Abengoa. Buy. Company update. New structure, strong growth. Spain/ Renewable Energy. Investment Research 8 February

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1 Spain/ Renewable Energy Company update Investment Research 8 February 2011 Buy Recommendation unchanged Share price: EUR closing price as of 07/02/2011 Target price: EUR vs Target Price: EUR New structure, strong growth We have updated our estimates on Abengoa, adapting these to the new reporting system adopted by the company. Also included are the projects not previously accounted. Buy recommendation reiterated and fair value at EUR 27.4/sh. Reuters/Bloomberg ABG.MC/ABG SM Daily avg. no. trad. sh. 12 mth 562,418 Daily avg. trad. vol. 12 mth (m) Price high 12 mth (EUR) Price low 12 mth (EUR) Abs. perf. 1 mth 22.0% Abs. perf. 3 mth 12.3% Abs. perf. 12 mth 4.1% Market capitalisation (EURm) 1,909 Current N of shares (m) 90 Free float 41% Key financials (EUR) 12/09 12/10e 12/11e Sales (m) 4,147 5,929 7,120 EBITDA (m) ,112 EBITDA margin 18.1% 16.5% 15.6% EBIT (m) EBIT margin 10.4% 12.4% 11.9% Net Profit (adj.)(m) ROCE 6.0% 8.6% 9.4% Net debt/(cash) (m) 4,097 5,418 5,456 Net Debt Equity Net Debt/EBITDA Int. cover(ebitda/fin.int) EV/Sales EV/EBITDA EV/EBITDA (adj.) EV/EBIT P/E (adj.) P/BV OpFCF yield 24.2% -31.0% 28.8% Dividend yield 0.9% 0.9% 1.0% EPS (adj.) BVPS DPS vvdsvdvsdy Jan 10 Feb 10 M ar 10 Apr 10 M ay 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Concessions make up 30% of the company: Abengoa has created a new activity called Contracted Off Takes (concessions), grouping 3 activities with recurrent revenues, high margins and strong growth based on the 2 year backlog. We estimate this activity to represent 26% of the results in 2011, and if we include all the future projects it would rise to 40% in No risks in solar and strong growth in Spain and abroad: the new thermosolar regulation in Spain has hardly affected Abengoa s accounts. At the moment the company has 181 MW in production in Spain. In MW will begin production in Algeria. In the future, the company has projects for 1,100MW (500MW in Spain, 500 MW in US and 100 MW in Abu Dhabi), of which 650 MW are financed (300 MW in Spain, 250 MW in US and 100 MW in Abu Dhabi). Apart from these projects that 4 fold production capacity, we estimate new projects to proceed from Desertec. High voltage lines represent 15% of EBITDA: This activity, apart from generating recurrent revenues (updated by CPI in Brazil or America) presents wide margins (EBITDA mg over 75%). Abengoa estimates doubling its kilometres during the next 3 years (these projects are completely financed). High order intake: The E&C division (48% of Abengoa s EBITDA) presents an order intake of EUR 9,586 m, around EUR 1,000 m are maintenance contracts, therefore by removing these, sales would be covered by 2x. We estimate 95% of 2011 sales to be hedged and 70% in Our estimates are -30% below Abengoa s targets: Abengoa s goal is to double 2009 EBITDA in 2013, i.e. up to EUR 1,500 m. Our estimates and consensus point to EUR 1,200 m. Fair value EUR27.4/share, upside 30%: We value Abengoa via two methods: the DCF (EUR 27.1/share) and sum of the parts (EUR 27.6/share). Consensus will have to revise estimates up: Consensus estimates for 2011 are below our forecasts, -15% in sales and -10% in EBITDA. In our opinion, consensus will have to improve estimates once 2010 results are released. Conclusion: We reiterate our Buy recommendation and our fair value at EUR 27.4/share and 30% upside potential. Abengoa is creating a perfect mix between activities with a large order intake and strong cash generation and activities with recurrent revenues, high margins and strong growths in various projects presented for upcoming years. ABENGOA IBEX 35 (Rebased) Source: Factset Shareholders: Inversión Corporativa 56%; Management 3%; Analyst(s): Sergio Ruiz Martin sruizmar@cajamadrid.es For company description please see summary table footnote Produced by: All ESN research is available on Bloomberg: ESNR <go> Distributed by the Members of ESN (see last page of this report)

2 CONTENTS The New Abengoa... 3 Concessions... 4 High Voltage Lines (for further details see Annex I) 4 Solar Plants Electricity Generation (for further details see Annex I) 5 Desalination Plants 6 Estimates on the Concessions Division 7 Commodities Division... 9 Bioethanol 9 Industrial Waste Recycling 10 Estimates on the Commodities Division 11 E&C Division Estimates on the E&C Division 14 Financial Estimates on Abengoa Consensus Below our Forecasts Valuation: Buy; Upside Potential 30% Sum of the Parts Valuation 19 Valuation via DCF 21 Annex I: Concessions Division Abengoa s High Voltage Lines in Brazil 22 Abengoa s High Voltage Lines in Peru & Chile 22 The IRR of an Electricity Transmission Concession 23 The Situation of the Solar Plants 24 Thermosolar Regulation in Spain 25 IRR on Thermosolar Projects 26 IRR on a Desalination Plant 27 Annex II: Commodities Division Steel Waste Recycling Process 28 Aluminium Recycling Process 30 ESN Recommendation System Page 2

3 The New Abengoa Abengoa has restructured activities reducing the previous 5 (Engineering, Befesa, Telvent, Solar and Bioethanol) to 3 (Concessions, Commodities and E&C). The intention behind these changes is to differentiate between: 1) E&C: division with large order intake portfolio, being the company s cash cow; 2) Concessions: recurrent revenues and high margins; and 3) Commodities: activities more exposed to the economic cycle and raw materials. Abengoa s Structure Abengoa Concessions Commodities E&C High Voltage Lines Bioethanol Engineering Solar Generation Desalination Industrial Wastes Recycling Telvent EPC Water Solar Engineering Source: Abengoa In the following graphs we can see that the E&C activity is the heavy weight in both sales and EBITDA. However, the Concessions division stands out with 6% sales but over 25% EBITDA. Sales Mix 2011 EBITDA Mix 2011 E&C 63% E&C 48% Commodities 32% Concessions 5% Commodities 26% Concessions 26% Page 3

4 Concessions The new Concessions division includes the high voltage lines in Latin America, electricity generation in solar plants and desalination plants. Therefore, the Concessions division groups the activities with recurrent revenues and high margins. The large project portfolio in this division also endows the division with strong growth potential. Structure of the Concessions Division Concessions Division High Voltage Lines Solar Generation Desalination Plants LatAm Spain Algeria US India Algeria China Abu Dhabi Source: Abengoa High Voltage Lines (for further details see Annex I) Abengoa s high voltage transmission lines concessions are located in Latin America (Brazil, Chile and Peru), Brazil represents the highest share (85% of the total kms). Abengoa has been present in LatAm for 40 years (high voltage lines opened to private investors 10 years ago). Thanks to this move and the alliances with local partners such as Electrobras, a large number of electricity transmission concessions were attained, setting Abengoa as one of the leading private companies in this area and with the greatest possibilities of being awarded new concessions. High voltage lines in Brazil Brazil is the most important country for Abengoa when referring to electricity transmission line concessions. Abengoa currently operates 9 concessions (following the sale of 2 concessions at the end of 2010 that were equity accounted) with 2,981 kms and three 3,948 kms under construction. During concessions of 1,500 kms will start up and in 2013 Abengoa s largest concession, Norte Brasil, will also start up with 2,375 kms. High voltage lines in Peru and Chile Abengoa also has electricity transmission lines concessions in Peru and Chile. The length of the concessions in Chile is only 305 kms and there are no other projects in the portfolio. However, in Peru there is a 575 km concession (although Abengoa only holds 24% of the latter) and in 2011 the first concession, ATN, will be inaugurated in which Abengoa holds 100% and in 2014 ATS reaching a total of 1,973 kms in the country. In 2013 Peru will represent around 20% of the total length of concessions in Latin America. Page 4

