KTG Energie
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KTG Energie |
Steady strength defies sector challenges |
Forecast update |
Alternative energy |
26 April 2016 |
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KTG Energie is a research client of Edison Investment Research Limited |
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Another amendment to the German renewable energy law could provide opportunities for KTG, either through sector consolidation or additional support for its plant. While we still see margin expansion, we have reduced our EBITDA margin forecast following the publication of the full annual report to reflect guidance more closely. On this basis, FY16e EPS declines to €0.67 (€0.75). Our fair value of €18/share remains unchanged as lower working capital requirement compensates.
Year end |
Revenue (€m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
10/14 |
73.3 |
4.0 |
0.40 |
0.45 |
23.7 |
4.8 |
10/15 |
92.8 |
4.6 |
0.40 |
0.50 |
23.7 |
5.3 |
10/16e |
100.4 |
8.2 |
0.67 |
0.55 |
14.1 |
5.8 |
10/17e |
107.9 |
10.0 |
0.82 |
0.65 |
11.5 |
6.9 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Draft renewable energy law amendment
The German cabinet has approved a first draft on the upcoming renewable energy law (EEG) amendment. The mature technologies, ie wind and large solar, are to move from automatic feed-in tariffs to tender mechanisms from 2017. Biogas will not be included in the new tender process. There is still debate as to whether existing biogas plants should have the possibility to tender for follow-on subsidies after their 20-year feed-in tariff under previous EEGs expires.
KTG is well positioned in any scenario
Whatever the outcome of the support debate, it would appear that KTG is well positioned. If the tender mechanism fails to gain approval, acquisition opportunities and/or sector consolidation may arise. If a tender mechanism is introduced, either for new plant or for existing plant as follow-on support, KTG should be a beneficiary. Tenders for new capacity would be very competitive. Given KTG’s feedstock advantage through its parent company relationship, it should be able to bid very competitively into new tenders. That should support capacity growth for KTG. Follow-on tenders would add further years of return that we have currently not factored into our estimates.
Update to our forecast
We have slightly tempered our implied EBITDA margin to 31% and now forecast EBITDA of €29.1m (from €31.5m), in line with management guidance. This feeds through to a decline in our EPS forecast to €0.67 (from €0.75). We forecast a net cash outflow of €7.4m in FY16 and net debt of €144m at end FY16.
Valuation: Unchanged at €18/share
We value KTG using a three-stage DCF methodology based on long-term normalised assumptions (risk-free rate 4.0%, equity risk premium 4.5%, 35% equity ratio). Our €18/share fair value remains unchanged.
Well positioned for the future
Debate on support is a positive
The German cabinet has approved a first draft on the upcoming renewable energy law (EEG) amendment. The EEG regularly gets amended in order to update feed-in tariffs and build-out targets in order to take into account rapid change in the sector in Germany. The mature technologies, ie wind and large solar, will move from a regime governed by automatic feed-in tariffs to tender mechanisms from 2017. This was expected and has been mentioned in previous bills. Biogas will not be included in the new tender process.
There is scope for further amendments to the draft bill before it gets passed by parliament. The annual new build cap for biogas could get reduced from 150MW to 100MW pa of new build. There is also debate as to whether existing biogas plants should have the possibility to tender for follow-on subsidies after their 20-year feed-in tariffs under previous EEGs expires. At the moment, there is no provision for any follow-on regimes for plant that see their EEG guarantees expiring. The industry lobby is pushing for such subsidies, given the upcoming end of subsidies for a number of older installations. We gather that this is a way to keep plant open that would otherwise have to shut. However, at this stage, there is no provision for this in the bill. We understand from management that, whatever the outcome of the debate and whether or not there will be follow-up support for old plant, it opens opportunities for KTG. Under current power prices of €22/MWh, biogas would not be viable without support. Consequently, if no provisions for tenders for old plant were to be included in the final bill, it could bring acquisition opportunities for KTG and/or could lead to sector consolidation. Conversely, if tenders were to be brought in, KTG would benefit for its first-generation plants and in the longer term for the later rounds of new build. That would be a significant positive; already written-off plant would receive additional guaranteed returns.
Updates to our forecast
Following the publication of the company’s full annual report, we have updated our model. We forecast FY16 revenues of €100m, with capacity growth the prime driver of our 8.2% y-o-y increase. Our EBITDA forecast declines slightly as we have tempered our margin forecast. We now forecast €29.1m of EBITDA for FY16 (from €31.5m). This implies a 31% underlying (excluding non-electricity revenues) EBITDA margin, which is in line with management’s guidance for like-for-like (ie prior to new capacity growth) implied EBITDA margins. Our net interest has decreased as a result of lower net debt. Nevertheless, because of the reduction in EBITDA and EBIT, our FY16 EPS forecast decreases to €0.67 (from €0.75). We have reduced our capex estimates as we have now seen evidence that the company can deliver growth at lower than initially expected levels of capex. Our 2016 capex forecast is now €15.0m (from €17.5m). As interest and a high dividend pay-out still exceed free cash flows, we forecast a net cash outflow of €7.4m for this year. This, however, is a substantial improvement from our previous forecast of an outflow of €13.2m. The key factor for this is a lower working capital requirement than our previous estimate. With that, we estimate net debt of €144m at the end of FY16.
