Capital Stage AG BERENBERG EQUITY RESEARCH. Buy A shining future. Stanislaus von Thurn und Taxis

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1 BERENBERG EQUITY RESEARCH Capital Stage AG Buy A shining future Stanislaus von Thurn und Taxis Analyst stanislaus.thurnundtaxis@berenberg.com 16 May 2013 Diversified Financials

2 For our disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz WpHG) and our disclaimer please see the end of this document. Please note that the use of this research report is subject to the conditions and restrictions set forth in the disclosures and the disclaimer at the end of this document.

3 Table of contents A shining future 4 Investment case 5 Competitive quality strategy, management and cash 9 Growth a shining future 13 Regulatory framework 22 Valuation considerable upside 29 Company overview 35 Financials 43 Contacts: Investment Banking 50 Disclosures in respect of section 34b of the German Securities Trading Act (Wertpapierhandelsgesetz WpHG) 47 3

4 A shining future We initiate coverage on Capital Stage with a Buy recommendation and a price target of EUR5.0 based on CFRoEV14E and DCF. Capital Stage is the largest independent operator of solar power plants in Germany and thus benefits from declining panel prices. In addition to its 143 MW photovoltaic (PV) operations, the company also operates in the wind energy sector, having added 41MW of capacity to its portfolio since 2010/11. Strong cash generation: The company mainly acquires turnkey projects on the secondary market and focuses on the operation of the plants. The investment in alternative energy production yields attractive, highly visible returns due to national regulations that guarantee the purchase of the total electricity output over a 20-year period at fixed feed-in-tariffs (FIT). Investments driving top-line growth and margin stabilisation: The most recent acquisition of a 9MW solar park in Mecklenburg- Vorpommern in March of this year has raised Capital Stage s total capacity to 183.5MW split roughly 20/80 between wind and solar parks which are located both in Germany and northern Italy. This represents a total of 130% yoy growth. Capital Stage has a project pipeline of over 200MW in Germany, Italy and other European countries. The company has access to cheap state-funded financing; project leverage is around 80%, leading to net debt/ebitda of an estimated 5.2x in 2013 as well as substantial interest payments. The existing business is highly cash-generative, and coupled with the management s proven track record and attractive financing conditions, sustained growth is secured. Positive momentum: Operators of wind and solar plants reap high returns at relatively low risks. Capital Stage had a 2012 EBITDA margin of 74% and an EBIT margin of 46%, owing to its high-quality portfolio, which is appreciating in value due to strong demand. This has driven the stock up over the past year with a total return of 30%. Valuation: The existing portfolio and further growth prospects, particularly in southern Europe, lead us to an upside potential of 26%. Buy (initiation) Rating system Current price EUR 3.78 Absolute Price target EUR /05/2013 XETRA Close Market cap EUR m Reuters HWAG.DE Bloomberg CAP GY Share data Shares outstanding (m) 53 Enterprise value (EUR m) 457 Daily trading volume 2500 Performance data High 52 weeks (EUR) 4 Low 52 weeks (EUR) 3 Relative performance to SXXP DAX 1 month -7.3 % -6.5 % 3 months % % 12 months -1.0 % 1.5 % Key data Price/book value 1.7 Net gearing 212.5% CAGR sales % CAGR EPS % Business activities: Renewables Non-institutional shareholders: AMCO Service GmbH 27% Blue Elephant Venture 8% Dr Liedtke GmbH 10%. Albert Buell 5% RTG GmbH 2% Free Float 45% Y/E , EUR m E 2014E 2015E 2016E Sales EBITDA EBIT Net profit Y/E net debt (net cash) EPS (reported) EPS (recurring) CPS DPS EBITDA margin 104% 69.9% 74.7% 70.8% 71.2% 74.9% 75.0% EBIT margin 54.1% 37.4% 45.5% 48.3% 46.8% 49.9% 49.8% Dividend yield 0.0% 1.3% 2.1% 2.1% 2.3% 2.9% 3.2% ROCE 6.1% 5.8% 5.9% 7.6% 7.8% 8.4% 8.4% EV/sales EV/EBITDA EV/EBIT P/E Cash flow RoEV 7.7% 4.3% 7.5% 8.8% 8.9% 10.0% 10.8% Source: Company data, Berenberg 16 May 2013 Stanislaus Thurn-Taxis Analyst stanislaus.thurnundtaxis@berenberg.com 4