5 We must bear in mind that the construction of transmission lines in Peru is much more difficult than in other regions considering the Andes divides the country in three geographic regions: coast, mountains and jungle. Some transmission lines are in areas above 4,800 metres. Abengoa s Transmission Lines Plan Producing Brazil: NTE, STE, ATE, ATE II, ATE III, ATE IV-VII Perú: Redesur (e.a.) 2011 Perú: ATN 2012 Brazil: Manaus, Linha Verde 2013 Brazil: Norte de Brazil 2014 Perú: ATS Chile: Trasam (e.a.), Palmucho Km transmisions lines 3,717 Km 4,387 Km 5,960 Km 8,335 Km 9,207 Km +18% +36% +40% +10.5% Source: Abengoa Abengoa s Thermosolar Production Plants Solar Plants Electricity Generation (for further details see Annex I) Abengoa Solar was created in 1984 with the construction of a solar platform in Almeria (Spain). The division focuses on the construction and exploitation of CSP solar plants. During the next 25 years the company will grow in Spain and abroad. Demonstrating this growth is the agreement signed in the US with APS (Arizona Public Services) to build what will be the largest thermosolar plant world wide, Solana, as well as the agreement with the electricity company Pacific Gas & Electric to build a 250MW plant in the Californian desert. Abengoa is also participating in the construction of the first 2 combined gas solar cycle hybrid plants worldwide, in Algeria and Morocco. Abengoa has also signed the adhesion as a founding partner to the Desertec Industrial Initiative project. This project is to produce renewable energies in the desert areas in north Africa and Middle East for local consumption and exports to Europe. The Spanish company currently has 181 MW CSP technology in force (located in Spain). During the next three years these will begin to produce 500 MW in Spain, 280 MW in US, 100 MW in Abu Dhabi, 150 MW in Algeria (130 MW are produced via combined cycles and 20 MW by CSP). We expect the Californian plant to start up before Although we do not expect any news financially speaking, we do expect news on the Desertec project. Producing Spain: PS-10, PS-20, Solnova 1, 2, Spain: Helionergy 1 Algeria: Hassi R mel 2012 Spain: Helioenergy 2 Solacor 1, 2 Solaben 1, 2 Abu Dhabi: Shams Spain: Solaben 3, 6 Helios 1, 2 USA: Arizona Before 2015 USA: Calofirnia Production capacity 381 MW 731 MW 1,181 MW 1,431 MW +110% +92% +62% +21% Source: Abengoa Page 5

6 Desalination Plants Start Up of Abengoa s Desalination Plants Abengoa also builds and operates the desalination plants (process to eliminate salt from sea water thus obtaining sweet water). The order intake includes 4 international concessions. These will start up throughout the period entailing There is also a fifth concession, Skikda (Algeria) which started up during the fourth quarter in There are no plants in Spain, 3 in Algeria, one in India and one in China. The total desalination capacity will reach 700,000 m 3 /day. However, Befesa s consolidated stakes in these plants do not surpass 50%, thus has a real production of just over 300,000m 3 /day. Befesa estimates: 1) Chennai in India to start up this year, and equity account the 25% stake held: 2) In mid 2011 or year end, two 200,000 m 3 plants in Algeria to start up (each); and 3) In 2012 the Chinese plant should be completed (92% stake). Producing Algeria: Skikda(34% part.) India: Chennai (p.e) 2011 Algeria: Honaine(50% part) Tenes (51% part.) 2012 China: Qingdao (92% part.) m 3 /día accumulate 200, , , % +20%. e.a.:equity accounted Page 6

7 Estimates on the Concessions Division All the activities included in the Concessions division present not only recurrent revenues but a 3 4 year projects portfolio. We therefore estimate a CAGR 10-12e in sales and EBITDA of over +30% and 75% in EBITDA margin. As we can see in the following graphs, the high voltage lines contribute over 50% of the sales and solar generation around 40%. At the EBITDA level the margins are similar in high voltage lines and solar, being slightly lower in desalination. Concessions Sales Mix 2011 Concessions EBITDA Mix 2011 Generación Solar 37% Desaladoras 8% Generación Solar 37% Desaladoras 6% Líneas alta tensión 55% Líneas alta tensión 57% Our estimates only include projects that will begin production within the next 12 months and are totally financed. Hence, we include the following projects that should begin production in 2011: 1) high voltage line in Peru (ATN), although we only consolidate it six months; 2) in solar generation we include Solnova 4 (50MW) and Algeria (150 MW), but we do not include Helioenergy 1 (50MW) due to the floods in Ecija (Spain) we expect production to be delayed until the beginning of 2012.; 3) We expect the desalination plant in Honaine to start up in mid thus will have an affect in both 2011 and As a result we forecast CAGR 10-12e in sales and EBITDA above 30%. Solar generation will be the activity to report the highest growths, although high tension lines will continue representing over 50% of the activity. Page 7

8 Concessions Division: Results & Estimates EUR m e 2011e 2012e 2013e 2014e 2015e CAGR 10/12e Sales % % var. 77.2% -1.1% 70.4% 37.7% 23.6% 3.0% 3.0% 2.5% High Voltage Lines % % var. 74.9% -11.2% 40.5% 8.0% 3.9% 3.9% 3.4% 3.0% Solar Generation % % var % 213.3% 166.4% 128.1% 51.1% 2.2% 2.8% 2.2% Desalination % % var. 52.0% 34.2% 2.0% 2.0% 2.0% EBITDA % % var. 0.0% 17.8% 48.6% 38.1% 23.4% 3.0% 3.0% 2.5% % margin 71.7% 85.4% 74.4% 74.6% 74.4% 74.5% 74.5% 74.5% High Voltage Lines % % var. 1.3% 26.1% 8.5% 3.7% 3.9% 3.4% 3.0% % margin 73.6% 84.0% 75.4% 75.7% 75.6% 75.6% 75.6% 75.6% Solar Generation % % var % 166.4% 128.1% 51.1% 2.2% 2.8% 2.2% % margin 30.0% 76.0% 76.0% 76.0% 76.0% 76.0% 76.0% 76.0% Desalination % % var. 0.0% 52.0% 34.2% 2.0% 2.0% 2.0% % margin 60.0% 60.0% 60.0% 60.0% 60.0% 60.0% Source: Company. Estimates: Caja Madrid Bolsa Page 8

9 Commodities Division The Commodities division is formed by Bioethanol activity and Befesa s Recycled Industrial Wastes activity. As its name indicates, this division depends heavily on raw materials and thus is the most volatile of the three divisions. Structure of the Commodities Division Commodities Division Industrial Wastes Recycling Bioethanol Europe LatAm Europe US Brazil Source: Abengoa Bioethanol Abengoa is the only bioethanol producer that is present in the principle markets world wide: Europe, US and Brazil. In Europe it has 5 plants, 3 in Spain, 1 in France and 1 in the Netherlands, with a total production capacity of 1,275 m litres. In the US Befesa has 6 plants and production capacity of 1,420 m litres. In Brazil the plant produces both sugar and bioethanol (maximum production capacity of bioethanol 400 m litres). All the plants are first generation (1G) and Abengoa does not plan to build any more. For years now, the company has been investigating 2G and has begun to build a plant in Arkansas to produce 2G bioethanol that is expected to begin production by the end of Plants Production Capacity (litres m)) Plants in Project Europe 5 1,275 0 Galicia Cartagena Salamanca France Rotterdam US 6 1,420 0 York Colwich 1 95 Portales Ravenna Indiana Illinois Brazil 2 400* 0 Source: Abengoa Page 9

