Short-term value, long-term growth

Mytilineos 19 September 2019 Update
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Mytilineos

Short-term value, long-term growth

H1 results

General industrials

19 September 2019

Price

€10.1

Market cap

€1,443m

Net debt (€m) at 30 June 2019

422

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

4.8

1.0

20.2

Rel (local)

(4.9)

(1.2)

(5.4)

52-week high/low

€11.27

€6.70

Business description

Mytilineos operates three main businesses: metallurgy (aluminium/alumina production), power & gas (power production/supply and gas trading) and large-scale infrastructure EPC. The company operates in 29 countries across Europe, the Middle East and Africa and has a workforce of 2,700 employees.

Next events

9M results

30 October 2019

Analyst

Dario Carradori

+44 (0)20 3077 5700

Mytilineos is a research client of Edison Investment Research Limited

Mytilineos reported solid revenue and EBITDA growth in H1, boosted by the power & gas business. Mytilineos is trading on low short-term multiples (c 8x FY19 P/E and 5x EV/EBITDA), but we believe the stock is even more attractive for investors focused on the strong growth potential driven by long-term projects, which, in our view, the company can finance mostly with its robust cash flow generation. We forecast a 15% net income CAGR in FY19e–22e with the new gas-fired power plant as key driver.

Year end

EBITDA*
(€m)

Net income*
(€m)

EPS*
(€)

DPS
(€)

P/E
(x)

Yield
(%)

12/17

299

139

1.02

0.32

10.3

3.2

12/18

290

139

1.01

0.36

10.4

3.6

12/19e

339

170

1.19

0.42

8.5

4.1

12/20e

330

175

1.23

0.43

8.2

4.2

Note: *EBITDA, net income and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Power & gas boosts H1 EBITDA by 21% y-o-y

Mytilineos reported H119 results with strong revenue growth (+38% y-o-y to €991m) and EBITDA progression (+21% y-o-y to €175m). In line with our expectations, the growth was boosted by the power & gas business (EBITDA up c 3x y-o-y) thanks to higher volumes and margins. The EBITDA for the metallurgy business declined only 6% y-o-y (despite a significant decline in alumina/aluminium prices and despite an exceptionally strong H118), while the EBITDA for the EPC & infrastructure business was broadly unchanged year-on-year.

We forecast +15% FY19–22e net income CAGR

We expect EBITDA to grow strongly in FY19 (+17% y-o-y) driven by a large increase in the power & gas activities and EPC & infrastructure business and a more moderate increase in the metallurgy business. Beyond FY19, we expect a reduction in EBITDA in FY20, driven by lower alumina and aluminium prices followed by a recovery in FY21 and, especially, in FY22 reflecting the contribution of the new 826MW gas-fired power plant. Although we have reduced FY19–21 EBITDA estimates by c 5% (to reflect a more conservative growth estimate for EPC & infrastructure in FY19 and lower alumina and aluminium prices in FY20–21), we increase FY22 EBITDA significantly (+17%), reflecting the commissioning of the new power plant. Overall, we forecast a 10% CAGR for EBITDA and a 15% CAGR for net income from FY19–22e.

Valuation: Short-term value, long-term growth

The stock is trading on undemanding short-term multiples (c 8x P/E and c 5x EV/EBITDA for FY19e), at a large discount to European diversified industrial stocks, and offers strong free cash flow yields (c 13% on average in the period FY19–22). But we believe the stock is even more attractive for investors focused on the strong growth potential deriving from long-term projects, which, in our view, the company can finance mostly with its strong cash flow generation. We have increased our valuation to €14.4/share (from €12.3/share), as the impact of the recent decline in country risk premium and the inclusion of the value creation from the CCGT project more than offset the impact of the lower short-term forecasts.

H1 EBITDA up 21% y-o-y boosted by power & gas

On 12 September, Mytilineos reported H119 results with strong revenue growth (+38% y-o-y to €991m) and EBITDA progression with H1 EBITDA of €175m, +21% y-o-y, broadly in line with our forecast of €178m. In line with our expectations, the growth was boosted by the power & gas business (EBITDA up c 3x y-o-y) thanks to higher volumes and margins. The EBITDA for the metallurgy business declined only 6% y-o-y (despite a significant decline in alumina/aluminium prices and despite an exceptionally strong H118), while the EBITDA for the EPC & infrastructure business was broadly unchanged year-on-year.

Although EBITDA increased significantly, net income declined 3% to €81.6m, reflecting the impact of higher minorities (due to a pick-up in profits for power generation and Metka EGN), a higher tax rate and the impact of IFRS 16.

Mytilineos benefited from strong cash flow generation with H1 operating cash flow increasing twofold to €139m (thanks to higher EBITDA and the non-repeat of a negative working capital variation in 1H18). Free cash flow increased to €41m in H119 (vs €16m in H118) despite an increase in capex. Net debt of €422m at 30 June (vs €390m at the end of FY18) reflects the adoption of IFRS 16 (including lease liabilities of €53m in net debt).

