Enlargement at a bargain price

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1 1 1 F e b r u a r y EQUITY FLASH NOTE Country: Greece Mytilineos Holdings Enlargement at a bargain price Materials Bloomberg: MYTIL GA Reuters: MYT.AT Mkt cap: million No. of Shares: 40,520, w. price range Max: 9.32 Min: 3.98 Price: 9.12 Target Price: (+37.5%) Outperform Following the acquisition of Aluminium of Greece we held a meeting with Mytilineos Holdings management. We consider the deal as an acquisition at a rather attrective price that adds value in the group. We assign an Outperform recommendation for the stock with our target price of 12.54, offering a 37.5% upside potential. Stock Performance 1 month: 31.0% 3 month: 79.5% 12 months: 59.4% Relative to index 1 month: 28.0% 3 month: 66.6% 12 months: 38.0% Turnover ( m) EBITDA ( m) Net Income ( m) EPS ( ) P/E x P/BV x EV/ EBITDA x Mkt Cap/ Sales X 2003a f f f Source: Company figures, Emporiki Bank Research estimates Major shareholders Mytilineos Family 42.45% Free Float 57.55% With the acquisition of Aluminium of Greece, Mytilineos Group almost doubles in size, diversifies further its sales mix, extends its activities in the production of aluminium and holds a leading position as a vertical producer of basic metals in SE Europe. What is more, all these are accomplished by paying an extremely satisfactory price of 6.95 per share. Text:... 08/02/05 Prices:... 08/02/05 The incorporation of Aluminium of Greece and the full consolidation of ELVO under IFRS, changes completely the Group s picture, making Mytilineos Holdings one of the largest non-financial listed groups in ATHEX. According to our estimates, turnover, EBITDA and net income are expected to reach 922.6m, 165.2m and 50.1m respectively. Analyst E.Papakonstantinou vangelis.papakonstantinou@investmentbank.gr We assign an Outperform stance on Mytilineos Holdings. Our SOTP valuation model derives a target price of for the stock, offering a 37.5% premium from the current levels and suggesting attractive P/E multiples of e and 11.6x of 06e earnings. We also adopt an Outperform recommendation for METKA with target price of 7.20 per share, while we are Neutral for Aluminium of Greece with target price of 12.0 per share.

2 Investment Summary Following a meeting with Mytilineos Holdings management, regarding the acquisition of Aluminium of Greece, we frame our positive opinion on the stock, as we consider it an acquisition at a rather attractive price that adds value in the group. Acquiring a 46% of Aluminium of Greece for 69m, the details of which are set out in a separate unit, Mytilineos Group almost doubles in size, acquires a sufficiently differentiated sales mix, extends its activities in the production of aluminium and holds a leading position as a vertical producer of basic metals in SE Europe. What is more, all these are accomplished by paying an extremely satisfactory price of 6.95 per share. In our opinion, the acquisition looks like an agreement between a hasty seller and a buyer with plenty of time and advantages in his hands. We are under the impression, that Alcan, the giant which until recently held 60% of Aluminium of Greece, had no strategic interest of maintaining its presence in the area while also having the obligation to proceed soon with a 200m investment on energy production an investment that would be of great significance for the company s future profitability. On the other hand, through incorporating Aluminium of Greece, Mytilineos Group manages to further empower its metallurgic activity, as well as its sales mix in general as already mentioned. Moreover, its leverage capabilities can be increased (which is highly important given the large investment that should be made in Aluminium of Greece) as Aluminium of Greece s high levels of cash brings the Group s total net debt almost down to zero. On top of that, the investment of Aluminium of Greece itself constitutes the main growth catalyst on the Group s subsidiary, Metka in the medium term. In any case, the numbers read that with 69m, Mytilineos Group acquires the control of company with zero debt and an estimated cash of 128m at the end of 2004, the right to receive dividends from the profits of 2004, the supply of alumina for a long time at a beneficial price and an important backlog for its subsidiary METKA. If we also consider that Aluminium of Greece stock price was standing at on the day the acquisition was announced, while our DCF model yields a fair price of 12.0, it is quite understandable that we believe the agreement is highly favorable for Mytilineos Group. Regarding the risks of this acquisition, it is definitely crucial that the investment in the co-generation power plant is made on time. That is because the expiration of the privileged contract with PPC, in April 2006, renders the increase in the cost of energy forbidding. The fact however that the specific investment is materialized by the Group s subsidiary METKA, ensures that everything possible will be done in order for the project to be completed promptly. Apart from the specific investment and the risks regarding the operational activity of the company, such as the fluctuation in aluminium prices or the Euro/Dollar exchange rate, we believe that there is a risk lurking behind the Group s lack of experience in the production of aluminium. Therefore, we consider of great importance the part of the agreement setting that Alcan will continue to provide technical and industrial support to Aluminium of Greece. Moreover, we believe that the specific risk is further offset by the Group s substantial experience and know-how in the commercial area. Mytilineos Holdings: Enlargement at a bargain price 2

