Solid fundamentals vs. challenging markets Rating Buy

Transcription

1 Mytilineos S.A. Holding / Greece Reuters/Bloomberg: MYTr.AT / MYTIL GA February 25, 2016 Solid fundamentals vs. challenging markets Rating Buy vs. previous rating Buy Mytilineos group shares have declined by 39% over the last 6-months affected by the sensitive domestic economic environment but as well as headwinds in all three divisions. Despite that, the group s solid fundamentals and diversification are expected to provide strong operational profitability. We reiterate our Buy recommendation on Mytilineos at a TP of EUR 6.30/share pointing to a 120% upside form current levels. As aluminium prices plunged by c20% in 2015 close to their 5 year lows and are expected to remain suppressed in the short to medium term, the focus for Aluminium of Greece (AoG) remains on the cost base. Currently the unit is the lowest cost producer in the EU and in the first quartile on a world scale driven by the achieved operational efficiencies, low natural gas prices and favorable FX. We estimate the division can generate EUR 80-90m p.a. of EBITDA in the next couple of years, with upside risk steaming from lower LNG prices and lower electricity costs. METKA had a very strong finish in 2015 due to the launch of the Ghana project in 4Q:15. Backlog replenishment remains a key theme with current backlog ex-syria seen at ceur 700m (1.5x 2016 sales). Management said that is examining two new projects (one in Africa and one in Iran) that, if materialize, will provide visibility for the next couple of years. We believe that METKA s successful track record and healthy balance sheet offer support to the company s efforts to secure new projects. Although with lower turnover and sales, METKA is expected to deliver ceur 50m of EBITDA p.a. in the next couple of years. Energy division is seen to finally gaining its place in the sun. Low natural gas prices are expected to push the utilization rates of Mytilineos natural gas units higher. Additionally the expected re-instatement of CACs (recall that capacity payments were not collected in 2015) from 2016 offer a significant upside to the division s EBITDA (EUR 25m for 2016). Opportunities from the group s engagement in the LNG markets and the sliding natural gas prices would further improve the division s profitability. Finally, the activity of the group in the retail supply electricity market is progressing at a quick pace, while wind capacity total RES capacity of 133MW (55MW of additional wind coming on line in ) will provide a material contribution to the division s EBITDA that is seen at EUR 78m in 2016 vs. 21m in We lower our EBITDA estimates by 18.6% and 14.7% respectively on the back of lower contribution from AoG and METKA. For 2016 we now expect an EBITDA of EUR (+8.8% y-o-y) with net income seen at EUR 55.3m (+20% y-o-y). Going forward improved performance in AoG and Energy divisions are expected to drive EBITDA higher to EUR 216m in 2017, while 2017 net income is seen at EUR 76.9m (+39.0% y-o-y). Group net debt moved north at the end of 2015 (seen at EUR 560m vs. EUR 373m in end-2014) due to the reduced cash position of METKA (used to kick start the Ghana project). Strong operational cash flows for all three divisions, at a time with small capex requirements are expected to push net debt/ebitda ratio downwards from 2.7x in end 2015 to 1.4x in Based on our revised estimates for the group s divisions, our SOTP valuation yields a TP of EUR 6.30/share (from EUR 10.00/share previously). On our estimates, Mytilineos trades at a P/E for of 6.1x and 4.4x respectively, while on EV/EBITDA terms for the same period it trades at 3.9x and 3.0x. EUR m E 2016F 2017F Revenues 1, , , ,280.5 EBITDA EBITDA margin 20.7% 14.9% 16.2% 16.9% Net Income EPS (Net Debt)/Cash P/E 8.2 x 7.9 x 6.1 x 4.4 x EV/EBITDA 3.6 x 4.4 x 3.9 x 3.0 x Dividend yield 2.2% 0.0% 3.3% 4.6% Target Price (EUR) 6.30 Current Share Price* (EUR) 2.88 *24 /02/ 2016 Stock Data Market Cap (EUR m) Free Float 68% EV (EUR m) 1,188.1 Num. of Shares (m) Performance 1m 3m 12m Absolute (%) ASE General (Abs) Day avg. no traded shr (k-12m) 173 Price high-12 m (EUR) 6.70 Price low-12m (EUR) Mytilineos is a leading industrial group in Greece with 3 distinct activities: (i) Metals & Mining (including Aluminium of Greece - one of the largest aluminium producers in Europe); (ii) EPC (Metka, a leading regional player in ME-Africa and Balkans); and (iii) energy (largest IPP in Greece). Shareholding Structure: Mytilineos Family 32.0%, Fairfax 5.02% Analysts MYTILINEOS HOLDINGS S.A. Constantinos Zouzoulas Constantinos.zouzoulas@axiavg.com Argyrios Gkonis Argyrios.gkonis@axiavg.com ATHEX Composite Index (Rebased) Axia Ventures Group - 4 Vas. Sofias Ave., Athens Greece, Tel: , Fax: , Web: Please refer to the last page for disclosures and analyst certification

