Mytilineos — Profiting from energy transition

Mytilineos is a diversified industrial company operating in four main business areas: power generation/supply (Power & Gas division, or P&G); alumina/aluminium production (Metallurgy division); engineering, procurement and construction (EPC) of power and sustainability projects (Sustainable Engineering Solutions division, or SES); and renewables/energy storage development (Renewables & Storage Development division, or RSD). It is listed on the Athens Stock Exchange and became a member of the MSCI Global Standard Indices earlier this year (May 2022), which has resulted in an increase in the stock’s liquidity. It has been investing heavily to benefit from the energy transition. It has invested c €0.9bn over five years (2017–21) and we estimate it will invest €1.7bn over the next five years (2022–26), including the development of 1.5GW of solar plants in Greece (in P&G) and renewable development assets (mostly solar photovoltaic, PV) of over 6GW at various stages of development and construction (in RSD). Mytilineos leverages synergies between the divisions to create a portfolio of assets that have in common a low-cost, competitive positioning. We forecast that Mytilineos will increase the share of its earnings (EBITDA) from energy transition activities from 26% in 2021 to 57% in 2025 (and 60% from 2026). This translates into a five-year EBITDA CAGR of 35% in energy transition-related activities (from c €130m in 2020 to c €436m in 2025), and a five-year group EPS CAGR of 18%.

Our valuation is based on a 10-year DCF for each division, which better reflects the longer-term energy transition, followed by a terminal value. We believe we have been conservative in applying 1% terminal growth across Metallurgy, P&G and SES; and 2% for RSD. We increase our WACC assumption to 7.5% from 7.0% previously to reflect an increase in the cost equity. We discuss our modelling assumptions in the following sections. Our DCF approach suggests a per-share valuation of €27.0, which implies c 85% upside versus the current share price (€14.65) and remains unchanged since our last published valuation. If the WACC and number of shares had remained unchanged, our valuation would have increased by €4.0/share to €31/share, driven by increased valuations across all divisions, with the largest contribution from RSD of 29% (c €2/share).

We use peer valuation as a cross-check, rather than driving our valuation, because we believe near-term earnings multiples do not accurately reflect Mytilineos’s long-term growth prospects. We take a sum-of-the-parts (SOTP) divisional based approach, which best reflects the uniqueness of the Mytilineos business. Adopting EV/EBITDA multiples of comparable peers on a divisional basis suggests an SOTP valuation of, on first impression, c €25.4/share, which when adjusted to adequately reflect the competitive strengths or growth prospects of Mytilineos’s divisions relative to their peers (we assume a 20% premium to the median peer multiples for some business units) increases by c €2.4/share to c €27.9/share. This is 3% above our DCF-based share valuation.

On the H122 earnings call the chairman suggested that Mytilineos could potentially substantially exceed its previous informal FY22 net income guidance of €260m (with H2 notably better than H1). Our forecasts now reflect this. We forecast net income of €350m in FY22 and forecast a three-year net income CAGR (2021–24) of 29%. We expect particularly strong growth in RSD as the strategic focus shifts towards higher-margin BOT projects. The current environment is highly attractive for these projects, as outlined in our European renewables report published on 30 May 2022. Mytilineos has increased its international renewables (mostly solar) development pipeline to more than 6GW, of which 2.5GW are mature or operating. In addition, we expect strong growth in SES, which is increasingly benefiting from the over $12tn in stimulus packages announced during the pandemic, a sizeable portion of which are being allocated to sustainability projects. Metallurgy and P&G have been strong performers over the last few quarters, and we expect solid performances to continue, assisted by competitive advantages in these divisions (discussed in the P&G and Metallurgy sections below).