5 Investment case The following factors lead us to believe that Capital Stage provides an interesting investment case. Recurring revenues and high operating margins Renewable energy plant operations provide Capital Stage with high operating margins. Capital Stage focuses on the acquisition of turnkey projects which minimises the risk with which renewable companies are normally associated. Investors should be aware that Capital Stage operates on a different level of the value chain than the much-discredited solar panel manufacturers or other members of the solar industry. The company states that on average its PV parks in Germany have an IRR of 10%. In Italy, the IRR is considerably higher at 12-14%. The consolidated EBITDA margin in 2012 was 74.7%, and is driven by the fact that once a renewable energy plant has been connected to the grid, operating costs remain low. Also, due to the fixed FITs, which are guaranteed by the respective government, the revenues of an operational project can be considered recurring with no real downside risk. The Capital Stage model is based on a grass roots approach (data available on request) we modelled each of the company s solar and wind plants before consolidating the respective income and cash flow statements on a segmental basis. This has enabled us to easily strip out estimated growth at the segmental level, leaving us with the pure numbers from the existing asset base. The table below shows the recurring nature of the revenues and other numbers which persist well over the years displayed here. There is only a slight revenue reduction over the years, mainly due to degradation (performance reduction) of solar panels. Capital Stage s current portfolio no growth shows recurring cash flows Source: Capital Stage, Berenberg e 2014e 2015e 2016e Sales EBITDA EBIT Net profit Y/E net debt (net cash) EPS reported EPS recurring CPS DPS Gross profit margin 99% 85% 85% 89% 89% 89% 89% EBITDA margin 105% 70% 75% 69% 69% 71% 70% EBIT margin 54% 37% 45% 47% 47% 49% 48% Dividend yield 0.0% 1.3% 2.1% 2.1% 2.0% 2.2% 2.1% ROCE 6.1% 5.8% 5.9% 7.0% 6.5% 6.1% 5.5% EV/sales 15x 8x 9x 7x 8x 8x 8x EV/EBITDA 14x 11x 13x 10x 12x 12x 12x EV/EBIT 27x 21x 21x 15x 17x 17x 18x PER 31x -105x 17x 11x 11x 10x 10x Cash flow RoEV 7.7% 4.2% 7.5% 8.4% 7.7% 7.5% 7.2% The secured cash flows of the solar and wind parks are especially interesting in the current sluggish macroeconomic environment. The company will pay a 2012 dividend of EUR0.08 per share, which represents a 2.1% dividend yield (current 5

6 share price) at a payout ratio of 41%. Capital Stage is aiming to steadily increase the dividend we conservatively estimate that the company will only pay a flat yoy DPS (EUR0.08) in 2013, albeit at a substantially lower payout ratio of 20.8%. In the years that follow, the dividend will be gradually raised in line with earnings. The DPS payments stated here are tax-exempt in accordance the German Corporation Tax Act. As the annual capex and acquisition costs decrease, Capital Stage is, as a result of its high and visible cash flows, expected to develop into an attractive dividend name. Proven track record and a diversified portfolio In recent years, Capital Stage has built up a strong track record of successful acquisition in the secondary market and to a minor degree, development and construction of wind and solar energy projects. The company today benefits from a regionally diversified asset portfolio which reduces operational (sun/wind) and political risks and provides a strong base in two of the most attractive European markets Germany and Italy both of which provide a stable environment in which to develop the business further. The political risks are clearly higher in Italy, due to the euro crisis, but the newly formed Letta government is looking to loosen the austerity grip on the country s finances. While fiscal adjustments do not directly influence the Italian renewables market, the softening of austerity measures, when they come, will have a positive effect on the economic climate and reduce economic risks. The German market is the most established renewable energy market in the world, with a high level of economic and political stability. The recent discussions in the national parliaments of a number of European countries concerning the retrospective reduction of FITs, in particular in southern Europe, have been dismissed in favour of a gradual forwardlooking reduction. Attractive financing conditions Capital Stage has access to low-interest government loans. The company pays interest rates as low as 3.75% during the initial 12 years of each project, subsequently switching to a moderate interest charge of around 6-7%. The company stresses that the subsequent interest charges are very conservative and are very likely to fall over time. Of the debt on Capital Stage s balance sheet, the majority is sourced from government lending programmes. The average gearing of solar and wind parks in Capital Stage s portfolio is 80%, which gives the company significant leverage and allows it to pursue an accelerated growth strategy. It should be noted that Capital Stage has in the past also not shied away from occasional allequity deals which present a somewhat higher risk but also an improved cash profile. Even though more equity lessens the return on the capital invested, the cash generation is much higher, which allows for higher dividends or valueaccretive investments. No debt recourse to holding company While the acquisition and construction of renewable energy plants is very capitalintensive and usually requires a large amount of debt financing, we believe that Capital Stage has a financial structure that allows it to profit from the attractive financing conditions while keeping the risk to shareholders funds to a minimum. Every special-purpose vehicle (SPV) is essentially kept independent from the holding, which prevents any recourse of debt coming back to the holding company, leaving it at the project level. 6

