ADMIE Holding started FY19 with a strong Q1 (IPTO’s EBITDA +19% y-o-y). We increased FY20e DPS by 12% and made small changes to earnings forecasts (FY19e adjusted net income +5%). Despite the recent share price appreciation, the stock still trades at a large discount to both European regulated utilities and the implied equity regulated asset base (RAB).
Written by
ADMIE Holding |
Valuation remains attractive after strong Q1 |
Q1 update |
Utilities |
10 June 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 started FY19 with a strong Q1 (IPTO’s EBITDA +19% y-o-y). We increased FY20e DPS by 12% and made small changes to earnings forecasts (FY19e adjusted net income +5%). Despite the recent share price appreciation, the stock still trades at a large discount to both European regulated utilities and the implied equity regulated asset base (RAB).
Year end |
EBIT* (€m) |
Net income* |
EPS* |
DPS** |
P/E |
Dividend yield |
12/17 |
25.1 |
25.1 |
10.84 |
0.00 |
17.4 |
N/A |
12/18 |
36.2 |
36.4 |
15.68 |
5.96 |
12.1 |
3.2 |
12/19e |
38.0 |
38.2 |
16.47 |
8.83 |
11.5 |
4.7 |
12/20e |
39.7 |
39.9 |
17.19 |
8.24 |
11.0 |
4.4 |
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).
Q1 earnings well above our forecast trend for 2019
IPTO’s Q1 adjusted EBITDA grew 19% y-o-y, well above the trend we previously forecast for the full year (-3%). The EBITDA increase was driven by revenue growth (+14% due to increased electricity demand as a result of more favourable weather conditions) and stable costs. Although we see no read-across for revenue in Q2–Q4, the stability in costs was supportive for future profitability. We calculate that IPTO’s net income, adjusted for a one-off provision release, grew by 75% y-o-y to €21m. IPTO spent little capex in Q1, but we expect a pick-up of investments in the coming quarters when most of the work for extending the network should be carried out. We have made small changes to our FY19 forecasts for ADMIE Holding with adjusted net income increasing 5% and FY20e DPS increasing 12%.
Investment case focused on network expansion
ADMIE Holding offers exposure to growth in the Greek electricity transmission grid company IPTO, a regulated utility with significant growth opportunities from investments in new transmission lines. IPTO’s underleveraged balance sheet (0.9x adjusted net debt/EBITDA at the end of 2018) sustains a c €4bn investment plan, which we estimate will result in an RAB CAGR of 11% in 2018–27. We estimate a 9% EPS CAGR for ADMIE Holding (FY19-23) and a 5% DPS CAGR (FY19-24).
Valuation: Large discount to peers and RAB
Despite the recent share price increase, ADMIE Holding is trading at a large discount to other European regulated utilities on P/E, EV/EBITDA and dividend yield. In addition, ADMIE Holding is trading at c 35% discount to equity RAB, even though we believe the returns allowed by the regulator are broadly in line with ADMIE’s WACC. Our RAB-based valuation of €2.85/share (from €2.83 per share) is c 50% higher than the current share price and implies no premium or discount to RAB.
ADMIE Holding reports strong Q1
ADMIE Holding/ IPTO started FY19 with a strong Q1 (IPTO’s EBITDA up 19% y-o-y). We have increased our FY20 DPS estimate by 12% and made small changes to earnings forecasts (FY19 adjusted net income +5%). Despite the recent share price appreciation, the stock still trades at a large discount to both European regulated utilities and the implied equity RAB.
FY19 off to a strong start
ADMIE Holding and IPTO started FY19 with strong earnings growth, ahead of our full-year expectations.
IPTO’s adjusted EBITDA grew 19% y-o-y, which is well above the trend we previously forecasted for the full year (-3%). The EBITDA growth was driven by revenue growth (+14%) and broadly stable costs (EBITDA margins grew to 70.6% in Q119 from 67.6% one year earlier). Revenue growth was helped by increased electricity demand as a result of more favourable weather conditions. Although we see no read-across for revenue in Q2–Q4, we feel the stability in costs is encouraging. We calculate that IPTO’s net income, adjusted for a one-off provision release, grew by 75% y-o-y to €21m.
IPTO’s capex in Q1 was €19m, up 76% y-o-y but representing only 5% of the capex we expect for the full-year (€390m). Although capex may appear low, we note that Q118 capex also represented only 6% of the FY18 amount – we expect a pick-up of investments in the coming quarters when most of the work for extending the network should be carried out. Capex is the key growth driver of IPTO, as it increases the regulated asset base on which IPTO is remunerated (RAB multiplied by the allowed rate of return = allowed EBIT).