We expect Mytilineos’s return on capital employed (ROCE) to average 14% over FY22–25e. This suggests the company is putting capital to good use. Although free cash flow (FCF) is negative in 2021, due to significant investment in BOT projects to take advantage of the current attractive environment, Mytilineos continues to have significant financial flexibility, with total liquidity of c €1.5bn, augmented by strong operating cash flow in all areas of the business. From FY23, Mytilineos’s investment programme could be fully funded through operating cash flow; however, we note that the company should gain access to cheap capital through the European RRF, so will likely opt to use this for some of the renewables investment. We estimate that the FCF yield will increase to 10% by FY24, as Mytilineos starts to see a cash return on its investments. Assuming Mytilineos continues its current dividend pay-out ratio of c 35%, we estimate its dividend yield will increase to 6–7% over FY22–25, an increase from 3% in FY21, and this is in addition to its ongoing share buyback programme (we estimate c €70m of shares have been repurchased so far over 2020–21). Mytilineos has a strong balance sheet with our forecast net debt to EBITDA ratio of just 1.7x in FY22–23, decreasing to 1.5x in FY24–25.

Mytilineos’s continued strong growth momentum in H122 delivered another record-high set of results. Net profit after minorities increased by 116% to €166m versus H121 (€77m) and was higher than the previous record performance in H221 (€103m). This demonstrates the robustness of its business model despite the energy crisis in Europe, inflationary pressures, rising interest rates, the evolution of the pandemic and the recent geopolitical tensions. We are impressed by the continued strength of the Power & Gas division, which has more than doubled its EBITDA to €125m versus H121 (€48m). This is despite record-high gas prices and is a testament to Mytilineos’s integrated model (including increasing exposure to retail), its ability to source gas at competitive prices and the high efficiency and flexibility of its power generation portfolio. The efficiency will be further enhanced as the new high-efficiency combined cycle gas turbine plant ramps up during H2. Metallurgy also delivered impressive results. We expect RSD to be stronger in H2 due to solar parks under construction nearing conclusion (potentially c 450MW). Similarly, SES should be stronger as projects come to fruition. Its order book has been significantly increasing and it is well-positioned to benefit from the mobilisation of the European RRF’s resources to focus on ‘green’ development projects. Mytilineos continues to have significant financial flexibility, with total liquidity of c €1.5bn, augmented by strong operating cash flow in all areas of the business.

It has been long accepted that companies that embrace good ESG practices are likely to be well run, have better cost efficiencies and profitability, and therefore achieve superior returns to similar companies that do not. Mytilineos is a good example of a company where good ESG practices, particularly in relation to the emissions reduction and the energy transition (the ‘E’ of ESG) should have a positive impact on earnings. The management team has positioned Mytilineos as a leader among Greek companies in ESG practices. It is among the first companies to set net zero carbon emissions targets (by 2030 for SES and RSD and by 2050 for the entire group). Mytilineos is implementing a range of ESG measures, including adopting the UK Corporate Governance Code 2018, and has been scoring well with ESG ratings providers (including improving its score in seven out of eight ratings in 2020).

Mytilineos is a diversified industrial company operating in four main business areas: power generation/supply (P&G); alumina/aluminium production (Metallurgy); EPC of power and sustainability projects (SES); and renewables/energy storage development (RSD). A majority of its operations are in Greece; however, it has been increasing international exposure, particularly through its SES and RSD businesses. We estimate the share of EBITDA from SES and RSD to increase from a combined 15% in 2021 to 29% by 2025. We discuss each division’s activities in more detail, including the proportion of earnings from energy transition-related activities, in this section and the following sections.

We have undertaken detailed modelling of Mytilineos, which separates those areas of the business that relate to energy transition activities:

We discuss the trends, Mytilineos’s strategic activities and our assumptions for each of the four divisions in separate sections below. We summarise our detailed assumptions and financial forecasts by division in the financials section.

Exhibits 3 below presents our EBITDA forecasts for each division, along with the percentage of EBITDA that is derived from the energy transition (RES, decarbonisation and sustainability) activities. The areas we model that relate to energy transition include:

We expect EBITDA to increase by 84% over 2021–25e, implying a CAGR of 17%. EPS increases by 97% or a 18% CAGR. We forecast an increase in EBITDA from energy transition activities from 36% in 2021 to 65% in 2025. This is considerably higher than Mytilineos’s strategic target of >40% (in 2025), set in a strategic presentation dated September 2020.

