mytilineos: quick snapshot

Analyst: Alex Boulougouris, CFA Prague: +420 222 096 274E-mail: [email protected] Website: www.wood.cz

EQUITY

RESEARCH

Industrials, Greece July 7, 2014

Initiation of coverage

Buy

Strong FCF paves the way for future growth

Mytilineos Price: EUR 6.34

Price target: EUR 8.50

We initiate coverage of Mytilineos Group with a BUY rating and a EUR8.5 price target (PT) (sum-of-the-parts valuation), implying c.34% totalreturn potential. Mytilineos is a leading industrial group in Greece,trading at very cheap valuations, at an EV/EBITDA of 5.1x and a PE of9.6x, on our 2015 estimates. The stock is also trading with an eye-catching free cash flow yield of over 20%! Mytilineos is deleveraging fastand we expect the net debt to EBITDA to fall below 1x by end-2015E. Thisprovides Mytilineos with huge firepower for growth through acquisitionsin a recovering economy with very low asset values.

Leading industrial group in Greece: Mytilineos is a leading industrial groupin Greece, active in three key business segments: 1) Engineering-Procurement-Construction (EPC) projects focused mainly on the energysegment (through listed subsidiary METKA); 2) Metals and Metallurgythrough the ownership of bauxite mines, an alumina refinery and analuminium smelter; and 3) Power and Gas, with a portfolio of energyassets, with a total installed capacity of 1,200 MW, with the main focusbeing on two thermal plants. Across the cycle, the operating profitability issplit relatively equally among the three business segments.

Organic growth opportunities muted, but scope to accelerate via M&A:unlike most of the Greek stocks in our coverage list, Mytilineos is not a2016 or 2017 organic growth story. We expect EBITDA to remain relativelystable over the next three years, with strong growth in the Aluminiumbusiness offset by weaker results from the EPC segment. However, webelieve that: 1) there is strong EPS growth ahead thanks to the deleveraging;2) there is upside risk in our forecasts; 3) there is a natural hedge betweenthe three business segments, providing good diversification and relativestability; and 4) the group is under-leveraged, with substantial capacity togrow through acquisitions.

Eye-catching free cash flow yield: the net debt has been reduced from EUR722m at the end of 2012 to below EUR 400m today, i.e., a reduction ofover EUR 300m in less than two years, or c.40% of the current marketcapitalisation! We expect free cash flow generation of c.EUR 180m,implying a massive free cash flow yield of c.25%, or 20% if we exclude thecash generated by the EPC segment that goes to the minorities. The massivereduction in net debt implies huge capacity to expand through acquisitionsin the next two years. In our view, management has a very strong trackrecord of value-adding acquisitions.

Valuation cheap: over the past two years, the stock has performed in linewith the ASE index, but has underperformed many non-financial names.We do not believe that the market has realised the huge generation of freecash, nor its ability to sustain the EBITDA levels. As a result, we believe thevaluation is now very appealing, trading at an EV/EBITDA of 5.1x and a PEof 9.6x, on our 2015 estimates.

Prefer Mytilineos over METKA: we prefer Mytilineos over METKA, which isalso very cheap but is suffering from a challenging market environment.METKA is a great story for dividend-orientated investors, in our view, butwe believe that the expansion opportunities ahead make the Mytilineosstory more appealing.

Expected Events

2Q14 results 7 August 2014

Key Data

Market Cap EUR 741mFree Float 63%Shares Outstanding 116.9mAverage daily volume EUR 1.9mMajor Shareholder founding family c.31.0% Reuters Code MYTr.ATBloomberg Code MYTIL GAASE Index 1,243.8

Price Performance

52-w range (EUR) 3.95-7.24YTD EUR Performance 12%Relative EUR Performance (vs ASE Index) 7%

Mytilineos share price performance

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mytil ga Equity ASE Index

( EUR m) Sales EBITDA Net EPS EPS P/E EV/EBITDA P/BV FCF ROICProfit grow th ( x) ( x) ( x) Yield

2017E 1,227 257 104 0.89 13.5% 7.1 4.4 0.66 22% 10.2%2016E 1,212 255 91 0.78 18.9% 8.1 4.7 0.71 25% 10.3%2015E 1,269 254 77 0.66 33.6% 9.6 5.1 0.76 25% 10.4%2014E 1,322 252 58 0.49 143.9% 12.9 5.5 0.80 27% 9.8%2013 1,403 235 23 0.20 13.4% 28.2 6.0 0.77 33% 8.0%2012 1,454 168 19 0.18 -55.0% 25.1 8.5 0.65 -11% 4.7%

Mytilineos Group 2 WOOD & COMPANY

Contents

Investment case and key risks ........................................................................... 3

Valuation ........................................................................................................... 6

Mytilineos: quick snapshot ................................................................................ 9

Metallurgy & Mining: can only get better ........................................................ 11

EPC business: the problem of too much cash ................................................... 16

Power and Gas: predictable EBITDA? .............................................................. 20

Group financials ............................................................................................... 23

Financial tables ................................................................................................. 26

Important disclosures ....................................................................................... 28

Closing Prices as of 4 July 2014 © 2014 by WOOD & Company Financial Services, a.s. All rights reserved. No part of this guide may be reproduced or transmitted in any form or by any means electronic or mechanical without written permission from WOOD & Company Financial Services, a.s. This book may not be lent, resold, hired out or otherwise disposed of by way of trade in any form of binding or cover other than that in which it is published without written permission from WOOD & Company Financial Services, a.s. Requests for permission to make copies of any part of the book should be mailed to: WOOD & Company Financial Services a.s. Palladium, Namesti Republiky 1079/1a, 110 00 Prague 1 — Czech Republic tel.: +420 222 096 111 fax: +420 222 096 222 http//: www.wood.com


Investment case and key risks We initiate coverage on Mytilineos Group with a BUY rating and a EUR 8.5 price target (PT) (sum-of-the-parts valuation), implying c.34% total return potential. Unlike many Greek stocks, Mytilineos is not a 2016 or 2017 organic growth story. Mytilineos is, in our view, a severely under-priced story today. The stock is trading at an EV/EBITDA of c.5.1x, on our 2015 estimates, and it has one of the highest free cash flow yields in the market (over 20%). This strong cash generation implies a fast reduction in net debt and substantial capacity to grow through acquisitions in the next two years. We believe this huge firepower in a distressed market and the solid track record of value-adding acquisitive growth make for a very appealing investment proposition.

Industrial group with good diversification: Mytilineos is active in three key business segments: 1) Engineering-Procurement-Construction (EPC) projects through 50% subsidiary METKA, focused mainly on energy projects and CCGT plants; 2) Metals and Metallurgy through 100% subsidiary Aluminium S.A., which is the owner of bauxite mines, an alumina refinery and an aluminium smelter; and 3) Power and Gas, with a portfolio of energy assets, with a total installed capacity of 1,200 MW, with the main focus on two thermal plants. Although Mytilineos appears rather complicated at first glance, we believe the current structure provides a natural hedge on commodity cycles and a relatively stable operating profitability and cash flow.