10 Industrial Waste Recycling Industrial Waste Recycling includes recycling aluminium, steel wastes and industrial wastes management. Recycling Steel Wastes Befesa is currently the leader in Spain and Europe in recycling steel wastes, with a much higher market share than peers (60% vs. its main competitor s 20%). The company has 8 production plants in Europe, involved in the valorisation of residual dust in the smelting and electric air furnaces, the recovery and treatment of stainless steel wastes and recycling of zinc wastes as well as the alloys proceeding from the galvanisation industry, metal injection and construction industries. The company has two affiliates that provide commercial and logistic services to transport these types of wastes. Location of Steel Waste Recycling Plants Capacity Utilisation of Befesa s Plants Source: Befesa Source: Befesa Recycling Auminium Befesa has 3 aluminium plants in Spain and 5 salt slag recycling plants in Europe (3 in Germany, 1 in UK and 1 in Spain). The company has 160,000 ton aluminium production capacity, and 630,000 tons in the salt slag plants. The aluminium market is very fragmentised; however, salt slag recycling is distributed among less than 10 companies in which Befesa is the leader with 60% market share (main competitors are K&S, RVA and Alustockach). Befesa has an integral aluminium waste recycling model: on one hand, it develops the technologies to improve management and waste treatment, and on the other, it is the only operator not producing solid wastes within the production process. Befesa recycles aluminium without generating new wastes within the recycling process, thus creating the perfect cycle. Location of Befesa s Aluminium Plants Salt Slag Market Share in Europe CAPRA 6% RVA 8% Alu-Stockach 3% Vedani 6% Aleris 3% JBMI 2% K&S 12% Befesa 60% Source:Befesa * Salt Slag Source: Befesa Page 10

11 Industrial Waste Management The integral industrial waste management activity is specialised in environmental services, with the goal of recycling the wastes generated. Befesa s main competitive advantage is that it is present throughout the entire industrial waste management cycle, thus attaining synergies with other links within the chain. The activities undertaken are: waste management, industrial cleaning, desulphurization, and plastics management, management of PCB, de-contaminating land, and replicating the process in Latin America. Befesa is the Spanish leader in industrial waste management in terms of volume treated as well as an important player in Latin American countries where present (Argentina, Chile, Mexico and Peru). Befesa s main clients are EDP, Repsol, Petronor and Cepsa, representing 28% sales. Estimates on the Commodities Division The Commodities Division is Abengoa s most volatile unit as it depends on raw material prices (gas, oil, cereals, zinc, aluminium, bioethanol ) and the economic cycle. We estimate CAGR10/12e in sales of +11.4% and +6.6% in EBITDA: Commodities Sales Mix 2011 Commodities EBITDA Mix 2011 Recycling 24% Recycling 35% Bioethanol 76% Bioethanol 65% Page 11

12 Within the bioethanol activity, Abengoa does not contemplate building an 1G plant, thus we will not see strong growths in volumes (except in 2011 which continues gathering an impact from plants that came into stream in 2010). Regarding results, these will be exposed to both raw material and ethanol prices. We estimate the strong hikes in the price of wheat, maize, barley etc to erode margins. On the other hand, Abengoa has begun the construction of a 2G plant in Arkansas, expected to start up in We do not rule out some of the advances in 2G could be applied to 1G to improve efficiency in the latter. In the industrial waste recycling activity the key would be to recover the utilisation capacity. During recent quarters we have seen a strong recovery due to the sharp drop seen in In 2011 we expect capacity to continue rising, but still far from 2008 levels. The optimisation of salt slag plants acquired in Germany at the end of 2009 will also bolster results. Estimates on the Commodities Division EUR m e 2011e 2012e 2013e 2014e 2015e CAGR 10/12e Sales % % var. 21.9% -2.7% 34.6% 16.9% 6.2% 4.0% 2.9% 2.9% Bioethanol % % var. 35.3% 21.7% 40.2% 20.4% 6.1% 3.1% 3.2% 3.2% Recycled % % var. 8.2% -34.1% 21.4% 7.3% 6.8% 6.7% 2.1% 1.9% EBITDA % % var. 0.0% -10.2% 24.7% 6.0% 7.1% 4.6% 3.2% 2.6% % margin 16.5% 15.2% 14.1% 12.8% 12.9% 12.9% 13.0% 12.9% Bioethanol % % var. 0.0% 36.1% 42.8% 6.2% 5.6% 2.9% 3.0% 3.1% % margin 10.9% 12.2% 12.5% 11.0% 10.9% 10.9% 10.9% 10.9% Recycled % % var. 0.0% -37.8% 0.9% 5.7% 9.8% 7.6% 3.6% 1.9% % margin 23.6% 22.3% 18.5% 18.3% 18.8% 18.9% 19.2% 19.2% Source: Befesa. Estimates Caja Madrid Bolsa Page 12

13 E&C Division Within this Activity Abengoa has grouped the EPC (Engineering Procurement and Construction) from Engineering, Befesa and Solar as well as Telvent s activity, i.e. all the activities focused on engineering, including desalination plants up to the construction of solar plants, technology sales, solar mirrors and other companies, and Telvent. Therefore, the principal data in this division is the backlog portfolio in each activity. Structure of the E&C Division E&C E&C Engineering E&C Befesa E&C Solar Telvent Source: Abengoa Befesa s EPS will depend on the construction of the desalination plants projected and mentioned within the Concessions Division, as well as other projects in the water market. The large water market, the strong investments (CAGR e 5% world wide) taking place world wide (worth mentioning are Saudi Arabia, India, Rumania, Algeria, China and Egypt) triggers our estimated sustainable growths for upcoming years. Internationally speaking, Befesa has detected 55 projects valued at EUR 9 bn, among which 21 projects are at very advanced phases (implying an investment of EUR 3,500 m). This gives a small insight regarding the size of this market and the possibility of maintaining this backlog, as well as the possibility of attaining more contracts in desalination. Abengoa holds 40% Telvent, following the stake sold a couple of years ago. Therefore, and although it seems the sales process has been stopped, we do not rule out the process restarting again in the medium term. Telvent has reflected sturdy results and high growth thanks to the geographic and activities diversification (CAGR EBITDA 34%). However, and despite the incorporation of DTN at the end of 2008 contributing more recurrent results, the crisis is taking its toll. Results will improve according to the recovery of the economic cycle and based on the geographic diversification (50% Europe, 35% US and 15% LAtAm). E&C Solar basically leans on the sale of mirrors for thermosolar plants being built by Abengoa or by third parties. In our view the strong growths seen in the construction of thermosolar plants in Spain and US will trigger recurrent revenues in this activity during the next few years. Page 13

14 Estimates on the E&C Division In the E&C forecasts, we must bear in mind the estimated EUR 40 m capital gains from the sale of high voltage lines in Brazil, and that in 2009 EUR 50 m was accounted from the sale of Abengoa s stake in Telvent. In EPC we estimate CAGR 10-12e sales of +12.2% and +4.9% EBITDA. The E&C figures will be defined according to the performance of the engineering activity as well as Telvent, because as we can see in the following graphs these represent almost 80% of the division s EBITDA. The division presents a backlog of EUR 9,586 m of which EUR 982 m are maintenance, covering 2x sales. We estimate 95% sales for 2011 and 70% in E&C s Sales Mix 2011 E&C s EBITDA Mix 2011 E&C Befesa 7% Telvent 18% E&C Solar 5% E&C Befesa 6% Telvent 23% E&C Solar 23% Engineering 70% Engineering 48% The high backlog (EUR 9,586 m) will sustain and guarantee revenues for upcoming quarters. However, in our view the wide margins seen in the engineering activity in the recent past will be narrower due to the crisis as well as the halted activity in Spain. We estimate EBITDA margin in the Engineering activity to reach 8% in upcoming years. For Befesa s E&C we estimate strong growths due to the strong portfolio as well as high growths in the water activity world wide. The international activity will gain weight which will widen margins (in domestic grounds competition is greater than abroad, hence the margins are smaller in Spain). In 2011, in E&C Solar we will see a positive effect when construction on the Solana plant begins. Rioglass, contolled by Abengoa and the main mirror supplier, may begin construction of a mirror plant in the US to supply Abengoa and third parties. Regarding Telvent we must bear in mind that the 2009 figures are distorted by Abengoa s stake sale. The capital gains accounted in 2009 were above EUR 50 m. For 2011 we expect Telvent to show growths thanks to the economic recovery, mainly in US. Page 14

