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Research: Industrials
Mytilineos has reported record-high quarterly results for the fourth consecutive quarter. Net profit after minorities increased by 283% to €146m, versus Q321 (€38m). It was encouraging to see a strong performance across all four divisions, with record quarterly results in Renewables & Storage Development (RSD), Sustainable Engineering Solutions (SES) and Power & Gas (P&G). RSD benefited from a strong pipeline of solar parks under construction coming to fruition; we expect this to continue in Q4. An influx of higher-margin gas projects helped drive earnings growth in SES. We upgrade our forecasts in this division. The continued strength in P&G is a testament to Mytilineos’s integrated model, its ability to source gas at competitive prices and the high efficiency and flexibility of its power generation portfolio. We also upgrade our forecasts in this division. Our per share valuation increases to €28.0 (from €27.0 previously).
Mytilineos |
Reaping rewards from proactive management |
Update on Q3 results |
Industrials |
2 November 2022 |
Share price performance
Business description
Next events
Analyst
Mytilineos is a research client of Edison Investment Research Limited |
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Mytilineos has reported record-high quarterly results for the fourth consecutive quarter. Net profit after minorities increased by 283% to €146m, versus Q321 (€38m). It was encouraging to see a strong performance across all four divisions, with record quarterly results in Renewables & Storage Development (RSD), Sustainable Engineering Solutions (SES) and Power & Gas (P&G). RSD benefited from a strong pipeline of solar parks under construction coming to fruition; we expect this to continue in Q4. An influx of higher-margin gas projects helped drive earnings growth in SES. We upgrade our forecasts in this division. The continued strength in P&G is a testament to Mytilineos’s integrated model, its ability to source gas at competitive prices and the high efficiency and flexibility of its power generation portfolio. We also upgrade our forecasts in this division. Our per share valuation increases to €28.0 (from €27.0 previously).
Year end |
EBITDA |
Net income |
EPS* |
DPS** |
P/E |
Yield |
12/20 |
315 |
130 |
0.91 |
0.38 |
15.9 |
2.6 |
12/21 |
359 |
180 |
1.32 |
0.46 |
10.9 |
3.1 |
12/22e |
717 |
392 |
2.87 |
1.00 |
5.8 |
6.0 |
12/23e |
783 |
441 |
3.23 |
1.13 |
5.1 |
6.8 |
12/24e |
796 |
450 |
3.30 |
1.15 |
5.0 |
6.9 |
Note: *Number of shares is adjusted for the company’s ongoing buyback scheme. **Final distributed dividend per share.
Proactive management team showing foresight
Mytilineos’s continued record quarterly earnings against the backdrop of the energy crisis in Europe, inflationary pressures, rising interest rates and geopolitical tensions reflects the robustness of its business model and the foresight that the management team has shown in its investment decisions on decarbonisation over the last few years. Q322 is the first quarter in which all divisions have performed strongly at the same time.
Significant financial flexibility
Mytilineos is well funded to support its investment in renewables (and the wider energy transition). Despite net debt increasing from €0.9bn at end-H122 to €1.4bn at 30 September 2022, it still has financial flexibility of c €1.0bn and should gain access to cheap finance from the European Recovery and Resilience Facility (RRF). This is augmented by strong operating cash flow across all areas of the business, albeit affected by increased working capital requirements in Q3 due to unprecedentedly high electricity prices in Greece. We expect net debt to decrease to €1.1bn by year end, due to reversals in working capital as the electricity price decreases. Our forecast net debt to EBITDA ratio is just 1.3–1.6x in FY22–25.
Valuation: Attractive upside
Our valuation increases to €28.0/share (c 70% above the current share price), from €27.0 previously. It is based on a 10-year discounted cash flow (DCF) methodology, which reflects Mytilineos’s growth prospects under the energy transition. We cross-check with a sum-of-the-parts (SOTP) peer valuation (€29.0/share).