Mytilineos is not an organic growth story: after a very strong 2013, we expect the group EBITDA to stabilise at c.EUR 250-260m over the next three years. The main growth driver should be the Aluminium business, in our view, driven by the substantial efficiency drive and the gradually improving aluminium prices. As a result, we expect the Metals & Metallurgy business segment to account for c.40% of total EBITDA from 2016E-onwards vs. 20% in 2013. On the negative side, we expect the operating profitability of the EPC segment to drop in our 2015-17E forecast period after a very strong 2014E, mainly on the challenging environment in replenishing EPC projects in the region and the lower margins from new Greek contacts. However, there could be upside risk in our forecasts as METKA has a very strong track record in gaining new projects and timing is on its side (with a strong backlog to sustain a good EBITDA for 2014E and 2015E). From Power and Gas, we expect a rather stable EBITDA trend (EUR 70-80m), driven by the capacity payments. Upside risk could come from the expansion into the supply market.

Reducing net debt at a very fast pace: Mytilineos Group entered the Greek debt crisis in an expansion phase as it had increased leverage for new investments, particularly in the energy segment through the construction of two thermal plants. As a result, its net debt reached a peak of EUR 722m in 2012, with the net debt to EBITDA at 4.3x. However, Mytilineos has emerged a winner from the crisis. Net debt is already below EUR 400m and we anticipate the net to EBITDA at a low 1.4x by year-end 2014E and below 1x by end-2015E.

Huge free cash flow (yield of >20%): in 2013, the company generated free cash flow of EUR 220m and reduced its net debt by EUR 215m. In 2014E, we expect free cash flow of EUR 200m and a further reduction in net debt by EUR 150m. Thus, in 2013 and 2014E alone, the company should generate free cash flow of c.EUR 420m, or over 50% of the current market capitalisation! We believe this is unique among the Greek peers and we expect the company to continue to generate a free cash flow of c.EUR 180m annually, implying a huge free cash flow yield of >25% (or >20% if we exclude the cash flow generated by METKA and which goes to minorities). The reason for the high free cash is the reduction in capex from 2013-onwards as the thermal plants and the efficiency drive of the Aluminium smelter was completed. On average, out of the EUR 180m of group free cash flow, around EUR 80-90m is derived from METKA, EUR 50m comes from the thermal plants and the remaining EUR 40-50m from the Metals & Metallurgy business.

Market environment challenging, but group emerging stronger from the crisis: the market environment is currently difficult in EPC (tough competition, turmoil in the Middle East), the Greek electricity market for IPPs (abolition of VCRM) and aluminium (LME prices at extremely low levels). Still, in such a challenging environment, the group is expected to generate a record-high EBITDA of c.EUR 250m this year, on our numbers, due to the cost efficiencies achieved in the aluminium business and the capacity payment


from the Power & Gas segment. This should, in our view, enable the company to continue on its deleveraging path and lay the ground for a new expansion phase.

New acquisitions ahead: the fast reduction in debt implies that the group will be under leveraged by the end of 2015E, with a net debt to EBITDA ratio of around 1x. However, we believe that this is unlikely and expect management to explore acquisition opportunities. On our calculations, Mytilineos has firepower of over EUR 300-400m for acquisitive growth over the next two years. Management has already guided that it could be interested in the mini PPC (when the sale takes place) or nickel producer Larco.

Can management add value through acquisitions? We believe that its overall track record is positive. The company has made two big transformational acquisitions in its history (METKA and Aluminium of Greece) and a large green-field investment in two thermal plants. In our view, these investments were successful and added value for Mytilineos’s shareholders. On the negative side, the group has made some smaller acquisitions that turned out to be NPV-negative, such as Hellenic Vehicles Industry. ROIC at a group level stood at 8% in 2013 (slightly below our calculated WACC), but we expect it to exceed the cost of capital from 2014E-onwards (we forecast c.10% ROIC in 2014E).

Multiples and sum-of-the-parts (SOTP) valuation very appealing: Mytilineos trades at a 2015E EV/EBITDA of c.5.1x, a PE of 9.6x and a free cash flow yield of above 20%. Although there are no comparable companies with a similar structure and business activities, we believe the current spot multiples are very attractive. Our SOTP valuation confirms our bullish view on the stock. We use a DCF to value the EPC segment (METKA) and the two thermal plants. The Metal & Metallurgy segment (Aluminium S.A.) and renewable energy are valued with multiples (EV/EBITDA). The enterprise value is reduced by the net debt as of year-end 2013 for each business segment. The value is split relatively evenly between the three key business segments (EPC, energy and Metals & Metallurgy). Although in terms of EBITDA the EPC business currently has a higher contribution vs. the other business segments, we expect operating profitability to normalise in the following years (EPC declining, but Metals & Metallurgy improving).

We prefer Mytilineos over METKA: METKA is the cash cow of the group, with a strong backlog and a large net cash position (over EUR 200m). However, at this point in the cycle, we prefer to BUY Mytilineos due to the expansion opportunities ahead, the solid management track record, the low multiples and the eye-catching free cash flow yield. We believe METKA is a great investment for dividend-orientated investors but with risks in replenishing the existing high margin EPC backlog.

Risks

Domestic macros. We expect an improvement in the GDP readings from 2014E-onwards, with growth rates picking up gradually. Although key leading indicators point to an improving economic outlook, the political environment remains fragile and could derail the recovery process. Long-term GDP trends also remain uncertain and fragile despite the recent progress and good leading indicators.

Geopolitical risks (mainly in the EPC segment): nearly 50% of METKA’s operating profits in 2014E and c.20% of group EBITDA are derived from Syria and Iraq. The contribution of these two countries is likely to fall, going forward, as the projects are completed. However, it does highlight that METKA is active in a region with huge geopolitical risks that could affect earnings substantially.

Challenging environment for new EPC projects: energy projects in Greece, the Middle East and SEE (including Turkey) are moving relatively slowly currently. The turmoil and the tough competitive landscape mean a relatively low project intake. The recent backlog expansion at METKA comes mainly from Greek infrastructure projects, which are relatively lower margin vs. the EPC segment.

Regulatory risks in the energy segment: our EBITDA forecasts for the Power and Gas sector depend on the capacity payment (i.e., a subsidy offered to IPPs to maintain their capacity). The future direction and structure of the market remain uncertain and could lead to a lower capacity payment and ROICs in this business segment.

Commodity prices and FX movements: the aluminium business (which accounts currently for more than 20% of group EBITDA) is a price taker. The prices are quoted on the


London Metal Exchange in USD. This FX risk is expected to grow in the next few years as we anticipate the aluminium business to be a key growth driver going forward.

Input costs: the company has made a strong effort to improve the efficiency of the aluminium business over the past two years. Still, operating profitability is heavily dependent on input costs (natural gas, electricity, raw materials). In addition, the company is still involved in a dispute with the Public Power Corporation over a favourable electricity price for the aluminium smelter.

Reinvestment risk: the company has a strong cash flow and is reducing its net debt at a fast pace. We expect management to proceed with new acquisitions in the next few years. Although we believe the track record in acquisitions is positive, there is a risk that new acquisitions could be value destructive for shareholders and in segments not related to the three key business activities of the group.


Valuation We value Mytilineos with a SOTP valuation since it is active in three distinct business segments. We use a DCF to value the EPC segment (METKA) and the two thermal plants. The Metal & Metallurgy segment (Aluminium S.A.) and renewable energy are valued with multiples (EV/EBITDA). The enterprise value is reduced by the net debt as of year-end 2013 for each business segment.