15 Estimates on the E&C Division EUR m e 2011e 2012e 2013e 2014e 2015e CAGR 10/12e Sales 2, , , , , , , , % % var. 28.1% 20.6% 4.0% 20.4% 4.5% 4.6% 4.6% 4.6% Engineering 2, , , , , , , , % % var. 31.9% 19.3% 2.0% 25.0% 5.0% 5.0% 5.0% 5.0% E&C Befesa % % var. 32.9% 27.2% 0.0% 15.0% 0.0% 0.0% 0.0% 0.0% Telvent % % var. 0.0% 0.0% 6.0% 6.0% 6.0% 6.0% 6.0% E&C Solar % % var % 25.2% 0.0% 0.0% 0.0% 0.0% EBITDA % % var. 0.0% 43.9% 8.2% 7.5% 2.3% 3.8% 3.9% 3.9% % margin 10.8% 12.9% 13.4% 11.9% 11.7% 11.6% 11.5% 11.4% Engineering % % var. 0.0% 2.7% 6.5% -0.3% 1.2% 5.0% 5.0% 5.0% % margin 11.6% 10.0% 10.4% 8.3% 8.0% 8.0% 8.0% 8.0% E&C Befesa % % var. 0.0% % 3.5% 36.6% 5.3% 0.0% 0.0% 0.0% % margin 0.8% 7.7% 8.0% 9.5% 10.0% 10.0% 10.0% 10.0% Telvent % % var. 44.9% 113.2% -36.9% 13.3% 6.0% 6.0% 6.0% 6.0% % margin 11.6% 22.8% 14.5% 15.5% 15.5% 15.5% 15.5% 15.5% E&C Solar % % var % 14.5% 0.0% 0.0% 0.0% 0.0% % margin 23.4% 54.7% 50.0% 50.0% 50.0% 50.0% 50.0% Source:Abengoa. Estimate: s Caja Madrid Bolsa Page 15

16 Financial Estimates on Abengoa We estimate CAGR 10/12e around 13% in sales and 11.3% in EBITDA. We must bear in mind these would be much higher if we don t include the EUR 40 m capital gains in 2010 proceeding from the sale of the high voltage lines. The Concessions division will show the highest growths thanks to the start up of new solar MWs (as mentioned earlier in this report), the new high voltage lines in Peru and a desalination plant in Algeria. We do not include new projects as from 2012 as the majority to start up in said year are completely financed. In the E&C division, the strong backlog and the construction of the solar plant in US will bolster additional sales. At the operating level the EUR 40 m capital gains accounted in 2010 and the lower margins suffered by the sector due to the crisis provoke the less attractive results. Commodities results will depend on the greater bioethanol volume and economic recovery at world level as well as positive effects. On the negative side, the strong rise in raw material prices will affect bioethanol margins. Abengoa expects to double the 2009 EBITDA results in 2013, which implies reaching EUR 1,500 m in 2013 and +28% above our forecasts. Estimates on Abengoa CAGR EUR m e 2011e 2012e 2013e 2014e 2015e 10/12e Sales % % var. 27.3% 12.3% 14.6% 20.1% 6.1% 4.3% 4.0% 4.0% Concessions % % inc. 77.2% -1.1% 70.4% 37.7% 23.6% 3.0% 3.0% 2.5% Commodities % % var. 21.9% -2.7% 34.6% 16.9% 6.2% 4.0% 2.9% 2.9% E&C % % var. 20.6% 4.0% 20.4% 4.5% 4.6% 4.6% 4.6% EBITDA % % var. 0.0% 20.1% 19.5% 13.7% 9.0% 3.8% 3.5% 3.2% % margin 14.8% 15.8% 16.5% 15.6% 16.0% 16.0% 15.9% 15.8% Concessions % % var. 0.0% 17.8% 48.6% 38.1% 23.4% 3.0% 3.0% 2.5% % margin 71.7% 85.4% 74.4% 74.6% 74.4% 74.5% 74.5% 74.5% Commodities % % var. 0.0% -10.2% 24.7% 6.0% 7.1% 4.6% 3.2% 2.6% % margin 16.5% 15.2% 14.1% 12.8% 12.9% 12.9% 13.0% 12.9% E&C % % var. 0.0% 0.0% 0.0% 7.5% 2.3% 3.8% 3.9% 3.9% % margin 0.0% 0.0% 13.4% 11.9% 11.7% 11.6% 11.5% 11.4% Source: Abengoa. Estimates: Caja Madrid Bolsa Page 16

17 Abengoa is currently in a strong investment phase caused by all the opportunities arising, namely in the thermosolar market in Spain and abroad, and in the high voltage line concessions in Latin America. This brings about the very high debt ratios and weight of financial results in EBITDA: In our estimates, we only include those projects to start up in 2011, hence our estimated debt and capex are below the company s. As we can see in the following graphs, if Abengoa reduces investments in new projects, the cash flow would surpass capex and the weight of financial results over EBITDA would shrink considerably. Capex vs Cash Flow Debt/EBITDA vs Financial Rslts/EBITDA % % -10% -15% % -25% -30% 2-35% % -45% e 2011e 2012e 2013e 2014e 2015e e 2011e 2012e 2013e 2014e 2015e -50% CAPEX Cash Flow Debt/EBITDA Financial results/ebitda In the following table we can see the recent debt data released by Abengoa. We can appreciate that the company has EUR 2,500 m cash, that much of the debt is non-recourse, and it complies with the 3x corporate debt/corporate EBITDA target. The average cost of debt comes to 6.5%. Results at June 2010 EBITDA 897 Corporate EBITDA 707 Net Corporate Debt (with recourse) 1,736 Non-recourse Debt 3,430 Debt pre-start up 2,517 Cash 2,805 Total Net Det 5,166 Corporate Debt/ Corporate EBITDA 2.5 Total debt / EBITDA 5.8 Total debt (ex pre-start up) / EBITDA 3.0 Source: Abengoa Page 17

18 Consensus Below our Forecasts Our 2010 and 2011 estimates are above consensus. We believe consensus will have to increase estimates for 2010 and 2011 in upcoming months. The main difference between our estimates and consensus is found at the operating level, in which our estimated EBITDA for 2010 is 15% higher (part of this difference could be because consensus does not include the capital gains from the high voltage lines sale) and 11.4% higher for As from 2011, we do not include new projects thus we estimate less investments and hence higher cash flow, therefore the estimates are not easily comparable. We must observe that both consensus and our forecasts are far from Abengoa s estimated EUR1,500 m in 2013 (specifically speaking, 15% to 20%).. Financial Estimates on Abengoa EUR m Caja Madrid Bolsa s Estimates Consensus 2010e 2011e 2012e 2013e 2010e 2011e 2012e 2013e Sales 5, , , , ,535 6,366 6,935 7,555 % var. 20.1% 6.1% 4.3% 15.0% 8.9% 8.9% EBITDA , , , ,101 1,282 % var. 13.7% 9.0% 3.8% 17.0% 10.3% 16.4% Net Profit % var. 8.8% 34.6% 16.9% 18.3% 3.9% 18.1% Source: FactSet Difference Between Consensus & CMB Estimates 2010e 2011e 2012e 2013e Sales 7.1% 11.8% 8.9% 4.3% EBITDA 14.7% 11.4% 10.1% -1.8% Net Profit 0.5% -7.6% 19.7% 18.6% Source: FactSet The following graphs show how consensus increased estimated sales and EBITDA for upcoming years. Despite this, as mentioned, we believe the estimates will have to be revised up. The improving outlook could take place after 2010 results (February 24). Revision of Consensus Sales on Abengoa Revision of Consensus EBITDA on Abengoa 1,200 1,100 1, Source: FactSet Aug-07 Oct-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan Days ,500 7,000 6,500 6,000 5,500 5,000 4,500 4,000 Source: FactSet Aug-07 Oct-07 Jan-08 Mar-08 May-08 Jul-08 Sep-08 Nov-08 Jan-09 Mar-09 May-09 Jul-09 Sep-09 Nov-09 Jan-10 Mar-10 May-10 Jul-10 Sep-10 Nov-10 Jan Days Page 18

