ADMIE Holding reported 9M19 results, with net income up 12% y-o-y, and said that IPTO’s 2019 development capex plan is being implemented in a timely manner. We believe the stock continues to trade at an excessive discount to peers and to the implied regulated asset base (RAB) value. Such a discount would only be justified if allowed regulatory returns were significantly below the actual cost of capital, which we believe is not the case. Our valuation of ADMIE Holding is broadly unchanged at €2.89/share and is roughly in line with the RAB value implied by IPTO.
Written by
ADMIE Holding |
Yield with growth |
9M19 results |
Utilities |
11 December 2019 |
Share price performance
Business description
Next events
Analyst
ADMIE Holding is a research client of Edison Investment Research Limited |
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ADMIE Holding reported 9M19 results, with net income up 12% y-o-y, and said that IPTO’s 2019 development capex plan is being implemented in a timely manner. We believe the stock continues to trade at an excessive discount to peers and to the implied regulated asset base (RAB) value. Such a discount would only be justified if allowed regulatory returns were significantly below the actual cost of capital, which we believe is not the case. Our valuation of ADMIE Holding is broadly unchanged at €2.89/share and is roughly in line with the RAB value implied by IPTO.
Year end |
EBIT* |
Net income* |
EPS* |
DPS** |
P/E |
Yield |
12/17 |
25.1 |
25.1 |
10.84 |
0.00 |
19.6 |
N/A |
12/18 |
36.0 |
36.1 |
15.57 |
5.96 |
13.7 |
2.8 |
12/19e |
39.6 |
39.9 |
17.18 |
8.83 |
12.4 |
4.1 |
12/20e |
39.4 |
39.6 |
17.09 |
8.18 |
12.5 |
3.8 |
Note: *EBIT, net income and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Related to fiscal year (not cash dividend).
9M results show earnings advance
ADMIE Holding’s 9M19 results showed net income up 12% y-o-y to €33m. IPTO’s EBITDA of €140m was broadly flat y-o-y. Adjusting EBITDA for exceptional items in both 9M18 and 9M19 (mainly the release of provisions and reversal of impairments), we calculate that adjusted EBITDA was up 8% y-o-y to €134.7m. PBT of €88m was up 5% y-o-y or 17% on an adjusted basis. Our adjusted net income forecasts for FY19–21 are down 1–5%, mostly reflecting revised capex assumptions.
Large capex plan drives earnings growth
IPTO has made progress on its development plans and at the 9M results said that the 2019 investment programme is on track. We believe IPTO’s underleveraged balance sheet (1.2x net debt/EBITDA at FY19e, the lowest among its peer group of EU regulated utilities) sustains its c. €4.0bn capex plan (2020–29). We estimate a RAB CAGR of 14% in 2019–23e, with an adjusted EBITDA and net income CAGR of 12% and 7%, respectively, for IPTO. We estimate a 7% EPS CAGR for ADMIE Holding (FY19–23) and a 4% DPS CAGR (FY19–24).
Valuation: Excessive discount persists
We believe the stock continues to trade at an excessive discount to peers and to the implied RAB value. Despite the positive share price performance, we estimate that ADMIE Holding is trading at a 30% discount to FY20 equity RAB. Such a discount would only be justified if allowed regulatory returns were significantly below the actual cost of capital for the company. However, we do not believe this is the case for IPTO and the pre-tax real return on assets of 6.9% in FY19e, reducing to 6.3% in FY21e, looks increasingly supportive considering the recent reduction in Greek country risk premium and the announced (but not yet approved) reduction in corporate tax rates. As a benchmark, Italy-regulated stocks Snam and Terna are trading at more than a 20% premium to equity RAB, despite Italian and Greek government bond yields now trading at similar levels. Our valuation of ADMIE Holding is broadly unchanged at €2.89/share and is roughly in line with the RAB value implied by IPTO.
9M results show earnings advance
ADMIE Holding’s nine-month results showed strong profit growth, in line with expectations. Overall, ADMIE Holding reported net income up 12% y-o-y to €33m, including equity consolidation of its 51% stake in IPTO. The key aspects of IPTO Group’s nine-month results included:
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EBITDA of €140m, broadly flat y-o-y. Adjusting EBITDA for exceptional items in both 9M18 and 9M19 (mainly the release of provisions and reversal of impairments), we calculate that adjusted EBITDA was up 8% y-o-y to €134.7m. EBITDA growth was driven by €13m higher revenues (+7% y-o-y), roughly split 50/50 between an increase in ‘transmission system rent’ (ie revenue recognized by the regulator) and ‘other revenues’ (non-regulated revenues), with a high level of the latter that may not be sustained over time.