7 Strong growth potential through large project pipeline Growth at Capital Stage is nearly entirely driven by new projects, and an important indication of the company s growth potential is its project pipeline. At present, the company has a project pipeline amounting to more than 200MW, and it is considering projects in all major European markets, including in Spain, which presents ample high-return opportunities. However, entry into a new market also carries considerable risk. The track record and substantial experience of the company should limit that risk. Management is confident that it can maintain growth at current margins. The chart on page 12 shows the risk and return profile by country/ energy which is central to Capital Stage s decision making process. Operational risks As the acquisition and construction of renewable energy plants is usually very capital-intensive, Capital Stage seeks around 80% debt financing on average. While the financing period of projects is secured through the FIT revenues, the amount of debt is still substantial and needs to be repaid at the project level. As a result, the bottom line is heavily affected by high interest payments for the duration of the financing period. Growth of revenue can only be achieved through new projects, for which the company needs equity. However, since newly added capacity means that cash flows are greatly reduced by interest payments, the key factor on which strong growth depends is the ability of Capital Stage to find alternative sources of cash. Appreciating existing portfolio Management has a proven track record of adding value-accretive plants to the portfolio. The current asset base is of a high quality and well diversified, and plants have (as of 2013) an average lifetime under the FIT scheme of 17.8 years for solar plants and 14.2 years for wind farms. As a result, the date of construction and commissioning of PV plants and wind farms is of great significance when valuing Capital Stage. The older the asset, the higher the FIT; however, the older the project, the earlier it falls out of the FIT scheme. It is therefore very important to have a well balanced portfolio. Capital Stage has managed to accumulate assets which have a well adjusted age mix. Management s determination to only acquire projects of high quality should ensure that the plants still produce good returns after the cessation of the FITs. The following chart displays the duration of the FIT contracts for Capital Stage s portfolio. Duration of FIT contracts for Capital Stage s portfolio Today Source: Capital Stage, Berenberg 7

8 The company notes that interest in high-quality PV projects has reached a level where some investors are ready to accept IRR of 6% or even less. This stand is in stark contrast to the average 10% IRR generated by the German portfolio of Capital Stage. The increasing demand for the secured cash flows of renewable energy plants has been a catalyst for solar and wind plant prices in Germany and northern Italy, and this has led to an appreciation in the value of the company s assets which, against the backdrop of the slow moving macroeconomic environment, has proved a catalyst for the stock s value. No peers We believe that Capital Stage provides an opportunity to invest in a portfolio of value-accretive renewable energy assets and a strong pipeline of projects in markets where energy generation is still under-developed and which promise strong growth. There are no comparable companies in Europe that follow the same stringent strategy. 8

9 Competitive quality strategy, management and cash Capital Stage operates in the renewable energy niche of the European utilities sector. While all utilities majors have renewable energy operations, they cannot be considered key competitors to Capital Stage. Instead, the company competes with a great number of small, focused niche players. In contrast to the major utilities companies, most niche players not only operate renewable energy projects but also develop them. The company focuses on the acquisition of turnkey projects and only to a lesser extent on the development of new projects. Capital Stage has pooled a high level of operating expertise in the PV Services segment which is a huge competitive advantage when considering new projects (due diligence) and the cost effective post-transaction management of assets. As the industry has been experiencing very high growth rates (with a 22.3% CAGR, taking it from 3.5GW of installed capacity in 2000 to 35GW projected in 2013), competition within its niche is relatively low. Highly visible cash flows from quality asset base Capital Stage s business model is very stable, and almost all of its revenues can be considered recurring. Once a PV or wind park is operational, the governments in both its markets, Germany and Italy, guarantee Capital Stage recurring revenues for a 20-year period. Management is determined to acquire or develop only those projects which it considers to be of high quality. This approach involves the use of high-end PV modules and wind turbines by brand manufacturers. Every German and Italian SPV plant is fitted with systems from quality providers. While this equipment incurs higher initial costs, it yields clear benefits for Capital Stage, which has a long-term focus. The company only expects a very slight degradation of its PV parks output pa, leaving the solar panels of the average Capital Stage with 93% effectiveness after 20 years. A constant output is of prime importance to the company, as it plans to continue to operate its PV parks after the end of the FIT payment period. At that point, the parks will be fully depreciated and the debt will have been repaid. Depending on the electricity market price, plants can more or less operate at a similar margin as during the FIT period due to the extremely low operating costs. The continuation of plants after the expiration of the subsidy is ensured by rent prolongation options of up to 10 years. In addition, some of the land on which its parks have been built has been acquired by Capital Stage to guarantee the continuation of operations. Although continuation of operations beyond the FIT period is, of course, somewhat uncertain, the optionality of most SPV plants continuation clause rental agreements gives the company scope to react quickly to changes in the competitive landscape. The guaranteed recurring cash flows are a defining strength of Capital Stage s business model and the company will use these to fund further growth and return cash to shareholders. Experience and expertise promotes growth across all segments In the recent past, promoted by the macroeconomic environment, the demand for stable and secured cash flows supplied by renewable energy production has steadily increased as players foreign to the sector, such as insurance companies and other asset managers, have entered the market in the hope of reaping above-inflationrate stable and secure returns. As Capital Stage acquires most of its plants on the 9