19 Valuation: Buy; Upside Potential 30% We value Abengoa via the DCF and sum of the parts methods. The average of the two results in a fair value of EUR 27.4/share. The implied ratios to this fair value are 7.5x EV/EBITDA 11e and 11x P/E11e, below the company s trailing ratios (average 10 years) of 8.2x and 15x respectively. Abengoa currently trades at an EV/EBITDA ratio of 6.9x and P/E 8.6x. Sum of the Parts Valuation Our sum of the parts valuation results in EUR 27.65/share. The heavy weight division in EV is Concessions followed by E&C and then Commodities. Below we include the EV breakdown. EV Breakdown per Division Sum of the Parts Commodity 26% Concessions 40% E&C 34% Concessions 3,328 High voltage lines 1,517 Solar electricity generation 1,612 Desalination plants 200 Commodities 2,204 Bioethanol 1,404 Recycling de residuos industriales 800 E&C 2,893 E&C Engineering 1,803 E&C Befesa 211 Telvent 879 E&C Solar 913 EV Total 8,425 - Debt Net Others 468 Market Cap 2,501 Nº shrs Target price Valuation of the Concessions Division In the Concessions Division, the high voltage lines and solar energy generation practically makes up 95% of the EV. The rest comes from desalination plants. We value solar electricity generation via the DCF on a 50 MW thermosolar plant, with 65% leverage, 2.5% annual growths, EBITDA margin above 75% and 7.3% WACC (for further details see Annex I: IRR of a thermosolar project). Applying the result on thermosolar plants included in our estimates, the EV comes to EUR 1,612 m. EV Solar 50 MW MW Part. ABG MW ABG PS % 11 PS % 20 Solnova % 50 Solnova % 50 Solnova % 50 Algeria % 77 Total MWs owned 258 EV generation solar 1,612 Page 19

20 Our estimates include all the high voltage lines to be completed in 2011 (those globally consolidated or equity accounted). With this hypothesis we reach an EV of EUR 1,517 m from the concessions activity, which equals EV/EBITDA 11e 8.8x. To carry out this analysis we realised a DCF on each concession using: 4% risk premium, 4.5% risk free premium and 10% cost of debt (further details in Annex I: IRR on high voltage lines). We do not estimate a terminal value, although we expect Abengoa to continue managing the lines (in Peru the lines belong to Abengoa) as we prefer to be cautious and foresee management of the lines to end at the end of the start up period. On the other hand, on the Brazilian concessions we apply a 40 year amortisation on assets and 34% tax rate, in Chile 25 years of amortisation and 17% tax rate, and in Peru 30 years amortisation and 30% tax rate. We also estimate the possible sale of equity accounted concessions in Peru and Chile in 2011, as the company had done at the end of 2010 in Brazil. Valuation of High Voltage Lines NTE % STE % ATE % ATE II % ATE III % ATE IV-VII % Palmucho 6 6.1% ATN % Total Global Consolidation global % Redesur % Trasam % Total Equity Accounted % TOTAL Lines Start Up 1, % We value the desalination plants via the DCF method, on a base 100,000 m 3 plant, with 80% leverage, 2% annual growth, 60% EBITDA margin and 5.5% WACC (more details in Annex I: IRR desalination plants). Applying the result on the 3 plants included in our estimates (Skikda and Honaine globally consolidated) and Chennai (equity accounted) results in EV EUR m. Valuation of Desalination Plants EV per 100,000 m 3 (EUR m) 180 EV IRR m 3 /day Part. ABG m 3 /day ABG Skkida 100,000 34% 34,000 Chennai 100,000 25% 25,000 Honaine 200,000 26% 52,000 Tenes 200,000 Qingdao 100,000 TOTAL owned BMA 111,000 EV Concessions Page 20

21 The rest of the activities included in the Commodities and E&C Divisions, are valued via comparatives: Industrial Waste Recycling: Comparatives are: Interseroh, Schnitzer, and Sims, applying 8x EV/EBITDA 11e. Bioethanol: Peers Agrana, ADM, Biofuel, Biopetrol, Clean Energy Brazil, CropEnergies, Pacific Etanol, and Verbio applying 7.5x. In E&C Engineering 7x EV/EBITDA. In E&C Befesa we use the average between: 1) comparison with Hyflux and 50% discount due to size (EV/EBITDA 8.6x) and 2) sale of E&C Befesa to Abengoa Telvent: Valued as the average between market prices and recent transactions realised by the company on DTN at a discount (EV/EBITDA 6.5x). E&C Solar: We apply a slightly higher ratio than that used for E&C Engineering (7.5x EV/EBITDA). Valuation EV Valuation Industrial Waste Recycling 800 Comparative Bioehtanol 1404 Comparative E&C Engineering 1803 Comparative E&C Befesa 211 Comparative, recent transactions Telvent 879 Comparative, recent transactions, market price E&C Solar 913 Comparative Valuation via DCF Our DCF valuation shows a fair value of EUR 27.1/share. To reach this result, we applied g = 0%, WACC 10.8% (risk free interest rate of 4.5%, 4% risk premium and beta 1.5). Valuation on Abengoa CASH FLOW (EUR m) e 2011e 2012e 2013e 2014e 2015e VR EBIT Normative Tax Rate 22% 15% 20% 20% 20% 20% 20% 20% NOPLAT Depreciation&other provisions Gross Operating Cash Flow Capex Change in Net Working Capital Cash Flow to be discounted DCF VALUATION (EUR m) WACC 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% Discount Rate factor Discounted Cash Flow Cumulated DCF 551 1,298 2,003 2,666 WACC & DCF ANALYSIS Free Risk Rate (10y Bonds) 4.5% Cumulated DCF 2,666 - Net Financial Debt 5,456 Beta 1.50 Perpetual Growth (g) 0.0% - Minorities 468 Risk Premium 4.0% Normalised Annual CF Associates 0 Cost of Equity 10.5% Terminal Value 7,756 0 Cost of Debt 12.0% Disc. Rate of T.Value Debt Tax Rate 8% Discounted T. Value 5,707 Cost of Debt net 11.0% Market Value (EUR m) 2,448 Target Gearing (D/E) 50% Financial assets 0.0 Number of shares (m) % Ke 50% Enterprise Value (EUR m) 8,372 Fair Value (EUR/sh.) 27.1 Normative Tax Rate 20% WACC 10.8% Page 21

22 Annex I: Concessions Division Abengoa s High Voltage Lines in Brazil Brazil is Abengoa s most important region when referring to high voltage lines concessions. Currently there are 9 in force (following the sale of 2 that were equity accounted at the end of 2010) with 2,981 kms and 3 under construction (3,948kms). During concessions of 1,500 kms will start up and the largest of Abengoa s concessions, Norte Brasil, of 2,375 kms will start up in Lengths Total Invest. ABG s Invest. ABG s Stake (Km) (EUR m) (EUR m) Partners Start Up Expansion* % Cobra, Elecnor, Isolux Dec-02 NTE % Dragados Jan-04 ETIM* % Cobra, Elecnor, Isolux Jul-04 STE % Dragados Jul-04 ATE % Oct-05 ATE II % Dec-06 ATE III % Nov-08 ATE IV % Aug-10 ATE V % Nov-09 ATE VI % Jul-09 ATE VII % Aug-09 Manaus % Electronorte, Chesf 1Q12 Norte Brasil 2,375 51% Electronorte, Electrosul 1Q13 Linha Verde % Electronorte, CTEEP 1Q12 TOTAL 7,716 2,519 1,676 Source: Abengoa *Sold in October 2010 Abengoa s High Voltage Lines in Peru & Chile Abengoa holds electricity transmission line concessions in Peru and Chile. The length of the concessions in Chile is only 305 kms and there are no projects in portfolio. However, in Peru Abengoa participates in a 575 km long concession (although only with 24%), and in 2011 will inaugurate ATN, the first concession in Peru in which it will hold 100% as well as ATS in 2014 reaching a total of 1,973 kms in the country. In 2013 Peru will represent around 20% of Abengoa s concessions in Latin America. We must consider that the construction of transmission lines in Peru is more difficult than in other regions because the Andes divide the country in three different geographic regions: coast, mountain range and jungle. Therefore there are transmission lines in areas above 4,800 metres. Page 22

