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Research: Industrials
Mytilineos issued its first bond on the international debt capital market. The €500m five-year bond issue has a 2.5% coupon, lower than initial expectations and below the current weighted average cost of debt for the group. In addition to refinancing existing debt, the proceeds will be used to finance organic growth capex. Among the growth projects, we believe a new €300m gas-fired power plant has the potential to generate double-digit returns. In our view the share price does not fully reflect the lower country risk premium and we see room for a further re-rating. Our forecasts and valuation are unchanged.
Written by
Dario Carradori
Mytilineos |
A low high yield |
New bond issue |
General industrials |
2 December 2019 |
Share price performance
Business description
Next events
Analyst
Mytilineos is a research client of Edison Investment Research Limited |
Mytilineos issued its first bond on the international debt capital market. The €500m five-year bond issue has a 2.5% coupon, lower than initial expectations and below the current weighted average cost of debt for the group. In addition to refinancing existing debt, the proceeds will be used to finance organic growth capex. Among the growth projects, we believe a new €300m gas-fired power plant has the potential to generate double-digit returns. In our view the share price does not fully reflect the lower country risk premium and we see room for a further re-rating. Our forecasts and valuation are unchanged.
Year end |
EBITDA* |
Net income* |
EPS* |
DPS |
P/E |
Yield |
12/17 |
299 |
139 |
1.02 |
0.32 |
10.0 |
3.2 |
12/18 |
290 |
139 |
1.01 |
0.36 |
10.1 |
3.6 |
12/19e |
337 |
169 |
1.18 |
0.41 |
8.3 |
4.1 |
12/20e |
330 |
175 |
1.22 |
0.43 |
8.0 |
4.3 |
Note: *EBITDA, net income and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Taking advantage of declining country risk premium
On 22 November 2019 Mytilineos issued its debut bond in the international debt capital markets. The €500m bond has a 2.5% coupon (which includes a new issuer premium), lower than the 2.75% initially expected as demand reached €1.3bn before books closed. The coupon is lower than Mytilineos’s bond issue in 2017 (3.1%, sold only on the domestic market and with a large retail component) and below the current weighted average cost of debt for the group of c 3%. Improving Greek financial conditions, thanks to a new pro-market government and ongoing economic recovery, drove a >50% decline in the 10-year Germany-Greece spread.
Low cost of debt, high returns from CCGT project
This sizeable bond issue improves the group’s liquidity position, extends the duration of its debt and provides more visibility on the company’s (low) cost of capital. In addition to refinancing, we expect proceeds of the issue to be used to finance growth capex. Among its growth projects, we believe the new €300m 826MW gas-fired power plant project (construction started in October) has the potential to generate double-digit returns. We have recently reduced our WACC assumptions to reflect the steep decline of Greek government bond yields and increased our valuation of Mytilineos accordingly.
Valuation: More room for a re-rating
We believe Mytilineos’s share price does not fully reflect the recent decline in Greek government bond yields and we see further room for a re-rating. We forecast Mytilineos to generate free cash flow (pre growth capex) equal to 43% of the current market cap in the period FY20–22. We expect a third of the cash flow to be paid as dividends, with the rest mostly invested in the new power plant, the key driver of EBITDA growth (our FY22 EBITDA forecast is 34% higher than FY19). Considering the robust growth profile/cash flow generation and solid balance sheet, we believe the current valuation multiples (c 8x P/E and 5x EV/EBITDA) are attractive. Our DCF-based value of €14.5/share offers significant upside potential.
Mytilineos: Taking advantage of declining interest rates
Exhibit 1 shows there is a correlation between the valuation multiples of Mytilineos (and the Greek stock market) and the country risk premium. Although the Greece 10-year government bond yield has declined dramatically in 2019 (down c 75%), thanks to improving economic conditions and the election of a more pro-market government, the impact on Mytilineos’s valuation multiples has been positive but more muted (from 6x to 8x P/E based on Refinitiv consensus estimates). Our sensitivity analysis suggests that a 1% lower WACC drives a 20% higher valuation. In addition, given the group’s significant discount to international diversified industrial groups and strong free cash flow yield, we see room for a further re-rating.
Exhibit 1: Mytilineos one-year forward P/E vs Greece 10-year government bond yield |
Source: Refinitiv |
A low high yield
As detailed in Exhibit 2, we believe the 2.5% coupon of Mytilineos’s recent bond issue compares favourably to a mix of other high-yield issuers over the same period. Mytilineos is a debut issuer on the international debt capital market and we believe the coupon is low considering that the issue also reflects a new issuer premium. The low cost in our view reflects the strong free cash flow generation of the company, the solid balance sheet and the diversification of its operations. This bond issue represents Mytilineos’s first Eurobond as the outstanding bond issued in 2017 is a Greek domestic bond, with a large retail component, listed on ATHEX (coupon 3.1%).