10 secondary market, it expects increasing prices and pressure on margins on its home turf. However, its track record of value-accretive investments, strong operational capabilities (PV Services) and project development expertise and experience in the development of projects are compelling qualities that we believe will give it a decisive competitive advantage in a consolidating industry. This highly regulated market requires a great deal of insight to acquire or develop the right projects. The increased demand for renewable plants raises the risk profile of the solar and wind energy market in Germany but also in other countries where there is a stable regulatory environment, and this makes the company s service offering very attractive to new and inexperienced market entrants. Capital Stage s strategic decision to build up a service offering that bundles the necessary development and operation skills could potentially prove to be the company s most valuable asset. The Services segment offers high EBIT margins of 50% and a huge growth potential considering average annual PV growth rates of around 40% in Europe. During the last year 17GW of PV volume was added to the European grid, which brings the total capacity to 69GW, of which nearly half is located in Germany (32GW). This presents Capital Stage with an enormous opportunity in both its services segment as well as in its solar and wind operations. Capital Stage s strategy of combining development capabilities and operating competences as well as the blend of wind and solar plants is a compelling competitive mix. The developing competence which is bundled in the PV Services segment allows Capital Stage to take advantage of primary market opportunities with a host of experience and know-how. Development of new projects is associated with more risk but also potentially yields considerably higher returns. The services segment combines know-how in the planning, development, financing and the subsequent operation of a new project. Lean organisation In its main role as an operator, the company generates a competitive advantage from the efficient management of its first-class asset base. Capital Stage s operating structure of consolidating the development and administration of PV plants in one segment allows for efficient management of the firm s assets. Following a projectoriented approach, the PV Services segment fulfils all administrative tasks for the operating SPVs as well as planning, developing and funding new projects. In return, the SPVs compensate the segment on a fee basis which allows the division to earn 50% EBIT margin. The total revenue generated by the PV Services segment in 2012 was EUR1.29m, which we estimate will increase by another 37% in 2013 in line with the build-up of Capital Stage s portfolio and a steadily increasing share of third-party contracts (see Growth a shining future section). The centralisation of key functions and expertise increases the company s efficiency in the PV segment, which makes up 66% of revenues. These functions include the development, planning and financing of the respective project. Capital Stage stands to benefit from establishing strong relationships with banks and suppliers, and from building and maintaining a network, which is hugely important in the PV niche market. The building of relationships at every level of the value chain will give the company a better overview of the market and foster best-in-class management of new and existing projects, particularly as efficient management of assets has been a weak point of the renewable energy industry to date due to excessive FIT schemes. As 10

11 the industry approaches grid parity, all market participants are being pressed to decrease their cost base and become more competitive. Access to cheap financing Capital Stage ensures the smooth functioning of its capital-intensive project development process via close relationships with its house bank and the stateowned KfW Bank. Funding for a new project needs to be secured in the early stage of development, when uncertainty about future cash flows is high. Therefore Capital Stage s strong relationship with well-capitalised banks is a vital precondition for competing in the primary and secondary PV and wind market. Capital Stage has worked with several banks in Italy, but in Germany, KfW and DKB have financed or co-financed nearly all of Capital Stage s projects. As a consequence of its good banking relationships, the average project is around 80% debt-financed, which helps the company increase the number of projects it can acquire or develop at any point in time. Management has proved that this lever has not led to wasteful spending but rather funded a fast and sustainable growth. New markets weighing returns against risk Capital Stage is only present in the German and Italian markets, but regional diversification is increasingly being driven forward by new acquisitions in these two countries. The company has historically not pursued an aggressive geographical expansion strategy, having only invested in two countries so far. Management is taking a cautious approach towards entering new markets, as investments in other countries carry risk: market insight is considered to be very important in this industry. Management is determined to minimise risk by avoiding countries with regulatory uncertainties and it is also shying away from young PV and wind markets. Capital Stage has been contemplating investments in other countries but has not found a suitable project so far. In particular, Spain provides the company with interesting opportunities which could potentially yield high returns. The southern European PV and wind energy markets have changed in response to the economic drought. Many PV and wind parks are financially struggling, which has led to a fresh round of consolidation. The opportunities presented by the availability of good-quality solar and wind assets at attractive prices must be carefully weighed against the political, regulatory and business risks. The following chart shows the risk and return profile by country/ energy which is central to Capital Stage s decision making process. 11

12 Risk/ Return by country/ energy source Risk High Wind Polen PV CEE PV Japan Medium Wind SCAN PV UK Wind GER/F PV F PV USA Wind I PV Australia PV CAN PV I PV SP Low PV GER Target IRR* CS Focus Source: Capital Stage Benefits of diversification Capital Stage has focused on countries with a fixed remuneration structure. The German and Italian markets are relatively established, providing a generally stable environment. Regional expansion would result in the company s dependence on sun irradiance and wind speeds in a certain region decreasing, balancing out the overall power generation of Capital Stage s portfolio. In addition, a dispersed portfolio also reduces regulatory and political risks. The combination of solar and wind plants acts as a natural hedge which levels out variations in irradiance and wind speeds. Capital Stage operates a diversified portfolio across the wind and solar segments, ensuring stable revenue generation while at the same time reducing the overall portfolio risk. 12

