Equity Research. Update: MYTILINEOS ELVO Consolidation Expected in 2003

Transcription

1 Greece Equity Research July 29, General Index MYTILINEOS <MYTr.AT>/[MYTIL GA] BUY KEY DATA Price: 4.62 Mkt Cap: 187m Shares Outstanding: 40,520, Mytilineos 52-week high low: Avg. daily trading vol. (1-month): 930,190/ 207,791 shares Avg. daily trading vol. (12-month): 303,361/ 107,981 shares 0 29/7/02 29/07/03 Update: MYTILINEOS ELVO Consolidation Expected in 2003 Mytilineos Group holds a 47.5% stake with an option to acquire an additional 17% in state-owned ELVO, the largest vehicle producer in Greece. The expected consolidation of ELVO by end-2003 is expected to boost group results. The Group aims to participate in 1.76bn total worth of defense programs with its two subsidiaries ELVO and METKA. The bulk of these projects are to be completed after 2005, securing the Group s business activity in this market for 4-5 years. Mytilineos expects to enhance its results from its defense and energy ventures as well as metal operations due to the expected shift of the economic cycle that is expected from end-2003 onwards. The Group s backlog (signed contracts) currently stands at 1.170bn. The company faces political and execution risk in its defense and energy projects. High dependence in such State projects reflects a weakness. GROUP PROFILE Mytilineos Group includes the parent company Mytilineos, its listed engineering subsidiary METKA and ELVO, a vehicles and defense products manufacturer. More than half (58%) of group revenues are coming from metallurgy and metal trading but the revenues mix is expected to change substantially the coming years due to the intense efforts being made to penetrate the defense and energy markets and establish the Group as the major local player in these markets. Mytilineos orderbook currently stands at 1.17bn, resulting mainly from these two areas of activity. The Group s clientele includes major multinational companies in all three segments of activities as well as the Greek State, the Greek armed forces, the Public Power Company, Oil Refineries etc. We should note that heavy dependence from state projects reflects a weakness.

2 Growth Drivers by Market Segment % 80% 60% 40% 20% 0% p Defence Systems Energy & Metal Construction Metallurgy Metal Trading Source: Mytilineos Holdings S.A. ELVO CONSOLIDATION The Group plans to consolidate ELVO in the FY03 balance sheet of the Group, boosting its results. The company published FY02 EBT of 8.7m, 281% higher from FY01 on a 14.5% lower turnover of 123m. Τhis surge in earnings is mainly due to a 10% decrease in production costs. The company achieved 20% and 7% gross and net profit margin respectively. It should be noted that depreciation charges surged 50%, to 4.7m from 3.1m in The management estimates that the revaluation of the company s assets under the implementation of I.A.S., will add 120m- 150m value to its equity. The revaluation of ELVO s assets and ELVO consolidation in the Group s results are the only effects to the Group by the application of I.A.S. rules. ELVO has a current backlog of 800m including the Infantry Armored Fighting Vehicle (IAFV-Kentavros) Program of the Greek Ministry of Defense (MoD). ELVO also plans to participate in other programmes of the Greek MoD that are scheduled to be concluded by the end of the year. These include mobile hospitals, amphibious armored vehicles and specialized vehicles. The company due to its specialization expects to realize a part of these projects. It should be noted that the company is awarded the contracts directly from the MoD without a tender process due to its current State ownership status (51%). However, with the possible exercise of the Group s option to acquire a further 17% from the State, ELVO will loose this significant privilege and will need to participate on open contests bidding for each project. The Group acquired a 43% stake in ELVO from the State in 2000 and exercises the management since then. In 2001 the Group increased its stake to 47.5%. Mytilineos Group has also a call option to acquire a further 17% stake in the company from the state. Mytilineos considers exercising this option in The time period to exercise the option is August 1, 2003 to August 1, ELVO s plant is situated in the industrial zone of Salonica and employs 985 persons. Its facilities cover a total area of 270,000 sqm and its equipment includes CNC machinery, CAD/CAM design equipment and laser shearing presses. The company is certified according to AQAP 4 and ISO 9001 quality standards. It is the largest producer of vehicles in Greece and the sole domestic manufacturer of armored and other specialized vehicles for the Greek armed forces. The product line of the company includes buses, trucks, off-road vehicles specialized vehicles for the armed forces, armored vehicles as well as other specialized vehicles such as fire engines. Mytilineos Group is using ELVO primarily in defense projects, as assembler and systems integrator. Effort is taken however to penetrate the civil market, especially in buses and off-road vehicles. The company holds close links with leading companies that are specialized in these two market segments (Daimler-Benz, Neoplan, Scania). In the civil vehicles segment, the company has signed contracts worth of 85m for the construction of 194 trolleys and busses for the cities of Athens and Thessalonica.