Mytilineos had 206MW of renewable energy sources (RES) operating at end-2021. This comprises nearly all wind farms benefiting from favourable fixed tariffs of €98/MWh. Due to a significant improvement in the economics of solar, Mytilineos has switched its focus to investing in solar plants in Greece. Greece has particularly favourable conditions for solar with high sunshine hours and intensity. We estimate that Mytilineos will add 300MW pa of solar capacity over 2023–27, as it develops and keeps (build to keep) its mature pipeline of 1.5GW (mostly) solar projects in Greece (acquired in February). At €50/MWh, we estimate that solar projects can achieve project internal rates of return (IRRs) of 9% and equity IRRs of 17%, based on total installed costs of c €0.7m/MW and operating and maintenance (O&M) costs of €10/kW.

In the recent renewable auction (on 5 September) in Greece, there were not enough applications to achieve an 80% level of competition for the 1GW originally planned. Total awards of 538MW were made, of which 372MW was for solar PV and 166MW was for wind farms. The lowest winning bid for solar was €46/MWh compared to €33/MWh in the previous auction in May 2021. This not only demonstrates cost inflation but also developers’ decisions to pursue more lucrative power purchase agreements (PPAs) with corporates looking for energy security on the backdrop of record-high wholesale electricity prices (monthly average of €437/MWh in August).

Mytilineos is currently undergoing testing at its new 826MW CCGT plant and we assume it will ramp up to full production by end-2022. Based on this, Mytilineos will, we estimate, achieve a 20% share of domestic production in 2023.

In reaction to the European energy crisis and dramatic increase in gas prices, the Greek government has paused plans to retire its remaining lignite plants and is poised to switch gas thermal plants to run on oil or lignite. In addition, there has been a significant increase in shipments of liquid natural gas (LNG) into Greece over the first half of 2022. Greece’s LNG terminal on the island of Revithoussa received 39 vessels (equating to 1.7bcm) during H122, accounting for c 45% of all imported gas into Greece, according to LNG Prime. This compared with 15 shipments in H121, equating to 1.1bcm. LNG deliveries to Greece are expected to continue to rise in future as it reduces its reliance on Russian gas. The Revithoussa LNG terminal has a capacity of up to 7bcm pa, which is enough to cover Greece’s entire natural gas consumption (c 7bcm in 2020). In addition, Greece is building another LNG terminal in Alexandroupolis, with capacity of 5.5bcm pa. Mytilineos has dramatically increased the number of slots it has booked in the Revithoussa terminal. It has secured 20 slots for 2023–24, which equates to c 3bcm in total, roughly 20% of Greece’s natural gas demand (based on 2021 levels of c 7bcm pa).

Greece’s state-owned power utility PPC had previously committed to cease operating all its existing lignite-fired power plants (c 2.6GW) by end-2023; however, in light of the energy crisis there is a possibility this may be extended. Mytilineos’s new 826MW CCGT plant will add up to just over 4.5TWh from 2023, as its ramps up to full commercial production by end-2022. In addition, PPC plans to convert a coal-fired thermal plant under construction to a 1GW gas power plant 2025. Assuming a load factor of 50%, this could add another 4TWh. Mytilineos’s new CCGT will be the most efficient plant in Greece, and this coupled with Mytilineos’s ability to source large quantities of natural gas at relatively attractive prices should enhance the company’s competitive advantage in power generation.

We summarise our modelling assumptions in Exhibits 6 and 7 and discuss them in detail in the financials section.

