ERM Power — US update and focus on energy solutions

ERM Power — US update and focus on energy solutions

ERM Power’s strategy is focused on sustaining growth in its cash-generative core Australian activities while developing two new growth areas: energy solutions and US supply. While we have reduced our short-term forecasts for the US activities to reflect lower margins and volumes, as guided by the company, we have increased our forecasts for energy solutions on the back of our new assessment following a recent investor briefing. Our analysis suggests this business could drive up to 40% growth in group EBITDA in the medium term (16% mid-case). Overall, our FY18-21e EBITDA forecasts change by -6%, -14%, -9% and +7% respectively. Our base case valuation, which includes core Australian business only, is unchanged at A$2.6/share.

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ERM Power

US update and focus on energy solutions

Update and FY results preview

Utilities

01 July 2018

Price

A$1.46

Market cap

A$364m

Net cash (A$m) end FY18e

40.0

Shares in issue

249.6m

Free float

75%

Code

EPWX

Primary exchange

ASX

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(4.9)

(17.6)

20.5

Rel (local)

(7.8)

(23.0)

10.8

52-week high/low

A$1.9

A$1.2

Business description

ERM Power is an energy retailer and trader founded in 1980 and listed in 2010. In Australia it operates an electricity supply business (second largest retailer to C&I customers) and two gas-fired generation plants. Key areas of growth are the US electricity retail market (entered in 2015) and energy solutions.

Next events

FY18 results

23 August 2018

Analysts

Dario Carradori

+44 (0)20 3077 5700

Graeme Moyse

+44 (0)20 3077 5700

ERM Power is a research client of Edison Investment Research Limited

ERM Power’s strategy is focused on sustaining growth in its cash-generative core Australian activities while developing two new growth areas: energy solutions and US supply. While we have reduced our short-term forecasts for the US activities to reflect lower margins and volumes, as guided by the company, we have increased our forecasts for energy solutions on the back of our new assessment following a recent investor briefing. Our analysis suggests this business could drive up to 40% growth in group EBITDA in the medium term (16% mid-case). Overall, our FY18-21e EBITDA forecasts change by -6%, -14%, -9% and +7% respectively. Our base case valuation, which includes core Australian business only, is unchanged at A$2.6/share.

Year end

EBITDA (A$m)

PBT*
(A$m)

EPS*
(A$)

DPS
(A$)

P/E
(x)

Yield
(%)

06/17

78

15

(0.11)

0.07

N/A

4.8

06/18e

84

11

0.03

0.07

45.0

4.8

06/19e

93

16

0.05

0.07

30.8

4.8

06/20e

117

36

0.11

0.07

13.9

4.8

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

Focus on energy solutions; lower US forecasts

ERM Power’s energy solutions business provides value-added services to its commercial and industrial (C&I) supply customers, including solutions to improve energy efficiency, reduce costs and improve customers’ environmental footprint. Based on our analysis following an investor briefing, we estimate that the medium-term development of the energy solutions activities could drive up to 40% growth in group EBITDA and 16% in a mid-case scenario. We have increased our medium-term forecast for energy solutions, but reduced the short-term estimates for the US activities following the latest trading update, which guided for lower margins and volumes. Overall our FY18-21 EBITDA forecasts change by -6%, -14%, -9% and +7% respectively.

Next catalyst is FY18 results

We believe the next catalyst for ERM Power is the FY18 results presentation on 23 August. We now forecast FY18 underlying EBITDA of A$84m, underlying NPAT of A$8m and DPS of A$0.07. We expect ERM Power to provide more details on the challenges/outlook for the US activities, as well as updated expectations for core Australian supply activities. Furthermore, as ERM Power is in a net cash position, we see room for additional balance sheet redeployment, including acquisitions and/or a continuation beyond 2018 of the recently announced A$20m share buyback programme.