13 Growth a shining future Global renewables market From , electricity generation worldwide from wind grew by 27% and solar energy by 42% per year. In 2012 wind energy capacity increased at a slightly lower rate of 20% bringing it up to 282GW globally. The development of the PV market has been even more dynamic capacity has doubled in the last two years and now amounts to over 100GW. According to the International Energy Agency, electricity production from alternative energy sources will nearly triple from 2010 to 2035, reaching 31% of total generation. In 2035, PV energy will provide up to 7.5%, and wind almost a quarter, of total energy. The forecast PV growth rates are also impressive, leading to a 26-fold growth from The rapid growth of the solar and wind energy market has been promoted by continuing government support, rapidly falling costs and an expected rise in fossil fuel prices in the long term. The fast build-up of renewable energy sources will require investment of USD6.4trn over the specified period to These investments include USD1.3trn for additional solar capacity and USD4.1trn for investments in wind energy. The persistent dynamic of the renewable energy market represents an enormous opportunity for Capital Stage. The company s foothold in Germany and Italy will allow its shareholders to continue profiting from the renewable energy boom within the framework of a relatively stable competitive environment. Renewable energy in Europe The European landscape for renewable energy has developed significantly over the past 15 years. In 1997, the European Commission (EC) proposed the target of 12% of energy production coming from renewable sources by After achieving 9% by 2006, the EC refined its targets in In its Directive on renewable energy, the EC once again set ambitious targets for all Member States so that the EU will reach a 20% share of energy from renewable sources by The chart displays the shares of energy consumption for the respective countries versus the national targets. Renewable energy target by country ( ) 25% 20% 15% 20% 17% 18% 20% 15% 10% 5% 0% 3% 4% 2% 2% 10% 11% 12% 13% 6% 8% 10% 12% 7% 8% 11% 12% 10% 12% 14% 15% European Union Italy Germany Spain United Kingdom Source: Eurostat The chart highlights the strong need for further developments of the renewable energy space. According to Eurostat, at the end of 2011 the EU as a whole 13

14 generated 13% of its energy consumption by renewable methods, up from 8.5% in There are a few major European markets which lag behind, such as the UK, which need to upscale investments to reach the European targets. This could in the future develop into a promising entry opportunity for Capital Stage. We expect the strong European trend to increase capacity will continue in the coming years. The momentum for investment in the renewable energy sector remains strong, supported by the very ambitious EU target; this has resulted in a strong political will at a country level and a speeding up of the permit delivery process for new projects in order to reach the 2020 country targets. In addition, the ongoing decommissioning of conventional energy sources will lead to a natural increase in demand for increased renewable energy capacity. The energy mix has changed dramatically in recent years: in 2000, solar capacity only made up 3% of the total, but this figure had increased to 17% in Solar energy high growth across the world and a maturing in Europe The governmental targets but also the general awareness and the ensuing public demand for clean energy are set to drive further dynamic growth of Capital Stage across all its business segments. The company has in the past concentrated on power from PV sources which will in the future remain a high growth industry. PV technology has grown over the past few years at an impressive rate, not only in times of economic stability but also during the period of sluggish growth that followed the outbreak of the financial crisis. This detachment from the general economic development promises growth in line with historical rates but also makes solar energy a prime investment opportunity, enabling investors to avoid the unfavourable risk-return profile of established industries which have suffered from the sluggish economy. According to EPIA, Europe remains the world s leading region in terms of cumulative installed capacity, with more than 70GW as of This represents about 70% of the world s cumulative PV capacity. However, Europe had about 75% of the world s capacity in 2011, which clearly indicates the increase in capacity made in other less developed markets outside Europe during the course of last year alone. Next-ranking is China with a total capacity of 8.3GW and then comes the US with 7.8GW, followed by Japan with 6.9GW. Even so, the cumulative installed capacity outside Europe reached 30GW as of 2012, demonstrating the ongoing rebalancing between Europe and the rest of the world, and reflecting more closely the patterns in electricity consumption. Europe s market has progressed rapidly over the past decade: from an annual market of less than 1GW in 2003 to a market of over 13.6GW in 2010 and 22.4GW in 2011 even in the face of difficult economic circumstances and varying levels of opposition to PV in some countries. But the record performance of 2011, driven by the fast expansion of PV in Italy and again a high level of installations in Germany, could not be emulated in 2012 and the market fell to 17.2GW additional PV capacity installed. For the first time in the last 12 years, the PV market in Europe decreased in terms of new connected capacity. Nonetheless, in 2012 the PV market in Europe again exceeded all expectations, since analysts had expected even lower even lower growth rate due to the difficult macroeconomic environment. For the seventh time in the last 13 years, Germany was the world s top PV market, with 7.6GW of newly connected systems; China was second, followed closely by Italy. Capital Stage operates in two of the world s top three growth markets. In these markets, the company has managed to acquire and develop projects successfully. The PV growth prospects in Europe and Capital Stage s track record 14

15 Capacity (MW) Capital Stage AG suggest that the company will continue to stay on the growth path. The following map displays the expected global capacity (GW) by continent in Estimated Global PV Capacity (GW; 2020) North America Europe Middle East Africa Asia South America Source: Bloomberg, Berenberg Management has stated that there are ample opportunities in the market that will enable the company to grow at substantial rates over the next few years. We estimate 2013 PV revenue will increase by 48%. Capital Stage has a total project pipeline of 200MW in all European markets and is considering entry into new markets to take advantage of more favourable conditions, such as higher irradiance or more attractive risk-return profiles. For this year, we estimate that Capital Stage will add 20MW in PV capacity, in addition to the 9MW plant already bought at the beginning of this year. We estimate that the company will continue to grow over the next few years. The following chart gives an idea of Capital Stage s forecast PV capacity additions until Estimated PV capacity and growth rates (2013E-16E) % 45% 40% 70 35% 60 30% 50 26% 25% % % 20% 15% 20 10% % e 2014e 2015e 2016e Solar Capacity added Growth (% of total PV capacity) 0% Source: Berenberg 15