Mytilineos owns Europe’s only integrated aluminium production facility, with aluminium capacity of 250kt (including primary aluminium capacity of 190kt), alumina capacity of 875kt and bauxite capacity of 650kt. It has proactively set emissions reduction targets to reduce total carbon dioxide (scope 1 and 2) emissions in the Metallurgy division by 65% and reduce specific emissions by 75% per tonne of aluminium produced by 2030 (relative to 2019 emission levels). Mytilineos’s management team has shown foresight in this area, as European standards are tightening, giving Mytilineos a competitive advantage over those European smelters that have been forced to catch up. As outlined in our December 2021 update note and expanded on in our themes report (published 21 March 2022), aluminium production is one of the most carbon-intensive industries, due to the high levels of electricity required for aluminium smelting. The aluminium industry must reduce its emissions by 77% by 2050 to meet global climate targets. Mytilineos’s strategy of sourcing renewable electricity and increasing its recycling capabilities put it at a competitive advantage versus many of its peers. We estimate that from 2025, Mytilineos’s entire primary production will qualify for a low carbon classification, which could lead to premium pricing (see our research reports referred to above). China accounts for more than 50% of global production, with 80% of Chinese production coming from coal-fired plants.

Intraday aluminium prices peaked at over $4,000/t on supply concerns following Russia’s invasion of Ukraine. Since then, demand concerns have taken over with manufacturing in China down and a strong US dollar, and daily prices have decreased to c $2,300/t in September. However, European price premiums remain strong at c $1,200/t as many countries and companies are refusing to purchase Russian aluminium. This equates to more than 50% of the spot prices and is helping support strong earnings for Metallurgy.

We summarise our modelling assumptions in Exhibits 10 and 11 and discuss them in detail in the financials section.

Through its Renewables and Storage Development (RSD) division, Mytilineos undertakes engineering, procurement and construction (EPC) projects for third parties along with its own renewables and energy storage developments, which are higher-margin BOT projects. The BOT projects are international projects, as Mytilineos typically keeps its own development projects in Greece, for instance the 1.5GW of solar projects being added to P&G in the coming years. RSD has been rapidly increasing its BOT development pipeline over the last couple of years (see Exhibit 12). As at end-H122, it had a total pipeline of 6.2GW, of which 2.5GW are mature or operating projects.

Unprecedentedly high wholesale gas and electricity prices across Europe, combined with Russia’s invasion of Ukraine, have accelerated energy security proposals in the EU and UK, which build on existing plans to reduce exposure to fossil fuels. Following Russia’s invasion of Ukraine, both the EU and UK have accelerated energy security measures to ensure less reliance on fossil fuels from volatile parts of the world such as Russia. The REPowerEU package and British Energy Security Strategy (BESS) paper set out ambitious plans where renewables will play an integral role. Mytilineos is well positioned to benefit. In our European renewables report, published on 30 May 2022, we conclude there is significant value coming into the sector and that renewables developers will be the main beneficiaries.

In addition, the European Commission has recently approved, under EU State aid rules, a Greek measure with an estimated budget of €341m to support the construction and operation of energy storage plants of up to 900MW. The measure will be partly funded by the RRF, following the European Commission’s positive assessment of the Greek Recovery and Resilience Plan and its adoption by the European Council. The measure aims at allowing a smooth integration in the Greek electricity system of an increasing share of renewable energy coming from wind and solar sources. Again, Mytilineos is well positioned to benefit. The support will be allocated as an investment grant in the construction phase and an annual incentive during the system’s operational life, for a term of 10 years. Energy storage developers will be awarded contracts by the end of 2023 and will be required to bring the proposed facilities online by end-2025.

We summarise our modelling assumptions in Exhibit 15 and discuss them in detail in the financial section.

In 2020, the former EPC & Infrastructure business was transformed into SES. We believe this marks a turning point for the business. In FY21, it delivered the strongest performance since FY18, with €33m of EBITDA, implying a 9% EBITDA margin (FY18: EBITDA of €55m, EBITDA margin of 15%). We forecast increasing revenues and improving profitability in the coming years, as the business expands into sustainable development infrastructure, while continuing to pursue opportunities in the construction of thermal plants and selected construction projects. SES is increasing its activities in areas such as solid and liquid waste management, hybrid and off-grid energy projects, energy upgrade projects and innovative first-of-a-kind energy projects (such as hydrogen projects). Sustainable development projects accounted for 15% of the committed order backlog of €1.2bn at end-H122, and there are mature projects worth €1.3bn that could potentially be converted to new orders, 39% of which are sustainable development projects. Recent conventional business wins for gas thermal plants in the UK and Poland have also helped increase the committed order backlog.

