Mytilineos — Reaping rewards from proactive management

Mytilineos (ASE: MYTIL)

Currency in EUR

Last close As at 03/02/2023

EUR24.12

0.32 (1.34%)

Market capitalisation

EUR3,401m

Research: Industrials

Mytilineos — Reaping rewards from proactive management

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).

James Magness

Written by

James Magness

Director, Energy & Resources

Industrials

Mytilineos

Reaping rewards from proactive management

Update on Q3 results

Industrials

2 November 2022

Price

€16.61

Market cap

€2,373m

Net debt (€m) at end 30 September 2022

1,398

Number of shares (excluding buybacks)

136.5m

Free float

73.5%

Code

MYTIL

Primary exchange

ASE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

13.8

9.7

5.9

Rel (local)

5.4

9.2

10.4

52-week high/low

€18.09

€12.80

Business description

Mytilineos is a leading industrial company with an international presence in all five continents. The company is active in Metallurgy, Power & Gas, Sustainable Engineering Solutions and Renewables & Storage Development, operating via a unique synergistic business model.

Next events

Full year results (estimated)

27 January 2023

Analyst

James Magness

+44 (0)20 3077 5756

Mytilineos is a research client of Edison Investment Research Limited

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
(€m)

Net income
(€m)

EPS*
(€)

DPS**
(€)

P/E
(x)

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
(€m)

EV/EBITDA
(x)

EBITDA
(€m)

EBITDA
(% CAGR)

EBITDA
(% margin)

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


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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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