Valuation: Base case unchanged at A$2.6/share

Our base case SOTP valuation is unchanged at A$2.6/share (excluding any value for US activities and energy solutions), implying significant upside following recent share price weakness (post the trading update downgrading the outlook for the US). Including a valuation for energy solutions and the US, and taking into account updated forecasts for these divisions, our SOTP would increase to A$3.2/share.

Forecasts update and focus on energy solutions

ERM’s strategy is focused on delivering continued medium-term growth in its core Australian electricity supply and production activities, while at the same time expanding in new growth markets and areas: energy solutions and US supply. While Australian supply and power production currently generate all the group’s cash flow, ERM Power expects the growth to come from US retail (a business which ERM Power entered in 2015) and energy solutions, the most innovative product offering of the group. In its latest trading update, ERM Power has stated that activities in Australia are performing in line or better than management expectations in FY18 (in line for FY19), while the short-term outlook for the US activities has been reduced. We have updated our forecasts to reflect lower contribution from the US but higher estimates for energy solutions (forecasts for other Australian activities are broadly unchanged), on the back of our analysis following an investor briefing, which has provided new elements on the growth potential of the division. We estimate that the medium-term development of the business could drive up to 40% of group EBITDA and 16% in a mid-case scenario (12.5% market share and 40% gross profit margin). The next catalyst for ERM Power is the FY18 results presentation on 23 August. We expect the company to provide more details on the challenges and outlook for the US activities, as well as updated guidance for the core Australian electricity supply activities.

FY18 results to provide update on US/Australian supply

ERM Power will present FY18 results on 23 August. We believe key investor focus will be on:

FY18 results: we now forecast FY18 underlying EBITDA of A$84m, +8% y-o-y, underlying NPAT of A$8m (vs -A$26m in FY17) and DPS of 7 Australian cents (stable y-o-y; H2 DPS 3.5c). For our previous forecasts and forecasts changes, see Exhibit 5.

Australian supply outlook: current guidance for FY18 gross supply margin is A$4.7/MWh “with upside potential” and A$4.0-5.5/MWh in the medium term. In its latest trading update, released at the end of May 2018, ERM Power said Australian activities were performing in line or better than expectations in FY18 and in line for FY19.

US supply outlook: we expect ERM Power to provide more details on current challenges, which led the company to materially reduce the outlook for unitary gross margins to A$3.7/3.3/MWh respectively for FY18/19 in its latest trading update.

Balance sheet capacity: we forecast that ERM Power will be A$40m net cash positive at end FY18 (non-recourse debt in power generation assets is more than offset by the cash in the holding), and see room for additional balance sheet redeployment, including acquisitions and/or a continuation beyond 2018 of the recently announced A$20m share buyback programme.

Focus on energy solutions

We have assessed the earnings growth potential of ERM Power’s recently launched division, Energy Solution, on the back of the company’s Investor Day on 29 May. Based on the information provided, we have built a sensitivity analysis to illustrate the potential positive impact on earnings of the growth in this new business.

Market context: New technology and client demand create business opportunity

The energy market in Australia (and globally) is undergoing significant transformation as a result of the energy transition, the emergence of new technology, and customers' demand for higher energy efficiency and sustainable solutions. Sophisticated C&I customers, who represent the company’s core business, increasingly require a comprehensive energy service in addition to delivery of the physical commodity, with the objective of reducing costs and consumption and improving their environmental footprint. All of these trends are supported by more stringent government regulations (eg energy efficiency, renewables growth and carbon reduction), an increase in electricity costs for commercial and industrial customers, and corporates’ desire to target a reduction in carbon emissions to reduce costs and achieve sustainability targets.

Product offering: Track, Advise and Deliver

ERM’s product offering includes the following services:

Track (20% of business mix): tools and digital platforms to monitor, measure and verify energy consumption, visualize data, receive data management alerts, and data insights and optimisation solutions.

Advise (20%): advisory services with the support of data analytics aimed at providing integrated energy solutions and action planning to implement energy efficiency investments.

Deliver (60%): product sourcing, equipment installations and partnerships with customers.