Exhibit 1: EPS forecast changes (€)
2015 |
2016e |
2017e |
|
EPS old (2016/17) |
0.40 |
0.75 |
0.94 |
EPS new |
0.67 |
0.82 |
Source: KTG Energie and Edison Investment Research
Exhibit 2: Financial summary
€000s |
2014 |
2015 |
2016e |
2017e |
2018e |
||
Year end 31 October |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|||||||
Revenue |
|
|
73,325 |
92,813 |
100,386 |
107,919 |
115,203 |
Cost of Sales |
(32,218) |
(42,256) |
(45,174) |
(48,564) |
(51,841) |
||
Gross Profit |
41,106 |
50,557 |
55,212 |
59,356 |
63,361 |
||
EBITDA |
|
|
21,968 |
25,016 |
29,097 |
31,311 |
35,100 |
Operating Profit (before amort. and except.) |
11,994 |
13,296 |
17,179 |
19,410 |
23,261 |
||
Intangible Amortisation |
0 |
0 |
0 |
0 |
0 |
||
Exceptionals |
0 |
0 |
0 |
0 |
0 |
||
Other |
0 |
0 |
0 |
0 |
0 |
||
Operating Profit |
11,994 |
13,296 |
17,179 |
19,410 |
23,261 |
||
Net Interest |
(7,931) |
(8,733) |
(8,948) |
(9,368) |
(9,341) |
||
Other financial items |
(71) |
(4) |
0 |
0 |
0 |
||
Profit Before Tax (norm) |
|
|
3,992 |
4,558 |
8,231 |
10,042 |
13,920 |
Profit Before Tax (FRS 3) |
|
|
3,992 |
4,558 |
8,231 |
10,042 |
13,920 |
Tax |
(1,369) |
(1,792) |
(3,417) |
(4,169) |
(5,778) |
||
Profit After Tax (norm) |
2,623 |
2,767 |
4,814 |
5,874 |
8,143 |
||
Profit After Tax (FRS 3) |
2,623 |
2,767 |
4,814 |
5,874 |
8,142 |
||
Average Number of Shares Outstanding (m) |
6.500 |
6.837 |
7.174 |
7.174 |
7.174 |
||
EPS - normalised (c) |
|
|
40.3 |
40.5 |
67.1 |
81.9 |
113.5 |
EPS - normalised fully diluted (c) |
|
|
40.3 |
40.5 |
67.1 |
81.9 |
113.5 |
EPS - (IFRS) (c) |
|
|
40.3 |
40.5 |
67.1 |
81.9 |
113.5 |
Dividend per share (c) |
45.0 |
50.0 |
55.0 |
65.0 |
80.0 |
||
Gross Margin (%) |
56.1 |
54.5 |
55.0 |
55.0 |
55.0 |
||
EBITDA Margin (%) |
30.0 |
27.0 |
29.0 |
29.0 |
30.5 |
||
Operating Margin (before GW and except.) (%) |
16.4 |
14.3 |
17.1 |
18.0 |
20.2 |
||
BALANCE SHEET |
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Fixed Assets |
|
|
177,787 |
191,917 |
194,999 |
198,098 |
186,259 |
Intangible Assets |
783 |
783 |
783 |
783 |
783 |
||
Tangible Assets |
177,002 |
191,132 |
194,214 |
197,313 |
185,474 |
||
Investments |
2 |
2 |
2 |
2 |
2 |
||
Current Assets |
|
|
60,475 |
55,293 |
61,923 |
67,924 |
84,327 |
Stocks |
17,430 |
17,498 |
18,317 |
19,292 |
20,594 |
||
Debtors |
33,677 |
27,069 |
32,880 |
37,905 |
42,191 |
||
Cash |
8,302 |
9,662 |
9,662 |
9,662 |
20,477 |
||
Other |
1,065 |
1,065 |
1,065 |
1,065 |
1,065 |
||
Current Liabilities |
|
|
(10,036) |
(6,663) |
(7,027) |
(7,554) |
(8,064) |
Creditors |
(10,036) |
(6,663) |
(7,027) |
(7,554) |
(8,064) |
||
Short term borrowings |
0 |
0 |
0 |
0 |
0 |
||
Long Term Liabilities |
|
|
(203,125) |
(205,905) |
(213,858) |
(220,502) |
(221,078) |
Long term borrowings |
(145,509) |
(145,925) |
(153,275) |
(159,380) |
(159,380) |
||
Other long term liabilities |
(57,616) |
(59,980) |
(60,582) |
(61,122) |
(61,698) |
||
Net Assets |
|
|
25,100 |
34,642 |
36,037 |
37,965 |
41,444 |
CASH FLOW |
|||||||
Operating Cash Flow |
|
|
14,317 |
27,152 |
20,016 |
22,209 |
24,819 |
Net Interest |
(7,931) |
(8,733) |
(8,948) |
(9,368) |
(9,341) |
||
Tax |
0 |
0 |
0 |
0 |
0 |
||
Capex |
(31,512) |
(16,706) |
(15,000) |
(15,000) |
0 |
||
Acquisitions/disposals |
0 |
0 |
0 |
0 |
0 |
||
Financing |
15,538 |
1,987 |
0 |
0 |
0 |
||
Dividends |
(2,400) |
(2,756) |
(3,419) |
(3,946) |
(4,663) |
||
Net Cash Flow |
(11,988) |
943 |
(7,351) |
(6,104) |
10,815 |
||
Opening net debt/(cash) |
|
|
125,219 |
137,207 |
136,263 |
143,614 |
149,718 |
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
||
Other |
0 |
(0) |
(0) |
(0) |
(0) |
||
Closing net debt/(cash) |
|
|
137,207 |
136,263 |
143,614 |
149,718 |
138,903 |
Source: KTG Energie and Edison Investment Research. Note: Under German GAAP, assets are valued at acquisition costs. IFRS would mark assets to market and thereby lead to higher net assets.
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