3 ELVO is strategically important for the Group to increase its penetration in the military and commercial vehicle markets. The company holds know-how in these fields that ensures its participation in most- if not all- the major programmes of the Greek MoD. Its position is unchallenged in the local market -in regards to the military segmentand the Group will ensure to make the most of ELVO s edge. The company plans to invest heavily the next couple of years in order to achieve higher added value to its products that will allow the improvement of its cash flow stream and profitability. DEFENSE SECTOR The Group is well positioned to take advantage of the large procurement programme that the Greek MoD has announced. The Government has approved a 8.8bn procurement programme and the Group estimates that it can capture some 1.8bn (20.5%) with its participation in various programmes. Management estimates that ELVO can capture 1.35bn and METKA 450m. The MoD is keen to see the local added value in the defense projects increased approximately 3-fold to 35% from the current 13%. The Group is currently under negotiations with many of the past suppliers of the Greek armed forces in order to undertake subcontracted or co-production of armament systems. METKA and ELVO, the Group s two subsidiaries have the know-how and the production facilities to make the most of the opportunities that arise in the local defense market. They also benefit from synergies since their activities are complementary. The Group has signed a 170m contract with KMW, a German battle vehicle manufacturer, which has been selected by the MoD as the supplier of the main battle tank for the Greek army. The programme starts next year and it will last until ELVO will assemble 170 Leopards A-2 and will manufacture the gearbox of the tanks. The MoD also has assigned ELVO the manufacturing of 150 new IAFV (Kentavros) armored vehicles with an option for another 130 vehicles. The initial contract is worth 410m with the option contract valued at 350m. Production is scheduled to begin in 2H05. ELVO also targets the mobile hospitals programme (19% participation- 12.3m) as well as other projects. METKA has been awarded a 110m contract for manufacturing various parts of the Leopard A-2 Main Battle Tank while it will participate in the IAFV (Kentavros) program with approximately 10% ( 40m) stake. Its participation in a submarines pressure hull manufacturing program secures revenues of 19.3m.The submarines are of the most recent 214-type. The Group also targets to realize the amphibious armored vehicles programme to be assigned by the MoD. The combined participation of METKA and ELVO will add to 36% ( 79m). Mytilineos Group has signed an MoU with the Eurofighter Consortium targeting works of 85m for the EF2000 fighter plane. The Greek Air Force has requested 60 aircrafts with 30 additional planes as an option. The programme however has been frozen due to its cost and construction (if any) is not going to begin before The Group has also signed an MoU with Oerlikon/Lockheed Martin for the air defense system ADATS targeting works worth 70m. ENERGY SECTOR The Group s prospects in the energy sector are promising. The Group s subsidiary, MPGS, has already been granted all the necessary licenses for the 400MW natural gas-fired plant in central Greece and at the moment is in negotiations with the natural gas supplier DEPA regarding the fuel prices in order to assess the feasibility of the project. The budget of this project is 250m and it is scheduled to start operations in 1H2006. MHWP, the second energy subsidiary of the Group has 7 wind farms under completion, 3 of which are expected to start operations at the beginning of The total capacity of the 7 wind farms is 88.9MW while further applications for wind farms with a total capacity of 28.5 MW are still pending for approval. The company self-finances the wind farm projects with 30% while debt will cover 40% and there s a 30% subsidy. The Group also participates in BOO energy projects in a joint venture with Roll-Royce Power Ventures Ltd and local construction company Domiki Kritis SA. The RHODES POWER GENERATION AND SUPPLIES S.A., as this is the name of the joint venture, has submitted an offer for a 250MW power plant in the islands of Rhodes budgeted for 200m. The tender is in the financial evaluation phase. METKA will be the main constructor of Group s energy projects. The company is the main subcontractor/supplier to the PPC and currently holds a backlog of 370m, excluding its participation in Group s projects. The company will