3 Beyond the acquisition and regarding the other activities of Group, the ongoing increase in metal prices along with the recent slight devaluation of the Euro against the US Dollar, favor the metallurgic sector and the international trading. On the other side though, the curtailment of the defensive expenses program and the overall delay evidenced in the area of assigning programs set a rather non-encouraging scenery for ELVO. The incorporation of Aluminium of Greece and the full consolidation of ELVO under IFRS, changes completely the Group s picture, which will be fully reflected in 2005 financial statements, making Mytilineos Holdings one of the largest non-financial listed groups in ATHEX. According to our estimates, 2005 turnover is expected to reach 922.6m, with the metallurgic activity segment contributing by c55%, energy segment by c25% and defense segment by c20%. The following table, alongside with our estimates for 2005 & 2006, exhibits the 2004 proforma financial statement, incorporating Aluminium of Greece and ELVO, that we conducted for comparative reasons and in order to instantly portray the Group s new financial profile. Table 1: Mytilineos Holdings estimates (consolidated - m.) 2003 / 2003 Proforma / (proforma) / Turnover % % % Gross Profit % % % Gross margin 19.1% 21.2% 18.0% 20.8% 14.8% EBITDA % % % EBITDA margin 11.3% 12.8% 16.1% 17.9% 14.5% EBIT % % % EBIT margin 9.3% 11.0% 13.3% 14.2% 10.1% Profit Bef Tax & Minor % % % EBT margin 8.0% 9.0% 12.1% 13.6% 9.6% Net Income % % % Net margin 3.1% 4.4% 4.6% 5.4% 4.5% Source: Company figures, Emporiki Bank Research estimates Mytilineos Holdings: Enlargement at a bargain price 3

4 Valuation We assign an Outperform recommendation for Mytilineos Holdings as our SOTP valuation model derives a fair value of 508m or per share, offering a 37.5% upside from the current levels. We use our DCF valuation model to value its one of the four bussiness units of the group and we present our results in the following table: Table 2: Mytilineos Holdings SOTP Valuation ( mil) Equity Value Holding s Stake Valuation METKA % 246 ELVO % 25 Aluminium of Greece % 119 Metal Trading Unit % 118 Equity Value 508 Per Share Source: Emporiki Bank Research All the above valuations along with our estimates and assumptions can be found in separate units on this report. Moreover, note that our fair price for the new Mytilineos entity, suggests reasonable earnings multiplies of 10.1x and 11.6x on and net income respectively. Mytilineos Holdings: Enlargement at a bargain price 4

5 The Deal The acquisition of Aluminium of Greece by Mytilineos S.A. involves the purchase of a 60.18% stake at 6.95 per share for a total amount of 90.25m. Mytilineos Holdings initially acquired a 46% stake, while Evangelos and Ioannis Mytilineos got an additional 7% raising the stake that Mytilineos S.A. controls at 53%. For the remaining stake, the seller (i.e. Alcan) retains a put option with a 3-month exercised period commencing 12-months after the initial share transfer, due in Q1 `05. In any case the company s management is not willing to proceed to a delisting of Aluminium of Greece. As a result, Mytilineos Holdings should find a way to increase its stake above 50% prior to the exercise of the option for the 7.18% stake held by Alcan in order not to proceed to a public offering. Following the completion of the acquisition of Aluminium of Greece, Mytilineos Holdings will have the right for dividend for the Mytilineos Holdings will get hold of a six year contract between Aluminium of Greece and Alcan where the latter was purchasing alumina at a fixed price of 12.75% of LME aluminium spot price Alcan and Mytilineos S.A also agreed that Alcan will continue to provide technical and industrials support to Aluminium of Greece. The transfer of shares as well as the completion of the acquisition is subject to approval by the Committee of Competition and the Ministry of Growth. It is expected to be completed during Q Mytilineos Holdings: Enlargement at a bargain price 5