For FY19, Mytilineos expects ‘overall significant growth and strong cash flow generation’ and confirmed that the construction of a new gas-fired power plant, a key growth project for the group, will start in October 2019.

Forecasts overview: New CCGT boosts growth outlook

We expect EBITDA to grow strongly in FY19 (+17% y-o-y) driven by a large increase in the power & gas activities and EPC & infrastructure business and a more moderate increase in the metallurgy business. Beyond FY19, we expect a small reduction in EBITDA in FY20, driven by lower alumina and aluminium prices (we revised down FY20–21 EBITDA by 4% to reflect lower prices) followed by a significant recovery in FY21 and, especially, in FY22, which now includes the full benefit of the new 826MW gas-fired power plant. Overall, we forecast a 10% FY19–22e EBITDA CAGR, which translates into a 15% net income CAGR.

Exhibit 1: Adjusted EBITDA breakdown by division

Adjusted EBITDA (€m)

2017

2018

2019e

2020e

2021e

2022e

Metallurgy

124

166

169

134

148

170

Power & gas

75

64

101

107

113

181

EPC & Infrastructure

89

55

69

90

94

99

Others

11

5

0

0

0

0

Total

299

290

339

330

356

450

% y-o-y growth

-3%

17%

-3%

8%

27%

Source: Mytilineos data, Edison Investment Research

We provide more details below for the three divisions of the group.

Metallurgy: in H119 EBITDA declined 6% y-o-y mainly due to the exceptionally strong result in H118, driven by very high alumina prices due to US sanctions against Russia’s Rusal, one of the largest aluminium producers globally, and the partial shutdown of the largest alumina refinery globally, Norsk Hydro’s Alunorte in Brazil. The US sanctions against Rusal were lifted in January 2019 and Alunorte restarted towards the end of H119, sending alumina (and aluminium) prices sharply lower (alumina prices roughly halved since the peak at c $600/tonne around the 1H of 2018). The current low-price environment for alumina and aluminium creates risks mostly for FY20 as Mytilineos has stated at H1 results that it has no hedges in place for next year. The full integration of recently acquired EPALME, the likely reduction in production costs (driven by lower commodity prices and efficiencies/cost cutting efforts currently undertaken by Mytilineos) should partly offset the revenue decline. Based on new lower alumina/aluminium price assumptions, now broadly consistent with current forward prices for FY20 (we assume alumina and aluminium prices c 3% higher than current forwards), we currently expect a c 20% y-o-y EBITDA reduction in FY20 followed by a gradual recovery thereafter. As a guidance the FY20 alumina price is c 15% lower than the average price for 1H19, while the aluminium price is broadly in line. The key growth project is the construction of a new alumina refinery plant; a final investment decision is expected by Q120.

Power generation: we expect FY19 to be a very strong year for the division and see this business as the key growth engine of the group’s growth over the period FY19–22 (see our recent report focusing on the prospects for this business). EBITDA grew more than three times in H119, thanks to higher volumes (driven by higher Greek power demand and lower hydro production, and increased renewable capacity) and margins (high clean spark spreads thanks to higher carbon prices, lower hydro output, stronger demand and very favourable gas import prices for Mytilineos). We expect the strong performance to continue for the rest of FY19, although H218 is a tougher comparison, and we forecast +58% y-o-y EBITDA. Beyond FY19, the key growth driver for this business is the construction of a new combined-cycle gas turbine (CCGT) power plant with installed capacity of 826MW (roughly doubling current gas-fired capacity for Mytilineos), to be commissioned by Q421. With construction planned to start at the beginning of October 2019, we now include this project in our forecasts and assume c €60m EBITDA for the plant in FY22 (for more details on the project and sensitivity to various assumptions, please see our recent report).

EPC & infrastructure: We expect strong growth for this business in FY19 (+26% yoy EBITDA), mostly reflecting normalisation for H219 following a weak H218, although we have reduced our expectations for the year following H1 results. Our forecasts imply a significant pick-up in the growth rate in the second half of the year, after the first half was broadly flat year-on-year. We continue to believe that this is realistic although we recognise that there is little visibility on the timing of the projects. The backlog at the end of H119 increased significantly compared to the end of FY18 (€1.2bn over the next five years vs €1.0bn previously) also thanks to additional projects in Chile, Greece, Slovenia and Australia. In our view, the largest risk to the pipeline remains the project in Libya (€343m contract value or c 30% of the backlog), due to the political situation. We continue to see opportunities from renewables projects (especially solar) and expect increasing profit opportunities from the development of the build, operate and transfer (BOT) business.