Continued momentum in record earnings
Mytilineos has reported record-high quarterly results for the fourth consecutive quarter. EBITDA increased quarter-on-quarter from €86m in Q321 to €240m in Q322 and net income (after minorities) has increased from €38m in Q321 to €146m in Q322. This growth has been supported by proactive investments made by the entrepreneurial management team. Over the last three years, Mytilineos has invested c €1bn, mostly in energy transition related activities. This has helped position it favourably against its peers.
|
Exhibit 1: Progression of quarterly EBITDA from Q319 to Q322 (€m) |
|
|
Source: Edison Investment Research, Mytilineos |
Valuation: Risk-reward balance skewed to the upside
We use a 10-year DCF analysis (on a SOTP basis), in order to reflect the longer-term impact of the energy transition. We place less emphasis on peer valuation, using it only as a cross-check. Our DCF approach suggests a per-share valuation of €28.0, which implies c 70% upside versus the current share price (€16.61) and is a €1.0/share increase on our last published valuation. The main drivers for our increased valuation are upgraded forecasts in the SES and P&G divisions, as set out in the financials section below. This has resulted in our enterprise valuation for each of these divisions increasing by 8%, as shown in Exhibit 2.
25BDCF
Key assumptions and drivers for our cash flow model are as follows:
■
In line with the European Central Bank’s projections, we apply inflation of 8.1% in 2022, 5.5% in 2023 and 2.3% in 2024, followed by 2% pa from 2025 to our forecasts made in real terms over a 10-year explicit cash flow period.
■
A 1% terminal growth rate for Metallurgy, P&G and SES, and 2% for RSD, which is conservative, particularly for businesses that should benefit from strong long-term growth rates associated with the energy transition.
■
A WACC of 7.5%, based on a beta of 1.0x, cost of equity of 11.7%, risk free rate of 1.4% and gross cost of debt of 2.0% (with total debt at an assumed 40% of capital).
■
Terminal capex (included in the terminal cash flow) for the P&G and Metallurgy divisions of 1.5x depreciation.
■
SES is not a capex intensive business; however, we adopt capex assumptions equating to c 2x depreciation throughout our forecast period.
■
For RSD, we assume capex of €364m in FY22 for the completion of ‘build, operate and transfer’ (BOT) solar plants under construction (665MW at the end of H122). For the subsequent period we assume that proceeds from the sale of projects is reinvested to maintain a run rate of 500MW pa; thus, net growth capex is zero.
■
We use the number of shares excluding share repurchases (136.5m) in arriving at our value per share of €28. This is consistent with using the number of shares in issue (142.9m) but adding Mytilineos’s investment in its own shares (c 6.4m shares repurchased) to the equity valuation.
Exhibit 2: DCF-based SOTP valuation
Components |
Edison new EV (€m) |
Per share |
EBITDA 2022e (€m) |
Implied EV/EBITDA (x) |
Edison old EV (€m) |
Per share (old) (€) |
Difference old versus new (%) |
Per share difference (€) |
P&G |
1,629 |
11.9 |
320 |
5.1x |
1,513 |
11.0 |
8% |
0.9 |
Metallurgy |
1,801 |
13.2 |
251 |
7.2x |
1,802 |
13.1 |
0% |
0.1 |
RSD |
1,123 |
8.2 |
96 |
11.7x |
1,124 |
8.2 |
0% |
0.0 |
SES |
528 |
3.9 |
70 |
7.6x |
491 |
3.6 |
8% |
0.3 |
Other* |
(19) |
|||||||
Enterprise value |
5,081 |
37.2 |
717 |
7.1x |
4,929 |
35.9 |
3% |
1.4 |
Net cash/(debt)** |
(926) |
(6.8) |
(886) |
(6.4) |
5% |
-0.3 |
||
Other adjustments * |
(339) |
(2.5) |
(336) |
(2.4) |
1% |
0.0 |
||
Total equity value |
3,816 |
28.0 |
3,707 |
27.0 |
3% |
1.0 |
||
Number of shares (m) |
136.5 |
137.4 |
-1% |
|||||
Value per share (€) (rounded) |
28.0 |
27.0 |
4% |
|||||
Current share price (€) |
16.6 |
|||||||
% upside/(downside) |
69% |
Source: Edison Investment Research. Note: *Includes associates, minority interests, employment benefits liability and an adjustment for c €12m pa of post-tax cash flow (which includes other items of negative €4m pa) not included in divisional forecasts. **Net debt at end of H122 adjusted for share repurchase payments since the start of H222; we use apportioned H222 cash flow in the first year of our DCF.