The value is split relatively evenly between the three key business segments (EPC, energy and Metals & Metallurgy). Although in terms of EBITDA the EPC business currently has a higher contribution vs. other business segments, we expect operating profitability to normalise in the following years (EPC declining but Metals & Metallurgy improving).

The stock is attractively valued, in our view, trading at 5.1x EV/EBITDA on our 2015 estimates and a PE of 9.6x, and a very strong free cash flow yield of >20%.

On our PT, the stock would trade at 6.1x 2015E EV/EBITDA, which we find very reasonable in view of the strong cash generation, the diversified asset base and the stable operating profitability.

Mytilineos: SOTP

Source: Wood Research *Korinthos Plant and EPC equity value refer to Mytilineos’ stake

EPC segment

We value the EPC segment with a DCF valuation, deriving an equity value of EUR 340m. Our key assumptions are:

A WACC of 15%, based on a beta of 1x, a risk free rate of 10.5% and a risk premium of 4.5%.

The appropriate risk free rate is a challenge in the valuation of METKA. More than 50% of the backlog is derived from Syria and Iraq currently. The only proxy we can use as a weighted average risk free is Egypt (10-year bond yield at 15%). Thus, the 10.5% risk free is an average between the Greek bond yields (c.6%) and this proxy (c.15%).

WACC equal to the cost of equity as METKA has zero debt.

Explicit forecasts up to 2017, stable growth period from 2018 to 2023. Growth in after-tax EBIT of 2% in the stable growth period. Zero perpetual growth, i.e., an assumption that WACC is equal to ROIC.

The DCF valuation is very sensitive to WACC. If we assume a WACC of 12% (rather than 15%), the PT increases to EUR 17.0 per share, all else being equal.

On top of the DCF value of EUR 340m, we also value separately the management fee that METKA pays to Mytilineos (EUR 6m per year). We value this as a perpetuity at METKA’s cost of equity, adding another EUR 31m to the EPC segment.

We double check our DCF value for METKA with a peer group valuation. On 2014E and 2015E earnings, METKA trades at very deep discounts to selected EPC contractors

Valuation Method Valuation Stake EV Net debt Equity value

Metal & Metalurgy EV/EBITDA 100% 665 150 515

Protergia plant DCF 100% 311 110 201

Korinthos plant DCF 65% 309 180 84

RES EV/EBITDA 100% 65 10 55

EPC DCF 50% 487 -192 340

EPC management fee Terminal value 30 0 30

Group EV 1,867 258 1,224

Less: parent net debt (2013) 250

Less: group overheads 59

Group Equity Value 915

Group equity value per share 7.8

DCF / Share year end 2014 8.5


globally. Thus, unlike most Greek stocks, METKA is cheaper vs. its peers on near-term earnings but trades closer to its peers from 2016E-onwards. This reflects the strong current backlog for METKA and the expectations that earnings will normalise (at lower levels) from 2016E-onwards as the market environment for EPC contractors remains challenging.

METKA: discount cash flow model

Source: Wood Research

EPC peers

Source: Bloomberg, Wood Research

Metals and Metallurgy

We value this division through a peer group comparison. Aluminium S.A. has made a huge effort to improve its competitiveness over the past three years and is now on a par with the international averages on the global cost curve.

EV/EBITDA multiples vary substantially among the peers. Since Aluminium has managed to reposition itself on the global cost curve and is now in line with the international averages, we believe it is reasonable to apply the average peer group multiples to value this business segment.

Multiples valuation


2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Terminal Value

EBIT 111 96 82 81 82 84 86 87 89 91 93

Less: Tax 19 16 14 14 14 14 15 15 15 15 16

After tax EBIT 92 79 68 67 68 70 71 72 74 75 77

- WC Change 39 -31 -29 3 3 4 4 4 4 4 0

+ Depreciation 4 4 5 5 5 5 5 5 5 5 0

- Capital expenditure 3 4 5 5 10 11 11 11 11 11 0

Free Cash Flow 54 111 97 57 59 60 62 63 64 65 77

WACC 15.0%

Discounted FCF Sum (10 years) 360

+ Discounted terminal value 127

Perpetual growth rate 0.0%

= Total EV 487

+ Net Debt -192

= Total 662

2014 2015 2016 2014 2015 2016 2014 2015 2016

JGC Corp 15.7 17.3 15.0 5.6 6.2 5.4 1.5% 1.6% 1.4%

Petrofac Ltd 11.6 9.4 8.2 7.3 5.7 5.0 3.3% 3.2% 3.6%

SNC - Lavalin Group 43.3 23.2 30.0 13.1 13.4 11.7 1.6% 1.7% 1.8%

AMEC 13.8 12.2 11.5 9.7 8.9 8.4 3.3% 3.8% 4.1%

Jacobs Engineering 16.2 13.0 11.4 9.5 7.5 6.7 0.0% 0.0% 0.0%

AKER Solutions 16.5 12.5 11.0 7.7 6.8 6.3 3.6% 3.9% 4.0%

KBR 29.0 14.5 10.1 7.6 5.2 4.5 1.0% 1.9% 3.1%

Toshiba Plant Systems 14.0 12.8 12.8 4.0 3.7 3.7 1.0% 1.0% 1.0%

Fluor Corp 18.1 15.0 13.1 7.6 6.6 5.8 0.8% 1.1% 1.1%

Kvaener and Kentz 7.1 11.0 12.8 2.9 4.0 4.8 9.2% 9.7% 10.1%

Foster Wheeler 18.5 14.6 12.9 9.7 8.1 7.4 0.0% 0.0% 0.0%

Median 16.2 13.0 12.8 7.6 6.6 5.8 2.3% 2.5% 2.8%

METKA 7.7 8.9 10.4 3.8 4.0 4.3 9.8% 9.7% 9.6%

CompanyP/E EV/EBITDA div yield

2014E 2015E 2016E

EV/EBITDA multiple 10 8.2 7.1

EBITDA 65 81 96

EV 645 664 685

EV average 665

Net debt 150

Equity value 515


Aluminium peers

Source: Wood Research, Bloomberg

Energy

We value this division with a DCF on the two power plants. The renewable assets are valued at 5x EBITDA but account for a small part of the segment’s equity value. We assume an EBITDA of c.EUR 60m for the two thermal plans, which, in essence, is the capacity payments received for the 880MW CCGTs. Thus, we value these capacity payments as perpetuity as we assume very low capacity utilisation going forward. Consequently, the total equity value stands at EUR 330m vs. a total construction cost of EUR 532m for the two thermal plants (i.e., a discount of >30% on replacement value).

Valuation of thermal plants

Source: Bloomberg, Wood Research

Our estimates are in line with the street’s

Our estimates for 2014 and 2015 are close to the street consensus. However, we do caution that coverage is relatively low (according to Bloomberg, there are only five analysts covering the stock).