4 benefit from the Group s Energy projects in the next five years. It has been strengthened by the recent takeovers of four non-listed companies that are specialized in refinery and electromechanical projects. METALLURGY/METAL TRADING The core business of the Group is cyclical and highly depended on metal prices. There are expectations about an upward shift in the economic cycle from 4Q03 onwards. Spot prices in the London Metal Exchange have picked up considerably since the beginning of the year and it is expected that they will have a positive effect on the Group s results for Metal Sales Breakdown by Product (value)-2002 Switzerland 8% G.Britain 4% Romania 9% Egypt 4% Greece 37% Italy 14% Cyprus 24% Source: Mytilineos Holdings S.A. Mytilineos has been hurt by the weak dollar and the weak metals prices in The Group had invested heavily the past 5 years in projects in the Balkans that didn t produce what was expected, mainly due to the political unrest that prevailed in the area in the past. The company is expected to proceed to write-offs from part of these investments. Approximately 1/3 of the parent s metal-related turnover results from the home market with Cyprus and Italy following with 22% and 13% respectively. Zinc and copper contribute 65% of total sales in terms of value. Metal Regional Breakdown 2002 (MT) Wires 2% Lead 6% Aluminium 11% Copper 30% Steel Products 17% Zinc 34% Source: Mytilineos Holdings S.A. Mytilineos main goal is to expand geographically and increase its production capacity. The Group plans to invest $30m in its Romanian subsidiary SOMETRA by 2005 in order to increase its production to 120,000 MT of zinc and lead. It holds an ongoing co-operation agreement with RTB-BOR smelter and it will consider the smelters acquisition when it will be available for privatization by the Serbian government. RTB-BOR is the biggest copper mine complex in Western Europe.

5 FINANCIALS Slowdown in economic activity has hurt Mytilineos FY02 results. Lower base metals prices and weak dollar has put pressure on its results from metal operations. FY02 turnover stood 32.3% lower at 259m. Energy and defense as well as the consolidation of ELVO are expected to boost Group profitability from FY2003 onwards. We estimate 68% higher total sales at 436m in FY03. Extensive restructuring allowed the Mytilineos to increase its FY02 gross margin to 18.7% from 15.5% and its EBITDA margin to11.6% from 9.4%. Net (after-tax) profit margin fell substantially from 4.1% to 2.1% in 2002 due to a 10.5m negative impact in extraordinary results. We expect net profit margin to improve in 2003 to 3.2% and EBITDA margin to improve in the following years above 14% by Mytilineos has refinanced its older debt with two syndicated loans of 55m and 45m respectively also lowering its cost of financing. At the moment, total debt decreased by 26m at 134m while cash and equivalent exceeds 55m. Long-term debt stands at 100m from the total 134m. Financial strength is underlined by operating cash flows which for 2002 stand above 16m. Expected cash flows will be further strengthened by the consolidation of ELVO. VALUATION We realized a DCF and multiples relative valuation for the Group. We restate the assumption that subsidiary ELVO is consolidated in the Group s FY2003 results. For a DCF approach we assumed a 4.43% risk free rate and used a beta of 1.36 for Mytilineos Group. Market premium used stands at 4% and expected perpetual growth at 2%. Mytilineos Group - if we do not add ELVO s results - is fairly traded according to a DCF approach at 5.66 per share offering a 23% upside. However we have applied DCF in the Free Cash Flow of Mytilineos and that of ELVO. Specifically we have added the 64.5% part of ELVO s FCF excluding cash corresponding to ELVO s minority shareholders. This approach offers a fair price for Mytilineos and ELVO of 7.48 (62% upside). However, a valuation with the use of multiples results to a fair share price of 4.95 for the Mytilineos-ELVO Group (8% upside). We have applied the P/E and P/BV multiples that correspond to the Group s sectors at 9x (P/E) and 1.5x (P/BV). Standing on the conservative side, we combine the two methods assigning greater weight on multiples outcome. This offers a fair valuation for the Mytilineos-ELVO group at 5.79 per share (Mkt Cap of 235m). Therefore, the share still offers a 26% upside in spite of the sharp (225%) rise from recent lowest of 1.40.