Forecasts changes: Lower alumina/aluminium prices and CCGT project included

Our FY19 EBITDA forecast reduces by 6% (reflecting a more cautious estimate for the growth of the EPC & infrastructure business) and we have reduced our FY20 and FY21 EBITDA estimates by c 4% to reflect lower alumina and aluminium prices. On the other hand, FY22 increases significantly (+17%) reflecting the commissioning of the new CCGT power plant. Our net income forecasts for FY19–21 reduce to reflect lower EBITDA, higher minorities, D&A and financial expenses, partly offset by a lower tax rate. Net income increases in FY22, thanks to the contribution of the new CCGT.

Net debt increases significantly reflecting the impact of IFRS 16 (a €53m increase) and the inclusion of the €300m capex for the new CCGT project (we assume capitalisation of interest costs for this project until the plant is commissioned at the end of 2021).

Exhibit 2: Forecast changes

€m

FY18

FY19e

FY20e

FY21e

FY22e

Revenues

New

1,527

1,943

2,118

2,311

3,091

Old

2,237

2,373

2,668

3,017

% change

-13%

-11%

-13%

2%

Adjusted EBITDA

New

290

339

330

356

450

Old

360

346

369

385

% change

-6%

-5%

-4%

17%

Net income

New

139

170

175

199

255

Old

207

198

222

240

% change

-17%

-12%

-10%

6%

Net debt/(cash)

New

390

418

476

520

401

Old

306

199

78

(43 )

% change

36%

139%

570%

-1,031%

Source: Mytilineos data, Edison Investment Research

Valuation: Lower WACC, growth project value creation

The stock is trading on undemanding short-term multiples (c 8x P/E and c 5x EV/EBITDA for FY19e) and offers strong free cash flow yields (c 13% on average, pre-growth capex, in the period FY19–22).

We have increased our valuation to €14.4/share (from €12.3/share), as the impact of a lower WACC and the inclusion of the value creation from the CCGT project more than offset the impact of lower short-term forecasts. We see significant upside potential to the current share price, in particular for investors focused on the cash flow generation potential deriving from long-term growth projects.

Following the decline in the Greek country risk premium (Greek 10-year bond spreads vs Germany have roughly halved since the beginning of the year), we have reduced our WACC to 7.5% (from 8.5%). The reduction in Greek bond yields has been a key driver of the strong performance of Greek equities in the year-to-date, including Mytilineos, in our view.

In addition, as we now incorporate the new CCGT in our forecasts, we have included our assumptions for the value creation. This is a key driver of the increase in the valuation for the power & gas business.

Exhibit 3: Free cash flow yield, dividend yield and leverage metrics

€m

2018

2019e

2020e

2021e

2022e

Cash flow from operations

267.6

208.0

215.2

239.0

290.7

Maintenance capex

(45)

(45)

(45)

(45)

(55)

Free cash flow

222.6

163.0

170.2

194.0

235.7

FCF yield

15.4%

11.3%

11.8%

13.4%

16.3%

Dividend yield

3.7%

4.2%

4.3%

4.8%

6.2%

Net debt/EBITDA

1.4

1.2

1.4

1.5

0.9

Source: Edison Investment Research

Exhibit 4: Sum-of-the-parts valuation

FY19e, €m

EV

EBITDA

EV/EBITDA

Comment

Metallurgy

1,027

169

6.1

DCF, 7.5% WACC, 0.5% terminal growth rate

Power & gas

1,037

101

10.3

Gas-fired plants

716

58

12.3

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

Wind

266

32

8.4

DCF, €1.26m/MW

Supply

55

11

5.0

5x EV/EBITDA multiple

EPC & Infrastructure

838

69

12.1

DCF, 7.5% WACC, 0.5% terminal growth rate

Total EV

2,903

339

8.6

– net debt

-418

– provisions

-30

– minorities

-60

+ associates

24

Discount

15%

Equity

2,056

Number of shares (m)

142.9

Value per share (€)

14.4

Source: Edison Investment Research

While we acknowledge that the market may focus on the downside risks for FY20 due to the current unhedged positions for alumina and aluminium, we believe these concerns are likely overdone. As a sensitivity, a 10% reduction in alumina and aluminium reduces group EBITDA by 14%. Even assuming a rather negative further 10% decline in both alumina and aluminium prices, the stock would trade on only c 11x P/E and offer c 9% FCF yield for FY20, offering good value especially considering the strong growth potential.

