120.

Despite reduced electricity consumption in Greece, the total power generation of Mytilineos’ thermal and renewable energy plants remained stable overall at 2.2TWh in the first half of 2020. With regard to the electric power and natural gas supply, Protergia, Mytilineos’s electricity and natural gas unit, increased its market share to 7.7% in June 2020, steadily strengthening its market position. The construction of the new 826MW H-Class CCGT, high efficiency plant is advancing according to schedule and is expected to be commissioned during Q421. It will contribute to Greece’s transition to an energy mix that has a smaller carbon footprint.

RSD benefiting from the sale of solar park portfolio in Greece

The new renewables and energy storage development (RSD) business unit registered a turnover and EBITDA of €179m and €13m respectively in H120 compared to €72m and €3m in H119. The business unit conducted its first build-operate-transfer (BOT) project sale of a 47MW solar park portfolio in Northern and Central Greece, for a total consideration of €45.8m in Q120. This transaction is the first in a total pipeline of c 600MW in solar projects to be developed, constructed and disposed of within the next 18–24 months. The RSD business unit is well placed to capitalise on the international trend of increasing installed capacity of solar projects.

SES: The new business unit focused on energy transition

The year 2020 is one of transition, as the EPC business unit is being transformed into Sustainable Engineering Solutions (SES) and is expanding into sustainable development infrastructures, while continuing to pursue opportunities in the construction of thermal plants and selected construction projects. The new business unit is now also focusing on projects such as solid and liquid waste management, hybrid and off-grid energy projects, energy upgrade projects and innovative first-of-a-kind energy projects (such as hydrogen projects).

In H120, performance was weaker with turnover of €62m. This is mainly due to the effects of COVID-19 pandemic that caused delays in the execution of existing projects while also postponing the signing of new ones.

Valuation and estimates

In this note we update our valuation and estimates taking H120 results into consideration. Exhibit 4 shows our changes to forecasts versus our previous note.

Exhibit 4: Edison changes to forecasts

Key financial figures

Actual

New

Old

Difference

2019

2020e

2021e

2020e

2021e

2020e

2021e

Turnover (€m)

2,256

1,901

2,143

2,124

2,644

-10%

-19%

EBITDA (€m)

313

310

332

282

339

10%

-2%

Earnings after tax and minorities (€m)

145

139

164

133

170

5%

-3%

EPS (€)

1.014

0.972

1.149

0.928

1.189

5%

-3%

Net debt (€m)

421

524

612

528

612

-1%

0%

EBITDA margin (%)

14%

16%

15%

13%

13%

23%

21%

EATam margin (%)

6%

7%

8%

6%

6%

17%

19%

Source: Mytilineos, Edison Investment Research

We value Mytilineos using a blend of DCF and peer group EV/EBITDA multiples by division, arriving at a combined valuation of €13.0/share. Our valuation implies c 30% upside to current share price levels. This is supported by management’s view on share price weakness as Mytilineos has implemented its share buyback programme with more than 3.6m shares acquired (c 2.5% of share capital) and c €30.1m spent on the programme since its announcement on 1 June 2020 until the time of writing.

Peer-based valuation

Despite an increase in profitability and the positive impact on the valuation from the upgrade in our FY20 EBITDA forecast, it has been largely offset by the lower valuation multiples of the metallurgy and gas-fired power plant peers. We have also observed an increase in valuations for wind power peers and RSD + EPC businesses, but given their lower contributions to overall EBITDA, the impact did not result in a higher total enterprise value. Overall, based on the EV/EBITDA approach, we arrived at a valuation of €12.0/share, a 10% increase over our previous estimate of €10.9/share.

Exhibit 5: Valuation benchmarking

FY20e (€m)

Implied EV
(€m)

Forecast EBITDA
(€m)

Applied multiple EV/EBITDA (x)

Metallurgy

760

129

5.9

Power & gas

1,082

146

7.4

Gas-fired plants

433

71

6.1

Wind

404

40

10.2

Supply

245

35

7.0

RSD + SES

347

35

10.0

Total EV

2,189

310

7.1

- FY19 net debt

(421)

- provisions

(29)

- minorities

(50)

+ associates

24

Equity value

1,713

Number of share (m)

142.9

Value per share (€)

12.0

Source: Edison Investment Research, Refinitv multiple estimates at 20 October 2020

DCF based SOTP valuation

Our updated DCF-based SOTP analysis also suggests a valuation of €14.0/share, 4% above our previous estimate of €13.4/share thanks to higher forecast profitability and FY20e earnings.

