ADMIE Holding offers an attractive opportunity to gain exposure to the strong growth of Greek electricity transmission grid company, IPTO, a regulated utility with significant growth opportunities from investments in new transmission lines. Despite the recent share price rise and supportive H1 results (adjusted net income up 9% y-o-y), ADMIE Holding is trading at a large discount to European regulated utilities peers and to its regulated asset base (RAB).
Written by
ADMIE Holding |
Valuation attractive despite recent share price rise |
H1 results |
Utilities |
4 November 2019 |
Share price performance
Business description
Next events
Analyst
ADMIE Holding is a research client of Edison Investment Research Limited |
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ADMIE Holding offers an attractive opportunity to gain exposure to the strong growth of Greek electricity transmission grid company, IPTO, a regulated utility with significant growth opportunities from investments in new transmission lines. Despite the recent share price rise and supportive H1 results (adjusted net income up 9% y-o-y), ADMIE Holding is trading at a large discount to European regulated utilities peers and to its regulated asset base (RAB).
Year end |
EBIT* |
Net income* |
EPS* |
DPS** |
P/E |
Yield |
12/17 |
25.1 |
25.1 |
10.84 |
0.00 |
19.7 |
N/A |
12/18 |
36.0 |
36.1 |
15.57 |
5.96 |
13.7 |
2.8 |
12/19e |
40.1 |
40.4 |
17.40 |
8.83 |
12.3 |
4.1 |
12/20e |
40.7 |
41.0 |
17.65 |
8.29 |
12.1 |
3.9 |
Note: *EBIT, net income and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Related to fiscal year (not cash dividend).
H1 adjusted net income up 9% y-o-y
We see IPTO’s (and therefore ADMIE Holding’s) H1 results as continuing the trend of Q1. We calculate that H119 adjusted EBITDA was slightly lower y-o-y (-2%), while H119 adjusted net income was up 9% to €39m, thanks to a significant reduction in net financial expenses. H1 capex of €78m was more than four times the H118 level (€17m), but still represents a relatively small percentage (31%) of our FY19 forecast of €251m (revised down from €391m, mostly due to capex related to ARIADNE being transferred to FY20). In FY19, we expect a large pick-up in capex in H219. We have made small changes to our FY19–21 forecasts, with IPTO’s adjusted net income up 1% on average driven by a 2% increase in EBITDA.
Large investments, low leverage, visibility on returns
We continue to believe that IPTO’s underleveraged balance sheet (0.9x adjusted net debt/EBITDA at the end of 2018) sustains its c €4bn investment plan, which we estimate will result in a RAB CAGR of 11% in 2018–27e. In its recent investor presentation, ADMIE Holding confirmed the previously disclosed allowed regulatory returns (pre-tax real return on assets of 6.9% in FY19, reducing to 6.3% in FY21), which look increasingly supportive considering the recent reduction in Greek country risk premium (10-year Greek bond spreads vs German bonds) have more than halved ytd) and the announced (but not yet approved) reduction in corporate tax rates (to 24% in 2020 from 28% currently). We now estimate a 8% EPS CAGR for ADMIE Holding (FY19–23) and a 5% DPS CAGR (FY19–24).
Valuation: Large discount to peers and RAB value
We believe ADMIE Holding is trading at an excessive discount to both European regulated peers (17%/37% for FY1 P/E and EV/EBITDA) and its own RAB (c 30% discount to equity RAB value). Our RAB-based valuation of ADMIE Holding is €2.87/share (broadly unchanged), which is in line with the equity RAB implied by IPTO. Our valuation implies significant upside to the current share price, despite the c 40% share price rise ytd.
Investment case remains intact: Long-term infrastructure growth
ADMIE Holding is a holding company which owns a 51% stake in IPTO, a Greek regulated utility. IPTO owns, manages and operates the Greek electricity transmission grid. It is implementing a c €4bn investment plan, mainly focused on connecting the Greek islands to the electricity grid of the mainland, with the objectives of reducing costs for consumers, improving security of supply and environmental sustainability.
The investment plan is very large compared to IPTO’s current RAB (€1.4bn at the end of 2018) and we estimate it should result in an 11% 2018–27 RAB CAGR (in real terms). Based on our slightly updated estimates, we forecast FY19–23 adjusted EBITDA and net income CAGR of 14% and 8%, respectively, for IPTO, based on the assumption that the capex plan is implemented in a timely manner. This translates into an 8% EPS CAGR for ADMIE Holding. IPTO has a target of a minimum 50% payout ratio on earnings. Assuming a flat dividend payout ratio on earnings of 50% for IPTO, we forecast a 5% DPS CAGR for ADMIE Holding. We note that the payout ratio of 50% is well below the average level of European regulated utilities (70%+), which indicates that the future growth potential of the dividend is significantly higher than for other European peers.
Because of the high level of capex, we expect an average annual cash outflow of c €300m for IPTO (2019–23). As a result, leverage increases significantly, but only towards levels broadly in line with other European regulated utilities (c 5x net debt/EBITDA and c 50% debt/RAB in 2025). In our view, these levels do not suggest that a capital increase is needed over the course of the investment programme.