6 Metka Metka benefits the most from the acquisition of Aluminium of Greece, as it will assume the construction of the co-generation power plant of electricity and steam at a budget of 200m. The station will be located at Aspra Spitia Viotias and will have a power of 320Mw. According to management investment plant, the specific project will increase METKA s turnover by 58.0m in 2005, 66.0m in 2006 and 76.0 in The above project adds up to the Company s existing backlog of 450m due until Moreover, the Company s projects under negotiation stands at 400m, out of which 200m involve the construction of an electricity production station for Mytilineos Group in Volos (or in Aspra Spitia, in the event that the transfer of the station s license is approved) and 200m involve new contracts with PPC. Estimates According to management, METKA has already completed and will bill in Q4 part of the large PPC project in Lavrio, the total budget of which comes up to 194m, while the biggest part of it will be invoiced in We have incorporated the income from the specific project in our 2005 estimates. We revise our figures for 2004 & 2005 in order to include the Aluminium of Greece project regarding the construction of a co-producing unit. Our 2004 revisions as well as our forecasts on METKA s key financial figures are exhibited in the following table: Table 2: Metka estimates (Greek GAAP - m.) 2003 new Source: Company figures, Emporiki Bank Research estimates old new vs old / 2003 / / Turnover % 21% % % Gross Profit % 14% % % Gross margin 21.8% 21.2% 20.6% 22.3% 22.6% EBITDA % 14% % % EBITDA margin 17.9% 16.9% 16.9% 18.2% 18.7% EBIT % 15% % % EBIT margin 16.1% 15.0% 15.3% 17.0% 17.3% Profit Before Tax & Minorities % 25% % % EBT margin 14.3% 14.9% 14.7% 16.8% 17.4% Net Income % 18% % % Net margin 9.4% 9.0% 9.1% 10.9% 11.8% Mytilineos Holdings: Enlargement at a bargain price 6

7 Valuation Given a certain set of assumptions (average WACC: 8.8%, long term growth rate 3%) our DCF model yields a share price target of 7.2, from 5.5 previously, implying some 19.6% upside potential from current price levels. Thus, we adopt an Outperform stance for the stock. Table 3: Metka DCF Valuation (in m) 2004f 2005f 2006f 2007f 2008f 2009f FCF to FIRM (32) (8) TERMINAL VALUE 451 Cost of Capital 8.6% 8.6% 8.3% 8.5% 8.6% 8.6% Cumulative WACC 100.0% 108.6% 117.4% 127.8% 139.1% 151.1% Present Value (32) (8) PV of TERMINAL VALUE 305 Firm Value 352 (Plus) / Less: Net (cash) / debt (21) Less: Minorities 12 Plus: ELVO participation 12.94% 14 Equity Value 374 Per share 7.20 Current price 6.02 Upside to target 19.6% Source: Emporiki Bank Research Mytilineos Holdings: Enlargement at a bargain price 7

8 Aluminium of Greece The investment program of Aluminium of Greece for the period is estimated at 310m with the construction of the co-generation power plant budgeted at 200m being a top priority. The plant is expected to be ready at the end of 2006 and is subsidized by the state with an amount of 35m. However, a rise in energy cost for Aluminium of Greece cannot be avoided given the favorable contract terms offered by Public Power Corporation currently. According to calculations by Mytilineos management, the energy cost for the company, following the completion of the power plant, will amount to 32/Mwh from 22/Mwh today. The above-mentioned price of 32/Μwh is certainly lower than 43.5/Mwh, which is the regular tariff (A150) of PPC for industrial customers. Moreover, since the power plant will be co-producing electricity and steam, it is estimated that it will replace roughly 70% out of the 260,000 tones of petroleum currently used for the production of steam. All in all, according to our estimates, since the energy cost for Aluminium of Greece constitutes approximately 1/3 of the total cost of sales, we expect an increase of 43m from current levels as of 2007; though reduced to 27m as a result of the replacement of petroleum cost. Management believes that there is room for further cost reduction in production, mainly through containment of operating costs. Given that the contract with PPC terminates in April 2006 and the power plant will be operational at the end of 2006 there is a transitional period in which the company should renegotiate its contract terms with PPC. According to our calculations, should the supply be made at the current tariff of PPC for industrial customers ( 43.5/Mwh), there will be an additional cost of 37m for Beside the construction of the co-generation power plant, Mytilineos aims to invest some 80.5m over the next three years in order to improve product quality and increase alumina and aluminium capacity by c tones and c tones respectively. Estimates For the calculation of turnover we have assumed conservative average aluminium price for 2005 of $1800 per ton and a gradual decrease of the price by 10% till Moreover, we have assume a stable USD/EUR exchange rate at On the costs side we have increase production cost by 37m in and by 27m from 2007e and afterwards should the co-generation power plant be operational. Mytilineos Holdings: Enlargement at a bargain price 8