Exhibit 6: DCF-based SOTP approach

FY20e

EV
(€m)

EBITDA
(€m)

Implied EV/EBITDA (x)

Comment

Metallurgy

1,326

129

10.3

DCF, 7.5% WACC, 0.5% terminal growth rate

Power & gas

959

146

6.6

Gas-fired plants

443

71

6.2

DCF, 7.5% WACC. Includes value creation from new CCGT project

Wind

340

40

8.6

DCF, €1.85m/MW

Supply

175

35

5.0

5x EV/EBITDA multiple

RSD + SES

185

35

5.3

DCF, 7.5% WACC, 0.5% terminal growth rate

Total EV

2,469

310

8.0

 

- FY19e net debt

(421)

- provisions

(29)

- minorities

(50)

+ associates

24

Equity value

1,994

Number of shares (m)

142.9

Value per share (€)

14.0

Source: Edison Investment Research

Exhibit 7: Financial summary

Accounts: IFRS, year-end: 31 December, €m

 

2018

2019

2020e

2021e

2022e

2023e

INCOME STATEMENT

 

 

 

 

 

 

 

Total revenues

 

1,527

2,256

1,901

2,143

2,429

2,505

Cost of sales

 

(1,229)

(1,922)

(1,574)

(1,791)

(2,028)

(2,096)

Gross profit

 

297

334

327

352

401

409

SG&A (expenses)

 

(88)

(127)

(119)

(124)

(135)

(136)

R&D costs

 

(0)

(0)

(0)

(0)

(0)

(0)

Other income/(expense)

 

(5)

12

11

12

13

13

Exceptionals and adjustments

 

0

0

0

0

0

0

Reported EBIT

 

204

219

219

239

278

286

Finance income/(expense)

 

(38)

(27)

(16)

(28)

(32)

(31)

Other income/(expense)

 

1

(12)

(34)

(14)

(34)

(34)

Reported PBT

 

167

180

169

197

212

221

Income tax expense (includes exceptionals)

 

(27)

(32)

(27)

(30)

(32)

(33)

Reported net income

 

140

148

142

168

180

188

Minorities

 

1

(3)

(3)

(4)

(4)

(4)

Net Income After Minorities

 

141

145

139

164

176

184

Basic average number of shares, m

 

142.9

142.9

142.9

142.9

142.9

142.9

Basic EPS (€)

 

0.99

1.01

0.97

1.15

1.23

1.28

DPS (€)

 

0.36

0.36

0.34

0.40

0.43

0.45

EBITDA

 

284

313

310

332

378

386

BALANCE SHEET

 

Property, plant and equipment

 

1,142

1,121

1,267

1,412

1,444

1,445

Goodwill

 

209

215

215

215

215

215

Intangible assets

 

235

232

232

232

232

232

Other non-current assets

 

272

257

257

257

256

256

Total non-current assets

 

1,858

1,824

1,970

2,115

2,146

2,148

Cash and equivalents

 

208

713

305

217

235

306

Inventories

 

184

214

221

227

234

241

Trade and other receivables

 

1,059

1,405

1,514

1,634

1,780

1,941

Other current assets

 

32

1

1

1

1

1

Total current assets

 

1,483

2,334

2,041

2,080

2,250

2,489

Non-current loans and borrowings

 

534

1,051

746

746

746

746

Other non-current liabilities

 

375

325

309

293

277

286

Total non-current liabilities

 

909

1,376

1,055

1,039

1,023

1,033

Trade and other payables

 

608

815

897

986

1,085

1,194

Current loans and borrowings

 

64

78

78

78

78

78

Other current liabilities

 

198

255

255

254

254

253

Total current liabilities

 

871

1,148

1,229

1,318

1,417

1,525

Equity attributable to company

 

1,508

1,584

1,675

1,781

1,896

2,015

Non-controlling interest

 

53

50

53

56

60

64

CASH FLOW STATEMENT

 

Profit for the year

 

144

150

142

168

180

188

Taxation expenses

 

23

29

27

30

32

33

Net finance expenses

 

38

25

51

43

67

66

Depreciation and amortisation

 

81

97

90

92

100

100

Other adjustments

 

(7)

(14)

(26)

(26)

(26)

(1)

Movements in working capital

 

(68)

(20)

(34)

(37)

(53)

(60)

Interest paid / received

 

(31)

(21)

(51)

(43)

(67)

(66)

Income taxes paid

 

(18)

(2)

(27)

(30)

(32)

(33)

Cash from operations (CFO)

 

162

244

172

197

201

227

Capex

 

(85)

(134)

(236)

(237)

(131)

(101)

Acquisitions & disposals net

 

20

2

0

0

0

0

Other investing activities

 

18

10

10

10

10

10

Cash used in investing activities (CFIA)

 

(47)

(122)

(227)

(227)

(121)

(91)

Net proceeds from issue of shares

 

0

0

0

0

0

0

Movements in debt

 

(128)

476

(305)

0

0

0

Dividends paid

 

(46)

(52)

(49)

(57)

(62)

(64)

Other financing activities

 

105

(40)

0

0

0

0

Cash from financing activities (CFF)

 

(69)

383

(354)

(57)

(62)

(64)

Increase/(decrease) in cash and equivalents

 

47

506

(408)

(88)

18

71

Cash and equivalents at end of period

 

208

713

305

217

235

306

Net (debt)/cash

 

(390)

(421)

(524)

(612)

(594)

(523)

Movement in net (debt)/cash over period

 

178

(30)

(103)

(88)

18

71

Source: Mytilineos, Edison Investment Research


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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 £49,500 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.

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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 £49,500 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.

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Copyright: Copyright 2020 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.

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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

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