2 Updated Estimates Our revised estimates for 2015 call for a group EBITDA of EUR 204.5m (-19.6% y-o-y) affected mainly by the non-collection of capacity payments from the energy division. Yet the resilient performance of the aluminium business and the expected strong Q4:15 performance of METKA provides support. Net income for 2015 is seen at EUR 42.5m vs. EUR 64.9m in 2014 affected mainly by METKA minorities and reduced profitability in energy. For 2016, the group s EBITDA is expected to decline to EUR 198.7m (-3.0% y-o-y) affected by the lower activity levels in METKA and the pressured LME prices, while energy division is seen boosting its performance and increasing its incremental EBITDA by 260% y-o-y. Going forward we estimate that group EBITDA will grow by 5.0% CAGR in driven by the metallurgy and energy divisions. Accordingly, we expect 2016 net income to settle at EUR 55.3m and grow by c23% CAGR between driven by the increasing profitability in metallurgy and energy. It is worth noting that group net debt at the end of 2015 is seen spiking to EUR 560m (2.7x net debt/ebitda form 1.5x net debt/ebitda at the end of 2014) mainly due to the reduced cash in METKA for the contribution in the project in Ghana. Going forward strong operational cash flows in the region EUR 150m p.a. combined with small capex requirements (seen at EUR 43m p.a. in ) are expected to drive leverage levels significantly lower. Mytilineos group updated estimates New Old New-vs-old New Old New-vs-old New Old New-vs-old Revenues 1, , % 1, , % 1, , % EBITDA % % % Net Income % % % Consensus* AXIA-vs-Consensus Consensus* AXIA-vs-Consensus Consensus* AXIA-vs-Consensus Revenues 1, % 1, % 1, % EBITDA % % % Net Income % % NA NA *Capital IQ Source: AXIA Research AXIA Research Page 2

3 Mytilineos group detailed estimates by division Mytilineos Group E 2016F 2017F 2018F Revenues (EUR m) Metallurgy y-o-y 8.0% 21.6% -27.2% 3.0% 3.0% % of total 38.0% 41.6% 33.9% 33.5% 34.2% Construction y-o-y -0.3% 1.9% -28.5% -2.7% -4.7% % of total 48.5% 44.6% 35.7% 33.3% 31.5% Energy y-o-y -54.7% 14.1% 95.5% 13.8% 4.5% % of total 13.5% 13.8% 30.3% 33.1% 34.3% Other 0.0 Discontinued -8.0 Total 1, , , , ,292.7 y-o-y -12.2% 11.7% -10.8% 4.3% 1.0% EBITDA (EUR m) Metallurgy margin 18.5% 16.5% 18.7% 19.7% 20.5% % of total 44.2% 49.8% 61.2% 61.0% 66.2% y-o-y 107.1% 8.3% -17.4% 8.7% 7.4% Construction margin 18.3% 15.5% 11.3% 12.7% 11.4% % of total 40.6% 45.1% 24.1% 24.4% 20.6% y-o-y 1.9% -13.5% -48.1% 9.7% -14.6% Energy margin 44.3% 11.3% 20.8% 19.7% 19.7% % of total 27.3% 10.2% 37.9% 37.6% 38.9% y-o-y -16.9% -71.0% 260.7% 7.8% 4.5% Other (inc. HQ costs) Discontinued -1.0 Total EBITDA margin 20.6% 14.9% 16.2% 16.9% 16.9% y-o-y 12.9% -19.4% -3.0% 8.8% 1.0% Source: AXIA Research, The Company Mytilineos group net debt breakdown (EUR m) 2015E 2016F 2017F 2018F Metallurgy EPC (160.1) (225.7) (297.4) (362.2) Energy Corporate Group net debt Net Debt/EBITDA (x) Source: AXIA Research AXIA Research Page 3