Small earnings forecasts changes post Q1; FY20e DPS increased 12%
We have made small forecast earnings changes, mainly reflecting the stronger than expected Q1. The most notable change is the increase in DPS for FY20e (+12%), which reflects a stable payout ratio applied to increased earnings (FY19e adj. net income up 5%; in addition reported earnings, on which DPS is calculated, benefitted from a one-off provision release of €6.9m in Q1).
Exhibit 1: Forecast changes: small increase for FY19
ADMIE Holding |
IPTO |
|||||||||
€ 000 |
2019e |
2020e |
2021e |
€m |
2019e |
2020e |
2021e |
|||
Adj. EBIT |
NEW |
38,044 |
39,732 |
41,435 |
Revenues |
NEW |
256 |
273 |
279 |
|
OLD |
36,208 |
39,691 |
41,336 |
OLD |
251 |
273 |
279 |
|||
% change |
5% |
0% |
0% |
% change |
2% |
0% |
0% |
|||
Adj. net income |
NEW |
38,200 |
39,888 |
41,591 |
Adj. EBITDA |
NEW |
168 |
185 |
190 |
|
OLD |
36,364 |
39,846 |
41,492 |
OLD |
163 |
185 |
190 |
|||
% change |
5% |
0% |
0% |
% change |
3% |
0% |
0% |
|||
DPS |
NEW |
0.088 |
0.082 |
0.081 |
Adj. net income |
NEW |
75 |
79 |
82 |
|
OLD |
0.088 |
0.073 |
0.081 |
OLD |
72 |
79 |
82 |
|||
% change |
0% |
12% |
0% |
% change |
5% |
0% |
0% |
|||
Adj. net debt |
NEW |
368 |
728 |
1025 |
||||||
OLD |
374 |
742 |
1039 |
|||||||
% change |
-1% |
-2% |
-1% |
Source: Edison Investment Research
Investment case: Regulated utility with large capex opportunity
IPTO has launched a c €4bn investment plan, mainly focused on the connection of 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 when compared to the current RAB of IPTO (€1.4bn at the end of 2018) and we estimate it should result in an 11% 2018–27 RAB CAGR (in real terms). We forecast FY19–23 EBITDA and net income CAGR of 16% and 9%, respectively, for IPTO, based on the assumption that the capex plan is implemented in a timely manner. This translates into a 9% 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 the payout ratio of 50% is well below the average level of European regulated utilities (70%+), which indicates the future growth potential of the dividend is significantly higher than other European peers. Because of the high level of capex, we expect an average annual cash outflow of c €300m for IPTO. As a result, the leverage increases significantly but only towards levels broadly in line with other European regulated utilities (around 5x net debt/EBITDA and c 50% debt/RAB in 2025). In our view, these levels do not suggest a capital increase is needed.
Exhibit 2: Key financials for IPTO (revised post Q1; see exhibit 1 for forecasts changes)
€m |
2017 |
2018 |
2019e |
2020e |
2021e |
2022e |
2023e |
Revenues |
256.5 |
249.2 |
255.8 |
273.1 |
278.9 |
283.6 |
418.0 |
% y-o-y change |
-3% |
3% |
7% |
2% |
2% |
47% |
|
Reported EBITDA |
172.0 |
182.7 |
174.7 |
185.1 |
189.9 |
194.8 |
316.4 |
% y-o-y change |
6% |
-4% |
6% |
3% |
3% |
62% |
|
Adj. EBITDA |
177.5 |
168.0 |
167.8 |
185.1 |
189.9 |
194.8 |
316.4 |
% y-o-y change |
-5% |
0% |
10% |
3% |
3% |
62% |
|
Reported EBIT |
107.7 |
115.4 |
116.7 |
109.1 |
112.9 |
116.6 |
195.2 |
% y-o-y change |
7% |
1% |
-6% |
4% |
3% |
67% |
|
Adjusted EBIT |
113.2 |
100.7 |
109.8 |
109.1 |
112.9 |
116.6 |
195.2 |
% y-o-y change |
-11% |
9% |
-1% |
4% |
3% |
67% |
|
Reported net income |
61.7 |
85.9 |
80.2 |
78.6 |
81.9 |
89.5 |
107.8 |
% y-o-y change |
39% |
-7% |
-2% |
4% |
9% |
20% |
|
Adjusted net income |
65.9 |
74.3 |
75.3 |
78.6 |
81.9 |
89.5 |
107.8 |
% y-o-y change |
13% |
1% |
4% |
4% |
9% |
20% |
|
Adjusted net debt |
285.8 |
171.1 |
368.5 |
727.9 |
1024.9 |
1415.0 |
1459.6 |
Capex (gross of subsidies) incl. ARIADNE |
70.1 |
183.1 |
390.7 |
592.3 |
436.2 |
550.8 |
262.8 |
Source: Company data, Edison Investment Research.