Exhibit 3: Sensitivities of DCF valuation (€/share) to WACC and terminal growth rate assumptions
WACC |
||||||||
6.00% |
6.50% |
7.00% |
7.50% |
8.00% |
8.50% |
9.00% |
||
Terminal growth rate* |
0.0% |
33.6 |
30.3 |
27.5 |
25.1 |
23.0 |
21.1 |
19.5 |
0.5% |
36.0 |
32.3 |
29.1 |
26.4 |
24.1 |
22.1 |
20.3 |
|
1.0% |
39.0 |
34.6 |
31.0 |
28.0 |
25.4 |
23.1 |
21.2 |
|
1.5% |
42.8 |
37.5 |
33.3 |
29.8 |
26.9 |
24.4 |
22.2 |
|
2.0% |
47.5 |
41.1 |
36.0 |
32.0 |
28.6 |
25.8 |
23.4 |
|
2.5% |
53.9 |
45.7 |
39.5 |
34.6 |
30.7 |
27.5 |
24.8 |
|
3.0% |
62.8 |
51.8 |
43.9 |
37.9 |
33.3 |
29.5 |
26.4 |
|
Source: Edison Investment Research. Note: *Stated terminal growth rate (TGR) applies to all divisions, expect RSD; TGR for RSD is stated TGR + 1%.
Peer valuation: Divisional SOTP
We use peer valuation as a cross-check, rather than to drive our valuation, as we believe near-term earnings multiples do not accurately reflect Mytilineos’s long-term growth prospects. In our approach, we apply EV/EBITDA multiples (using the current enterprise value (EV)) to peers for each division. We use 2023 EBITDA given that we are now in Q422.
On first impression, the peer valuation suggests €26.5/share, which is €1.5/share below our valuation of €28.0. However, we do not believe the multiples adequately reflect the competitive strengths or the growth prospects of some of Mytilineos’s business units versus their peers:
■
The Metallurgy division benefits from superior margins (2023e EBITDA margin of 23% versus 17% for its peers) and is an early mover in the transition to green and sustainable aluminium. Many of its peers are Asian, operating production facilities using captive coal plants; they will need to invest heavily as they come under increasing pressure to decarbonise.
■
The RES power generation business (within the P&G division) has higher long-term growth prospects than its peers, with an EBITDA CAGR of 30% in 2022–24e versus 16% for its peers, and we expect growth beyond 2024 will also be higher than its peers as we estimate that it adds solar capacity of 300MW pa in 2025–27. In addition, margins are higher (2022 EBITDA margin of 77% vs 57% for its peers).
We apply a 20% premium to multiples for each of these business units. Collectively, this would increase the valuation by c €2.5/share to an adjusted €29.0/share, which is 4% above our DCF valuation.