9 Table 4: Aluminium of Greece estimates (Greek GAAP - m.) 2003 Source: Company figures, Emporiki Bank Research estimates / 2003 / / Turnover % % % Gross Profit % % % Gross margin 8.9% 16.0% 16.8% 4.0% EBITDA % % % EBITDA margin 7.2% 15.1% 15.8% 3.0% Profit Before Tax & Minorities % % % EBT margin 5.8% 13.5% 15.3% 2.9% Net Income % % % Net margin 2.3% 8.8% 10.4% 2.0% Valuation Our DCF model for Aluminium of Greece derives a fair price of 12.0 per share. We have assumed maintenance capex of c. 13.5m from 2008e and Also, for this certain years, we have increased alumina and aluminium capacity as scheduled incorporating the related investments. We assign a Neutral stance for the stock, since the current price stood some 5.2% above our fair price. Table 5: Aluminium of Greece DCF Valuation (in m) 2004f 2005f 2006f 2007f 2008f 2009f FCF to FIRM 86 (56) (111) (55) TERMINAL VALUE 323 Cost of Capital 9.4% 9.3% 9.3% 9.3% 9.3% 9.3% Cumulative WACC 100.0% 109.3% 119.6% 130.7% 143.0% 156.3% Present Value 86 (51) (93) (42) PV of TERMINAL VALUE 207 Firm Value 131 (Plus) / Less: Net (cash) / debt (128) Less: Minorities Equity Value 259 Per share Current price Upside to target -5.2% Source: Emporiki Bank Research Mytilineos Holdings: Enlargement at a bargain price 9

10 ELVO Currently the company s backlog stands at 155m. In the final stage of negotiation there are projects worth approximately 300m in the field of defense. The new government will re-examine the defense program for the period. According to management, the total amount of the program is expecting to exceed 4.0 bn with ELVO s participation range between 20%-40%. Estimates We estimate that net income of ELVO is going to decrease by 24% and 26% for the and respectively. Given the uncertainty related the approval of defense projects we assume flat turnover at 143 m from and onwards along with a slightly decrease in margins. Table 6: ELVO estimates (Greek GAAP - m.) 2003 / 2003 / / Turnover % % % Gross Profit % % % Gross margin 24.0% 20.2% 19.0% 18.6% EBITDA % % % EBITDA margin 15.7% 13.2% 13.2% 13.2% EBIT % % % EBIT margin 12.6% 9.9% 8.7% 8.4% Profit Before Tax & Minorities % % % EBT margin 12.5% 9.6% 8.8% 8.7% Net Income % % 9.9-2% Net margin 10.2% 7.6% 7.1% 6.9% Source: Company figures, Emporiki Bank Research estimates Valuation According to our DCF model we value ELVO at 110 m. Table 7: ELVO DCF Valuation (in m) 2004f 2005f 2006f 2007f 2008f 2009f FCF to FIRM TERMINAL VALUE 156 Cost of Capital 7.0% 7.4% 7.9% 8.2% 8.5% 8.8% Cumulative WACC 100.0% 107.4% 116.4% 126.6% 138.4% 152.3% Present Value PV of TERMINAL VALUE 102 Firm Value 154 (Plus) / Less: Net (cash) / debt 45 Less: Minorities Equity Value 110 Source: Emporiki Bank Research Mytilineos Holdings: Enlargement at a bargain price 10

11 Metal Trading Unit (parent company) The metal trading unit got hold of a six-year contract between Aluminium of Greece and Alcan where the latter was purchasing alumina at a fixed price of 12.75% of LME aluminium spot price. Currently, alumina is trading spot at c.22% of LME aluminium price, applying a significant price difference in favor of the parent company. The current environment is rather favorable for the metal trading unit, given the ongoing increase in metal prices along with the recent slight devaluation of the Euro against the US Dollar. Estimates Our estimates for the, and appear in the following table. We incorporate the alumina contract in our estimates. We use a conservative scenario, decreasing gradually alumina price at 13% of aluminium LME price by 2009 from c.22% that currently stands. Table 8: Metal Trading Unit (parent company) estimates (Greek GAAP - m.) 2003 Source: Company figures, Emporiki Bank Research estimates / 2003 / / Turnover % % % Gross Profit % % % Gross margin 10.2% 16.8% 28.7% 22.2% EBITDA % % % EBITDA margin 6.0% 11.5% 25.6% 19.7% EBIT % % % EBIT margin 4.9% 10.9% 24.7% 18.6% Profit Before Tax & Minorities % % % EBT margin 6.5% 9.1% 35.8% 27.8% Net Income % % % Net margin 5.2% 7.3% 28.7% 22.3% Valuation We value metal trading unit at 118m, adopting an average WACC of 8.5% and a long-term growth of 3%. Table 9: Metal Trading Unit (parent company) DCF Valuation (in m) 2004f 2005f 2006f 2007f 2008f 2009f FCF to FIRM TERMINAL VALUE 227 Cost of Capital 8.0% 8.5% 8.4% 8.4% 8.4% 8.4% Cumulative WACC 100.0% 108.5% 117.6% 127.5% 138.3% 149.9% Present Value PV of TERMINAL VALUE 151 Firm Value 210 (Plus) / Less: Net (cash) / debt 92 Less: Minorities Equity Value 118 Source: Emporiki Bank Research Mytilineos Holdings: Enlargement at a bargain price 11