Wood’s estimates vs. the Bloomberg consensus

Source: Wood Research, Bloomberg

EV/EBITDA

2014E 2015E 2016E

Alcoa 10.0 8.4 7.7

Century Aluminium 12.5 8.2 8.0

Aluminium Corp of China 20.9 14.8 10.6

Kaiser Aluminium Corp 8.1 7.1 6.6

United Co Rusal 16.3 13.1 11.3

Alumina Ltd 55.8 33.4 24.1

AMAG Austria Metall 8.3 7.0 6.0

Hindalco Industries 10.7 8.4 7.1

Shandong Nanshan Aluminium 5.3 4.6 4.4

Kvaener and Kentz 5.9 4.2 3.6

Noranda Aluminum Holding 8.5 5.0 4.0

Median 10.0 8.2 7.1

DCF - Korinthos plant DCF - Protergia plantWACC 7.8% WACC 7.8%

Discounted FCF Sum (30 years) 309 Discounted FCF Sum (30 years) 311

+ Discounted terminal value 0 + Discounted terminal value 0

Perpetual growth rate 0.0% Perpetual growth rate 0.0%

= Total EV 309 = Total EV 311

+ Net Debt 180 + Net Debt 110

- Minority interest (fair value) 0 - Minority interest (fair value) 0

= Total 129 = Total 201

65% stake for Mytilineos 84 100% stake for Mytilineos 201

EUR m 2014E 2015E 2016E 2014E 2015E 2016E

Wood estimates 252 254 255 58 77 91

Bloomberg consensus 250 245 261 55 72 87

Difference 0% 4% -2% 4% 7% 5%

EBITDA Net profit


Mytilineos: quick snapshot

Brief History

Mytilineos is a Greek industrial group active in Energy, Metallurgy and EPC projects. The company was established in 1990, evolving from a family-owned metallurgy business that began operations in 1908.

In 1998, Mytilineos acquired a majority stake in METKA, a leading metal construction group in Greece at the time. In 2005, Mytilineos acquired Aluminium of Greece from Alcan. In the past 10 years, the company has also expanded into energy production and is currently the leading independent energy producer in Greece.

The company has three main activities currently:

Engineering-Procurement-Construction EPC: subsidiary METKA is a leading international EPC (Engineering-Procurement-Construction) contractor, active within the energy, infrastructure and defence sectors. Within the EPC business, METKA is focused on constructing major power plant projects throughout Europe, the Middle East and Africa, with strong emphasis on highly-efficient combined cycle gas turbine technology. The EPC segment is the largest contributor to group profitability (accounting for nearly half of all the EBITDA).

Metallurgy & Mining: vertically-integrated operations, as the company owns the bauxite mines, an alumina refinery and an aluminium smelter. Production capacity in alumina is 810k Mt and 175k Mt in aluminium. This business segment contributed nearly 31% of group sales in 2013 and c.21% of group EBITDA.

Power and Gas: it is the largest independent power producer in Greece through its wholly owned subsidiary Protergia S.A. Protergia’s portfolio of energy assets, with a total installed capacity of 1,200 MW, corresponds to more than 10% of the country's total electricity generation (ex-autonomous islands). The company is operating and managing all of the group’s power plants currently, which comprise gas-driven thermal plants and renewable energy assets (wind farms, photovoltaic parks and small hydropower plants).

Sales breakdown (2013) EBITDA breakdown (2013)


Key shareholders

Mytilineos was listed on the Athens Stock Exchange in 1995. The Mytilineos family owns 31% of the outstanding shares currently.

In mid-October, Fairfax Financial acquired a 5% stake in the company (through a placement of the treasury stock at a price of EUR 5.1 per share).

The chairman and managing director of the group is Evangelos Mytilineos. His brother Ioannis Mytilineos is the chairman and CEO of METKA.

Metallurgy & mining, 31%

Power & Gas, 26%

EPC, 43%

Metallurgy & mining,

21%

Power & Gas, 38%

EPC, 47%


Shareholders’ structure

Source: Athens Stock Exchange

Mytilineos Evangelos, 15%

Mytilineos Ioannis, 16%

Faifax Financial, 5%

Free float, 63%


Metallurgy & Mining: can only get better

Brief history

Aluminium S.A. (formerly Aluminium of Greece S.A) was established in 1960 by Pechiney, the French metallurgy giant of that time, in order to exploit the rich bauxite deposits of Central Greece for producing alumina and aluminium.

The company has an annual production capacity that exceeds 175,000 tonnes of aluminium and 815,000 tonnes of alumina. The industrial complex is located in Ag. Nikolaos, Viotia, and employs 1,100 people directly and more than 400 indirectly.

Aluminium S.A. is currently the largest vertically-integrated aluminium and alumina producer in the European Union. In addition, Delphi-Distomon, a subsidiary of Aluminium S.A., is one of the largest bauxite producers in Greece and Europe, with an annual production of 650,000 tonnes of bauxite exclusively from underground mines.

Mytilineos Group acquired Aluminium S.A. in early-2005. This acquisition enabled Mytilineos to move from the traditional metals trading activity into industrial production. In 2007, Aluminium S.A. was delisted from the Athens Stock Exchange and was fully acquired by Mytilineos.

Key products

Bauxite is mined by Delphi-Distomon, is the basic raw material for the production of alumina and aluminium. It is a mineral deposit rock formed by a mixture of metal oxides, named after the French city of Baux, where the ore’s deposits were first found. In Greece, the most important known bauxite deposits are estimated at around 100 million tonnes and are located in the Mt Helikon—Mt Parnassus—Mt Giona zone. Greek bauxites are of diasporic type and are composed of one molecule of crystalline water per one molecule of alumina (aluminium oxide).

Alumina is the industrial product derived from bauxite ore and is used to produce primary cast aluminium, as well as other non-metallurgical products (abrasives and insulating materials, refractory materials, detergents, pharmaceuticals and substances used in the treatment of water). Alumina, which aluminium extracts from bauxite, may be hydrated or calcined (anhydrous), depending on the degree to which it has been processed. Calcined alumina, also known as metallurgical grade alumina, is obtained by baking hydrated alumina, in order to remove the quantities of water contained in it.

Aluminium: the company produces primary cast aluminium by electrolysing calcined alumina. To process primary cast aluminium and deliver the end products (billets, slabs and T-ingots), the company’s production plant comprises of the following:

The Anodes line, which produces assembled anodes and ensures their supply to the Electrolysis line. It has an annual output capacity of 90,000 tonnes of baked anodes.

The Electrolysis line, with an annual production capacity of 164,000 tonnes of liquid aluminium.

The Foundry line, where the liquid metal is cast and formed in billets (124,000 tonnes) and slabs (40,000 tonnes).

The production support line, which ensures the reconstruction of the protective coating of the electrolysis basins and of the foundry ladles.

Aluminium is a metal with light weight, corrosion resistance, a moderate melting point, versatility and low toxicity. As a result, it is widely used in aircraft construction, in the automotive industry, in the sport articles industry, in shipbuilding, in the construction of buildings and in the packaging of products.

Global production of primary aluminium stands at c.42m tonnes. The biggest producer globally is Alcoa, with a c.10% market share and the concentration levels are rather low (the top-six companies worldwide control 38% of the market). The story is similar on the global alumina market (c.90m tonnes global production) but with slightly higher concentration levels (top-six at a 53% market share).


Outlook ahead

Over the past 40 years, global primary aluminium production has risen by a compounded annual growth rate of c.3%, while annual growth was closer to 5% over the past decade despite two recessions. The key driver behind this growth is the emerging markets. In the early 1970s, nearly 60% of global aluminium production was consumed in industrialised countries. In 2010, the combined share of industrialised countries did not exceed 25% and have been replaced by China, India and Brazil.