4 Valuation Based on our updated estimates we lower our TP on Mytilineos to EUR 6.30/share form EUR 10.0/share previously. We assign a Buy recommendation on the stock, as our TP implies a 120% upside potential from current levels. The stock has taken a hit over the last 6-months, posting losses of 39% y-t-d, vs. ASE s decline of 23% y-t-d affected not only by the Greek issue but also the challenging market conditions commodities and EPC projects) On our estimates the group trades at P/E of 6.1x and 4.4x respectively, while in terms of EV/EBITDA it trades at 3.9x and 3.0x respectively. Our highlight changes in valuation are summarized below: We lower AoG EV to EUR 615.4m from EUR 760m previously considering the significant decline in LME prices (mitigated though to a large extend by cost containment), as well as higher WACC. We have reduced METKA s TP to EUR 9.30/share vs. EUR 10.0/share previously on the back of our revised estimates. We lower the valuation of the CCGT units mainly due to higher WACC. Mytilineos group SOTP valuation (EUR m) Valuation Method EV (@ 100%) Mytilineos Stake Stake's EV Metallurgy & Mining Aluminium of Greece (AoG) DCF % Construction METKA DCF % Energy RES portfolio DCF % Korinthos Power DCF % Ag. Nikolas Viotias DCF % Retail Supply DFC % 45.0 Capitalized fees and HQ costs METKA management fee DCF 45.6 HQ Overheads DCF (63) Group EV 1,347.9 Group Net Debt (end-2015) (561) Group NAV Num. of Shares (m) Value Per Share 6.3 Current Share Price 2.88 Upside 120.5% Source: AXIA Research AXIA Research Page 4

5 AoG: Low cost base cushions lower prices The group s aluminium business faces a challenging market, with LME prices hovering around $1,500/MT since the second half of 2015, affected by the global sentiment. As visibility on a price rebound is poor, the focus of the group is in cost containment. AoG is taking advantage of the prevailing low energy prices, the favorable FX dynamics and the continued efforts to streamline operations. Currently estimated AoG s cash costs hover around $ 1,500/MT (AoG is now amongst the lower cost procurers on a global scale) with further downside potential mainly due to energy costs opportunities. Aluminium market outlook In 2015 global aluminium consumption grew by 4.8% y-o-y, down from 7.4% in 2014 affected by the slowdown in the growth pace of the global economy. Importantly aluminium consumption in China grew at 8.5% y-o-y in 2015 vs. the double digit figures of the previous years, with similar trends observed in other EM (Russia, Brazil, India). For 2016 demand is expected to pick up its pace again, with major market players calling for a 5.0%- 6.0% y-o-y growth driven by a c8.0% y-o-y growth in China and 4.0% y-o-y growth in ROW coming from automotive and construction. On the supply side, production of primary metal grew by 6.6% in 2015 driven by China. For 2016, as a response to the low prices, production output is seen slowing down to 5.0%, according to EIU, responding to the challenging market environment. Since 2H:15, curtailments have been announced in Chinese capacity (affected by high cost base), while North America producers have taken a sever hit due to their exposure to USD denominated costs. On other hand, producers with non-usd denominated cost base and able to capture the low energy prices are expected to support output. Aluminium drivers performance (indexed to Brent) Source: Capital IQ, AXIA Research Aluminium LME Cash ($/MT) Brent ($/bbl) $/ We believe that LME prices in the short to medium term will remain subdued given the prevailing oil levels and the strong USD. Price recovery could be triggered by capacity closures of larger scale in China and further curtailments in the US. For 2016 we model in LME price for AoG of $1,529/MT (-15% y-o-y). As premiums for the company are also expected to decline by 26% y-o-y, the total realized price is seen retracting by 17% y-o-y. Going forward we assume a growth rate in prices of 3.0% y-o-y, tracking the global demand outlook that according to IAA is expected to grow by 4.0% CAGR for All in all we expect 2016 all in price of $1,835/MT and at $1,890/MT for 2017, from c$2,213/mt in AXIA Research Page 5

6 Low cost base safeguards profitability AoG over the past four years has managed to reduce its cash cost base by more than $800/MT following significant savings efforts in energy consumption, raw material, transport and labor. Since early 2015 management has initiated the Excellence campaign, targeting to lower the company s cost base by additional c$200/mt vs levels mainly aiming at productivity improvements and energy-cost reduction. In this effort, there has been significant support from the declining oil prices that allowed the group to sharply reduce its expenses for natural gas. We also note that the group is active in the LNG trading, allowing it to realize even lower natural gas prices. Recall that pipeline gas prices are indexed to oil with a six month lag. Additionally the group has now engaged into discussions with PPC over an ad-hoc tariff scheme that will finally dissolve the long going dispute between the two sides on the electricity costs. Note that currently, according to the arbitration procedure, AoG is charged by PPC at ceur 42/MWh (all in price). We understand that management will be targeting a pricing formula connected to LME prices that will provide a cushion to current low levels. All in all we estimate that AoG cash costs for FY 2015 stood at c1,700/mt vs. $2,000/MT in 2014, while currently cost base is seen at c$1520/mt. Management s aim is to push this even lower upon the completion of the Excellence campaign, targeting a cash cost of $1,300/MT in the current oil market environment. Remaining on the cautious side going forward, we do not lower our cash cost assumption going forward from the current levels of $ 1520/MT for 2016 and are estimated to remain stable over the next couple of years. We note that at these levels, AoG is already one of the lower cost producers on a global scale. AoG model assumptions Oil ($/bbl) $/ Electricity Cost ( /MWh) Aluminium Cash Cost ($/MT) 1,520 1,541 1,556 1,588 Aluminium Cash Price ($/MT) 1,529 1,575 1,622 1,671 Premium ($/MT) Alumina Price ($/MT) Aluminium Sales Volume (kts) Alumina Sales Volume (kts) Source: AXIA Research AXIA Research Page 6