Exhibit 4: Peer group multiple analysis
Implied EV |
EV/EBITDA |
EBITDA |
EBITDA |
EBITDA |
|
2022 |
2022 |
2020–23e |
2022 |
||
Comps – median metrics: |
|
|
|
|
|
CCGT plants |
3.8 |
1,452 |
16% |
25% |
|
RES |
11.4 |
421 |
16% |
57% |
|
Supply |
4.5 |
0 |
0% |
0% |
|
Power & Gas |
|||||
Metallurgy |
4.6 |
1,144 |
6% |
17% |
|
RSD (i) |
12.4 |
1,579 |
17% |
25% |
|
SES |
7.5 |
515 |
22% |
7% |
|
Mytilineos: |
|||||
CCGT plants |
1,175 |
3.8 |
308 |
1% |
16% |
RES |
610 |
11.4 |
53 |
30% |
77% |
Supply |
78 |
4.5 |
17 |
0% |
0% |
Power & Gas |
1,863 |
4.9 |
379 |
0% |
0% |
Metallurgy |
1,015 |
4.6 |
222 |
0% |
23% |
RSD |
1,518 |
12.4 |
122 |
19% |
14% |
SES |
490 |
7.5 |
65 |
-1% |
13% |
Total |
4,886 |
||||
Net debt and other adjustments* |
(1,265) |
||||
Equity value |
3,621 |
||||
Number of shares (m) |
136.5 |
||||
Value per share (€) |
26.5 |
||||
Fair value adjustment** (€) |
2.5 |
||||
Adjusted value per share (€) |
29.0 |
Source: Edison Investment Research, Refinitiv. Note: Priced at 1 November 2022. *Net debt at end of H122 adjusted for share repurchase payments since the start of H222; other adjustments include associates, minority interests, employment benefits liability and an adjustment for c €12m pa of post-tax cash flow not included in divisional forecasts. **20% premium applied to some business areas to reflect fair value (see commentary in the paragraph above the table).
Financials
Please refer to our September outlook report for detailed financials and assumptions by division. Following the publication of the Q3 results and further changes in commodity and energy prices, we have upgraded our earnings forecasts for SES and P&G. We have made no changes to our forecasts for RSD and Metallurgy. This results in increases in our EPS estimates of 10%, 16% and 11% for FY22, FY23 and FY24, respectively. The most important factors affecting our forecasts are set out below.
Power & Gas: Benefiting from favourable clean spark spread
■
We have decreased our gas price assumptions to reflect current market conditions. We assume the average gas price peaks at €110/MWh (daily average) in 2022 (versus our previous assumption of €140/MWh), decreasing on a straight-line basis to €30/MWh from 2025. As we keep our wholesale electricity and carbon price assumptions, our clean spark spread assumption thus increases, which results in increases of 16%, 23% and 18% in our EBITDA forecasts for FY22, FY23 and FY24, respectively. Our forecasts from FY25 remain unchanged.
SES: Increased near-term margins to reflect order book
■
SES had a strong Q3, with sales of €121m and EBITDA of €37m. This implies an EBITDA margin of 31%, or 18% on a nine-month basis, as quarterly margins can often be lumpy due to a number of factors including sales mix. Mytilineos has recently been adding higher-margin gas plant construction contracts to its orderbook, such as three open-cycle gas turbine (OCGT) power plant projects in the UK, and a 560MW combined cycle gas turbine (CCGT) plant in Poland (as part of a consortium). As such we increase our EBITDA margin assumption for FY22 to 15% (from 10% previously), and for FY23 and FY24 to 13% (from 11% and 12% previously).
■
We keep our sales forecasts unchanged over the entire forecast period and our margin assumptions remain unchanged at 12% from FY25 onwards. This results in increases of 55%, 18% and 8% in our EBITDA forecasts for FY22, FY23 and FY24, respectively, and no change to our forecasts from FY25.