On the positive side, although consumption per capita in mature economies has stabilised, it remains low in emerging economies. Consumption per capita in industrialised countries stood at c.20kg, at c.10kg in China, and below 5kg in India and Brazil. Thus, if these countries follow the same pattern as mature economies, the demand for global primary aluminium consumption should continue at a rate of 3-4% per annum for the next 20 years. On the negative side, the challenges in the aluminium industry are derived from the possible substitution from plastics or other materials.

Price taker

The pricing policy for aluminium is a function of:

The international aluminium prices, as these fluctuate on the London Metal Exchange (LME).

The EUR/USD exchange rate (for converting international prices denominated in US dollars).

The surplus value of the product, as this derives from the product type, the particularities of the market, and the other terms and conditions of each specific commercial agreement.

For alumina, the pricing is based on bilateral agreements, which, however, is usually correlated to international aluminium prices.

The cash prices of aluminium stand currently at relatively low levels of c.USD 1,800 per tonne. However, this is counterbalanced by higher-than-average product premium prices due to increased inventories and the incentive for stock financing. This is gradually expected to normalise going forward as the LME changes its warehousing rules. Consequently, we should gradually see a reversal of trends (i.e., higher aluminium prices but lower product premiums).

LME primary aluminium cash (in USD)

Source: Bloomberg

0

500

1000

1500

2000

2500

3000

3500

Feb

-01

Au

g-0

1

Feb

-02

Au

g-0

2

Feb

-03

Au

g-0

3

Feb

-04

Au

g-0

4

Feb

-05

Au

g-0

5

Feb

-06

Au

g-0

6

Feb

-07

Au

g-0

7

Feb

-08

Au

g-0

8

Feb

-09

Au

g-0

9

Feb

-10

Au

g-1

0

Feb

-11

Au

g-1

1

Feb

-12

Au

g-1

2

Feb

-13

Au

g-1

3

Feb

-14


All-in price moving upwards

The longer-term trend for increasing LME prices and lower premiums is also evident in the future prices as there is currently a contango situation, where future prices are higher than the spot price, i.e., investors are willing to pay a premium to have the commodity in the future rather than paying the costs of storage and carry the costs of buying the commodity today.

More important for Aluminium S.A. is the all-in price (i.e., the sum of both the LME price from aluminium and the product premium). After a relatively weak period between 2009 and 2013 (with the exception of 2011), it appears that we are heading for a period of increasing all-in prices. This is already evident in 2014 (particularly from 2Q-onwards) as product premiums have reached a new high.

All in price (USD/tonne) Products premium as % of LME price


Repositioning on the global cost curve

Since Aluminium producers are price takers, the key controllable factor in this business is the production cost.

Traditionally, the most competitive smelters are in the Middle East and Canada, whereas the highest cost are the Chinese smelters. Prior to 2011, the primary aluminium cash cost production of Aluminium S.A. was at the bottom end on a global scale. The production cost stood at over USD 2,500 per Mt compared to a global average of USD 1,840 per Mt currently.

The cost structure of Aluminium S.A., however, has changed drastically over the past three years on the back of an ambitious cost-cutting programme, which was completed at the end of 2013. As a result, Aluminium S.A. has repositioned itself on the cost curve to a level that is in line with the global averages and is expected to improve even further in 2014.

The main pillars of the cost-cutting exercise were:

The construction of an energy co-generation plant.

Savings on raw materials, logistics and freights.

Labour cost savings.

Replacement of heavy fuel oil with natural gas and numerous other actions.

The strong improvement in costs is the key for the investment case in Aluminium S.A. The efficient cost structure will now enable the company to benefit directly from the upward momentum in all-in (LME plus product premium) aluminium prices. In addition, operating leverage could increase even more going forward as we expect a further drive to improve the cost structure.

15001700190021002300250027002900310033003500

5%

10%

15%

20%

25%

30%


LME primary aluminium cash (in USD per Mt)

Source: Bloomberg

The main cost items for an aluminium producer are the cost of alumina and electricity, which account for c.65% of total expenses. In the alumina cost breakdown, the biggest item is raw materials (mainly bauxite).

Aluminium and PPC are involved in a long-running dispute over the price of electricity. The two parties recently reached an agreement and Aluminium paid EUR 21m (EUR 17.4m plus interest) in cash that was deemed as state aid by the EU. However, Aluminium maintains that no state aid was granted and has, therefore, not booked this loss in the P&L, awaiting the final EU court decisions. Thus, depending on the final court decision, the company will either book a loss of EUR 17m (no impact on cash flow), or receive an equivalent cash inflow. More importantly, Aluminium and PPC are in negotiations regarding the signing of a new electricity supply contract. We assume, in our model, that pricing will remain at the current levels (47-48 EUR/MWh).

Cost breakdown (aluminium) Cost breakdown (alumina)


1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

2,800

3,000

2008 2009 2010 2011 2012 2013

Global avg cost: 1,840 $/Mt

Alumina, 27%

Electricity, 39%

Fabrication, 23%

Other (coke, fuel oil, etc.),

11%Raw

materials, 36%

Electricity, 4%

Fuel oil , 19%

Steam cost / CHP, 18%

Fabrication, 22%


Our estimates & assumptions

According to the EIU Economic & Commodity forecast in March 2014, aluminium is expected to average at 2,025 USD/tonne in 2014E, improving to USD 2,153 in 2015E and USD 2,275 in 2016E.

We expect the tightness in the physical market to ease going forward, resulting in higher spot prices and lower product premiums. However, our estimates are somewhat more conservative vs. the EIU forecasts as the 1Q average LME price stood at USD1,708 (down 14.% yoy), albeit premiums surged to a new high.

All-in-all, we believe that the Metals & Metallurgy segment should be a good growth driver for the group in the next three years on the back of an efficient cost structure, enabling the company to benefit from a cyclical upturn in aluminium prices. We expect EBITDA in 2015-17E to reach EUR 80-100m, which is nearly double compared to the profitability in 2013 and 3x higher than the low levels of 2011 and 2012.

Model assumptions for Aluminium S.A.

Source: Company data, Wood Research

2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E

OX Alumina ktn 470 507 477 477 477 477 477 477 477

AL Aluminium ktn 135 136 165 165 175 175 175 175 175

LME Aluminium (USD) 1,667 2,172 2,395 2,018 1,844 1,850 2,000 2,100 2,150

Alumina (USD) 288 300 335 330 338 325 330 335 337

Product Premium (USD) 317 330 415 440 470 480 450 400 380

Product premiums as % of AL LME price 19% 15% 17% 22% 25% 26% 23% 19% 18%

All in price (USD) 1,984 2,502 2,810 2,458 2,314 2,330 2,450 2,500 2,530

USD/EUR rate 1.39 1.33 1.39 1.29 1.33 1.35 1.35 1.35 1.35

Oil (USD per barrel) 60 80 111 110 108 108 108 108 108

PPC (EUR/MWh) 55 56 54 48 42 47 47 48 48

EBITDA (EUR m) 71 59 32 29 48 65 81 96 100


EPC business: the problem of too much cash

METKA’s history and shareholders

Brief history: METKA was established more than 50 years ago and is now a leading international EPC (Engineering-Procurement-Construction) contractor, active within the energy, infrastructure and defence sectors. Within the EPC business, METKA is focused on constructing major power plant projects throughout Europe, the Middle East and Africa, with a strong emphasis on highly-efficient combined cycle gas turbine technology.