7 Updated estimates Following the revision of our assumptions that account for c25% lower realized prices, we lower our EBITDA estimates for by c25%. For 2015 we expect the group s metallurgy division to book an EBITDA of EUR 96.2m (+47.8% y-o-y) mainly on the back of the strong USD and its low cost base. AoG updated estimates Estimates New Revenues EBITDA EBITDA margin 18.7% 19.7% 20.5% 20.7% Revenues EBITDA EBITDA margin 31.3% 31.6% 31.9% 31.9% Old New-vs-Old Revenues 13.6% 18.0% 21.5% 25.2% EBITDA -32.4% -26.5% -21.7% -18.8% EBITDA margin bps Source: AXIA research Recall that AoG incorporates the operation of the Co-gen natural gas unit. In this context we include Capacity payments (CAC s) of ceur 8.0m p.a. from 2016 onwards, noting that CAC s were not paid in 2015 (note that CAC s for AoG are reported as other income). AoG 2016E EBITDA sensitivity to LME spot prices and FX /$ Source: AXIA research 2016 EBITDA LME Price ($/MT) EUR m 1,429 1,479 1,529 1,579 1, AXIA Research Page 7

8 Valuation The DCF exercise for AoG based on our revised estimates yields an EV of EUR 615.3m vs. EUR 760m previously. WACC is now set at 10% (vs. 9.0% previously) reflecting the elevated levels of the GGBs vs. since our previous report. AoG DCF exercise EUR m EBITDA (Capex) (25.0) (25.0) (25.0) (25.0) (25.0) (Taxes) (8.5) (10.6) (12.6) (13.8) (15.7) WC Changes 65.5 (4.8) (5.5) (4.2) (6.0) FCF Discounted FCF Terminal Value EV Source: AXIA Research In terms of multiples, on our estimates for , AoG would trade at 7.9x and 7.3x EV/EBITDA respectively vs. global aluminium peers that currently trade at 8.5x and 7.5x respectively. Aluminium global peers Country P/E EV/EBITDA Norsk Hydro ASA Norway Hindalco Industries Ltd. India Alcoa Inc. United States Aluminum Corporation Of China Limited China NM NM United Company RUSAL Plc Russia Alumina Ltd. Australia Constellium N.V Netherlands NM China Hongqiao Group Ltd. China Kaiser Aluminum Corporation United States Century Aluminum Co. United States 0.0 NM NM NM 0.0 NM AMAG Austria Metall AG Austria Grupa Kety Spolka Akcyjna Poland UACJ Corporation Japan Average Median AoG on AXIA valuation Greece Source: Capital IQ, AXIA Research AXIA Research Page 8

9 EPC-METKA: Successful tapping of a new market- Ghana-Yet low visibility going forward Although METKA is seen entering a period of smaller turnover and lower profitability margins, the company is expected to continue its healthy EBITDA contribution to the group accounts, with the risk being on the upside from the replenishment of the backlog. METKA s current backlog stands at ceur 1.2bn (c2.0x 2015E sales) with METKA announcing two new projects before the end of METKA undertook the construction of an EPC project in Ghana (its first in the Sub-Saharan Africa) valued at USD 350m and photovoltaic projects totaling EUR 112m in Puerto Rico and UK which will be undertaken by its 50.1% owned subsidiary METKA EGN. Backlog also includes a railway project in Greece, EPC projects in Iraq and other projects. We focus on the project in Ghana, as this signifies the successful tapping of a new market for the company, that of the Sub-Saharan Africa. The company utilized part of its cash to kick start the project that, given its fast-track profile, is expected to be concluded within 1Q:2016. According to the terms, the company will maintain the management of the project over a 5-year period, while the project should carry healthy EBITDA margins. The signing of the project in Ghana, with a big part of it executed in 4Q:15 is expected to drive 2015 sales at EUR 618.5m (+1.5% y-o-y). Given the low visibility over new projects, we expect METKA s sales to decline in 2016 (28.5% lower y-o-y in 2016 at EUR 438.7m) and even further in 2017 (EUR 427.0m). Going forward the focus is primarily placed in the Sub-Saharan Africa market and recently in Iran. Management noted that is examining two new projects for the construction of electricity production units in Nigeria and Iran. If materialized, these projects should provide adequate visibility for We note that in its effort to replenish backlog the company should be assisted by its strong brand name, strong relationships with equipment suppliers and healthy balance sheet. Regarding the last point we note that METKA management commenting on the current market environment for EPC projects stated that any new project will likely require some equity participation (similar to what we saw in Ghana). At the same time scarcity of new projects is expected to put pressure on profitability. METKA backlog and new order evolution METKA sales breakdown (EUR m) 2,090 2, ,728 1, ,465 1,331 1, Signed EPC projects New EPC Solar Infrastructure e Backlog (Year-end) (EUR m) New order intake (EUR m) Other Total Turnover Source: METKA, AXIA Research Profitability METKA has consistently managed to maintain a lucrative EBITDA margin above 16%. EBITDA margin is seen sliding lower given 1) the limited availability of new EPC projects and 2) the sales mix (increased revenues from lower-margin solar and infrastructure projects). We now expect METKA s margin to move below the 13% mark over the next couple of years. AXIA Research Page 9