12 MYTILINEOS GROUP of Co. Materials 9.12 P&L Items (in m) f 2005f 2006f Sales Breakdown (group f) Turnover Gross Profit Defense 20% EBITDA EBIT Profit Before Tax Net Income BS Items (in m) f 2005f 2006f Net Plant Energy 25% Inventories Trade Debtors Cash & Equivalents Total Current Assets Total Assets , Growth rates: Sales & EBITDA Short Term Debt % Trade Creditors % Total Current Liabilities % Long Term Debt % Total Net Worth % PER SHARE DATA f 2005f 2006f 100.0% EPS % CEPS % BVPS (50.0%) DPS Metallurgy 55% Sales 2003 EBITDA 2004f 2005f 2006f GROWTH RATES f 2005f 2006f Sales growth & EBITDA margin Sales 7.1% 11.8% 196.8% 4.6% EBITDA 3.9% 27.4% 313.9% (15.2%) 300.0% EBIT 9.2% 32.9% 282.9% (25.2%) 250.0% Pretax Profit 26.2% 26.1% 349.1% (26.4%) Net Income 74.9% 60.8% 263.0% (12.7%) 200.0% EPS 74.9% 60.8% 263.0% (12.7%) 150.0% DPS 100.0% 2.1% 61.1% 4.9% 100.0% RATIOS f 2005f 2006f 50.0% Profitability EBITDA Margin 11.3% 12.8% 17.9% 14.5% 0.0% EBIT Margin 9.3% 11.0% 14.2% 10.1% (50.0%) f 2005f 2006f Net Margin 3.1% 4.4% 5.4% 4.5% Sales Growth EBITDA margin Tax Rate 40.2% 32.0% 32.0% 29.0% Payout Ratio 47.2% 30.0% 13.3% 16.0% ROE (avg) 10.8% 10.7% 16.7% 10.2% Share Price (52-wk) Liquidity & Leverage Current Ratio Net Debt (Cash) / Equity TL Debt / TL Assets 35.7% 23.6% 14.4% 15.3% 8.0 TL Assets / Equity Efficiency 6.0 Sales / TL Assets Working Investment / Sales 26.4% 32.4% 33.5% 33.8% Performance Share Relative to Gen.Index month 31.0% 28.0% 28.0% 02/04 04/04 06/04 08/04 10/04 12/04 3 months 79.5% 66.6% 66.6% 12 months 59.4% 38.0% 38.0% 20.0% 17.5% 15.0% 12.5% 10.0% 7.5% 5.0% Valuation* f 2005f 2006f Stock & General Index Performance (52-wk) Mkt Cap (in Dr bn) EV (in m) P/E (x) PCE PBV Mkt Cap/Sales EV/EBITDA EV/EBIT EV/Sales DY 2.7% 2.0% 1.8% 1.9% /04 04/04 06/04 08/04 10/04 12/04 MYTILINEOS GROUP of Co. Gen.Index * Historic valuations are calculated with the average share price of each year. Current & future valuations are calculated with the current price Source: Company, Emporiki Investment Bank estimates Mytilineos Holdings: Enlargement at a bargain price 12

13 Emporiki Bank Equity Division, Research 16 Solonos str., Athens Tel: Fax: research@investment-bank.gr RESEARCH Epaminondas Liverezas Evaggelos Papakonstantinou Tatiana Linoxilaki TECHNICAL ANALYSIS Nikos Kostopoulos The above information is intended for information purposes only and is not intended as an offer or a solicitation for the purchase or sale of any security. The information in this report has been obtained from sources that are believed to be reliable but their accuracy can not be checked.