Valuation: Discount to peers and RAB still excessive
Despite the recent share price appreciation, we believe ADMIE Holding still trades at an excessive discount to both its own implied equity RAB value (Exhibit 3) and other European regulated utilities (Exhibit 4).
Exhibit 3: Discount to RAB
€m |
2018 |
2019e |
2020e |
2021e |
EV RAB of IPTO + work in progress |
1437 |
1741 |
2133 |
2424 |
-net debt |
-171 |
-368 |
-728 |
-1025 |
-provisions |
-78 |
-74 |
-77 |
-80 |
Equity RAB of IPTO |
1188 |
1299 |
1328 |
1319 |
ADMIE Holding's stake in IPTO |
51% |
51% |
51% |
51% |
Value of ADMIE Holding's 51% stake in IPTO |
606 |
662 |
677 |
673 |
ADMIE Holding adjustments (net cash position, DCF of corporate costs) |
-2 |
2 |
1 |
2 |
RAB-based equity value of ADMIE Holding |
603 |
664 |
679 |
675 |
Market cap |
438 |
438 |
438 |
438 |
Premium / (discount) to equity RAB |
-27% |
-34% |
-35% |
-35% |
Premium / (discount) to EV RAB |
-23% |
-25% |
-22% |
-19% |
Source: Company data, Edison Investment Research
Exhibit 4: Valuation multiples of European regulated utilities
Company |
Country |
Mkt cap (€m) |
---P/E--- |
---EV/EBITDA--- |
---Div. Yld--- |
FY0–FY2 EBITDA CAGR |
FY0–FY2 EPS CAGR |
||||||
FY0 |
FY1 |
FY2 |
FY0 |
FY1 |
FY2 |
FY0 |
FY1 |
FY2 |
|||||
Terna Rete Elettrica Nazionale |
Italy |
14,828 |
16.4x |
15.6x |
15.1x |
11.8x |
11.2x |
10.8x |
4.1% |
4.3% |
4.7% |
4.4% |
4.2% |
Snam |
Italy |
20,625 |
15.7x |
15.1x |
14.7x |
13.0x |
12.8x |
12.5x |
4.8% |
5.0% |
5.3% |
2.1% |
3.2% |
Italgas |
Italy |
6,181 |
15.2x |
14.5x |
13.9x |
10.2x |
10.1x |
9.8x |
3.9% |
4.1% |
4.4% |
1.8% |
4.8% |
Enagas |
Spain |
7,803 |
13.7x |
14.4x |
13.4x |
10.1x |
10.2x |
10.0x |
5.9% |
6.3% |
6.6% |
0.5% |
1.1% |
Red Electrica Corporacion |
Spain |
13,679 |
15.0x |
14.6x |
15.1x |
10.0x |
9.5x |
9.6x |
5.0% |
5.3% |
5.4% |
2.2% |
-0.4% |
National Grid PLC |
UK |
40,759 |
13.6x |
14.2x |
13.3x |
10.9x |
10.4x |
9.8x |
5.8% |
5.9% |
6.1% |
5.1% |
1.0% |
Elia System Operator SA |
Belgium |
5,747 |
14.5x |
16.7x |
15.9x |
13.9x |
10.9x |
10.3x |
1.8% |
2.6% |
2.7% |
16.1% |
-4.5% |
Ren Redes Energeticas Nacionais |
Portugal |
2,114 |
14.5x |
13.4x |
13.3x |
8.6x |
8.8x |
8.9x |
5.0% |
6.7% |
6.8% |
-1.3% |
4.5% |
Severn Trent PLC |
UK |
7,148 |
14.3x |
15.7x |
18.0x |
11.9x |
11.5x |
11.9x |
4.5% |
4.8% |
4.9% |
0.0% |
-11.0% |
Pennon Group PLC |
UK |
4,638 |
13.2x |
12.9x |
14.0x |
NA |
10.8x |
11.1x |
5.4% |
5.8% |
6.0% |
NA |
-3.0% |
United Utilities Group PLC |
UK |
8,241 |
15.0x |
14.5x |
18.2x |
12.7x |
11.5x |
12.5x |
4.9% |
5.0% |
5.0% |
0.9% |
-9.1% |
Average |
14.5x |
14.5x |
14.7x |
11.3x |
10.8x |
10.3x |
4.9% |
5.0% |
5.3% |
2.0% |
1.0% |
||
ADMIE Holding |
Greece |
438 |
12.1x |
11.5x |
11.0x |
6.6x |
7.8x |
9.0x |
3.2% |
4.7% |
4.4% |
5.0% |
4.7% |
Source: Refinitiv, Edison Investment Research. Note: Priced at 7 June 2019.