Since the start of the pandemic, governments globally have announced over $12tn in stimulus packages, including the United States with c $2tn and Europe with c $1tn (its €800m recovery fund). A sizeable portion of these funds are being allocated to sustainability projects. McKinsey estimates there are $1tn of unassigned energy and environmental projects for 2020–22.

We summarise our modelling assumptions in Exhibit 19 and discuss them in detail in the financials section.

We use a 10-year DCF analysis (on a SOTP basis), which better considers the longer-term impact of the energy transition. We place less emphasis on peer valuation, using it only as a cross-check.

Our DCF approach suggests a per-share valuation of €27.0, which implies c 85% upside versus the current share price (€14.65) and remains unchanged since our last published valuation. This is due to an uplift in valuation of the RSD division (+€2.1/share), despite an increase in WACC to 7.5% from 7%, being offset by the impact of the increase in WACC on our valuations for the other divisions combined with an adjustment to the number of shares used in our valuation (due to 4.5m shares previously repurchased by the company being awarded for free to senior executives).

If the WACC and number of shares had remained unchanged, our valuation would have increased by €5.0/share to €31/share, driven by increases valuations across all division, with the largest contribution from RSD of 30% (€1.9/share), and increases in Metallurgy, P&G and SES of 8% (€0.6/share), 8% (€0.7/share) and 0% respectively.

Key assumptions and drivers for our cash flow model are as follows:

We use peer valuation as a cross-check, rather than driving our valuation, as we believe near-term earnings multiples do not accurately reflect Mytilineos’s long-term growth prospects. In our approach, we apply EV/EBITDA multiples (using the current enterprise value (EV)) to peers for each division. We use 2023 EBITDA given that we are now more than halfway through 2022.

On first impression, the peer valuation suggests €25.4/share, which is €1.6/share below our valuation of €27.0. However, we do not believe the multiples adequately reflect the competitive strengths or the growth prospects of some of Mytilineos’s business units versus their peers:

We apply a 20% premium to multiples for each of these business units. Collectively, this would increase the valuation by c €2.4/share to an adjusted €27.8/share, which is 3% above our DCF valuation.

We estimate capex of c €630m in FY22, which includes upfront expenditure on BOT solar plants (developed for sale to third parties). Combined with our estimated working capital investment of c €150m, this equates to c €780m. This is an increase of c €270m on our previous estimate for capex plus working capital investment (of c €510m) and represents increased activity in BOT solar plants in the RSD division, where we have increased our sales forecast to 500MW pa over FY22–24 (previously 350MW, 400MW and 450MW respectively), along with increased working capital in P&G due to volatile gas prices.

For FY22, this will mostly be funded through operating cash flow (Mytilineos is highly cash generative) and the remainder through net debt. Based on our forecasts, from FY23, Mytilineos’s investment programme could be fully funded through operating cash flow; however, we note that the company should gain access to cheap capital through the European RRF, so will likely opt to use this for some of the renewables investment.

Net debt increased from €803m at end-FY21 to €945m at end-H122. We estimate the sale of 450MW of BOT solar plants in H222 should provide a positive contribution of c €430m to H222 cashflow, however, the proceeds will be mostly reinvested in future BOT projects, thus we forecast net debt will increase to c €1.1bn by end-FY22. However, due to the significant increase in EBITDA during FY22e, net debt to EBITDA will decrease to 1.7x (from 2.3x end-FY21), which is well below sector average.

We increase the effective tax rate in FY22 to 19% (from 17% previously), which is consistent with H122 results. We note that this is still below the Greek corporate income tax rate of 22% and reflects non-taxable items included in profit outweighing non-tax-deductible expenditures. We increase the effective tax rate to 20% by 2025 and 22% by 2030.