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Profit before tax of €88m, up 5% y-o-y, thanks to an improvement in net financial expenses (driven by a reduction in the cost of debt and also by higher positive income, including one-off items such as the return of a significant part of cash in a Bank of Greece special account and the inflow of a lump sum repayment from the Polypotamos project). Adjusting for exceptional items, adjusted profit before tax was up 17% y-o-y to €80m.
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Net debt of €89m was at a similar level to 9M18 (€84m) and H119 (€94m). Capex was €117m, up 4x y-o-y. We expect an acceleration in investment in Q4, which appears possible considering a similarly strong pick-up in Q418 with capex of more than €150m (this is driven by seasonality as the majority of the works are carried out during the summer and mostly invoiced in Q4).
ADMIE Holding says IPTO’s 2019 capex plan is on track
The Greek government and IPTO have launched large projects for the interconnection of the Greek islands, with the objectives of reducing costs for consumers, improving security of supply and environmental sustainability. In most cases, the Greek islands currently rely on expensive and polluting fuel oil-fired plants (often close to tourist areas). The extra costs of running these plants is shared among all Greek consumers (this component represents 4–12% of a retail consumer’s bill). The construction of interconnections should allow for the replacement of these plants (which would be put in cold reserve) with renewables and imports from the mainland, lowering both costs for the consumers and carbon emissions.
IPTO has made progress on its development plans and at the 9M results said that the 2019 investment programme is on track. In terms of key upcoming projects, the construction of the Crete-Peloponnese interconnection (€364m investment) has started and the company expects it to be completed in 2020. The first part of the upgrade of the Cyclades interconnection is expected to be completed in early 2020. Requests for tenders for the Sporades interconnection (€54m budget) are also in progress. The €995m Crete-Attica interconnection (developed by 100%-owned subsidiary ARIADNE) is making progress, with the tender process ongoing and construction contracts expected to be signed in Q120 (project completion expected by Q422/Q123). Finally, the €1.5bn project for the interconnection of the Dodecanese has been included in the 2020–29 development plan and is expected to be completed in the second half of the next decade.
Our capex assumption for FY19 is unchanged at €251m, having been reduced in our previous update note (from €391m), reflecting the extension in the tendering process and delayed approval by the Regulatory Authority for Energy, RAE). We have revised our capex estimates for FY20–23, to broadly align them to the 2020–29 10-year network development plan published by IPTO (published for consultation and not yet approved by the regulator). The main change is for FY20, for which we assume a significant year-on-year pick-up in capex, to €587m, although this estimate has been revised down from €731m previously. This year-on-year growth reflects the timing of the large growth projects planned by the company.
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Exhibit 1: RAB growth 2018–21 (enterprise value) |
Exhibit 2: RAB growth 2018–27 (enterprise value) |
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Source: Edison Investment Research |
Source: Edison Investment Research |
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Exhibit 1: RAB growth 2018–21 (enterprise value) |
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Source: Edison Investment Research |
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Exhibit 2: RAB growth 2018–27 (enterprise value) |
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Source: Edison Investment Research |
Financials and forecasts changes
We believe IPTO’s underleveraged balance sheet (1.2x adjusted net debt/EBITDA at the end of FY19e, the lowest among European regulated utilities) sustains its c €4.0bn investment plan in the 10-year development plan period 2020–29.
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Exhibit 3: FY1 net debt/EBITDA for listed European regulated utilities |
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Source: Refinitiv, Edison Investment Research |
We estimate the development capex will result in a RAB CAGR of 14% in 2019–23e. We forecast FY19–23 adjusted EBITDA and net income CAGR of 12% and 7%, respectively, for IPTO, based on the assumption that the capex plan is implemented as planned. We estimate a 7% EPS CAGR for ADMIE Holding (FY19–23) and a 4% DPS CAGR (FY19–24).