The S&P credit rating awarded to Mytilineos is the same as Greece (BB-) while the company’s Fitch rating is higher (BB vs BB- for Greece).
Exhibit 2: High-yield bonds issued in the same period
Date |
Issuer |
Tenor (year) |
S&P rating |
Size (m) |
Coupon (%) |
19 November 2019 |
Teva |
5.25 |
BB |
$1,000 |
7.125% |
19 November 2019 |
Teva |
5.25 |
BB |
€1,000 |
6.000% |
21 November 2019 |
Jaguar Land Rover |
7.00 |
B+ |
€300 |
6.875% |
21 November 2019 |
Jaguar Land Rover |
5.00 |
B+ |
€500 |
5.875% |
22 November 2019 |
Mytilineos |
5.00 |
BB- |
€500 |
2.500% |
22 November 2019 |
TAP |
5.00 |
BB- |
€375 |
5.750% |
Source: Refinitiv, Mytilineos, industry sources
Exhibit 3: Financial summary
Accounts: IFRS; year-end 31 December, €m |
|
2017 |
2018 |
2019e |
2020e |
2021e |
2022e |
INCOME STATEMENT |
|
|
|
|
|
|
|
Total revenues |
|
1,527 |
1,527 |
1,941 |
2,088 |
2,266 |
3,025 |
Cost of sales |
|
(1,143) |
(1,150) |
(1,500) |
(1,649) |
(1,799) |
(2,446) |
Gross profit |
|
384 |
376 |
441 |
439 |
468 |
579 |
SG&A (expenses) |
|
(86) |
(88) |
(99) |
(104) |
(107) |
(121) |
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 |
250 |
239 |
262 |
351 |
Finance income/(expense) |
|
(43) |
(38) |
(23) |
(12) |
(9) |
(26) |
Other income/(expense) |
|
(7) |
1 |
(7) |
(7) |
(7) |
(7) |
Reported PBT |
|
182 |
161 |
220 |
220 |
246 |
318 |
Income tax expense (includes exceptionals) |
|
(24) |
(24) |
(44) |
(42) |
(44) |
(57) |
Reported net income |
|
158 |
133 |
175 |
178 |
202 |
261 |
Basic average number of shares (m) |
|
142.9 |
142.9 |
142.9 |
142.9 |
142.9 |
142.9 |
Basic EPS (€) |
|
1.08 |
0.99 |
1.18 |
1.22 |
1.39 |
1.80 |
Adjusted EBITDA |
|
299 |
290 |
337 |
330 |
355 |
452 |
Adjusted EBIT |
|
226 |
290 |
250 |
239 |
262 |
351 |
Adjusted PBT |
|
175 |
167 |
220 |
220 |
246 |
318 |
Adjusted net income |
|
139 |
139 |
169 |
175 |
198 |
257 |
Adjusted EPS (€) |
|
1.02 |
1.01 |
1.18 |
1.22 |
1.39 |
1.80 |
Adjusted diluted EPS (€) |
|
1.02 |
1.01 |
1.18 |
1.22 |
1.39 |
1.80 |
DPS (€) |
|
0.32 |
0.36 |
0.41 |
0.43 |
0.49 |
0.63 |
Adjusted EBIT margin |
|
15% |
13% |
13% |
11% |
12% |
12% |
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 |
80 |
(29) |
(73) |
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 |
1,444 |
1,428 |
1,488 |
1,730 |
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 |
1,618 |
1,731 |
1,860 |
2,027 |
Non-controlling interest |
|
54 |
53 |
60 |
63 |
66 |
70 |
CASH FLOW STATEMENT |
|
|
|
|
|
|
|
Profit for the year |
|
158 |
144 |
176 |
178 |
202 |
261 |
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 |
207 |
215 |
239 |
292 |
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) |
(69) |
(90) |
Other financing activities |
|
(48) |
106 |
(53) |
0 |
0 |
0 |
Cash from financing activities (CFF) |
|
(134) |
(68) |
(212) |
(111) |
(69) |
(90) |
Increase/(decrease) in cash and equivalents |
|
(37) |
47 |
(128) |
(109) |
(44) |
120 |
Cash and equivalents at end of period |
|
161 |
208 |
80 |
(29) |
(73) |
47 |
Net (debt)/cash |
|
(568) |
(390) |
(419) |
(477) |
(521) |
(401) |
Movement in net (debt)/cash over period |
|
50 |
178 |
(28) |
(59) |
(44) |
120 |
Source: Company accounts, Edison Investment Research
|
|
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