While we believe there may be some reasons that partly justify a discount to other European peers (limited liquidity of the stock, higher country risk premium, control by the Greek government and the fact that the regulation for IPTO has a shorter track record than other European countries), we believe the discount is excessive.
Our RAB-based valuation of ADMIE Holding is €2.85/share (small change vs €2.83/share previously thanks to slightly lower net debt) and is broadly in line with the equity RAB implied by IPTO. This is because we calculate that the return allowed by the regulator is broadly in line with the actual cost of capital for the company, based on current market values for cost of debt and cost of equity.
As the capex plan is gradually implemented and the company establishes a growth track record, we expect a gradual rerating of the stock.
Key risks for ADMIE Holding are rising interest rates, changes in the regulatory framework, increasing country risk premium and political intervention risks.
Exhibit 5: Financial summary
Accounts: IFRS, Yr end: December, EUR: Thousands |
|
|
2017 |
2018 |
2019e |
2020e |
2021e |
2022e |
2023e |
Income statement |
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
0 |
0 |
0 |
0 |
0 |
0 |
0 |
Cost of sales |
|
|
0 |
0 |
0 |
0 |
0 |
0 |
0 |
Gross profit |
|
|
0 |
0 |
0 |
0 |
0 |
0 |
0 |
SG&A (expenses) |
|
|
(973) |
(239) |
(335) |
(341) |
(348) |
(355) |
(362) |
Profit (loss) from JVs / associates (post tax) |
|
|
24,024 |
42,353 |
40,919 |
40,082 |
41,794 |
45,646 |
54,971 |
Depreciation and amortisation |
|
|
(2) |
(4) |
(6) |
(8) |
(10) |
(12) |
(14) |
Reported EBIT |
|
|
23,049 |
42,110 |
40,578 |
39,732 |
41,435 |
45,279 |
54,595 |
Finance income/(expense) |
|
|
(8) |
156 |
156 |
156 |
156 |
156 |
156 |
Reported PBT |
|
|
23,041 |
42,265 |
40,733 |
39,888 |
41,591 |
45,434 |
54,751 |
Income tax expense (includes exceptionals) |
|
|
0 |
0 |
0 |
0 |
0 |
0 |
0 |
Reported net income |
|
|
23,041 |
42,265 |
40,733 |
39,888 |
41,591 |
45,434 |
54,751 |
Adjusted net income |
25,139 |
36,376 |
38,200 |
39,888 |
41,591 |
45,434 |
54,751 |
||
Basic average number of shares, m |
|
|
232 |
232 |
232 |
232 |
232 |
232 |
232 |
Basic EPS, €cents/share |
|
|
9.93 |
18.22 |
17.56 |
17.19 |
17.93 |
19.58 |
23.60 |
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA |
|
|
25,149 |
36,225 |
38,050 |
39,740 |
41,446 |
45,291 |
54,609 |
Adjusted EBIT |
|
|
25,147 |
36,221 |
38,044 |
39,732 |
41,435 |
45,279 |
54,595 |
Adjusted PBT |
|
|
25,139 |
36,376 |
38,200 |
39,888 |
41,591 |
45,434 |
54,751 |
Adjusted EPS, cents/share |
|
|
10.84 |
15.68 |
16.47 |
17.19 |
17.93 |
19.58 |
23.60 |
Adjusted diluted EPS, cents/share |
|
|
10.84 |
15.68 |
16.47 |
17.19 |
17.93 |
19.58 |
23.60 |
DPS, cents/share (declared for fiscal year) |
|
|
0.00 |
5.96 |
8.83 |
8.24 |
8.06 |
8.41 |
9.20 |
DPS, €cents/share (cash payment for the year) |
|
|
0.00 |
3.16 |
8.80 |
8.83 |
8.24 |
8.06 |
8.41 |
Balance sheet |
|
|
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
5 |
5 |
9 |
11 |
10 |
8 |
4 |
Intangible assets |
|
|
9 |
7 |
7 |
7 |
7 |
7 |
7 |
Other non-current assets |
|
|
520,134 |
550,439 |
569,466 |
589,088 |
610,841 |