ERM power highlighted that a key achievement over the last few years was to increase the proportion of revenues from multi-product deals (to >50% in FY18e from 0% in FY16), as opposed to single-product deals and to increase the proportion of revenue from projects over A$100k (to c 90% in FY18e from less than 50% in FY16).

Competitive landscape: ERM Power’s key strengths amid high competition

Currently, the energy services industry is fragmented and dynamic, with new players that have recently entered the markets. We believe ERM Power faces significant competition from the following:

global technology players such Schneider Electric, Siemens, Signify (previously Philips Lighting) and global utility/energy services companies such as Veolia, GDF SUEZ and Vinci;

local utility players such as AGL, Origin Energy and Energy Australia;

energy savings consultancy and technology installation companies such as AECOM, Airmaster, City Holdings, Conservia, Ecosave, Energetics, Energy Action, Norman Disney & Young, Total Energy Solutions, Verdia, and Vivid Illuminate/Vivid Industrial; and

local renewable plant providers to commercial/industrial users, such as solar installation companies Todae Solar, Cherry Energy Solutions, Solgen Energy Group.

In this highly competitive environment, we see the following competitive advantages for ERM Power:

1.

It already has a large client base to which it can cross-sell its energy solutions (although its offer is not limited to these clients), as ERM Power is the second largest retailer to commercial and industrial customers in Australia, with 22% market share in FY17. ERM Power has very good visibility on its customers’ energy consumption data.

2.

It provides a fully comprehensive service (auditing of energy costs/consumption through data science and analytics, development of tailored integrated solutions, sourcing and installation of multiple products such as solar PV plants, LEDs, etc, performance monitoring, and finance and funding solutions), rather than just focusing on one category of products like several specialized competitors.

3.

It has an established brand with strong reputation: number one in both customer satisfaction – Utility Market Intelligence (UMI) Survey, February 2018 and broker satisfaction – Markets & Communication Research (MCR), February 2018.

Financial impact: We estimate energy solutions could drive 0%-40% EBITDA growth in the medium term

Starting point: Although the energy solutions activities have experienced significant revenue growth since the launch in 2016, from a financial point of view this business has so far been a drag on profit and cash flow. The negative EBITDA contribution currently has a significant effect on the bottom line: company guidance for FY18e EBITDA of -A$4.0-4.5m implies a negative effect on net income (on a post-tax basis) of -A$3m vs our FY18 group net income forecast of A$8m. In addition, we estimate a negative cash flow for the division of -A$11m, equivalent to 32% of FY18e free cash flow and 3% of ERM’s market cap. The reversal of this loss into a medium-term profit is a key driver of the earnings growth we forecast for ERM Power, although clearly this is subject to risks. The company targets a positive contribution to group net income from 2020.

Energy solutions market size: ERM Power estimates that the addressable market for its energy solutions business is A$1bn+. This was calculated on the basis of an estimate of 25% potential energy savings applied to a A$16bn energy market and a payback period of four years. The size of the market was calculated exclusively based on the energy efficiency savings that corporates could theoretically achieve, but we highlight that this excludes the additional business potentially deriving from other corporate priorities such as the improvement in environmental sustainability, etc.

Market share and revenue potential: ERM Power expects that it can realistically achieve a 5-20% share of the Australian energy solutions market (as guidance, ERM Power had 22% market share in the Australian C&I supply market in FY17). Applying 5-20% market share to the A$1bn market potential provides a A$50-200m range for potential revenues for the energy solutions business in the medium term.

Gross profit margin: ERM Power has provided no indication about gross margin prospects for the energy solutions business, and has only shown that it expects “high” gross margins in the Track and Advise activities and the lowest margins in the Deliver activities. As a starting point, however, we have calculated that company guidance for FY18 energy solutions activities (revenues doubling vs FY17, capex of A$15m and EBITDA loss of A$4.0-4.5m) implies a gross profit margin of c 40%. In our sensitivity analysis we have considered a range of 30-50%.