10 More specifically, 2015 EBITDA is seen at EUR 95.1m (-7.9% y-o-y), with EBITDA margin retracting to 15.5% (vs. 17% in 2014) due to the incremental contribution of the executed projects. Going forward we expect EBITDA of EUR 49.4m in 2016 and 54.1m in 2017 with the respective margins at 11.2% and 12.7% affected by the slow top line performance and the sales mix. METKA EBITDA and EBITDA margin evolution % % % 16.83% 16.95% 15.50% % % 11.25% 11.36% e 2016f 2017f 2018f 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% EBITDA (EUR m) EBITDA margin Source: METKA, AXIA Research METKA updated estimates 2015e 2016f 2017f 2018f New Sales EBITDA Net Income Old Sales EBITDA Net Income New-vs-Old Sales 31.1% 0.6% -0.2% -7.5% EBITDA 34.0% -16.3% -9.8% -25.4% Net Income 15.0% -32.0% -21.4% -35.6% Consensus* Sales EBITDA Net Income AXIA-vs-Consensus Sales 15.8% -8.8% -11.7% -0.5% EBITDA 30.6% -26.2% -22.7% -18.9% Net Income 7.1% -14.9% 3.2% -18.3% *S&P Capital IQ Source: AXIA Research AXIA Research Page 10

11 Valuation On the back of our updated estimates, we lower our TP on METKA to EUR 9.30/share from EUR 13.20/share previously. Given current market levels, we assign a Buy recommendation on the stock. In our DCF exercise we use our explicit forecasts for up to 2019, while our WACC is set at 16% in reflecting METKA s presence in regions with elevated geopolitical risk (10% risk free rate, 5.5% equity risk premium) as well as its capital structure (0% leverage). METKA DCF exercise EUR m 2016f 2017f 2018f 2019f EBITDA (Capex) (Tax) WC Changes FCF NPV Terminal Value 96.6 (Net Debt)/Cash (end-2015) NAV Num. of Shares (m) 52.0 Target Price ( /sh) 9.3 Current Price ( /sh) 6.33 Upside 47.0% Mytilineos Stake 50% EV for Mytilineos Group Source: AXIA Research Please find more details on METKA on our recent company update report AXIA Research Page 11