16 EURmn Capital Stage AG This raises total PV capacity form 134MW in 2012 to 345MW in 2016, which represents a total growth rate of 160% over the next few years, contributing the largest amount to estimated group revenue growth of 47% in 2013 and an average CAGR of 13% by The capacity additions in relation to total capacity are displayed in the following chart. Total estimated PV capacity (MW) e 2014e 2015e 2016e New capacity Existing capacity Source: Berenberg Additions that exceed the estimated capacity will require significant investments and will be dependent on the company being able to access other sources of cash to finance its growth. The outlined growth prospects of the solar segment will lead to considerable revenue and bottom line growth. The following chart shows the segmental revenue, EBITDA and EBIT development over the next few years. PV segment: revenue, EBITDA and EBIT (2013E-16E) Source: Berenberg 2013e 2014e 2015e 2016e Revenue EBITDA EBIT 0 16

17 The growth rates for the segment revenue and bottom line are displayed in the table below. Solar segment: growth ( E) Source: Berenberg 2013e 2014e 2015e 2016e Revenue 48% 21% 17% 12% Total Capacity (MW) 22% 43% 26% 19% Total Output pa (MW) 73% 46% 27% 19% EBITDA 8% 25% 13% 10% EBIT 10% 23% 11% 9% EAT 31% 18% 9% 8% Capital Stage s solar operations are set to grow substantially during the next few years, profiting from the FIT scheme, which will continue to provide investors with high recurring revenues. The PV service segment will benefit from the company s growth path due to the increased in the portfolio of PV parks. Besides the growing in-house business, the company aims to progressively target third-party plants. Besides the beneficial effect of driving down the cost and better risk management, the segment also contributes a growing share of earnings. We estimate that the revenue from thirdparty plants will grow by 34% this year. It is important to bear in mind that not quite all of this revenue is consolidated, as the segment also provides services inhouse to Capital Stage s PV segment. Therefore the growing sales from external service contracts are an important source of additional recurring income. The 2012 EBITDA margin for the Services segment was 54% we estimate that there is some room for improvement over the next few years. The following chart displays the estimated total revenue until Estimated revenue growth, PV Services ( E) e 2014e 2015e 2016e In-house revenue Third-party revenue Source: Capital Stage, Berenberg 17

18 Wind energy still important Wind energy plays a vital role in achieving the EU 2020 product mix targets. The EC estimates that of the 20% renewable target, wind energy will contribute 12%, explaining the very high capacity additions during the last decade. In 1995 the total installed wind capacity stood at 2.5GW and increased to 83GW in 2010, an average annual increase of 26%. In addition to the strong overall increase in wind-generated electricity capacity, the installation momentum has accelerated significantly since In 2005, wind power installations had a volume of 6.2GW, compared to 7.6GW, 8.5GW and even 10.5GW in 2006, 2007 and 2010, respectively. In 2011 wind power installation grew by 9.6GW, at which level installations are valued at EUR12.6bn. Wind power is set to continue to expand rapidly as it becomes more costcompetitive with conventional sources of electricity generation, driven to a large degree by supportive government policies. The International Energy Agency states that the incremental electricity output from wind is greater than that of any other renewable source. According to the agency, global generation from wind will increase dramatically from 342TWh in 2010 to around 2,680TWh in 2035, pushing up its share in total electricity generation from 1.6% to 7.3%. Furthermore, the IEA estimates that wind energy will penetrate most in the EU, where it will account for almost one-fifth of electricity generated in 2035, compared with less than 5% in Capital Stage has participated in the strong growth of wind energy since its strategic move into the industry, and has added 41MW of wind power to its portfolio. The company has clearly focused more on PV energy but is open to new wind acquisitions. We estimate conservative capacity additions from 2013 onwards and a gradual build-up of the wind portfolio in the following years. The following chart displays the capacity development until Estimated wind capacity ( E) e 2014e 2015e 2016e Existing capacity New capacity Source: Capital Stage, Berenberg The company has stated that the returns profile of wind farms is less attractive than that of solar projects. Therefore we estimate that the initial wind capacity 18