6 MYTILINEOS GROUP Including ELVO; Financial Statements as of FY2003 (Greek GAAP-in EUR 000) MYTILINEOS & ELVO Balance Sheet e 2004f 2005f 2006f ASSETS Gross Fixed Assets 179, , , , , ,142 Less: Accum. Depreciation 113, , , , , ,717 Net Fixed Assets 65,929 66, , , , ,425 Participations 25,184 26,226 26,394 26,394 26,394 26,394 Total Fixed Assets 91,113 93, , , , ,819 Inventories 86,024 78, , , , ,720 Accounts Receivable 137, , , , , ,716 Securities 39,812 33,323 43, , , ,208 Cash 34,704 19,334 35,000 35,000 35,000 35,000 Total Current Assets 298, , , , , ,644 Transitory Accounts 1,955 1,034 5,413 5,955 6,550 7,205 TOTAL ASSETS 391, , , , , ,668 LIABILITIES & EQUITY Share Capital 24,312 24,312 34,376 34,376 34,376 34,376 Capital in Excess 183, , , , , ,269 Reserves 45,189 37,814 59,141 66,379 75,094 83,789 Retained Earnings 4,843 6,286-3,441 2,779 7,399 11,954 Consol. Differences -148, , , , , ,872 Minorities 52,979 48,098 53,430 59,403 66,092 73,583 Total Equity 162, , , , , ,099 Provisions 2,226 10,746 16,609 21,591 28,068 36,489 Long Term Liabilities 112,031 52, , , , ,126 Suppliers 28,569 43,510 56,988 59,731 62,008 64,133 Short term Bank Debt 51,625 81,448 16,449 16,449 16,449 16,449 Tax & Social Security 14,394 11,015 16,147 16,954 17,802 18,692 Dividends payable 3,104 2,696 2,696 2,696 2,696 2,696 Other Liabilities 16,777 10,284 94, , , ,377 Total Current Liabilities 114, , , , , ,347 Total Liabilities 226, , , , , ,473 Transitory Accounts ,958 2,154 2,369 2,606 TOTAL LIAB. & EQUITY 391, , , , , ,668 Source: The Company & ARTION Research MYTILINEOS & ELVO Income Statement Source: The Company & ARTION Research e 2004f 2005f 2006f Total Turnover 383, , , , , ,863 COGS 324, , , , , ,745 Gross Operating income 59,064 48,237 82,377 94, , ,118 Other Operating Income Operating Income 59,647 48,634 82,824 94, , ,637 Aministrative & Selling Expenses 30,394 25,041 46,189 46,496 48,606 50,813 EBITDA 35,918 30,197 48,684 61,318 67,850 71,111 Plus: Income (loss) from participations& tr 1, Plus: Interest Income 1,407 1,786 2,024 2,226 2,248 2,361 Less: Interest Expenses 11,531 7,348 8,050 9,086 10,960 12,100 Extraordinary Income (Expenses) 9,308-1, Less: Depreciation 6,665 6,604 12,050 13,220 14,498 15,288 Plus: Depreciation charged on COGS 6,665 6,604 12,050 13,220 14,498 15,288 EBT 29,676 17,596 30,608 41,237 44,641 46,084 Taxes 8,787 7,023 11,537 15,632 17,154 17,900 Less: Minority Rights 5,170 5,078 5,332 5,972 6,689 7,492 EATM 15,719 5,494 13,738 19,633 20,798 20,692

7 MYTILINEOS & ELVO Significant Ratios Source: ARTION Research e 2004f 2005f 2006f Profit Margins Gross Margin 15.4% 18.6% 19.2% 20.6% 21.2% 21.2% EBITDA Margin 9.4% 11.6% 11.3% 13.4% 14.2% 14.2% EBT Margin 7.7% 6.8% 7.1% 9.0% 9.3% 9.2% EAT Margin 4.1% 2.1% 3.2% 4.3% 4.3% 4.1% Per share Data (in EUR) EPS (after tax) EPS (pre tax) EBITDAPS CFPS DPS BVPS Valuation Ratios (x) P/E P/S EV/EBITDA EV/S P/BV P/CF Profitability Ratios (%) ROE (avg) 19.4% 3.5% 8.0% 9.0% 8.1% 7.7% ROCE (avg) 14.0% 3.5% 5.1% 5.2% 5.1% 5.2% ROA (avg) 8.0% 1.5% 3.1% 3.4% 3.2% 3.1% ROE - EBITDA (avg) 44.3% 19.4% 28.4% 28.2% 26.4% 26.6% ROA - EBITDA (avg) 18.4% 8.0% 11.0% 10.7% 10.5% 10.6% Liquidity Ratios Current Liquidity Acid Ratio Gearing 72% 74% 61% 69% 72% 76% Debt / EBITDA Interest/ EBITDA Interest Coverage ARTION Research research@artion.net