12 Energy (Protergia): Brighter days are coming Energy division is set to become a significant EBITDA contributor for the group in the coming years driven by -the long awaited- changes in the domestic electricity market. Greece s largest IPP is expected to benefit from the higher utilization rates of its CCGT units, the re-instatement of CACs as well as the expansion in the retail supply sector and the increasing wind capacity. We now expect EBITDA to jump from EUR 21m in 2015 to EUR 77.5m in 2016 and EUR 84m in has been very challenging for the energy division of the group, with EBITDA estimated to decline by c72% y-o-y mainly due to the non-received capacity assurance certificates or CACs (estimated at ceur 32m for the division or EUR 43m on a group level for FY15). Despite that, the group s units managed to increase their output volumes by 25% y-o-y driven by: i) their low cost of production that made them competitive to lignite units; ii) increased demand (+2.2% y-o-y); and iii) lower lignite production by PPC s units (-14.4% y-o-y). Going forward the division is expected to benefit from: 1. Higher contribution of natural gas units to the total production mix due to lower natural gas prices. The decline in natural gas prices has favored modern CCGT units, with their generations cost now competing PPC s lignite fleet. Also the prevailing low natural gas prices as well as the group s exposure to LNG, support profitable operational spreads. In addition to the above, PPC s lignite output is expected to decline by c15% due to regulatory limitations (decommissioning of units). All in all we expect utilization rates of natural gas fired units to more than double y-o-y in Re-instatement of Capacity Certificates in The delays in the decision for 2015 CACs resulted in a loss of income of ceur 43m for the group (ceur 32m for Protergia units and EUR 11m for AoG co-generation unit). The decision over 2016 CACs is expected within the coming months following the recent appointment of RAE s (the regulator) new BoD members. CACs for the group in 2016 are forecasted at ceur 3.6m per calendar month. We expect the scheme to be finalized in the coming two months. Assuming no retroactive application first part of the year, we pensile-in a total of EUR 28.8m for the group in Going forward as MoU guidelines call for the establishment of the permanent capacity payment mechanism, we maintain capacity payments at the 2016 levels. 3. New wind parks coming on line in Mytilineos currently operates 62MW of wind parks in the country, while is currently investing in another 55MW, expected to come online in the next two years. Upon their completion Protegia will have a RES installed capacity of 123MW (106MW wind, 11.5MW PV, 6MW small hydro) contributing an estimated EUR 13.4m of EBITDA in 2016 and EUR 17m in Expanding market share in the electricity retail supply. Protergia has moved aggressively into penetrating the supply market, with its market share increasing sharply in 2015 (+273% y-o-y), now covering 1.2% of the total demand. We note that the retail supply business carries descent margins (estimated EBITDA margin of 5%-6%), while the group is naturally hedged against fluctuation in the wholesale prices due to its own production fleet. AXIA Research Page 12

13 Total domestic electricity production mix (interconnected system) 100% 80% 60% 40% 20% 0% Jan Mar May Jul Sept Nov Jan Mar May Jul Sept Nov Jan Mar May Jul Sept Nov Jan Mar May Jul Sept Nov Source: IPTO, AXIA Research Gas Lgnite Res Hydro All in all we expect EBITDA in 2016 to increase to EUR 77.5m from 21.5m in 2015 and contribute 37.9% of the total group EBITDA. Going forward the operating conditions should allow for even stronger performance from the division with EBITDA seen growing by c6.0% CAGR 2015E 2016F 2017F 2018F Revenues CCGT units y-o-y -45% 165% -2% 10% RES y-o-y 14% 31% 29% 0% Trading & Other Total Revenues y-o-y 13% 96% 14% 5% EBITDA CCGT units margin 11% 29% 30% 29% y-o-y -89% 626% 1% 6% RES margin 79% 78% 77% 77% y-o-y 137% 30% 28% 0% Trading & Other margin 2% 1% 1% 1% y-o-y n.m. 50% 33% 0% Total EBITDA margin 11% 21% 20% 20% y-o-y -71% 261% 8% 4% Source: AXIA Research Valuation Energy division SOTP valuation EUR m MW EV EV/MW Mytilineos Stake EV per stake Method Korinthos Power % DCF Viotia % DCF RES % DCF Retail Supply % 45.0 DCF Total 1, Source: AXIA Research AXIA Research Page 13

14 Jan Mar May jul Sept Nov Jan Mar May jul Sept Nov Jan Mar May jul Sept Nov Jan Mar May jul Sept Nov Jan Mar May jul Sept Nov Mytilineos Group Company Update Appendix: Greek electricity market outlook and the effect on Mytilineos Domestic electricity market performance in 2015 Domestic electricity demand in 2015 grew by 2.2% y-o-y driven by a rebound in the medium and low voltage consumers. This was first increase in electricity demand in the country since the start of the crisis. On the production side, domestic production increased by 1.1% y-o-y, while net imports increased by c9.0% y-o-y. In respect of production mix in the interconnected system, lignite production accounted for c47% of the total production, reduced by 14.4% y-o-y though affected decommission of units and lower utilization rates due to the 28.8% y-o-y increase in hydro output. Natural gas covered 17.5% of total demand, increasing its production share by c19% y-o-y driven by lower natural gas prices and reduced lignite output. Finally, RES increased their share in the total mix in 2015 to c23.5% vs. 20.9% in 2014 driven mainly by improved wind dynamics and incremental capacity additions (+4.0% y-o-y). Following the significant decline in oil and natural gas prices, as well as the increased hydro contribution, SMP in 2015 declined by 9.7% y-o-y, with the annual average standing at EUR 51.9/MWh. SMP evolution (EUR/MWh) Natural gas vs. lignite output y-o-y evolution in Source: LAGIE, IPTO, AXIA Research 250.0% 200.0% 150.0% 100.0% 50.0% 0.0% -50.0% % Jan Feb Mar Apr May Jun Jul Aug Sept oct Nov Dec Lignite NG Total Production Capacity certificates In respect of pending regulatory issues, we expect RAE to present and ratify within the following weeks the decision for the transitional CACs scheme for This will allow CCGT units to recover ceur 40k/MW for We note that any delays of the decision will impact the actual amount received, since as the approval is not expected to apply retroactively (as was the case in 2015). Therefore the actual booked amount could be lower. Going forward, the MoU guidelines provide for the implementation of a CAC market mechanism. In this context, we would expect the market regulator to propose a scheme were the modern CCGT units of PPC and IPPs will submit bids for making their capacity available to the system operator. Similar schemes are implemented in other EU countries (i.e. in the UK), with CACs levels seen slightly below the estimated for the Greek market figure in We expect further progress on this scheme to be made later within Limitation on lignite production In respect of lignite generation, PPC is obliged to comply with the EU decisions under which a number of lignite-fired plants with a total output of c1.0gw enter into a limited production regime for the next five years. After the end of this period PPC will have to decommission the units. Although it is not clear what the strategy of PPC will be on the utilization rates and the relevant residual lifetime of specific the units, we assume that PPC will try to maximize their availability resulting in lower annual utilization rates over a larger period in time. With only 1 new lignite unit currently under construction (expected on-line in 2019), this is expected to create space for the natural gas units, that given the low natural gas prices could start operating as base-load units in the coming periods. AXIA Research Page 14