23 Peru Length (Km) ABG s Stake Total Investment (EUR m) ABG s Investment (EUR m) Partners Start Up Redesur % REE, ACS Mar-01 ATN % Nov-10 ATS % Jul-13 TOTAL Peru 1, Chile Trasam % 39 8 GE, EFS 1996/2003 Palmucho % 6 6 Nov-07 TOTAL Chile Source: Abengoa The IRR of an Electricity Transmission Concession We estimate the IRR of an electricity transmission concession to be just above 12%. To reach this conclusion we realised an analysis on a 100 km concession, with an average investment of EUR 0.39 m per kilometre (average investment per km in concessions in force owned by Abengoa and globally consolidated), 59% leverage (average leverage of the concessions operated by Abengoa and globally consolidated), 30% tax rate (in Brazil 34% and Chile 17%) and CPI 2% (average between the US estimated HCPI and CPI). Hypotheses Number of Kms 100 Invesment / km 0.39 Investment (EUR m) Leverage 59.2% Tax rate 30.0% CPI 2.0% We estimate EUR 7.3 m revenues per 100 kms (average of 2010e sales and kms in operating lines at 2011) and the 2% growth rate (in Abengoa s transmission lines, i.e. in Brazil and Peru, these are updated via HCPI in Brazil and US inflation in Peru s case) during the next 30 years. We do not estimate changes to the forex rate. EBITDA margin of 75% estimated, similar to the average margins in Abengoa s globally consolidated concessions, 30 year amortisation (concession life span) although it can be extended. In Brazil concessions are for 40 years and in Chile for 20 years) resulting in over 56% EBIT margin. Estimating a 30% tax rate (34% in Brazil, 17% in Chile) and 30 years cash flow, not considering the terminal value, the IRR on the project would be 12.1%. This IRR will obviously vary according to the promoters experience, where the concession is built, CPI fluctuations, technological aspects, maintenance costs. Page 23

24 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Nº Kms Sales per Km Revenues % var. 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% EBITDA % var. 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% 2.0% % margin 75.2% 75.2% 75.2% 75.2% 75.2% 75.2% 75.2% 75.2% 75.2% 75.2% EBIT Tax on EBIT NOPLAT Amortisation Free Cash Flow year IRR 12.06% Spain The Situation of the Solar Plants As mentioned in this report, Abengoa has 181 MWs in production. Despite the fact we only include the new MWs to begin production in 2011, i.e. 200 MW (50 MW in Spain and 150 MW in Algeria), the company has another 5 plants fully financed in Spain (250 MW), one in US (280 MW) and another one in Abu Dhabi (20 MW), to start up in the next couple of years. We expect another 200 MWs to be financed in Spain in 2011 and at the end of the current year or beginning of 2012 another plant in US (California 250 MW). Capacity (MW) Abengoa (%) Location Start Up Finance Partner Solnova Seville 2Q10 European Banks Solnova Seville 2Q10 European Banks Solnova Seville 3Q10 European Banks Helionergy Ecija 4Q11 Financed E.On at 50% Helionergy Ecija 1Q12 Financed E.On at 50% Solacor El Carpio (Córdoba) 1Q12 Financed JGC Corporation Solacor El Carpio (Córdoba) 2Q12 Financed JGC Corporation Solaben Cáceres 4Q12 Financed Itochu 30% Solaben Cáceres 4Q12 Financed Itochu 30% Helios 1 50 Ciudad Real Expected 2011 Helios 2 50 Ciudad Real Expected 2011 Solaben 3 50 Cáceres Expected 2011 Solaben 6 50 Cáceres Expected 2011 Algeria Hassi R mel Algeria 1Q11 Local Banks Abu Dhabi Shams Abu Dhabi 3Q12 Financed Total 20%, Masdar 60% EEUU Arizona US 4Q13 Financed California 250 US Expected 2011ye Source: Abengoa &: Caja Madrid Bolsa Page 24

25 Thermosolar Regulation in Spain At the end of 2010 the Government approved the new thermosolar regulation. The tariffs were maintained, but stipulated the obligation to adhere to the fixed tariff option during the plants first production year (i.e. the option to adhere to the premium regime was excluded). There is also a limit on the number of hours with premium rights, considering the various technologies and situation. The thermosolar tariff regulation in Spain is set for the first 25 years of life, reducing as from this point. For the first tranche the fixed rate is EUR 285/MWh, and reaching a maximum - if a variable tariff is chosen - of EUR 363.9/MWh. First 25 years After 25 years Variable Tariff Pool Price + Premium Pool Price + Premium Maximum: EUR 363.9/MWh Minimum: EUR 268.8/MWh Fixed Tariff (EUR/MWh) Tariff 2010, adjusted CPI -0.25% until Then CPI -0.5% Source: Ministry of Industry The main players in the Spanish thermosolar market in term of size and per number of plants awarded in the pre-registration are: Abengoa, Acciona, ACS and Iberdrola. All have plans to increase installed capacity before Abengoa presents an advantage which is its R+D and Engineering division, the later capable of building plants more rapidly (less than 2 years). Main Players in the Thermosolar Market (installation capacity until 2013) Abengoa 650 ACS 300 Acciona 250 Renovalia/Infinia 171 Elecnor/Aries/Eiser 150 Iberdrola 100 FCC 100 Ibereolica/Inveravante 100 OHL & Fotowatio 100 Sener 100 Source: Ministry of Industry Page 25

26 IRR on Thermosolar Projects We estimate the IRR on a thermosolar project without storage between 9.5% and 10%. To reach this level we realised an analysis on a 50 MW plant with investments of EUR 4.5m/MW, efficiency of 2,100 hours per year (which would generate a net energy production of 100 GWh) and 65% leverage. With these hypotheses the EV comes to EUR 6.3m/MW, which implies creating value of EUR 1.8m/MW. We do not expect many changes in the return on these, although regulation could reduce tariffs on the new plants to start up as from 2012, we believe that the costs and yields should also improve, maintaining returns stable in the future. Hypotheses Installed Capacity (MW) 50 Investment / MW (EUR m) 4.5 Investment (EUR m) 225 Efficiency (hours /year) 2100 Leverage 65.0% Tax rate 30.0% CPI 2.5% We estimate that 50 MW generates around 100,000 MWh net electricity, i.e. considering selfconsumption and losses. Estimating EUR 45/MWh pool price during the first year (2010) reaching EUR 60MWh in 2015 (maintained during 35 years) and a premium of EUR MWh in year 1, updated annually according to CPI (estimating an average annual rise of 2.1% in CPI during the next 35 years), we reach revenues of EUR 31.8 m during the first year, with CAGR of 1.9% for the next 35 years. We estimate an EBITDA margin around 75% considering the plants built by Abengoa have a gas cycle for self-consumption (this is a back up for cloudy days therefore the plant continuously feeds electricity to the system). We estimate the plant to be amortised in 35 years resulting in an EBIT margin of 55%. Estimating a 30% tax rate and cash flow for 35 years, not including the terminal value, the IRR on a project would be 9.68%. This yield obviously varies according to the promoter s experience, the location of the plant, the electricity price fluctuations, technological factors, maintenance costs. EUR m Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Pool Price (EUR/MWh) Premium (EUR/MWh) Price (EUR / MWh) Net Energy Generated (MWh) Revenues EBITDA % margin 75.6% 76.0% 76.3% 76.3% 76.5% 76.6% 76.5% 76.4% 76.3% 76.3% EBIT Taxes on EBIT NOPLAT Depreciation Free Cash Flow IRR 35 years 9.68% Page 26

