Mytilineos — Synergies and solar delivering growth

MYTIL’s diverse range of activities (aluminium production, power production, gas supply, electricity supply and power projects) is highly synergistic. There are natural industrial linkages between power intensive industries, such as aluminium, and power generation and in turn sourcing and supply of natural gas.

Solar is part of MYTIL’s RES business, M Renewables, which is part of the Energy division. MYTIL develops solar plants from early-stage planning through to full operation, sometimes retaining the assets or alternatively selling the assets once they are fully operational and de-risked (effectively recycling the capital into further growth). Unlike some renewables focused developers, MYTIL has an existing asset base of cash generative assets to assist its growth. M Renewables is still at a relatively early stage of a significant period of growth. We forecast EBITDA from M Renewables to reach €311m in 2024 and €340m in 2025.

We estimate that c 10% of earnings is currently from engineering, procurement and construction (building solar plants for others) and around one-third is from generation, with the balance from asset rotation (ie divesting RES projects that have been developed from scratch, resulting in a greater return on capital versus returns on operating assets). MYTIL has a total pipeline of 13GW of solar capacity (discussed in detail below) and we have remodelled this pipeline, allowing for 10–11GW of construction over the next decade (we have conservatively allowed for some delays to the early-stage pipeline), with rotation of some finished projects. We estimate an operating base of c 5GW by the end of this period. Naturally, the mix of growth and retention will depend on market conditions but, given the strong structural growth in demand and MYTIL’s skill and experience as a builder and operator of power generation assets, we expect both construction and operation to be drivers of earnings. Capital spending for building 10–11GW of solar capacity could total €7–7.5bn over 10 years, but we estimate that 70–75% of this total could come from asset sales over the same period, with asset disposals of the projects that have been constructed either from project finance (PF) or a combination of PF and de-risked providing the majority of funding for this buildout in retained capacity.

During H123, MYTIL entered into bilateral electricity supply agreements (‘green’ power purchase agreements) between RES producers and final consumers for three of its Australian solar projects with the following: Zen Energy (23MW), SmartestEnergy (53MW) and Telstra and Australia’s National Broadband Network (150MW).

One of the challenges facing solar developers is the ability to raise capital, particularly as some listed developers have begun to trade at discounts to net asset value (NAV) in response to rising interest rates and the comparative attractiveness of other risk-free assets (such as fixed income). MYTIL is well placed compared to some of its competition for a variety of reasons, particularly in a high interest rate environment. It is not dependent on new capital raisings to fund growth as it has existing cash-generative industrial assets. It is also well funded (with net debt/EBITDA of 1.5x and a borrowing cost <4%) and can use asset rotation and power generation to also boost development capex spending.

Given that end-use is still growing strongly (see below), this gives MYTIL an opportunity to continue to expand aggressively into a growing market, when others may be finding this difficult. It can use a relatively capex light approach and use its other industrial assets and relative financial strength to continue to advance and develop its pipeline. As this is built, it provides further opportunities for cash funding of growth, either through operation or through asset rotation. In these ways, MYTIL as a significant scale developer of solar assets should be able to maintain or accelerate its solar business.

MYTIL’s global RES portfolio continues to expand and now covers all five continents. At end Q323, the portfolio’s total pipeline capacity exceeded 13GW (see breakdown in Exhibit 2 below). At H123 MYTIL’s total portfolio capacity had seen a total increase of 4.6GW (c 46%) year-on-year from H122. During the third quarter of 2023, MYTIL’s RES pipeline continued to expand with a 0.4GW increase in early-stage projects, mainly in Romania and Poland.

Approximately one-third of the increase in MYTIL’s global RES portfolio is attributed to the acquisition of a 1.4GW portfolio of five utility solar photovoltaic (PV) projects located in Alberta, Canada. The capex for this investment is estimated at €1.16bn, but this is a gross capex estimate, which could be reduced up to 30% due to Canadian government incentives. This value however excludes battery energy storage systems (BESS) equipment.