635,590 |
667,739 |
Total non-current assets |
|
|
520,148 |
550,451 |
569,482 |
589,106 |
610,858 |
635,606 |
667,750 |
Cash and equivalents |
|
|
2,181 |
4,843 |
6,130 |
5,914 |
6,640 |
8,619 |
11,711 |
Inventories |
|
|
0 |
0 |
0 |
0 |
0 |
0 |
0 |
Trade and other receivables |
|
|
79 |
9,907 |
9,907 |
9,907 |
9,907 |
9,907 |
9,907 |
Other current assets |
|
|
0 |
0 |
0 |
0 |
0 |
0 |
0 |
Total current assets |
|
|
2,260 |
14,750 |
16,037 |
15,821 |
16,547 |
18,526 |
21,618 |
Non-current loans and borrowings |
|
|
0 |
0 |
0 |
0 |
0 |
0 |
0 |
Other non-current liabilities |
|
|
0 |
0 |
0 |
0 |
0 |
0 |
0 |
Total non-current liabilities |
|
|
0 |
0 |
0 |
0 |
0 |
0 |
0 |
Trade and other payables |
|
|
18 |
20 |
20 |
20 |
20 |
20 |
20 |
Current loans and borrowings |
|
|
0 |
0 |
0 |
0 |
0 |
0 |
0 |
Other current liabilities |
|
|
3,731 |
0 |
0 |
0 |
0 |
0 |
0 |
Total current liabilities |
|
|
3,749 |
20 |
20 |
20 |
20 |
20 |
20 |
Equity attributable to company |
|
|
518,659 |
565,181 |
585,498 |
604,906 |
627,385 |
654,112 |
689,348 |
Non-controlling interest |
|
|
0 |
0 |
0 |
0 |
0 |
0 |
0 |
|
|
|
|
|
|
|
|
|
|
Cashflow statement |
|
|
|
|
|
|
|
|
|
Profit before tax |
|
|
23,041 |
42,265 |
40,733 |
39,888 |
41,591 |
45,434 |
54,751 |
Net finance expenses |
|
|
19 |
(156) |
(156) |
(156) |
(156) |
(156) |
(156) |
Depreciation and amortisation |
|
|
2 |
4 |
6 |
8 |
10 |
12 |
14 |
Other adjustments |
|
|
(24,024) |
(42,353) |
(40,919) |
(40,082) |
(41,794) |
(45,646) |
(54,971) |
Movements in working capital |
|
|
(622) |
(1,053) |
0 |
0 |
0 |
0 |
0 |
Cash from operations (CFO) |
|
|
(1,584) |
(1,293) |
(335) |
(341) |
(348) |
(355) |
(362) |
Capex |
|
|
(16) |
(2) |
(10) |
(10) |
(10) |
(10) |
(10) |
Cash used in investing activities (CFIA) |
|
|
(16) |
(2) |
(10) |
(10) |
(10) |
(10) |
(10) |
Net proceeds from issue of shares |
|
|
70 |
0 |
0 |
0 |
0 |
0 |
0 |
Dividends paid |
|
|
0 |
(6,300) |
(20,416) |
(20,479) |
(19,112) |
(18,708) |
(19,515) |
Other financing activities |
|
|
3,711 |
10,256 |
22,047 |
20,615 |
20,196 |
21,052 |
22,979 |
Cash from financing activities (CFF) |
|
|
3,781 |
3,956 |
1,631 |
135 |
1,084 |
2,344 |
3,464 |
Increase/(decrease) in cash and equivalents |
|
|
2,181 |
2,662 |
1,287 |
(216) |
726 |
1,979 |
3,092 |
Cash and equivalents at end of period |
|
|
2,181 |
4,843 |
6,130 |
5,914 |
6,640 |
8,619 |
11,711 |
Net (debt) cash |
|
|
2,181 |
4,843 |
6,130 |
5,914 |
6,640 |
8,619 |
11,711 |
Movement in net (debt) cash over period |
|
|
2,181 |
2,662 |
1,287 |
(216) |
726 |
1,979 |
3,092 |
Source: Company data, Edison Investment Research
|
|
Research: Healthcare
Pacific Edge recently reported FY19 results, including 12.3% growth in Cxbladder sales compared to FY18. These sales exclude tests for patients covered by the US Centers for Medicare and Medicaid Services (CMS), which currently account for approximately 50% of lab throughput. Total lab throughput increased by 8.6% during the year, with Q419 up 26% compared to Q418 and up 12% compared to the prior quarter. Rest of world (ROW) throughput (which represents 20% of the total) increased by 126% in the quarter versus Q418, mainly due to strength in the New Zealand market.