19 EURm Capital Stage AG growth rates will not persist over the coming periods. However, this estimation can be considered very conservative. The moderate additions to Capital Stage s portfolio will serve as a diversification tool and a natural hedge against swings in output due to wind/sun variances. In 2012, wind capacity contributed EUR2.46m to the group s top line. The EBITDA margin was 146% due to one-off effects in the context of purchase price allocations. We estimate that the margin will normalise and remain at around 80% in the future. For 2013, we expect an impressive revenue growth rate of 260%, mainly due to the capacity acquired during the last financial year which will level off from 2013 onwards to an average growth of approximately 6.5% pa. The following chart displays the estimated revenue and margin development until Wind segment: revenue, EBITDA, EBIT and EAT ( E) e 2014e 2015e 2016e Revenue EBITDA EBIT EAT Source: Capital Stage, Berenberg Over the next few years, the wind segment will show a steady revenue growth rate. In line with top-line growth, EBITDA, EBIT and EAT will pick up. At these capacity additions, the EBIT and EAT will significantly improve after the end of the financing period and the full depreciation of the wind assets. The following table shows the estimated growth rates for revenue and earnings. Wind segment: revenue and earnings growth (2013E-16E) Source: Berenberg 2013e 2014e 2015e 2016e Revenue 259% 6% 6% 8% EBITDA 114% 5% 7% 6% EBIT 123% 4% 7% 5% EBT 110% 6% 11% 7% EAT 87% 4% 11% 5% 19

20 The earnings estimates are certainly conservative when considering the growth rates that the company experienced in 2012 and is expected to achieve this year. However, in 2009 and 2010, the earnings growth rates in the PV segment were similarly high and normalised, albeit at a higher rate than we expect for the wind operations. The same is true for the margin development 2012 is characterised by margins that exceed revenues due to one-off effects from the allocation of purchase prices in the course of the consolidation process. In 2012, the EBITDA margin was 146%, which is expected to level off to 87% in 2013 and stay at this high level in the future. The margin structure for wind farms is comparable to the solar segment high EBITDA margins due to low operating costs and relatively high depreciation (average of 30 years) and interest costs (average of 18 years). The following table shows the margin development over the next few years. Wind segment: margin development ( E) Source: Capital Stage, Berenberg Group level and guidance On the group level, the consolidated estimates lead to top-line growth of 47% in During the next few years, the growth levels off, this is conservative when considering the enormous growth opportunities in the market, the cash-generative nature of the business and management s determination to deliver substantial revenue increases. The following table shows the growth rate for revenue and earnings for the respective years until 2016E. Revenue and earnings growth ( E) Source: Capital Stage, Berenberg e 2014e 2015e 2016e EBITDA 146% 87% 86% 87% 86% EBIT 96% 60% 59% 60% 59% EBT 62% 36% 36% 38% 38% EAT 62% 32% 32% 33% 33% e 2014e 2015e 2016e Revenue 27% 47% 15% 13% 10% EBITDA 36% 40% 16% 19% 10% EBIT 55% 56% 11% 21% 10% EAT 259% 123% 3% 25% 9% This amounts to estimated revenue of EUR66.4m for 2013, EBITDA of EUR47.0m, EBIT of EUR32.1m and EBT of EUR23.6m. This is considerably higher than the guidance given out by the company. The company expects revenue of EUR60.0m, EBITDA of EUR44.0m, EBIT of EUR26.0m and EBT of EUR14.0m. This difference can be explained by the fact that Capital Stage has not planned for growth but only considers returns revenue from the existing portfolio. However, considering the history of Capital Stage and management s determination to grow, it is highly unlikely that the company will not add further capacity in the next few months and beyond. We have modelled every project, both in the PV and wind segments, which has enabled us to strip out growth. When comparing the numbers estimated in our no-growth model, we find that the numbers are considerably closer to the guidance while still giving higher returns. The following table gives a snapshot of the mentioned numbers. 20

21 EURm Capital Stage AG No-growth model ( E) Source: Capital Stage, Berenberg e 2014e 2015e 2016e Sales EBITDA EBIT Net profit Capital Stage has for the last two years exceeded investor expectations and its own guidance. Thus the no-growth model should provide an accurate picture of what to anticipate if the company does not acquire further operations this year. However, we do not expect this scenario to materialise and we estimate a total capacity growth of 18% in 2013 and 35% in The following chart summarises historical data on absolute revenue, EBITDA and EBIT margin and displays our estimations for 2013 until Capital Stage s historical and estimated revenue, EBITDA and EBIT margin % % % % % 70% % 75% % 71% 71% 48% 47% 75% 75% 50% 50% 60% 40% % e 2014e 2015e 2016e Sales EBIT margin EBITDA margin 0% Source: Capital Stage, Berenberg The chart wraps up our positive expectations and illustrates the potential that Capital Stage offers to investors. We estimated that Capital Stage will be able to achieve EUR95.0m in revenue by 2016 at an EBITDA margin of 75% and an EBIT margin of 50%. 21

