Mytilineos — Well placed to benefit from renewables

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It is well funded to support its investment plans. It has a strong balance sheet with financial flexibility of over €1.4bn, having raised €500m in ‘green’ bonds in April 2021. This is augmented by strong operating cash flow across all areas of the business.

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Its RSD division undertakes EPC projects for third parties along with its own renewables and energy storage developments, which are higher margin. It has the flexibility to sell its own development projects, opportunistically, at the right price, generating significant cash flow for recycling back into the development portfolio, which includes expanding its renewables operating asset base.

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Generally, Mytilineos plans to develop and keep its renewable assets in Greece and sell its international renewable assets under a build, operate and transfer (BOT) model. However, due to Mytilineos’s financial strength it has the flexibility to keep and operate its BOT assets over the short term to benefit from the current high wholesale electricity prices. Moreover, Mytilineos is able to build these assets using its own balance sheet, without project financiers requiring a power purchase agreement (PPA) in advance before commencing construction of the renewable project. This is highly favourable in the current environment.

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As well as its ‘green’ bonds, we believe Mytilineos is well placed to gain cheap financing through the European Recovery fund, with Greece’s allocation expected soon. In addition, again under an EU initiative to help decarbonise high-emitting industries such as the aluminium industry, Mytilineos is expecting cash injections in lieu of carbon costs paid in its aluminium business. The company suggests that for every $1 of carbon emissions cost paid, it could get in return $2–3 in cash as a rebate, equating to over €100m pa of effective capital over the next few years.

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2% pa inflation applies to forecasts made in real terms over a 10-year explicit cash flow period, except for 2022 where we assume 5% inflation, in line with the European Central Bank’s current outlook.

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A 1% terminal growth rate for Metallurgy, Power & Gas (P&G) and Sustainable Engineering Solutions (SES), and 2% for RSD, which is conservative, particularly for businesses that should benefit from strong long-term growth rates associated with the energy transition.

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We keep a WACC of 7.0%, based on a beta of 1.0x, a cost of equity of 10.7% and a gross cost of debt of 2.5% (with total debt at an assumed 40% of capital). We believe that pressures on cost of capital from the currently inflationary environment are offset by Mytilineos’s potential access to future capital through the European recovery fund at very attractive interest rates (possibly close to zero).

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Terminal capex (included in the terminal cash flow) for the P&G and Metallurgy divisions representing 1.5x depreciation.

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RSD and SES are not capex-intensive businesses (although there are significant working capital requirements for RSD); however, we adopt capex assumptions equating to 2.0–2.5x throughout our forecast periods.

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We use the number of shares excluding share repurchases (134.3m) in arriving at our value per share of €27. This is consistent with using the number of shares in issue (142.9m), but with adding Mytilineos’s investment in its own shares (c 8.6m shares repurchased) to the equity valuation.

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The SES division benefits from superior margins and growth compared to its peer group, with a 2022e EBITDA margin of 10% versus 8% for peers and an EBITDA CAGR of 23% in 2021–24e versus 11% for peers.

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The RSD division enjoys significantly higher growth prospects compared to its peers (EBITDA CAGR of 50% in 2021–24e versus 15% for its peers).

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The Metallurgy division benefits from superior margins (2022e EBITDA margin of 28% versus 20% for its peers) and is an early mover in the transition to green and sustainable aluminium. Many of its peers are Asian, operating production facilities using captive coal plants; they will need to invest heavily as they come under increasing pressure to decarbonise. It also has favourable growth prospects (EBITDA CAGR of 19% in 2021–24e versus 6% for its peers).

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The renewable energy sources (RES) power generation business (within the P&G business unit) has higher long-term growth prospects than its peers, with an EBITDA CAGR of 14% in 2021–24e versus 7% for its peers, and we expect growth beyond 2023 will also be higher than its peers as we estimate that it adds solar capacity of 300MW pa in 2022–26. In addition, margins are higher (2022 EBITDA margin of 77% vs 65% for its peers).

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The earnings benefit from the new combined cycle gas turbine (CCGT) plant, which we expect to start ramping up production during H121, is only partially included in our 2022 EBITDA forecast (for CCGT plants) as we expect the plant to ramp up production over H122.

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We have increased our aluminium price forecasts to reflect an increase in Bloomberg consensus prices over 2022–24. Our long-term aluminium price (real) assumption increases to $2,400/t (from $2,200/t previously), and we assume $3,000/t, $2,800/t and $2,600/t in 2022–24 respectively, although note that due to hedging/fixed price contracts Mytilineos typically realises these prices with a c 18 month lag, which was not fully appreciated in our previous forecasts.

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We assume premiums decrease from 40% of the aluminium price in 2021 and 2022e to 20% of aluminium price from 2025 onwards. As noted in our recent decarbonisation of 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.