Opex: the company guides for A$15m opex in FY18 and indicates that the growth in headcount is expected to moderate significantly thereafter, following a material initial investment. In our sensitivity analysis, we have assumed opex to grow to $20-30mn in the medium term depending on the size of the business ($50-200m revenues).

Medium-term potential impact: overall, based on the above assumptions, we estimate that the medium-term development of the business could drive up to 40% growth in group EBITDA (2022e) and 16% in a mid-case scenario (12.5% market share and 40% gross profit margin).

Our forecast: in our model we have included gradual growth in revenues to A$125m in 2022e, a gross profit margin of 38% and EBITDA of A$21m (we previously forecast A$79m revenues and A$4m EBITDA in 2022).

Exhibit 1: Energy solutions could drive up to 40% EBITDA growth medium-term

Addressable market size

A$m

1,000

Market share

%

5%

12.5%

20%

Revenue

A$m

50

125

200

Gross profit margin

%

30%

40%

50%

30%

40%

50%

30%

40%

50%

Gross profit

A$m

15

20

25

37.5

50

62.5

60

80

100

Opex

A$m

20

20

20

25

25

25

30

30

30

EBITDA

A$m

-5

0

5

12.5

25

37.5

30

50

70

% of 2022e group EBITDA

%

-3%

0%

3%

8%

16%

23%

19%

31%

43%

Source: Company data, Edison Investment Research.

We believe delivery on the growth potential of energy solutions activities represents a significant value creation opportunity for ERM Power. For example, the global utility player ENGIE completed 33 acquisitions of energy services companies at an average multiple of 9x (pre-synergies) over the last five years. Applying this multiple to our FY22e EBITDA for energy solutions (A$21m) and discounting back to the end of FY18 would generate a valuation for this business of A$126m, equivalent to c 35% of ERM Power’s current market cap.

Forecasts updated: Lower US, higher energy solutions

As described in our note US outlook downgraded; Australia in line or better (published on 29 May 2018), ERM Power issued a trading update on 25 May 2018. Although the company said it expects the Australian activities (retail, generation and energy solutions) to perform in line or above expectations for 2018 (in line for 2019), it expects slightly lower volumes in the US and significantly lower gross margins. For the US business (17% of 2018e group revenues), ERM Power expects volumes of c 6.3TWh in FY18 (vs 6.5TWh previously), increasing to c 7.2TWh in FY19. The US gross margin in FY18 is expected to be c A$3.70/MWh (vs A$4.50/MWh previously), reducing to A$3.30/MWh in FY19. ERM Power also said that although it sees a significant improvement in US gross margins in FY20 vs FY19, it will provide an update in FY19 regarding its current guidance that the US business will be NPAT break-even in FY20.

The new guidance has a negative impact on our FY18 and FY19 net income forecasts of A$4m and A$13m respectively (vs our previous forecasts). Although we see the downgrade in the US outlook as disappointing, we believe downside risks for the ERM Power group are limited. In our view, the current negative impact on group earnings of the loss-making US business will eventually be eliminated, either because ERM Power manages to improve the profitability of this business to at least break-even, or because the business, which is independently financed, is sold/closed down. Hence the risk to the company is of a limited duration, in our view.

We have updated our US forecasts to reflect a larger NPAT loss in the short term and a delayed NPAT break-even point (we now assume 2021 vs current company guidance of FY20).

Exhibit 2: US breaks even with rising volumes/margins

Exhibit 3: We have moved US NPAT break-even to 2021

Source: ERM Power, Edison Investment Research.

Source: ERM Power, Edison Investment Research.

Exhibit 2: US breaks even with rising volumes/margins

Source: ERM Power, Edison Investment Research.

Exhibit 3: We have moved US NPAT break-even to 2021

Source: ERM Power, Edison Investment Research.