Major shareholders: METKA is a member of Mytilineos Group, a Greek industrial group active in Energy, Metallurgy and EPC projects. Mytilineos owns 50% (plus one) of the outstanding shares.

Turnkey projects: METKA is a leading international contractor for specialised large-scale turn-key projects, undertaking the complete range of Engineering, Procurement and Construction activities through to project completion. Key reference projects include power plants in Greece, Turkey, Romania, Syria, Iraq and Algeria. EPC is clearly the most important segment for METKA and accounted in 2013 for c.90% of total sales.

Industrial activities: METKA’s industrial activities focus on the manufacturing for high-value added heavy and/or complex steel fabrications for energy, infrastructure and defence applications. Typically, these projects involve the use of the company’s sophisticated computer-controlled machining equipment and high-quality fabrication capabilities.

Shareholding structure Sales breakdown (2013)

Source: Company data

Breakdown of current backlog and EPC projects

METKA’s backlog stands currently at EUR 1.5bn. The backlog reached a peak of EUR 2.2bn in 2010, due to large EPC projects undertaken in Syria ad Turkey. The current backlog is skewed towards Syria (c.50%), Algeria (21%), Iraq (11%) and Greece (10%). Nearly 75-80% of the current backlog consists of EPC projects. The key projects under way currently include:

A power plant station of 700 MW in Deir Ali, Syria: ANSALDO—METKA’s joint venture (with METKA acting as the leader) undertook, in 2010, for the Public Establishment of Electricity for Generation and Transmission (PEEGT), the engineering, procurement, construction and commissioning of a natural gas power plant that generates power with natural gas fuel, with a minimum capacity of 700 MW in Deir Ali, Syria. The execution of the project started in July 2010, following the opening of the Letter of Credit. Works are in full progress and more than 85% of the project has already been executed. The contract price stood at EUR 673m, with the current backlog at around EUR 80m. The project is expected to be completed within the second half of 2014.

A power plant station of 724MW in Deir Azzour, Syria: this is the second major project in Syria and is also a joint venture between ANSALDO and METKA (with METKA acting as a leader). This is also a natural gas power plant in Northeastern Syria. The budget of the contract is EUR 687m and the project owner is again PEEGT. A Letter of Credit, which has been opened in METKA’s name, was confirmed in April 2012, but the project is on hold

Mytilineos, 50.4%Foreign

Institutional 28.3%

Greek institutional

10.3%

Retail, 11.0%

EPC, 91.0%

Defense, 3.2%

Other, 5.9%


due to significant tension in the area of Deir Azzour. Up to now, only 15% of the project has been completed and the current backlog stands at EUR 580m. However, in early-2014, the project re-started with the relocation in Deir Ali (which is in government-controlled Southern Syria). This will enable METKA to execute the engineering and procurement part of the project (c.50-60% of value).

OCGT plants in Algeria: METKA has three ongoing projects in Algeria, with a total current backlog of EUR 284m. The projects are in a consortium with General Electric and the project owner is Société Algérienne de Production de l’Electricité (SPE Spa). SPE belongs to Sonelgaz Group, the biggest electric power supplier in Algeria. Both relate to the construction of open cycle gas turbines of 368MW and 591MW, respectively, in Hassi R’mel. In addition, METKA has undertaken the engineering, procurement, construction, and commissioning of eight mobile gas turbine power generation units of 180 MW in three different sites in Algeria.

A thermal power plant of 1250 MW in Iraq: further to a contract signed on 23 November 2011, METKA undertook, on behalf of the Ministry of Electricity Republic of Iraq, the engineering, installation and commissioning of a thermal power plant of 1,250MW, with General Electric turbine technology, in open-cycle, natural gas-fuelled, in the Basra area of South Iraq. The contract budget is USD 401m. The current backlog stands at EUR 146m. In the Iraqi backlog, we do not include the development of the 1,642MW CCGT power plant in al-Anbar, with a budget of US 1,050m, awarded in mid-2013. Management has already announced that it has reached an agreement with the Chinese SEPCO Electric Power Construction Corporation to undertake this development, with METKA acting as a consultant. The expected fee is around USD 30-40m.

Power plant construction of 143 MW in Jordan: METKA undertook, on behalf of Samra Electric Power Co. (SEPCO), the expansion of an existing power station in Jordan, following the successful completion of the relevant tender. The project in Zarqa, near the capital Amman, concerns the engineering, procurement, construction and commissioning of a 143MW expansion to an existing power plant, by the addition of a combined cycle plant, of Alstom technology, to the existing open-cycle gas turbines. This project started in early-2013 and is expected to be completed within 2014E. The current backlog stands at EUR 43m.

Railway line in Southern Greece: METKA won the tender earlier this year for the construction of a railway line between Athens and Patras, with a total budget of EUR 273m. For the implementation of the project, METKA will collaborate with the international company THALES, the global leader in the field of signalling and tele-commanding, as well as with Xanthakis, a Greek company specialising in railway superstructure works.

Defence projects: in November 2013, METKA signed an industrial coproduction agreement with Krauss-Maffei Wegmann GmbH & Co. KG (KMW), Europe’s leading manufacturer of highly protected wheeled and tracked military vehicles. KMW chose METKA to supply the defined metal structures of the hull and turret for 62 LEOPARD 2 main battle tanks for the Middle East market. The value of the agreement stands at EUR 56.5m and deliveries are expected to be concluded within 2016E.

Backlog and new order evolution Breakdown of backlog per country


1460

20902220

1728 1682 1685

1236

969744

512 502609

2008 2009 2010 2011 2012 2013

Backlog New Orders

IRAQ, 10%

Syria, 43%

Algeria, 19%

Greece, 22%

Jordan, 3%

Germany, 4%

Turkey, 1%


New order flow: challenging market environment in EPC

In 2014 ytd, METKA has signed two projects worth EUR 340m and looks set to meet our full-year forecasts for new orders of EUR 500m. However, out of the EUR 340m, the largest part refers to the railway contract in Greece, worth EUR 273m. Thus, for the year-to-date, the company has signed one energy contract in Algeria worth EUR 66m.

Energy projects in Greece, the Middle East and SEE (including Turkey) are moving relatively slowly currently. The turmoil and the tough competitive landscape mean a relatively low project intake. Still, METKA has a very strong track record in securing and completing projects in the Middle East. The key opportunities for expansion ahead are in Africa, in our view, with energy projects currently in Libya, Angola, Kenya, Nigeria and Lebanon.

The company’s energy projects in Greece are limited currently to operations and maintenance in Megalopoli Station; however, there are prospects going forward driven by an old and inefficient existing capacity, the replacement of old lignite fired plants and opportunities in renewable energy. The fundamentals appear brighter on non-energy projects as well, as evidenced by the recent railway project.

Sales and EBITDA for 2014E and 2015E: safe and steady

Although the new order flow is slow, the company has the luxury to wait as it currently enjoys a strong and secure backlog. Thus, the revenue stream for 2014E and 2015E is relatively visible:

Re-start of Syria II is a strong positive driver for short-term earnings since we expect them to account for c.30% of total sales this year.

We expect Syria I to be completed this year, bringing in sales of c.EUR 80m (total sales from Syria at c.40% of revenues, on our estimates).

The projects in Algeria are also an important contributor (c.25% of sales), or nearly EUR 180m, on our numbers.