27 IRR on a Desalination Plant The base analysis on the desalination plant results in an IRR of 11%. For our hypotheses we use the following data: 100,000 m 3 /day, which is equal to 36.5 m 3 per year, EUR 100 m investments, 80% leverage, CPI 2% and 20% tax rate. This results in generating sales of around EUR20m and EBITDA of EUR12m, obviously this varies according to the country. Hypotheses Treatment (m 3 /day) 100,000 Treatment (m 3 /day) 100,000 Investment (EUR m) 100 Sales 20.0 Leverage 80.0% EBITDA 12.0 Tax rate 20.0% % margin 60.0% CPI 2.0% EBIT 8.0 Using the mentioned hypotheses, and estimating an average water price of EUR 0.55/m 3 (the price varies greatly according to the country) we reach EUR 20 m sales, estimating EBITDA margin of 60% which is equal to EBITDA of EUR 12 m. Bearing in mind the 25 year amortisation, cost of debt at around 6% (depending on the country and the projects, for example Befesa s project in Algeria it is 3.75%) and a 20% 35% tax rate, we reach an IRR ranging between 11% and 9.5%. Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 Price (EUR / m 3 ) Annual Treatment (m 3 ) 36,500,000 36,500,000 36,500,000 36,500,000 36,500,000 36,500,000 36,500,000 36,500,000 36,500,000 36,500,000 Revenues (EUR m) EBITDA % margin 60.0% 60.0% 60.0% 60.0% 60.0% 60.0% 60.0% 60.0% 60.0% 60.0% EBIT Taxes on EBIT NOPLAT Depreciation Free Cash Flow IRR 11.1% Page 27

28 Annex II: Commodities Division Steel Waste Recycling Process The productive process in recycling carbon steel (practically the total sales from recycling steel wastes) is based on recovering wastes proceeding from steel plants and smelting plants containing zinc and lead (from a legal point of view, classified as dangerous toxic wastes), submitted to a process and producing waelz oxide. This product is later used by the zinc industry. Befesa manages the entire recycling process up to its conversion to a product later sold to clients in the zinc electrolysis industry (half of the galvanized zinc production is estimated to be used in manufacturing automobiles). Therefore, Befesa, within the production process, charges steel companies (mainly Mini Mills) for the waste collection (considered toxic) proceeding from steel production, treats the waste and then sells the resulting product (waelz oxide) to zinc producers. In Spain Befesa has no direct competitor; whereas internationally speaking the main competitors are Pontenossa, Harz Metall and Porto Vesme. The steel waste recycling process has two revenues sources (see graph below): Recollection: 1) Recurrent revenues; 2) EUR50/60 per ton (including transport costs); and 3) Long term relationship with steel producers (Mini Mills). Befesa charges a price per ton for collecting steel dust from steel producers. The contracts are annual and are not correlated to the price of zinc. The main clients are the large steel producers, that is: Arcelor Mittal, Thyssen, Acerinox, Outokumpu, Asturiana de Zinc. Sale of waelz oxide: 1) prices move according to the zinc market (revised annually); 2) Befesa has hedged zinc prices to mitigate fluctuations; 3) long term contracts (1 to 3 years) with zinc producers. The main clients are Boliden, Nystar, Korea Zinc, Strada. Steel Waste Recycling Model Source Befesa * Mini Mills: steel plants that melt scrap recycled steel to generate basic steel products. Page 28

29 Production plants are distinguished according to the following activities: Common/carbon steel recycling plants: 4 plants: 2 operating in Duisburg and Freiberg in Germany, the Erandio plant in Spain and the participated (50%) Recytech in France, make up the group s operations in the common steel waste recycling process. The industrial process developed in these plants includes a double environmental benefit: avoids contaminating lands and the phreatic layers originated by steel dust and on the other hand is a never-ending source of metals vs. mining, which is constantly exhausting the planet s natural resources. Stainless steel recycling plants: Befesa has 2 plants with sufficient volume to treat all the steel dust produced in Europe, reinforcing its stance as a strategic ally for the treatment of these wastes. The business model varies to carbon steel, because in this case Befesa only charges a fee to collect the wastes, processes it and returns the treated product (nickel and chrome) to the stainless steel companies. Galvanization plants: Befesa Zinc Sondika and Befesa Zinc Amorebieta are the companies focused on recycling and valorization of high zinc content wastes. The main activities are to produce oxide zinc (ZnO), to be used by the cork and ceramics industries, as well as produce secondary zinc ingots for heat galvanization. Location of Steel Waste Recycling Plants Capacity Utilisation of Befesa s Plants Source: Befesa Source: Befesa The following table includes the data on Befesa s main steel recycling plants. We must distinguish between the carbon steel and stainless steel plants. The recycling process of the carbon steel wastes has been covered (pg 28), charging a fee to collect wastes and sale of the resulting final product (waelz oxide) to zinc producers. However, in the stainless steel recycling process Befesa only charges a toll fee i.e. wastes are collected and the resulting product (nickel and chrome) are returned to stainless steel producers. Therefore the main activity in the steel dust recycling activity is based on carbon steel producers or Mini Mills. Page 29

30 Steel Dust Plants Location Freiberg Duisburg, Landskrona, Bilbao, Fuquières-lez-lens, Gravelines, Germany Germany Sweden Spain France France Treated Product Carbon Steel Carbon Steel Stainless Steel Carbon Steel Carbon Steel Stainless Steel Wastes Wastes Wastes Wastes Wastes Wastes Employees Capacity (Tn) 200,000 95,000 64, , , ,000 Capacity (Tn) / Employee 2,299 2, ,540 2,500 1,375 Main Clients Steel Producers Steel Producers Stainless Steel Steel Producers Steel Producers Stainless Steel Source: Befesa & Zinc Producers & Zinc Producers Producers & Zinc Producers & Zinc Producers Producers Aluminium Recycling Process This division, despite representing 31% of the industrial waste recycling activities sales, only contributes 4% to EBITDA (not including non-recurrent revenues). The aluminium waste recycling activity recovers aluminium contained in various wastes and scraps. To carry out this activity, Befesa collects and transports, recovers aluminium wastes and scraps and produces and commercialises secondary aluminium alloy. The most important destination for recycled aluminium wastes are for the production and sale of alloys to the automobile and construction sectors. From the aluminium production process, salt slags are created (a dangerous and toxic waste). The correct recycling is essential to totally close the recycling circle and take advantage of wastes containing aluminium. From the salt slags, concentrated aluminium, salts and aluminium oxide are attained. The main clients are the cement, automobile, steel and construction sectors. In the aluminium recycling process we must distinguish between two production processes: 1) that included in the following graph, where Befesa acquires aluminium scraps and once processed sells the secondary alloy; and 2) salt slags, which is similar to the carbon steel recycling process in which Befesa charges a fee to collect the salt slags and then sells the resulting product (aluminium and aluminium oxide) to treat these slags. In both cases the final client is mainly the automobile industry as well as electronic household appliances (main clients: Fagor, SEAT, Cie, Ferrolli) representing 36% revenues and 60% of the sales to domestic clients. Recycling of Aluminium & Salt Slags Source: Befesa Page 30