15 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Ιούλ-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Mytilineos Group Company Update Energy auctions (NOME) - Retail market The energy auction scheme is considered a measure that will increase competition in the electricity market, by providing access to third parties to lignite and hydro generation that are currently fully controlled by PPC. The structure of the scheme is expected to be introduced later in 2016 (at least at a preparatory level). Key parameters will be the quantities that will be available to the market but most importantly the auctioning price. PPC stands firm that the auctions starting price must cover its production costs plus a reasonable return. The ability of third party producers to acquire lignite and hydro production will be key for their further penetration to the retail supply market. Third party suppliers, and especially those with owned generation capacity (Protergia, Heron, Elpedisson) have launched active campaigns for their retail supply managing to increase their presence in the market. If NOME scheme fails to work towards that direction, alternative measures of opening up the market could be considered (including the sale/concession of PPC assets in lignite and hydro generation). In this context we note recent press reports noting the potential for cooperation of PPC with private investors in lignite units. Outlook For 2016, demand is expected once more to remain connected to weather conditions (electricity is now the main heating source in many households) and to a lesser extend form the performance of the domestic economy, that is expected to start growing again sometime in 2H:16. Following our estimates for reduced lignite production by c6%-8% due to the limitation in the output of c1.0gw of lignite units (c2.0 TWh lower y-o-y), we expect natural gas units to increase their output by c15% y-o-y, with their utilization rates exceeding 35% (vs. c17% in 2015). Going forward, the utilization rates of the natural gas units in expected to increase on the back of: i) Increased demand following the rebounding Greek economy. ii) New demand in the interconnected system due to the connection of Cyclades islands to the main grid (1 st phase). This is estimated to add 1.0%-2.0% in the demand of the interconnected system. iii) Limited output of PPC s lignite units due to regulatory decisions and flexibility issues. iv) Low natural gas prices that make modern CCGT units costs competitive to lignite. v) Limited RES additions in the short to medium term at least. Greek SMP vs. Natural gas pipeline prices (Indexed) Source: RAE, LAGIE, AXIA Research Nat.Gas SMP Installed capacity in Greece (Dec-2015) Unit Type Capacity (MW) (%) of total Thermal Units 12,653 61% Lignite 4,456 21% Natural Gas IPPs 2,568 12% Natural Gas PPC 3,178 15% Oil 2,451 12% Large Hydros 3,173 15% RES 4,968 24% Wind 2,089 10% PV 2,604 13% Other 275 1% Total 20,794 AXIA Research Page 15