We expect the thermal plants in Iraq to be completed in 2014 and 2015; thus, accounting for c.10% of total revenues each year.

Completion of the final backlog in Jordan (EUR 42m).

In total, the aforementioned projects account for c.80% of our estimated 2015E sales and c.65% for 2015E. Thus, we feel quite comfortable with our estimates for the next two years. Similarly, EBITDA margins should remain strong, reflecting the current backlog.

Traditionally, the EBITDA margins for METKA’s EPC segment come in at a range of 16-18%; however, we expect a gradual decline in 2015E as the Greek railway project comes in at lower operating profit margins than EPC.

Revenue-EBITDA model for METKA


EUR m 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E

Backlog 2,090 2,220 1,728 1,682 1,685 1,489 1,413 1,420 1,435

% change 43% 6% -22% -3% 0% -12% -5% 0% 1%

New orders 969 744 512 502 609 500 550 567 583

% of backlog 46% 34% 30% 30% 36% 34% 39% 40% 41%

Sales 339 581 1,004 548 606 696 626 560 568

% change -11% 71% 73% -45% 11% 15% -10% -11% 1%

% of backlog 23% 28% 45% 32% 36% 41% 42% 40% 40%

EBITDA 61 101 162 93 102 115 100 87 85

% change -9% 66% 60% -43% 10% 13% -13% -13% -2%

EBITDA Margin 18% 17% 16% 17% 17% 17% 16% 16% 15%


Strong but inefficient balance sheet

As of year-end 2013, the company had a net cash position of EUR 192m, including: 1) EUR 35m in cash held at a Mytilineos Group company to manage centrally group liquidity; and 2) EUR 32m of deposits that are used as collateral in order to obtain letters of guarantee from banks. In 1Q, the cash position stood at EUR 232m and we anticipate a year-end net cash position of c.EUR 250m.

The cash position stands currently at c.35% of the market cap of METKA and half of the invested capital of the company! This inefficient capital structure is a substantial drain on the ROIC. Although we assume a payout ratio of 70-100% in our forecast period, the cash position continues to grow, leading to net cash of >EUR 300m from 2016E-onwards, on our numbers. As a result, ROIC declines going forward to c.13% by 2017E from 18% in 2013.

We believe that a large capital return of >EUR 100m is necessary in order to maintain ROIC comfortably above the cost of equity. Assuming a EUR 100m capital return in 2015E, ROIC would increase by approximately 300bps, staying comfortably above 15% in our three-year forecast period.

Why so much cash? The net cash position has increased from EUR 66m in 2010 to over EUR 200m currently. This reflects the strong backlog execution during the same period, combined with a very low payout ratio (below 20% in the past two years). This was prudent during the crisis to enable METKA to remain competitive on the international landscape and obtain letters of guarantee at decent pricing. In our view, these reasons no longer apply and a higher payout ratio policy is feasible.

ROIC still high; but for how long?


0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

40.0%

45.0%

2010 2011 2012 2013 2014E 2015E 2016E 2017E


Power and Gas: predictable EBITDA?

Snapshot of energy portfolio

Mytilineos is the largest independent power producer in Greece through its wholly-owned subsidiary Protergia S.A.

Protergia’s portfolio of energy assets corresponds with a total installed capacity of 1,200MW. The company operates and manages all of the group’s power plants currently, which comprise gas-driven thermal plants and renewable energy assets (wind farms, photovoltaic parks and small hydropower plants).

The energy portfolio consists of:

Gas-fired combined cycle thermal power plant (CCGT) in Ag. Nikolaos (Viotia) with a capacity 444.48 MW. Total capex stood at EUR 242m and it entered commercial operations in June 2011.

Gas-fired combined cycle thermal power plant (CCGT) in Ag. Theodori (Corinth) with a capacity of 436.6MW. The plant in Corinth is 65%-owned by Protergia and 35% by refiner Motor Oil Hellas (MOH GA, BUY, PT EUR 11.7). Total capex stood at EUR 290m and it entered commercial operations in April 2012.

Gas-fired combined heat and power plant (CHP) in Ag. Nikolaos (Viotia) with a capacity of 334MW. This plant mostly covers the needs of 100% subsidiary Aluminium S.A. Total capex stood at EUR 216m and the plant was connected to the grid in 2008.

Renewable energy assets, with a total capacity of 54MW (36MW in Wind, 14MW Solar and 6MW hydro).

Planning gradual entry into the retail market for electricity with a trading licence for 310MW and a supply licence for 500MW of electricity.

Energy portfolio breakdown (MW capacity)


6 1436

334

436 444

Hydro Photovoltaic WIND Alumina Co-Gen CHP

KorinthosPower CCGT

ProtergiaCCGT


The Greek electricity market

Public Power Corporation (PPC GA, BUY, PT EUR 14.0) is the dominant player in the market, with a market share of c.98% in supply and c.70% in domestic generation (in volume terms). In terms of installed capacity, the incumbent utility owns 64% of the total vs. 97% in 2003. RES represents approximately 23% of the installed capacity following the explosive growth in photovoltaic in 2010-13, and is dominated by European utilities (EDF, Iberdrola, Enel) and Terna Energy (TEBERGY GA).

The remaining 13% of installed capacity is split among: 1) Mytilineos group, with three plants with a total capacity of 1,200MW; 2) Elpedison, a JV between Hellenic Petroleum (ELPE GA) and Edison, with two CCGTs with 810MW capacity; and 3) Heron, a JV between Gek-Terna and GDF-Suez and a partnership with Qatar Petroleum International, with two OCGTs with 582MW installed capacity.

For more details on the Greek electricity market, please refer to our initiation report on Public Power Corporation, A utilities play on purchasing power rebound, dated 19 February 2014.

Generation market shares

Source: Company data, national reports to the European Commission, Wood Research

VCRM abolished, IPPs reimbursed through capacity payments

IPPs have benefited substantially over the past few years from the market distorting the VCRM (variable cost recovery mechanism). Under this regime, the natural gas plants were reimbursed on a variable cost plus a 10% margin, i.e., providing a recurring and fixed profit margin for the IPPs. The VCRM will be fully phased out by July. Instead, the IPPs will be reimbursed through higher capacity payments.

The abolition of the VCRM, the generally weak electricity demand and a high penetration in RES should imply a substantial reduction in load factors from 2014E-onwards. On our numbers, we assume load factors of c.25% in 2014E from over 40% in 2013. As a result, we expect sales from the Power and Gas segment to drop by 45% yoy.

On the positive side, IPPs are compensated in the form of higher capacity payments. This payment is made in order to ensure that there is sufficient capacity for the domestic electricity system’s peak demand. The capacity payment has increased to EUR 79,000 per installed capacity and will remain in place until September 2014. We do not expect any substantial reduction in the capacity payment in September. However, in view of the relatively high reserve margins in Greece, we believe it is reasonable to assume a gradual softening. We assume, in our model, a drop to EUR 73,000 per installed capacity. This implies a stable EBITDA of c.EUR60m from the thermal plants.

PPC, 61%

IPPs, 14%

RES, 14%

Imports, 10%


Our estimates and assumptions

In our model, we assume EBITDA generation close to the capacity payments and stable load factors. Demand economics could improve gradually, leading to higher-than-expected capacity utilisation. We believe that Greek power consumption should be comparably well-correlated with GDP growth because of the high share of commercial and household demand relative to industry. Still, even if load factors or system marginal prices improve materially, we do not believe that Mytilineos will be able to have it both ways (i.e., high capacity payments and strong profits from operating the plants).