31 Abengoa: Summary tables PROFIT & LOSS (EURm ) 12/ / / /2010e 12/2011e 12/2012e Sales 3,214 3,769 4,147 5,929 7,120 7,555 Cost of Sales & Operating Costs -2,831-3,228-3,397-4,951-6,007-6,343 Non Recurrent Expenses/Income EBITDA ,112 1,212 EBITDA (adj.)* ,112 1,212 Depreciation EBITA EBITA (adj)* Amortisations and Write Dow ns EBIT EBIT (adj.)* Net Financial Interest Other Financials Associates Other Non Recurrent Items Earnings Before Tax (EBT) Tax Tax rate 9.5% nm 22.3% 15.0% 20.0% 20.0% Discontinued Operations Minorities Net Profit (reported) Net Profit (adj.) CASH FLOW (EURm ) 12/ / / /2010e 12/2011e 12/2012e Cash Flow from Operations before change in NWC Change in Net Working Capital Cash Flow from Operations Capex ,142-1, Net Financial Investments Free Cash Flow ,769-2, Dividends Other (incl. Capital Increase & share buy backs) Change in Net Debt , NOPLAT 259 1, BALANCE SHEET & OTHER ITEMS (EURm ) 12/ / / /2010e 12/2011e 12/2012e Net Tangible Assets 1,648 2,399 4,024 4,767 4,955 4,715 Net Intangible Assets (incl.goodw ill) 2,088 1,943 2,954 3,076 3,056 2,928 Net Financial Assets & Other ,015 1,015 1,015 1,015 Total Fixed Assets 4,153 5,107 7,994 8,859 9,027 8,659 Net Working Capital ,209-1, Net Capital Invested 3,496 3,898 6,566 8,263 8,188 8,023 Group Shareholders Equity ,171 1,407 1,660 1,989 o/w own Shareholders Equity ,192 1,471 Net Debt 2,520 3,281 4,097 5,418 5,456 5,336 Provisions Other Net Liabilities or Assets ,154 1, Net Capital Em ployed 3,496 3,898 6,566 8,263 8,188 8,023 GROWTH & MARGINS 12/ / / /2010e 12/2011e 12/2012e Sales growth 20.1% 17.3% 10.0% 43.0% 20.1% 6.1% EBITDA (adj.)* growth 33.2% 41.2% 38.7% 30.4% 13.7% 9.0% EBITA (adj.)* growth 30.4% 26.9% 51.4% 33.7% 15.0% 10.9% EBIT (adj)*growth 30.4% 26.9% 18.8% 70.5% 15.0% 10.9% Net Profit growth 19.5% 17.1% 21.3% 19.9% 8.8% 34.6% EPS adj. growth 19.5% 17.1% 21.3% 19.9% 8.8% 34.6% DPS adj. growth 6.3% 5.9% 5.6% 5.3% 5.0% 4.8% EBITDA margin 11.9% 14.4% 18.1% 16.5% 15.6% 16.0% EBITDA (adj)* margin 11.9% 14.4% 18.1% 16.5% 15.6% 16.0% EBITA margin 8.9% 9.6% 13.2% 12.4% 11.9% 12.4% EBITA (adj)* margin 8.9% 9.6% 13.2% 12.4% 11.9% 12.4% EBIT margin 8.9% 9.6% 10.4% 12.4% 11.9% 12.4% EBIT (adj)* margin 8.9% 9.6% 10.4% 12.4% 11.9% 12.4% Page 31

32 Abengoa: Summary tables RATIOS 12/ / / /2010e 12/2011e 12/2012e Net Debt/Equity 3.2 nm Net Debt/EBITDA Interest cover (EBITDA/Fin.interest) Capex/D&A 232.4% 325.7% % 591.4% 296.5% 98.5% Capex/Sales 7.0% 15.4% 51.6% 24.3% 11.1% 3.6% NWC/Sales -20.4% -32.1% -34.4% -10.0% -11.8% -8.4% ROE (average) 23.8% 27.4% 28.2% 22.8% 20.4% 22.5% ROCE (adj.) 8.4% 33.0% 6.0% 8.6% 9.4% 10.7% WACC 10.8% 10.8% 10.8% 10.8% 10.8% 10.8% ROCE (adj.)/wacc PER SHARE DATA (EUR)*** 12/ / / /2010e 12/2011e 12/2012e Average diluted number of shares EPS (reported) EPS (adj.) BVPS DPS VALUATION 12/ / / /2010e 12/2011e 12/2012e EV/Sales EV/EBITDA EV/EBITDA (adj.)* EV/EBITA EV/EBITA (adj.)* EV/EBIT EV/EBIT (adj.)* P/E (adj.) P/BV Total Yield Ratio 0.7% 1.5% 0.9% 0.9% 1.0% EV/CE OpFCF yield 13.4% 74.9% 24.2% -31.0% 28.8% -17.0% OpFCF/EV 6.1% 18.1% 7.8% -7.0% 7.1% -4.2% Payout ratio 12.8% 11.6% 10.1% 8.9% 8.6% 6.7% Dividend yield (gross) 0.7% 1.5% 0.9% 0.9% 1.0% 1.0% EV AND MKT CAP (EURm) 12/ / / /2010e 12/2011e 12/2012e Price** (EUR) Outstanding number of shares for main stock Total Market Cap 2,188 1,068 2,045 1,662 1,909 1,909 Net Debt 2,520 3,281 4,097 5,418 5,456 5,336 o/w Cash & Marketable Securities (-) -1,698-1,334-1, o/w Gross Debt (+) 4,218 4,615 5,643 5,418 5,456 5,336 Other EV components Enterprise Value (EV adj.) 4,832 4,411 6,338 7,352 7,712 7,667 Source: Company, Caja Madrid Bolsa estimates. Notes * Where EBITDA (adj.) or EBITA (adj) or EBIT (adj.)= EBITDA (or EBITA or EBIT) +/- Non Recurrent Expenses/Income **Price (in local currency): Fiscal year end price for Historical Years and Current Price for current and forecasted years ***EPS (adj.) diluted= Net Profit (adj.)/avg DIL. Ord. (+ Ord. equivalent) Shs. EPS (reported) = Net Profit reported/avg DIL. Ord. (+ Ord. equivalent) Shs. Sector: Renew able Energy/Renew able Energy Equipment Company Description: Abengoa is a w ell-diversified company, comprising of three business divisions offering strong grow th potential: Contracted off take (26% of 2011 EBITDA), E&C (48%), and Commodities (26%). Page 32

33 ESN Recommendation System The ESN Recommendation System is Absolute. It means that each stock is rated on the basis of a total return, measured by the upside potential (including dividends and capital reimbursement) over a 12 month time horizon. The ESN spectrum of recommendations (or ratings) for each stock comprises 5 categories: Buy, Accumulate (or Add), Hold, Reduce and Sell (in short: B, A, H, R, S). Furthermore, in specific cases and for a limited period of time, the analysts are allowed to rate the stocks as Rating Suspended (RS) or Not Rated (NR), as explained below. Meaning of each recommendation or rating: Buy: the stock is expected to generate total return of over 20% during the next 12 months time horizon Accumulate: the stock is expected to generate total return of 10% to 20% during the next 12 months time horizon Hold: the stock is expected to generate total return of 0% to 10% during the next 12 months time horizon. Reduce: the stock is expected to generate total return of 0% to -10% during the next 12 months time horizon Sell: the stock is expected to generate total return under -10% during the next 12 months time horizon Rating Suspended: the rating is suspended due to a capital operation (takeover bid, SPO, ) where the issuer of the document (a partner of ESN) or a related party of the issuer is or could be involved or to a change of analyst covering the stock Not Rated: there is no rating for a company being floated (IPO) by the issuer of the document (a partner of ESN) or a related party of the issuer Caja Madrid Ratings Breakdown History of ESN Recommendation System Since 18 October 2004, the Members of ESN are using an Absolute Recommendation System (before was a Relative Rec. System) to rate any single stock under coverage. Since 4 August 2008, the ESN Rec. System has been amended as follow. Time horizon changed to 12 months (it was 6 months) Recommendations Total Return Range changed as below: TODAY SELL REDUCE HOLD ACCUMULATE BUY -10% 0% 10% 20% BEFORE SELL REDUCE HOLD ACCUMULATE BUY -15% 0% 5% 15% Page 33

34 Recommendation history for ABENGOA Date Recommendation Target price Price at change date 08-Feb-11 Buy Jan-11 Buy Apr-10 Buy Feb-10 Buy Oct-09 Buy Sep-09 Reduce May-09 Reduce Apr-09 Buy Feb-09 Buy Nov-08 Buy Source: Factset & ESN, price data adjusted for stock splits. This chart shows Caja Madrid Bolsa continuing coverage of this stock; the current analyst may or may not have covered it over the entire period. Current analyst: Sergio Ruiz Martin (since 23/04/2008) Feb 10 Mar 10 Apr 10 May 10 Jun 10 Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11 Mar 11 Pr ice histor y Tar get pr ice histor y Buy Accumul at Hold Reduce Sell Not r ated Information regarding Market Abuse and Conflicts on Interests available on our web page: and our offices. The information and opinions contained in this document have been compiled by Caja Madrid Bolsa, S.V., from sources believed to be reliable. This document is not intended to be an offer, or a solicitation to buy or sell relevant securities. Caja Madrid Bolsa, S.V., will not take any responsibility whatsoever for losses which may derive from use of the present document or its contents, CMB can occasionally have positions in some of the securities mentioned in this report, through its trading portfolio or negotiation. Additionally, there can exist a commercial relation between CMB, Caja Madrid and the mentioned companies Page 34

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