Exhibit 5: Changes to Edison forecasts (€m, unless shown)
Edison new |
Edison old |
Difference (%) |
|||||||
2022e |
2023e |
2024e |
2022e |
2023e |
2024e |
2022e |
2023e |
2024e |
|
Divisional EBITDA: |
|||||||||
Metallurgy |
251 |
222 |
249 |
251 |
222 |
249 |
0% |
0% |
0% |
SES |
70 |
65 |
68 |
45 |
55 |
63 |
55% |
18% |
8% |
RSD |
96 |
122 |
137 |
96 |
122 |
137 |
0% |
0% |
0% |
P&G |
320 |
379 |
346 |
275 |
308 |
293 |
16% |
23% |
18% |
Other |
(19) |
(4) |
(4) |
(3) |
(3) |
(3) |
n/m |
n/m |
n/m |
Group EBITDA |
717 |
783 |
796 |
664 |
704 |
738 |
8% |
11% |
8% |
Net income* |
392 |
441 |
450 |
356 |
385 |
409 |
10% |
15% |
10% |
Reported EPS (€) |
2.87 |
3.23 |
3.30 |
2.60 |
2.80 |
2.97 |
10% |
16% |
11% |
Source: Edison Investment Research. Note: *Adjusted for minorities; change in EPS forecasts are different to net income due to own shares held.
Exhibit 6: Financial summary
€m |
2019 |
2020 |
2021 |
2022e |
2023e |
2024e |
||
Year end 31 December |
||||||||
PROFIT & LOSS |
||||||||
Revenue |
|
|
2,256 |
1,899 |
2,664 |
5,430 |
6,142 |
5,046 |
Cost of Sales |
(1,922) |
(1,559) |
(2,299) |
(4,690) |
(5,332) |
(4,223) |
||
Gross Profit |
334 |
339 |
365 |
740 |
810 |
823 |
||
EBITDA |
|
|
313 |
315 |
359 |
717 |
783 |
796 |
Operating Profit (before except.) |
219 |
225 |
279 |
603 |
651 |
654 |
||
Exceptionals |
||||||||
Operating Profit |
219 |
225 |
279 |
603 |
651 |
654 |
||
Other |
(12) |
(34) |
1 |
1 |
1 |
1 |
||
Net Interest |
(27) |
(18) |
(41) |
(61) |
(62) |
(59) |
||
Profit Before Tax (norm) |
|
180 |
172 |
239 |
544 |
590 |
596 |
|
Profit Before Tax (reported) |
|
180 |
172 |
239 |
544 |
590 |
596 |
|
Tax |
(29) |
(28) |
(41) |
(103) |
(114) |
(117) |
||
Profit After Tax (norm) |
150 |
144 |
198 |
440 |
476 |
479 |
||
Profit After Tax (FRS 3) |
150 |
144 |
198 |
440 |
476 |
479 |
||
Minority interests |
(3) |
(14) |
(18) |
(48) |
(34) |
(29) |
||
Discontinued activities |
(3) |
(1) |
(1) |
(1) |
(1) |
(1) |
||
Average Number of Shares Outstanding (m) |
142.9 |
141.2 |
136.0 |
136.5 |
136.5 |
136.5 |
||
Net income (normalised) |
148 |
130 |
180 |
392 |
442 |
450 |
||
Net income (FRS 3) |
145 |
129 |
180 |
392 |
441 |
450 |
||
EPS - normalised (€) |
|
|
1.033 |
0.923 |
1.327 |
2.874 |
3.238 |
3.299 |
EPS - normalised and fully diluted (€) |
1.033 |
0.923 |
1.327 |
2.874 |
3.238 |
3.299 |
||
EPS - reported (€) |
|
|
1.014 |
0.913 |
1.324 |
2.871 |
3.234 |
3.295 |
Final distributed dividend per share (€) |
0.36 |
0.38 |
0.46 |
1.00 |
1.13 |
1.15 |
||
Gross Margin (%) |
14.8 |
17.9 |
13.7 |
13.6 |
13.2 |
16.3 |
||
EBITDA Margin (%) |
13.9 |
16.6 |
13.5 |
13.2 |
12.8 |
15.8 |
||
Operating Margin (before GW and except.) (%) |
9.7 |
11.8 |
10.5 |
11.1 |
10.6 |
13.0 |
||
BALANCE SHEET |
||||||||