Our forecasts for core Australian supply and generation activities, which produce all the cash flow of the group, are unchanged. Overall, our FY18-21 EBITDA forecasts change by -6%, -14%, -9% and +7% and these impacts are amplified at the bottom line. We show the full changes to our forecasts in Exhibit 5.

Exhibit 4: Gross margins need to rise to cover opex, D&A and financing costs

Source: Company data, Edison Investment Research.

Exhibit 5: Forecasts lowered short-term, energy solutions increase drives medium-term upgrade

New forecasts

Old forecasts

% change

A$m

2018e

2019e

2020e

2021e

2018e

2019e

2020e

2021e

2018e

2019e

2020e

2021e

Revenues

3,391

3,524

3,676

3,794

3,406

3,544

3,689

3,791

0%

-1%

0%

0%

EBITDA

84

93

117

146

89

109

130

137

-6%

-14%

-9%

7%

Electricity retail AUS

66

68

70

70

66

68

70

70

0%

0%

0%

0%

Electricity retail US

(3

1

17

38

3

18

36

42

-194%

-96%

-52%

-7%

Power generation

39

39

40

40

39

39

40

40

0%

0%

0%

0%

Energy solutions

(4)

0

6

14

(4)

(2)

0

2

-6%

-97%

N/A

734%

Corporate

(15)

(15)

(16)

(16)

(15)

(15)

(16)

(16)

0%

0%

0%

0%

EBIT

41

48

69

94

46

64

82

88

-10%

-25%

-16%

8%

PBT

11

16

36

61

15

31

49

54

-28%

-49%

-27%

13%

Net Income from continuing operations

8

21

55

42

11

32

64

38

-28%

-34%

-14%

13%

Source: Edison Investment Research

Valuation unchanged at A$2.6/share

We value ERM Power using a sum-of-the-parts approach, which we believe allows us to capture the different risk profile and asset life of the various activities. We value the various divisions mostly with DCF valuations (with an average WACC of c 11%) and we back-test this approach by comparing the implied valuation multiples with comparable companies for each activity. Our base case SOTP valuation is unchanged at A$2.6/share, implying significant upside vs the current share price of A$1.46. As this valuation excludes any value for US activities and energy solutions, and forecasts for core Australian supply and generation activities are unchanged, there is no change to our valuation. Including a valuation for energy solutions and the US business (with updated forecasts, as described earlier in the note) would increase the SOTP valuation to A$3.2 (vs $2.8/share before; the increase in valuation is driven by a higher valuation for the energy solutions business on the back of higher forecasts). Our recent outlook note Offering solutions to corporate energy challenges, published on 29 March 2018, includes more details on our valuation methodology.

Key risks to our valuation and investment case are higher/lower supply and power generation margins in Australia, higher/lower supply margins in the US, and higher/lower growth in energy solutions.

Exhibit 6: Financial summary

Accounts: IFRS, Year-end: June, A$m

2016

2017

2018e

2019e

2020e

2021e

INCOME STATEMENT

 

 

 

 

 

 

Total revenues

2,691

3,127

3,391

3,524

3,676

3,794

Cost of sales

(2,620)

(3,049)

(3,306)

(3,431)

(3,559)

(3,649)

Gross profit

71

78

84

93

117

146

SG&A (expenses)

0

0

0

0

0

0

R&D costs

0

0

0

0

0

0

Other income/(expense)

0

0

0

0

0

0

Exceptionals and adjustments

(5)

0

0

0

0

0

Depreciation and amortisation

(25)

(38)

(43)

(45)

(49)

(51)

Reported EBIT

40

41

41

48

69

94

Finance income/(expense)

(23)

(26)

(30)

(32)

(33)

(34)

Other income/(expense)

0

(0)

0

0

0

0

Exceptionals and adjustments

39

37

0

0

0

0

Reported PBT

57

52

11

16

36

61

Income tax expense (includes exceptionals)

(22)

(52)

(3)

5

19

(18)

Reported net income

36

(1)

8

21

55

42

Basic average number of shares, m

242

244

238

230

230

230

Basic EPS

0.15

(0.00)