The total capex investment will be disbursed throughout the various phases of the Alberta projects’ development and construction, except for the advanced payment, with completion expected in 2026–27. The capex investment is expected to be equally distributed over a four-year period. These five solar projects will be able to generate more than 2TWh per year in total. All the projects have applied for and/or have been permitted for the installation and use of BESS, having a total anticipated combined storage capacity of 1,200MWh for the portfolio. The purchase price in respect of each special purpose vehicle is based on the relevant project’s actual installed maximum solar PV direct capacity, while being subject to standard working capital and debt adjustments and adjustments in the event that interconnection costs exceed estimates. The government of Alberta announced a six-month pause in approvals for new projects in early August so it can review grid infrastructure and end-of-life provisions. However, we do not foresee any long-term issues relating to the development of these projects as approximately half of the projects are in a ready to build stage and are unaffected, and the balance are relatively early stage and likely to be approved outside of this window. Alberta is particularly well suited for solar production and, in any case, we have only modelled the completion of 10–11GW of MYTIL’s current 13GW pipeline.

MYTIL is also active in energy storage projects in Greece and Italy, both at an early stage of development, having a maximum capacity of c 1.3GW.

MYTIL’s total power production from M Renewables, with a total installed capacity of 626MW, amounted to 725GWh for the first nine-months of 2023, of which 436GWh was produced from RES in Greece and the balance 289GWh from international RES.

The very significant amount of growth in both MYTIL’s own capacity and recycling capacity for other end users needs to be seen in the context of a rapidly expanding global renewable energy market. The shift towards renewable power is an obvious and significant part of energy transition. The general consensus of most reputable studies indicates that significant advancements need to be made in energy efficiency as well as significant scaling up of a wide range of clean energy technologies in the 2020s to drive down demand for fossil fuels. Arguably, the shift towards renewables is being driven by three forces:

Renewable power grew by an 11% CAGR from 2015–22, with 13% growth in 2022, and the IEA expects it to jump by one-third in 2023. Wind and solar power generation technologies have developed significantly over the last 20 years and costs have reduced substantially. Even before the recent energy price surges, the economics for solar PV and onshore wind compared favourably, on average, with other power generation technologies globally, without government support.

Exhibit 3 shows the global weighted average levelized cost of energy for a variety of technologies in 2010 and 2021. The outstanding change is in solar PV, where scale and technology advances have enabled an 88.4% drop in utility-scale cost of energy, bringing solar on par with hydropower. The costs of other technologies have also fallen (notably onshore and offshore wind) and the gap between RES and the low-end range for fossil fuels of c $60/MWh (corresponding to combined cycle gas turbine, CCGT) has now largely closed. These are global averages and naturally the economics of a particular technology will depend on locational factors, but it is reasonable to say that the economic gap has closed.

MYTIL’s focus on solar reflects a wider shift in energy production to renewable sources globally. MYTIL’s growth pipeline reflects end-use demand for solar energy production and its 13.7GW potential pipeline is quite small in relation the overall size of global market demand and investment requirements.

Solar has benefited from reductions in battery costs, as the combination of energy storage and solar has made projects more attractive to end users. This reduction in battery costs is due to scale effects and technology advances (see Exhibit 5 below). Solar is naturally an intermittent power source, so the continued development (in terms of scale, software and capital market/installer capabilities) of BESS (for more detail, see our report) has helped solar shift and manage its power generation and therefore become a more commercially viable source of power.

We have revised our earnings estimates slightly to reflect both six-month and nine-month results releases, which gave us confidence that €1bn in EBITDA in 2023 looks achievable.

MYTIL’s asset rotation plan in the first nine months of 2023 saw the sale of four PV parks in Romania with a total capacity of 211MW, which are in an advanced stage of development and will look to be commercially operational within the next two years. MYTIL also sold a 56MW PV park in Southern Spain. MYTIL’s asset rotation plan allows it to continue the profitable development of its self-sufficient M RES growth model, despite the current interest rate environment.

MYTIL recorded its highest quarterly profitability performance in its history, led by the Energy sector, despite the significant reduction in energy and metal prices. A key contributor in achieving this record was the recovery of power generation activity, especially during summer, which is a period of high demand, by the new H-Class 826MW plant.

For 9M23, MYTIL’s three combined cycle gas turbine (CCGT) plants along with the high-efficiency combined heat and power (CHP) plant collectively generated roughly 4TWh. This sum represents 10.5% of the total demand of the interconnected system and 33.9% of the production from natural gas units (27% for the same period in 2022). MYTIL’s total electricity production within Greece, from both thermal and renewable units, was 4.41TWh, which is equivalent to 11.7% of the total demand for Greece.