Fixed Assets |
|
|
1,824 |
1,881 |
2,188 |
2,714 |
2,905 |
3,056 |
Intangible Assets |
446 |
446 |
446 |
460 |
472 |
485 |
||
Tangible Assets |
1,121 |
1,161 |
1,429 |
1,942 |
2,119 |
2,258 |
||
Right of use assets |
48 |
45 |
48 |
48 |
48 |
48 |
||
Investments/Other |
209 |
227 |
266 |
266 |
266 |
266 |
||
Current Assets |
|
|
2,334 |
2,111 |
2,901 |
4,665 |
5,213 |
4,765 |
Stocks |
214 |
290 |
469 |
923 |
1,044 |
858 |
||
Debtors |
1,405 |
1,319 |
1,818 |
3,128 |
3,513 |
3,154 |
||
Cash |
713 |
493 |
603 |
603 |
644 |
742 |
||
Other |
1 |
9 |
12 |
12 |
12 |
12 |
||
Current Liabilities |
|
|
(1,148) |
(1,117) |
(1,691) |
(3,607) |
(4,022) |
(3,418) |
Creditors |
(1,066) |
(1,042) |
(1,609) |
(3,205) |
(3,619) |
(3,016) |
||
Short term borrowings |
(83) |
(76) |
(82) |
(402) |
(402) |
(402) |
||
Long Term Liabilities |
|
(1,376) |
(1,302) |
(1,682) |
(1,682) |
(1,682) |
(1,682) |
|
Long term borrowings |
(1,051) |
(955) |
(1,324) |
(1,324) |
(1,324) |
(1,324) |
||
Other long term liabilities |
(325) |
(348) |
(358) |
(358) |
(358) |
(358) |
||
Net Assets (ex minority) |
|
1,634 |
1,572 |
1,716 |
2,090 |
2,414 |
2,721 |
|
CASH FLOW |
||||||||
Operating Cash Flow |
|
270 |
316 |
277 |
491 |
646 |
699 |
|
Net Interest |
(11) |
(27) |
(23) |
(50) |
(52) |
(49) |
||
Tax |
(2) |
(36) |
(33) |
(41) |
(103) |
(114) |
||
Capex |
(127) |
(155) |
(380) |
(631) |
(313) |
(284) |
||
Acquisitions/disposals |
(4) |
(20) |
8 |
0 |
0 |
0 |
||
Financing |
0 |
(56) |
(32) |
(26) |
0 |
0 |
||
Dividends |
(52) |
(50) |
(52) |
(63) |
(137) |
(154) |
||
Other |
(110) |
(41) |
20 |
0 |
0 |
0 |
||
Net Cash Flow |
(37) |
(69) |
(214) |
(320) |
41 |
97 |
||
Opening net debt/(cash) |
|
390 |
421 |
538 |
803 |
1,124 |
1,082 |
|
HP finance leases initiated |
6 |
(48) |
(51) |
0 |
0 |
0 |
||
Other |
(0) |
0 |
0 |
(0) |
0 |
0 |
||
Closing net debt/(cash) |
|
421 |
538 |
803 |
1,124 |
1,082 |
984 |
|
Source: Edison Investment Research, Mytilineos accounts
|
|
Research: Healthcare
Basilea announced another successful oncology asset sale as a part of its strategic plan to focus on its core anti-infectives business. The company is anticipated to receive up to CHF3.0m in upfront and near-term milestones for its novel preclinical inhibitors of CLK kinases from Twentyeight-Seven (28-7) Therapeutics, a privately held US biotech. The deal will see Basilea with potential future development, regulatory and sales milestones payments of up to CHF351m. This is the third oncology sale in H222, and we view this latest development as a positive indicator for management realising its aim for the separation of its oncology business by end-FY22. We maintain our valuation of Basilea at CHF903.5m or CHF76.3/share.
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