16 Detailed Financials Income Statement E 2016F 2017F 2018F Revenues 1, , , , , , , ,292.7 COGS (1,323.1) (1,251.9) (1,142.4) (934.7) (1,139.9) (1,008.9) (1,041.4) (1,053.7) Gross Profit Other Expenses (55.5) (34.3) (33.4) (43.2) (31.8) (20.5) (22.8) (20.7) EBITDA EBITDA margin 12.2% 11.5% 16.2% 20.7% 14.9% 16.2% 16.9% 16.9% Depreciation EBIT Other (8.2) 3.4 (16.5) Interest Income Interest Expense (49.0) (55.5) (75.1) (71.1) (58.3) (53.3) (47.1) (43.5) EBT Income Tax (24.9) (10.0) (13.1) (22.6) (19.8) (27.6) (30.0) (33.8) EAT Minorities Net Income EPS DPS Balance Sheet E 2016F 2017F 2018F Total Fixed assest 1, , , , , , , ,006.9 Investments Other Total non-current assets 1, , , , , , , ,636.6 Inventories Receivables Other Cash and equivalent Total current assets 1, , , , , ,084.0 Total Assets 2, , , , , , , ,720.5 Share Capital Other Retained earnings Minority rights Total Equity , , , , , ,456.7 Interest bearing Bonds and loans Other non-current liabilities Total non-current liabilities Trade and other payables Short term borrowings Taxes payable Other current liabilities Total current liabilities 1, , Total Equity and Liabilities 2, , , , , , , ,720.5 Cash Flow E 2016F 2017F 2018F Gross cash flow from operating activities WC Changes 31.1 (101.4) (274.6) Income tax paid (39.1) (4.2) (4.7) (14.4) (19.8) (27.6) (30.0) (33.8) Net Cash from operating activities (147.9) Capex (117.0) (95.1) (56.4) (47.1) (43.5) (43.5) (43.5) (34.5) Other investing (32.3) (35.3) Change in debt 37.6 (121.7) (124.1) 1.1 (35.6) (30.0) (30.0) (30.0) Dividends paid (12.1) (17.1) (8.4) (8.0) - (11.1) (15.4) (16.8) Other (0.3) (0.0) Net increase/(decrease) in cash 6.3 (254.2) (222.9) Year start cash End year cash 82.7 (170.0) Source: The Company, AXIA Research AXIA Research Page 16

17 Per share data E 2016F 2017F 2018F EPS BVPS DPS Valuation ratios E 2016F 2017F 2018F P/E 7.8 x 24.5 x 39.5 x 8.2 x 7.9 x 6.1 x 4.4 x 4.0 x EV/EBITDA 4.7 x 7.1 x 5.0 x 3.6 x 4.4 x 3.9 x 3.0 x 2.2 x EV/EBIT 5.6 x 11.4 x 7.1 x 4.6 x 6.1 x 5.4 x 4.0 x 3.0 x EV/Sales 0.6 x 0.8 x 0.8 x 0.7 x 0.7 x 0.6 x 0.5 x 0.4 x P/BV 0.4 x 0.6 x 0.7 x 0.6 x 0.4 x 0.3 x 0.3 x 0.3 x Div. yield 0.0% 0.0% 0.0% 2.2% 0.0% 3.3% 4.6% 5.0% FCF yield % (vs. EV) 58.7% -10.7% 13.6% 14.4% -20.9% 17.6% 23.1% 34.9% ROA 3.2% 1.7% 2.3% 4.3% 2.7% 2.6% 3.5% 3.6% ROE 5.8% 2.5% 1.9% 7.3% 4.6% 5.7% 7.5% 7.7% ROIC 2.4% 1.0% 0.8% 3.4% 2.2% 2.7% 3.9% 4.4% Growth rates E 2016F 2017F 2018F Revenues 56.9% -7.5% -3.5% -12.1% 11.7% -10.8% 4.3% 1.0% EBITDA 11.8% -13.0% 35.7% 12.1% -19.6% -3.0% 8.8% 1.0% EBIT 6.8% -35.4% 53.7% 23.5% -25.4% -2.9% 12.9% 1.7% EBT -15.8% -49.8% 33.2% 84.7% -31.6% 5.7% 26.9% 6.4% Net Income -30.0% -55.2% -16.5% 307.9% -34.6% 30.4% 39.0% 9.4% Profitability ratios E 2016F 2017F 2018F Gross margin 15.8% 13.9% 18.6% 24.2% 17.2% 17.8% 18.7% 18.5% EBITDA margin 12.2% 11.5% 16.2% 20.7% 14.9% 16.2% 16.9% 16.9% EBIT margin 10.3% 7.2% 11.4% 16.0% 10.7% 11.7% 12.6% 12.7% Net Income margin 2.7% 1.3% 1.1% 5.3% 3.1% 4.5% 6.0% 6.5% Summary Table E 2016F 2017F 2018F Revenues 1, , , , , , , ,292.7 EBITDA EBITDA margin 12.2% 11.5% 16.2% 20.7% 14.9% 16.2% 16.9% 16.9% Net Income EPS (Net Debt)/Cash P/E 7.8 x 24.5 x 39.5 x 8.2 x 7.9 x 6.1 x 4.4 x 4.0 x EV/EBITDA 4.7 x 7.1 x 5.0 x 3.6 x 4.4 x 3.9 x 3.0 x 2.2 x Div. yield 0.0% 0.0% 0.0% 2.2% 0.0% 3.3% 4.6% 5.0% Source: The Company, AXIA Research AXIA Research Page 17

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