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We make some changes to input costs, based on FY21 results and current market conditions. The most notable changes are from FY24 as the company has a fixed-price power purchase agreement, which terminates at the end of 2023. From FY24, we assume power is sourced from the new CCGT plant (c 30%, and mostly overnight when gas prices are cheaper) and low-cost solar (c 70%, a combination of third-party power purchase agreements and the company’s own planned solar plants). This results in an estimated increase in power costs to €50/MWh (real) in FY24 followed by a reduction to €40/MWh (real) from FY25.

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The net impact of the above changes is an 11% decrease in our EBITDA forecasts for FY22 and a 3% decrease for FY23, followed by a 25% increase in FY24 normalising at a 5–8% increase by the second half of our 10-year forecast period. This results in an increase to our valuation for Metallurgy.

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We have increased our wholesale electricity price, gas price and carbon price assumptions to reflect current market conditions. We assume the average wholesale electricity price peaks at €200/MWh (daily average) in 2022, decreasing to €75/MWh from 2025; the average gas price peaks at €80/MWh (daily average) in 2022, decreasing to €30/MWh from 2025; and the average carbon price increases from €70/t in 2022 to €100/t from 2027.

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The above price assumptions should have a favourable impact on the clean spark spread for the company over FY22–24, with estimates (real) of €35/MWh, €30/MWh and €25/MWh respectively, and are a consequence of Mytilineos operating the most efficient thermal plant fleet in Greece. This is notably higher than our previous estimates of clean spark spreads of c €19/MWh, €18.5/MWh and €18/MWh respectively, and is the main driver for our earnings increase for the P&G division. Our long-term clean spark spread estimates remain roughly the same at c €17.5/MWh.

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FY21 reported capex was €380m, which was €100m below our forecast (c €480m). We therefore assume a six-month delay to own build Greek solar plants resulting in 150MW in FY22, 300MW pa in each of FY23–26, followed by 150MW in FY27. In addition, we assume the 43MW wind farm under construction is fully operational in FY23 (versus FY22 previously). The impact of these changes mildly offsets the increase in our near-term forecasts due to an estimated higher clean spark spread.

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We continue to assume the new CCGT plant starts production during H122 and ramps up to full capacity by year-end. We adopt a 30% load factor in FY22 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.

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To reflect Mytilineos’s growing renewable development pipeline, equating to c 5GW outside of Greece, we increase our forecasts for BOT projects over the period FY22–25e. Cumulatively, we now forecast 1.7GW over the period, up from 1.4GW previously. This compares to a mature (and operating) project pipeline of nearly 2GW (as at end-FY21), thus there could be potential to further increased our volume sales forecasts.

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In addition, we forecast continued momentum post-FY25 and therefore also increase our BOT forecasts for the second half of our 10-year forecast period. Our 10-year forecast BOT sales equate to 5.5GW, which compares to the company’s existing international pipeline of 6GW. We do not believe that all projects in the company’s existing pipeline will be successful and therefore implicitly assume that there will be a continued inflow of projects into the pipeline. Due to the capital intensity of BOT projects, we increase our working capital assumptions over FY22–31.

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Furthermore, due to favourable market conditions (ie high energy prices), we increase our margin assumptions on BOT projects from 11% to 12% over our entire 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 working capital implications too.

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For EPC sales, the firm and mature project backlog at the end of FY21 was 351MW, down from 589MW; thus, we decrease our EPC forecasts for FY22 and FY23 from 550MW and 700MW respectively to 400MW and 600MW respectively. As we expect an acceleration in renewable projects in the medium term, particularly in Europe, we keep our forecasts the same from FY24 onwards, and note that there could be further upside to these.

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The decrease in forecast near-term EPC sales only partially offsets the increase in BOT project sales, thus our earnings forecast and valuation for RSD increases.

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SES achieved an EBITDA margin of 9% in FY21, which was below our forecast of 11%. We therefore lower our FY22 and FY23 margin assumptions to 10% and 11% respectively (from 12% previously) and keep our long-term EBITDA margin estimate at 12% from FY24. This is in appreciation of the SES business continuing to turn-around and that it consistently achieved an 18–20% EBITDA margin over FY11–18.

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Our volumes sales forecasts remain unchanged. The firm order backlog has decreased from €1.0bn at end of FY20 to €0.8bn at end of FY21. However, the mature pipeline (not including firm orders) has increased from €0.5bn to €1.6bn over the same period.

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The net impact of the above changes is a decrease of 17% and 8% in our EBITDA forecast for FY22 and FY23 respectively, with FY24 onwards remaining unchanged. This results in an increase to our valuation for Metallurgy.