We adopt an average interest rate of 2.5% in FY22, which is roughly consistent with H122 results. This includes €500m green bonds issued in April 2021 with a maturity of 2026 and an interest rate of 2.25%. We reduce the interest rate to 2.0% by 2025 due to very low interest loans anticipated from the European RRF. We increase the interest rate gradually up to 3% by 2030.

On 20 April, Mytilineos awarded 4.5m of its previously repurchased shares to senior executives. Adjusting for this, the company held 4.6m of its own shares as at 30 June 2022. Based on company announcements, we calculate Mytilineos has repurchased a further 0.7m shares since 30 June 2022, with an estimated value of €10m based on an average price of €15 per share over the period. We reflect this in our cash flow statement and adjust the number of shares (excluding buybacks) to 137.4m. In last update note, published on 19 April, we estimated shares (excluding buybacks) of 134.4m. This was prior to the 4.5m share award.

We have decreased our aluminium price forecasts in 2022 to $2,800/t from $3,000/t to reflect a weakening of aluminium prices from Q2. This affects our forecasts for FY23 and FY24 due to an assumed lag of 18 months between spot prices and realised prices as a result of hedging/fixed price contracts. FY22 benefits from continued strong premiums of above $1,200/t (not hedged), equating to c 45% of spot aluminium prices.

Despite the recent decrease in aluminium price, we expect robust longer-term pricing, supported by the decarbonisation of aluminium (see our themes note published in March). We keep our 2023 price forecast at $2,800/t and increase our 2024 price forecast to $2,800/t (from $2,600/t) and our long-term price forecast (for 2025 onwards) to $2,500/t (from $2,400/t).

We assume premiums decrease from 45% of the aluminium price in 2022 (up from 40% previously) to 20% of aluminium price from 2025 onwards (remains unchanged). As noted in our recent aluminium themes report we believe that longer-term customers could be increasingly willing to pay an ‘additional’ premium for ‘low carbon’ aluminium. We do not take account of this in our long-term price or premium forecasts at this stage; however, we acknowledge potential upside in the future.

Due to increased raw material costs, we have increased our long-term renewables costs assumption to €45/MWh (from €40/MWh). This put downwards pressure on our long-term margin forecasts, however, this only partially offsets the upwards pressure from our long-term aluminium and alumina price assumption increases. Thus, our long-term margin assumption increases by €21/tonne.

The net impact of the above changes is a 13% increase in our EBITDA forecasts for FY22 and an 8% decrease for FY23 and FY24, normalising at a 5–8% increase by the second half of our 10-year forecast period. At a WACC of 7.0%, this results in an 8% increase to our valuation for Metallurgy; however, as we have increased WACC to 7.5%, our valuation stays more or less the same (down under 1%).

We have increased our wholesale electricity, gas and carbon price assumptions to reflect current market conditions. We assume the average gas price peaks at €140/MWh (daily average) in 2022 (previously €80/MWh), decreasing to €30/MWh from 2025 (unchanged); the average carbon price increases from €80/t in 2022 to €100/t from 2025 (previously €100/t from 2027); and the average wholesale electricity price peaks at €300/MWh (daily average) in 2022 (up from €200/MWh), decreasing to €75/MWh from 2025 (previously €75/MWh).

The above price assumptions result in favourable clean spark spreads (netted with earnings from the electricity supply business unit) for FY22–24, which we estimate (real) at €50/MWh (previously €31/MWh), €33/MWh (previously €31/MWh) and €29/MWh (previously €26/MWh) respectively, and are a consequence of Mytilineos operating the most efficient thermal plant fleet in Greece. Our long-term clean spark spread estimates remain roughly the same at c €20/MWh.

Mytilineos is seeking low-cost debt capital from the European RRF to contribute towards its 1.5GW of own build Greek solar plants. The terms of this funding are favourable, however, causing delays to the projects. We therefore assume a further six-month delay to these solar plants resulting in 300MW pa in each of FY23–27 (previously 150MW in FY22, 300MW pa in FY23–26, and 150MW in FY27). We thus reduce our capex estimate for FY22 to €154m (from €319m previously). We note our previous estimate also included a buffer for capex carried over from FY21, which has not materialised in P&G (but instead in RSD). Our capex estimates for FY23–26 remains unchanged, and we add €90m in capex to FY27 to represent the additional 150MW added to this year.