Exhibit 5: Financial summary

Accounts: IFRS; year end 31 December; €m

 

2017

2018

2019e

2020e

2021e

2022e

INCOME STATEMENT

 

 

 

 

 

 

 

Total revenues

 

1,527

1,527

1,943

2,118

2,311

3,091

Cost of sales

 

(1,143)

(1,150)

(1,500)

(1,679)

(1,843)

(2,513)

Gross profit

 

384

376

443

439

468

578

SG&A (expenses)

 

(86)

(88)

(99)

(104)

(108)

(122)

R&D costs

 

(0)

(0)

(0)

(0)

(0)

(0)

Other income/(expense)

 

1

(4)

(4)

(5)

(5)

(6)

Exceptionals and adjustments

 

6

(6)

0

0

0

0

Depreciation and amortisation

 

(73)

(79)

(87)

(91)

(93)

(101)

Reported EBIT

 

232

198

252

239

262

350

Finance income/(expense)

 

(43)

(38)

(23)

(12)

(9)

(26)

Other income/(expense)

 

(7)

1

(7)

(7)

(7)

(7)

Reported PBT

 

182

161

222

220

247

317

Income tax expense (includes exceptionals)

 

(24)

(24)

(44)

(42)

(44)

(57)

Reported net income

 

158

133

176

178

202

260

Basic average number of shares, m

 

142.9

142.9

142.9

142.9

142.9

142.9

Basic EPS, €/share

 

1.08

0.99

1.19

1.23

1.39

1.79

Adjusted EBITDA

 

299

290

339

330

356

450

Adjusted EBIT

 

226

290

252

239

262

350

Adjusted PBT

 

175

167

222

220

247

317

Adjusted net income

 

139

139

170

175

199

255

Adjusted EPS, €/share

 

1.02

1.01

1.19

1.23

1.39

1.79

Adjusted diluted EPS, €/share

 

1.02

1.01

1.19

1.23

1.39

1.79

DPS, €/share

 

0.32

0.36

0.42

0.43

0.49

0.63

Adjusted EBIT margin

 

15%

13%

13%

11%

11%

11%

BALANCE SHEET

 

Property, plant and equipment

 

1,137

1,142

1,197

1,338

1,477

1,478

Goodwill

 

209

209

209

209

209

209

Intangible assets

 

236

235

235

235

235

235

Other non-current assets

 

282

272

273

273

274

274

Total non-current assets

 

1,864

1,858

1,914

2,056

2,195

2,197

Cash and equivalents

 

161

208

81

(28)

(71)

47

Inventories

 

159

184

194

199

205

212

Trade and other receivables

 

1,018

1,059

1,138

1,226

1,323

1,440

Other current assets

 

16

32

32

32

32

32

Total current assets

 

1,354

1,483

1,445

1,429

1,489

1,731

Non-current loans and borrowings

 

599

534

434

384

384

384

Other non-current liabilities

 

298

375

315

308

300

293

Total non-current liabilities

 

897

909

749

692

684

677

Trade and other payables

 

575

608

669

736

810

891

Current loans and borrowings

 

130

64

64

64

64

64

Other current liabilities

 

184

198

198

198

198

198

Total current liabilities

 

890

871

932

999

1,072

1,153

Equity attributable to company

 

1,377

1,508

1,619

1,732

1,862

2,027

Non-controlling interest

 

54

53

60

63

66

70

CASH FLOW STATEMENT

 

Profit for the year

 

158

144

177

178

202

260

Taxation expenses

 

24

23

44

42

44

57

Net finance expenses

 

42

38

31

20

17

34

Depreciation and amortisation

 

76

81

86

90

92

100

Other adjustments

 

(9)

(7)

(27)

(26)

(26)

(26)

Movements in working capital

 

(38)

(68)

(28)

(27)

(29)

(42)

Interest paid / received

 

(32)

(31)

(31)

(20)

(17)

(34)

Income taxes paid

 

(6)

(18)

(44)

(42)

(44)

(57)

Cash from operations (CFO)

 

214

162

208

215

239

291

Capex

 

(127)

(85)

(141)

(231)

(231)

(101)

Acquisitions & disposals net

 

1

20

0

0

0

0

Other investing activities

 

9

18

18

18

18

18

Cash used in investing activities (CFIA)

 

(117)

(47)

(123)

(213)

(213)

(83)

Net proceeds from issue of shares

 

0

0

0

0

0

0

Movements in debt

 

(81)

(128)

(100)

(50)

0

0

Dividends paid

 

(5)

(46)

(59)

(61)

(70)

(89)

Other financing activities

 

(48)

106

(53)

0

0

0

Cash from financing activities (CFF)

 

(134)

(68)

(212)

(111)

(70)

(89)

Increase/(decrease) in cash and equivalents

 

(37)

47

(127)

(109)

(43)

119

Cash and equivalents at end of period

 

161

208

81

(28)

(71)

47

Net (debt) cash

 

(568)

(390)

(418)

(476)

(520)

(401)

Movement in net (debt) cash over period

 

50

178

(27)

(59)

(43)

119

Source: Company data, Edison Investment Research


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The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. 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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United States of America

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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

1,185 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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New Zealand

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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.

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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

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. 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

1,185 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

1,185 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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