22 Regulatory framework Investments in renewable energy projects are heavily supported by finance to promote the steady expansion of renewable power capacity. The current FIT structure and its development over the next few years is the single most important factor when analysing Capital Stage. The FIT system is not reliant on state subsidies but is financed by grid operators charging end-consumers slightly higher rates. In both of Capital Stage s markets, but particularly in Germany, the political will to promote renewable energy by creating and maintaining an attractive regulatory environment is strong. The political risk in Germany is low, whereas there is moderate risk in Italy due to the euro crisis and the uncertain economic outlook. Entry into other markets such as Spain needs to be carefully assessed by the company in terms of the regulatory framework. This note, however, focuses on the German and Italian regulations. The amount of the FIT depends on the development of manufacturing prices for solar and wind systems and the underlying raw materials. This is due to the fact that policymakers adjust the FIT based on the prices of PV and wind technology. Before diving into the details of the national regulations, we need to briefly elaborate on this correlation and the recent news from Brussels which suggests that the EU will start levying hefty duties on Chinese solar panels from beginning of June EU regulations solar panels and wind systems The rapid development of the Chinese solar industry and the renewables boom of the last decade have led to overcapacity in the market which has led to a collapse of solar system prices. Between the first quarter of 2010 and the first quarter of 2012, solar PV generating costs fell by 44%. The following chart shows the price development of polysilicon, the most important raw material. Polysilicon price development (USD/kg) Polysilicon Source: Bloomberg This situation has gradually pushed capacity out of the market and will eventually lead to a normalisation in pricing. In our model, we have provided for a conservative 5% decrease of capital expenditure, which is a reasonable assumption 22

23 even in light of the likely introduction of EU duties. The EC has called for provisional duties for a period up to five years, averaging 47% on PV panels, with some Chinese panel exporters paying as little as 37% and others up to 68% based on the level of cooperation during the EC s investigation of the matter. In our opinion, the heated discussions with regard to the duties have been overdone. We believe that even if they are introduced in the form suggested above they will have only a limited effect on Capital Stage s business: the existing portfolio will not be affected (the company will continue to reap high returns from its PV operations), and even in regard to future acquisitions and developments, the levy will be of minor importance. The EU has set fixed targets for the build-up of renewable energy production. The EU s overarching goal is for the region to generate 50% of its total energy from renewable sources by This ambitious plan is to be realised by EU national governments through subsidies and FIT schemes which are to be adjusted to account for market parameters such as changes in the price of renewable technology (discussed in the following paragraphs). The correlation between solar panel prices and the FIT is thus strong and will be adjusted according to the environment. The bottom line is that the duties likely to be charged by the EU will lead to higher PV prices, and thus higher development and acquisition costs, but will not harm returns because policymakers will adapt the FIT to the competitive landscape. The only loser will be the European consumer, who will have to pay more for electricity. That said, even without the excess capacity from China, there will be persistent pressure on prices not only for solar but also for wind systems. Germany The German Renewable Energy Act (EEG) is widely regarded as the most successful piece of legislation promoting renewable energy production. The act was passed in 2000, and since then it has been amended a number of times to reflect changes in market conditions and capacity quotas set by the German government. The EEG s purpose is to support renewable energy investments by securing and stabilising electricity prices from clean sources. The targets are to scale renewable electricity production up from the 20.5% of total energy production achieved in H to 50% in 2030, 65% in 2040 and 80% in The core elements of the EEG are: (1) renewable energy receives preferential treatment the grid operators are obliged to prioritise clean power in terms of connection, transmission and acceptance; and (2) FITs the EEG ensures the payment of constant FITs over a 20-year period for electricity produced by installations commissioned by the grid operator. The following table shows the degression of PV FIT amounts for groundmounted greenfield systems between 2004 and

24 PV FIT development ( ) E UR c t/kw h July October January April Agricultural land Contaminated land Others Source: German Federal Environment Ministry (BMU) In 2012, there were some major amendments to the act due to the progressively decreasing prices for renewable energy systems. In addition, the development of renewables entered a new strategic phase. The government would like to have more active control over the PV FIT, in order to improve flexibility and control the volume of installed PV capacity more tightly. This encompasses (a) more frequent FIT reductions, (b) PV capacity quotas which reduce tariffs at certain thresholds, (c) a 52GW PV total capacity threshold. It was noteworthy that in the 2012 review the 10MW size limitation on plants eligible for remuneration stayed in place. Another significant addition to the already existing regulatory act was the market premium option which allows renewable energy producers to market electricity directly to the market. Instead of receiving a FIT, the operator receives the spot rate and an additional market premium payment which is calculated on a monthly basis and is equal to the difference between the FIT price and the reference price at the end of each month. Despite the EC s plan to levy duties on Chinese solar panels, we believe that improving technology and economies of scale will continue to put pressure on prices. This gives huge potential for further generation cost declines the European Photovoltaic Industry Association (EPIA) expects around a 50% drop by 2020 (without EU duty). Such cost reductions would make alternative energy sources increasingly competitive. In response, the 2012 EEG modifications include: (1) revised FIT compensation rates; (2) revised FIT degression rates; (3) a market premium payment option (direct marketing); (4) a 90% cap on FIT-eligible PV electricity; and (5) a PV capacity threshold of 52GW. The following table shows the new FIT compensation for ground-mounted greenfield projects and the newly established reduction rate for PV FIT development 2013 E UR c t/kw h January February March April May June July September FIT Degression pm -2.5% -2.2% -2.2% -2.2% -2.2% -2.2% -2.2% -2.2% -2.2% Source: BMU The PV degression certainly puts pressure on all market participants to operate more cost efficiently. However, the transparent nature of the reductions will give participants enough time to react to changes. The following chart displays the reductions of the PV/ wind FIT on its path to grid parity (ability to compete). 24