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Exhibit 1: RAB evolution 2018/21 |
Exhibit 2: RAB evolution 2018/27 |
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Source: Company data, Edison Investment Research |
Source: Company data, Edison Investment Research |
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Exhibit 1: RAB evolution 2018/21 |
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Source: Company data, Edison Investment Research |
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Exhibit 2: RAB evolution 2018/27 |
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Source: Company data, Edison Investment Research |
H1 net income show continued growth trend
We see IPTO’s H1 results as continuing the trend of Q1. EBITDA was 13% lower as H118 benefited from a significant provisions release. We calculate that EBITDA adjusted for provisions in H118 and H119 was only slightly lower y-o-y (-2%) to €87m. H119 adjusted net income was instead up 9% to €39m, thanks to a significant reduction in net financial expenses.
IPTO’s net debt was little changed (€94m at the end of H119 vs €84m at the end of FY18). H1 capex of €78m was more than four times the H118 level (€17m), but still represents a relatively small percentage (31%) of our revised FY19 forecast of €251m. In FY19, we expect a large pick-up in capex in H219, in particular because ADMIE Holding has stated that the substantial capex programme is being implemented in a ‘timely’ manner, but we have now reduced our 2019 capex forecast by around one-third (we have transferred these investments to FY20). The company is making progress on the tenders for the Crete-Attica link. The first €600m tender for this project has been completed and technical bids are being considered, while the second (€315m) is still running.
Small forecast changes for FY19–21, 2019 capex reduced
On the back of the H1 results, we have made small changes to our FY19–21 forecasts for both IPTO and ADMIE Holding, with IPTO’s adjusted net income up 3% on average driven by a 3% increase in EBITDA, partly offset by higher D&A. Our FY20–21 net income estimates for ADMIE Holding increase by 2%. We have reduced our capex forecast to €251m (down from €391m previously) as we now expect some capex (the majority of the reduction is related to the ARIADNE project, due to the extension in the tendering process demanded by the participants) to be transferred into FY20. We expect little impact on earnings as capex related to ARIADNE is not remunerated until the project is completed (which we except in FY23). Our net income forecasts do not include any non-recurring impact from the periodical assessment of non-current assets, which is scheduled for Q419. While we assume a gradual reduction in corporate tax rates, our forecasts do not fully incorporate the announced (but not yet approved) reduction in corporate tax rates (to 24% in 2020 from 28% currently) – this represents an upside risk to our forecasts. The government has also announced a decrease in dividend tax from 10% to 5%.
Exhibit 3: FY19–21 forecast changes
ADMIE Holding |
IPTO group |
|||||||||
€000s |
2019e |
2020e |
2021e |
€m |
2019e |
2020e |
2021e |
|||
Adj. EBIT |
New |
40,120 |
40,707 |
42,032 |
Revenues |
New |
259 |
272 |
279 |
|
Old |
38,044 |
39,732 |
41,435 |
Old |
256 |
273 |
279 |
|||
% change |
5% |
2% |
1% |
% change |
1% |
0% |
0% |
|||
Adj. net income |
New |
40,370 |
40,957 |
42,282 |
Adj. EBITDA |
New |
181 |
185 |
191 |
|
Old |
38,200 |
39,888 |
41,591 |
Old |
168 |
185 |
190 |
|||
% change |
6% |
3% |
2% |
% change |
8% |
0% |
1% |
|||
DPS* (€/share) |
New |
0.088 |
0.083 |
0.083 |
Adj. net income |
New |
79 |
81 |
83 |
|
Old |
0.088 |
0.082 |
0.081 |
Old |
75 |
79 |
82 |
|||
% change |
0% |
1% |
2% |
% change |
5% |
2% |
1% |
|||
Adj. net debt |
New |
222 |
703 |
1005 |
||||||
Old |
368 |
728 |
1025 |
|||||||
% change |
-40% |
-3% |
-2% |
Source: Edison Investment Research. Note: *Declared for the year.
Exhibit 4: Key forecasts for IPTO group
€m |
2017 |
2018 |
2019e |
2020e |
2021e |
2022e |
2023e |
Revenues |
256.5 |
249.2 |
258.8 |
271.8 |
279.0 |
277.6 |
401.2 |
% y-o-y change |
-3% |
4% |
5% |
3% |
-1% |
45% |
|
Reported EBITDA |
172.0 |
182.7 |
182.7 |
184.8 |
191.0 |
191.9 |
306.6 |
% y-o-y change |
6% |
0% |
1% |
3% |
0% |
60% |
|
Adj. EBITDA |
177.5 |
168.0 |
180.8 |
184.8 |
191.0 |
191.9 |
306.6 |
% y-o-y change |
-5% |
8% |
5% |
3% |
0% |
60% |
|
Reported EBIT |
107.7 |
115.4 |
119.7 |
108.8 |
114.0 |
117.6 |
195.8 |
% y-o-y change |
7% |
4% |
-9% |
5% |
3% |
67% |
|
Adjusted EBIT |
113.2 |
100.7 |
117.8 |
108.8 |
114.0 |
117.6 |
195.8 |
% y-o-y change |
-11% |
17% |
-4% |
5% |
3% |
67% |
|
Reported net income |
61.7 |
85.9 |
80.7 |
80.5 |
83.1 |
90.5 |
108.4 |
% y-o-y change |
39% |
-6% |
0% |
3% |
9% |
20% |
|
Adjusted net income |
65.9 |
73.8 |
79.3 |
80.5 |
83.1 |
90.5 |
108.4 |
% y-o-y change |
12% |
7% |
6% |
3% |
9% |
20% |
|
Adjusted net debt |
286 |
171 |
222 |
703 |
1,005 |
1,399 |
1,463 |
Capex (gross of subsidies) incl. ARIADNE |
70 |
183 |
251 |
731 |
436 |
551 |
263 |
Source: Company data, Edison Investment Research
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