0.03

0.09

0.24

0.18

 

 

 

 

 

 

 

Adjusted EBITDA

71

78

84

93

117

146

Adjusted EBIT

46

41

41

48

69

94

Adjusted PBT

23

15

11

16

36

61

Adjusted EPS (A$)

0.08

(0.11)

0.03

0.05

0.11

0.18

Adjusted diluted EPS (A$)

0.08

(0.10)

0.03

0.05

0.11

0.18

DPS (A$)

0.12

0.07 

0.07

0.07

0.07

 0.07

BALANCE SHEET

 

 

 

 

 

 

Property, plant and equipment

391

391

383

370

358

345

Goodwill

0

0

0

0

0

0

Intangible assets

79

89

89

89

89

89

Other non-current assets

59

116

116

116

116

116

Total non-current assets

529

597

589

576

563

551

Cash and equivalents

192

245

229

249

300

335

Inventories

22

42

46

48

50

51

Trade and other receivables

331

361

391

407

424

438

Other current assets

164

331

331

331

331

331

Total current assets

709

979

998

1,035

1,106

1,156

Non-current loans and borrowings

184

181

181

181

181

181

Other non-current liabilities

161

287

287

287

287

287

Total non-current liabilities

345

467

467

467

467

467

Trade and other payables

367

464

504

523

542

556

Current loans and borrowings

37

8

8

8

8

8

Other current liabilities

18

70

70

70

70

70

Total current liabilities

422

543

582

601

621

634

Equity attributable to company

471

566

537

542

581

605

Non-controlling interest

0

0

0

0

0

0

 

 

 

 

 

 

 

CASH FLOW STATEMENT

 

 

 

 

 

 

EBIT

40

41

41

48

69

94

Depreciation and amortisation

16

53

43

45

49

51

Share based payments

0

0

0

0

0

0

Other adjustments

60

69

0

0

0

0

Movements in working capital

0

0

5

2

(0)

(2)

Interest paid / received

3

3

4

3

4

4

Income taxes paid

(0)

(14)

(3)

(5)

(11)

(18)

Cash from operations (CFO)

120

152

90

94

110

130

Capex

(26)

(40)

(35)

(32)

(37)

(39)

Acquisitions & disposals net

12

26

0

0

0

0

Other investing activities

(9)

(6)

0

0

0

0

Cash used in investing activities (CFIA)

(24)

(20)

(35)

(32)

(37)

(39)

Net proceeds from issue of shares

0

0

(20)

0

0

0

Movements in debt

(22)

(24)

0

0

0

0

Dividends paid

(28)

(23)

(17)

(16)

(16)

(18)

Other financing activities

(27)

(33)

(34)

(25)

(7)

(38)

Cash from financing activities (CFF)

(76)

(79)

(71)

(41)

(23)

(57)

Currency translation differences and other

0

0

0

0

0

0

Increase/(decrease) in cash and equivalents

20

53

(15)

20

51

35

Currency translation differences and other

0

(1)

0

0

0

0

Cash and equivalents at end of period

192

245

229

249

300

335

Net (debt)/cash

(29)

56

40

60

111

146

Movement in net (debt)/cash over period

(29)

85

(15)

20

51

35

Source: Company data, Edison Investment Research.

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Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by ERM Power and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

295 Madison Avenue, 18th Floor

10017, New York

US

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER
Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by ERM Power and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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

295 Madison Avenue, 18th Floor

10017, New York

US

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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Research: Healthcare

Selvita — Progress across pipeline; Services sales up 53%

Over the past several months Selvita has been executing on its new R&D-focused multi-year strategy funded by the share issue in March 2018 raising PLN134m and other sources. While sales continue to grow at an impressive rate in the Services business (up 53% in Q118), R&D progress across the pipeline has been reported in several publications in recent months. Our Selvita valuation is PLN1.30bn or PLN81.2/share versus PLN81.7/share previously.

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