Following the nine-month results, we have made some changes to our forecasts (adjusted net income in FY19–21 down 1–5%), incorporating higher D&A offset by higher financial income in FY19e and the impact of lower capex estimates for FY20–21.
Exhibit 4: Forecasts changes
ADMIE Holding |
IPTO |
|||||||||
€000s |
2019e |
2020e |
2021e |
€m |
2019e |
2020e |
2021e |
|||
Adjusted EBIT |
New |
39,609 |
39,397 |
40,065 |
Revenues |
New |
258.8 |
267.7 |
271.0 |
|
Old |
40,120 |
40,707 |
42,032 |
Old |
258.8 |
271.8 |
279.0 |
|||
% change |
-1% |
-3% |
-5% |
% change |
0% |
-2% |
-3% |
|||
Adjusted net income |
New |
39,859 |
39,647 |
40,315 |
Adjusted EBITDA |
New |
180.8 |
180.7 |
183.0 |
|
Old |
40,370 |
40,957 |
42,282 |
Old |
180.8 |
184.8 |
191.0 |
|||
% change |
-1% |
-3% |
-5% |
% change |
0% |
-2% |
-4% |
|||
DPS (€) |
New |
0.088 |
0.082 |
0.080 |
Adjusted net income |
New |
78.3 |
77.9 |
79.3 |
|
Old |
0.088 |
0.083 |
0.083 |
Old |
79.3 |
80.5 |
83.1 |
|||
% change |
0% |
-1% |
-3% |
% change |
-1% |
-3% |
-5% |
|||
Adjusted net debt |
New |
216.5 |
557.9 |
849.1 |
||||||
Old |
222.5 |
703.3 |
1004.6 |
|||||||
% change |
-3% |
-21% |
-15% |
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Source: Edison Investment Research
Our net income forecasts exclude any non-recurring impact from the periodic assessment of non-current assets, which is scheduled for Q419. While this may result in a one-off impact on the bottom line (if any), with no implication for future years’ earnings, there may be an impact on ADMIE Holding’s dividend, which currently yields c 4% in FY19. Finally, while we assume a gradual reduction in corporate tax rates, our forecasts do not fully incorporate the announced (but not yet approved) reduction in corporate tax rates (to 24% in 2020 from 28% currently), which represents upside potential to our forecasts. The government has also proposed a decrease in dividend tax from 10% to 5%.
Exhibit 5: IPTO key financials
€m |
2017 |
2018 |
2019e |
2020e |
2021e |
2022e |
2023e |
Revenues |
256.5 |
249.2 |
258.8 |
267.7 |
271.0 |
258.3 |
376.2 |
% y-o-y change |
-3% |
4% |
3% |
1% |
-5% |
46% |
|
Reported EBITDA |
172.0 |
182.7 |
182.7 |
180.7 |
183.0 |
174.9 |
286.0 |
% y-o-y change |
6% |
0% |
-1% |
1% |
-4% |
63% |
|
Adj. EBITDA |
177.5 |
168.0 |
180.8 |
180.7 |
183.0 |
174.9 |
286.0 |
% y-o-y change |
-5% |
8% |
0% |
1% |
-4% |
63% |
|
Reported EBIT |
107.7 |
115.4 |
112.7 |
104.7 |
106.0 |
107.1 |
182.8 |
% y-o-y change |
7% |
-2% |
-7% |
1% |
1% |
71% |
|
Adjusted EBIT |
113.2 |
100.7 |
110.8 |
104.7 |
106.0 |
107.1 |
182.8 |
% y-o-y change |
-11% |
10% |
-6% |
1% |
1% |
71% |
|
Reported net income |
61.7 |
85.9 |
79.7 |
77.9 |
79.3 |
84.8 |
102.0 |
% y-o-y change |
39% |
-7% |
-2% |
2% |
7% |
20% |
|
Adjusted net income |
65.9 |
73.8 |
78.3 |
77.9 |
79.3 |
84.8 |
102.0 |
% y-o-y change |
12% |
6% |
-1% |
2% |
7% |
20% |
|
Adjusted net debt |
286 |
171 |
216 |
558 |
849 |
1,168 |
1,263 |
Capex (gross of subsidies) incl. ARIADNE |
70 |
183 |
251 |
587 |
436 |
480 |
263 |
Source: Company data, Edison Investment Research
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