We assume the new CCGT plant starts production during H222 (previously H122) and ramps up to full capacity by year-end. We adopt a 20% load factor in FY22 (previously 30%) based on our estimated ramp-up profile. Once at full capacity (load factor of more than 60%), it will notably enhance the company's thermal fleet efficiency.

The net impact of the above changes is a 33% increase in our EBITDA forecasts for FY22 and increases of 7% and 9% for FY23 and FY24 respectively; the forecasts in the second half of our 10-year forecast period are slightly higher. At a WACC of 7.0%, this results in an 8% increase to our valuation for P&G; however, as we have increased WACC to 7.5%, our valuation stays more or less the same (c 1%).

To reflect the increasingly favourable environment for European renewables and Mytilineos’s growing renewable development pipeline, equating to c 6.2GW outside of Greece, we increase our forecasts for BOT project sales to 550MW in FY22 (previously 350MW) and 500MW pa from FY23 (previously 400MW in FY23 and 450MW in FY24). Cumulatively, we now forecast sales of 2.0GW over FY22–25 up from 1.7GW previously. This compares to a mature (and operating) project pipeline of nearly 2.5GW (as at end-FY21), thus there could be potential to further increase our sales forecasts.

We extend our sales assumption of 500MW pa over our entire forecast period (previously increased from 500MW in FY25 to 700MW in FY31). This is for modelling simplicity as we assume that the proceeds from BOT sales are reinvested in future projects, thus zero growth capex is required from FY23. In FY22, we assume net capex of c €350m as BOT sales ramp up from 189MW in FY21 to 550MW in FY22, before reaching a steady state at 500MW pa. Our 10-year forecast BOT sales equate to c 5.0GW, which is less than the company’s existing international pipeline of 6.2GW, however allows for some projects not coming to fruition.

Due to supply chain and inflationary pressures, we increase our cost per MW assumptions to €0.70m/MW for EPC contracts (previously €0.60m/MW) and €0.75m/MW for BOT projects (previously €0.65m/MW).

Furthermore, due to favourable market conditions (ie high energy prices), we increase our margin assumptions on BOT projects from 12% across the entire forecast period (equating to c €100/kW) to 16% in FY22 (equating to c €150/kW), 21% in FY23 (equating to c €200/kW) and 23% in FY24–25 (equating to c €225/kW). We then reduce it gradually to c €175/kW by the end of the forecast period. Due to Mytilineos’s strong balance sheet, it has the flexibility to ensure margins are optimised on each project sale. For simplicity, we model the company’s international pipeline as BOT only (and not build to keep), however, we note that keeping, in the short term, some solar plants with exposure to the current high merchant prices could further increase value accretion in RSD. There would of course be near-term capital and cash flow implications too.

For EPC sales, the firm and mature project backlog at the end of H122 was 451MW, up from 351MW at the end of FY21; thus, we increase our EPC sales forecast for FY22 to 450MW (previously 400MW). As Mytilineos is shifting its focus to higher-margin BOT projects, we reduce our FY23–25 sales forecasts to 500MW, 550MW and 600MW respectively from 600MW, 750MW and 800MW respectively.

The net impact of the above changes is an increase in our EBITDA forecasts for FY22, FY23 and FY24 by 104%, 102% and 89% respectively. At a WACC of 7.0%, this results in a 29% increase to our valuation for RSD; however, as we have increased WACC to 7.5%, our valuation increases by 16%.

We keep our forecasts the same for SES. As we adopt a half year period (H222) as the first period of our DCF, at a WACC of 7.0%, this results in a slight (c 1%) increase to our valuation for SES, in recognition of a stronger H2 (than H1); however, as we have increased WACC to 7.5%, our valuation decreases by 6%.