Despite the scheduled maintenance of the Agios Nikolaos (Protergia) plant in the first quarter of 2023, MYTIL managed to maintain total production levels from thermal units during the 9M23 at similar levels to the previous period in 2022. This was due to the significant contribution of the new CCGT unit, which contributed for the first time, producing 826MW, roughly 40% of MYTIL’s overall thermal production in the third quarter. The new CCGT plant commenced its operating life during a period of increased demand due to high summer temperatures, decisively contributing to supporting Greece’s transition towards an energy mix with a significantly lower carbon footprint. Due to the expected demand increase throughout winter months combined with the high efficiency and flexibility of MYTIL’s units, as well as the supply of natural gas at competitive prices, management expects that the plant will significantly boost MYTIL’s profitability not only in 2023 but also in the years to come.

MYTIL has recently completed a range of bolt-on acquisitions to grow its power distribution and upstream aluminium businesses. We have incorporated the effect of the following transactions in our modelling.

MYTIL acquired 100% of the share capital of UNISON Facility Services, one of the largest companies in the facility management sector, in order to further accelerate the creation of a groundbreaking platform that will improve its ability to provide long-term energy solutions and services to its customers.

MYTIL has also acquired both Volterra and EfaEnergy, further enhancing the company’s synergies in their retrospective business lines. The integration of Volterra (following WATT+VOLT in 2022) into MYTIL’s M Energy Customer Solutions business has increased the company’s market share of the Greek electricity market to 13% and is expected to reach 20–25% in 2024. The integration of EfaEnergy has further strengthened MYTIL’s M Energy sector and subsector M Energy Customer Solutions, with a focus area of natural gas supply, by increasing its market share with an additional 11,000 customers. This has widened MYTIL’s natural gas basket price, which in turn will improve profitability.

The acquisition of Imerys Bauxite means that MYTIL will become fully integrated (ie self-sufficient) in bauxite supply to feed its alumina, and ultimately aluminium production, leaving MYTIL with the only fully integrated aluminium production chain in the EU. This acquisition will allow MYTIL to improve its profitability within its M Metals business. MYTIL could potentially invest up to €100m in the reserve and resource expansion of existing and new deposits, although this latter commitment depends in part on the provisions of the EU Critical Raw Materials Act.

MYTIL’s consortium was named the preferred supplier for energy transmission project in the UK. It will work alongside GE Vernova as the preferred supplier of two high-voltage direct current (HVDC) converter stations for the Eastern Green Link 1, which is a 525kV, 2GW HVDC subsea transmission link from East Lothian in Scotland to County Durham in England. The project is being delivered by a joint venture of National Grid Electricity Transmission and SP Transmission, part of SP Energy Networks (SPEN). MYTIL has also recently signed an EPC contract for the largest solar park in the UK (373MW solar park).

On 16 October 2023, MYTIL announced a memorandum of understanding (MoU) with SK E&S, an international company that can organically connect renewable energy, clean hydrogen, energy solutions and its LNG business, in order to explore means of cooperation in the energy sector. Through this MoU, MYTIL is strongly positioned and committed to expand its presence in the Asia-Pacific energy and RES market.

The key sectors that both companies have agreed to cooperate in are:

Our primary valuation method is a 10-year DCF analysis. Key assumptions include a weighted average cost of capital (WACC) of 7.5% and a 1% terminal growth rate for Metallurgy, Power & Gas (P&G) and Sustainable Engineering Solutions (SES), and 2% for Renewables & Storage Development (RSD). We assume terminal capex (included in terminal cash flow) for the P&G and Metallurgy divisions at 1.5x depreciation. These assumptions are unchanged from our last review.

We have increased our longer-term organic growth forecasts for RES to reflect MYTIL’s growth ambitions, summarised in this note. We have also rolled forward our model and base our comparisons on FY24 earnings. Our revised earnings estimates yield a DCF valuation of €45/share, which implies a 2024e EV/EBITDA multiple of 7.2x (compared with 6.4x 2023e in our last note).

This represents a 22% increase on our previous valuation of €36.0/share and implies 30% upside to the current stock price of €34.50. We do not blend valuation approaches, but cross-check against divisional-based DCFs (sum-of-the-parts based, see Exhibit 8) and a peer-group multiple-based valuation on EV/EBITDA. These yield similar results (€43/share and €48/share respectively).

Our DCF valuation for MYTIL’s M Renewables business suggests a 2024e EV/EBITDA multiple of 9.6x, which is roughly in line with our peer group multiple of 9.1x.