Thus, we believe that, over the next few years, the thermal plants will mostly rely on the capacity payment. On our numbers, the EUR 60-65m of EBITDA from thermal implies a ROIC of 6-7%, which would be probably be considered as adequate by the regulator.

Upside for Mytilineos in the energy segment could come from:

The interconnection of islands with the mainland: the islands in Greece currently use oil-fired power plants, which are inefficient and costly. In the next two years, the interconnection with the mainland should take place. We note that the autonomous islands account for c.10% of total demand, increasing the need for IPPs in the system. In the longer term (post-2016E), the gradual phasing out of old lignite plants could also be an opportunity for the IPPs.

The opening up of the supply business, but it is difficult to quantify the potential impact and it is not clear yet how the market will evolve. Thus, we do not include any profitability from the supply segment yet. Although this is a low-margin business, a decent market share for Protergia could lead to meaningful EBITDA numbers for the group.

Participation in the so-called “small PPC”: management has expressed interest in the carving out of 30% of PPC’s generation, distribution and supply business. The government’s timetable for completing the separation of PPC is 2015 and the project is included in a memorandum of economic policy agreed with the troika. Small PPC is likely to include 1,400MW of lignite units, 500MW of hydro-electric and 500MW of natural gas units. The tender to sell "Small PPC" will be made by the Hellenic Republic Asset Development Fund. We value the generation and mining segment of PPC at an enterprise value of c.EUR 3.1bn; thus, the 30% could imply a cost of c.EUR 1bn. In view of the big size of the project, we would expect Mytilineos to tender for the project with an international partner.

Model assumptions on thermal plants


2014E 2015E 2016E 2017E

Load factor 25% 26% 27% 28%

Average Sales Price (EUR/MW) 68 66 64 65

Capacity Payment (EUR/MW) 79,000 77,000 75,000 73,000

Natural Gas cost (EUR/MW) 37 36 35 35

EBITDA (Power and Gas Segment) 74 74 73 73


Group financials

Pressure on top line, stable EBITDA

After a very strong 2013, we expect the EBITDA to stabilise at c.EUR 255m. The main growth driver is the Aluminium business, driven by the substantial efficiency drive and the gradually improving aluminium prices. As a result, the Metals & Metallurgy business segment is expected to account for c.40% of total EBITDA by 2016E from c.20% in 2013.

On the negative side, we expect the operating profitability of the EPC segment to drop in our 2015-17E forecast period after a very strong 2014E, mainly on the challenging environment in replenishing EPC projects in the region and the lower margins from new Greek contacts. However, there could be upside risk to our forecasts as METKA has a very strong track record in gaining new projects and timing is on its side (with a strong backlog to sustain good EBITDA for 2014E and 2015E).

Upside could also come from lower natural gas prices in the long run, affecting the EBITDA in both the energy and aluminium businesses positively. We note that, earlier this year, the state-run natural gas distributor DEPA and Gazprom agreed on a 15% price cut. Prices could soften even further in the future.

Sales breakdown by business segment


EBITDA breakdown by business segment


EUR m 2012 2013 2014E 2015E 2016E 2017E

Metallurgy & mining 506.0 436.0 427.2 444.5 452.7 457.3

% change -3% -14% -2% 4% 2% 1%

% of sales 35% 31% 32% 35% 37% 37%

Power & Gas 446.0 369.0 204.1 204.0 204.5 206.5

% change 230% -17% -45% 0% 0% 1%

% of sales 31% 26% 15% 16% 17% 17%

EPC 507.0 604.0 695.9 625.9 560.0 567.9

% change -45% 19% 15% -10% -11% 1%

% of sales 35% 43% 53% 49% 46% 46%

Total Sales 1,454 1,403 1,322 1,269 1,212 1,227

% change -7% -3% -6% -4% -4% 1%

EUR m 2012 2013 2014E 2015E 2016E 2017E

Metallurgy & mining 29.0 48.0 64.6 80.8 95.8 99.8

% change -9% 66% 35% 25% 19% 4%

% of EBITDA 17% 21% 26% 32% 38% 39%

EBITDA margin 6% 11% 15% 18% 21% 22%

Power & Gas 65.0 89.0 74.2 74.1 73.4 73.2

% change 117% 37% -17% 0% -1% 0%

% of EBITDA 38% 38% 29% 29% 29% 28%

EBITDA margin 15% 24% 36% 36% 36% 35%

EPC 94.0 108.0 120.8 106.1 92.8 91.2

% change -42% 15% 12% -12% -13% -2%

% of EBITDA 55% 47% 48% 42% 36% 35%

EBITDA margin 19% 18% 17% 17% 17% 16%

Total EBITDA 171.0 232.0 251.6 254.1 255.0 257.2

% change -16% 36% 8% 1% 0% 1%

EBITDA margin 12% 17% 19% 20% 21% 21%


Balance sheet: healthy again

Net debt reached a peak at the end of 2012 at EUR 722m, on the back of major investments in the energy segment. The net debt to EBITDA also hit a peak in 2012 at a high 4.3x.

Following the significant reduction in new capital expenditure, from 2013 debt has been reduced substantially. On an absolute level, net debt is already below EUR 400m (based on a statement by the CEO at the AGM on 18 June 2014) vs. EUR 437m in 1Q and EUR 508m at the end of 2013. On an annualised basis, the net debt to EBITDA is already at a comfortable 1.6x.

What led to this successful deleveraging? The end of all of the major investments (all new thermal plants came onstream at the end of 2012), the backlog execution and cash generation by METKA, and the gradual pick-up in the aluminium business.

Going forward, we expect the free cash flow to remain strong, at >EUR 180m per year, driven by the predictable cash flow from the thermal plants (c.EUR 50m annually) and the strong EBITDA growth in Aluminium S.A. (in our numbers, we expect operating profitability to reach EUR 80-90m by 2015E from EUR 48m in 2013). We believe that the EPC business will continue to generate strong free cash flows (of >EUR 80m p.a.); however, more generous treatment for the minority shareholders is necessary, in our view.

The reduction in debt and the lower interest rates should also have a very positive impact on interest expenses. In 2013, interest expenses reached a peak of EUR 75m, reflecting the high debt levels at the end of 2012. We expect interest expenses to more than halve in the next three years in line with the reduction in net debt, providing good support for the EPS at the group level.

Breakdown of free cash flow (2014E)


Big firepower in a distressed country with low asset values

On our calculations, the net debt to EBITDA will fall to c.1.4x in 2014E and 1x in 2015E. Thus, all else being equal, the group has the capacity to re-leverage by c.EUR 300m to EUR 400m in order to proceed with acquisitions over the next couple of years. This will take the net debt to EBITDA up to a range of 2.3-2.7x without taking into account the potential EBITDA that could be generated from new acquisitions or investments.

We believe this is an opportunity as the group has a solid track record in making value-adding acquisitions. In our opinion, the three biggest acquisitions/investments over the past 20 years (METKA, Aluminium of Greece, thermal plants) have been value-adding for shareholders and transformational for Mytilineos Group. However, in terms of smaller-scale acquisitions, the track record is more of a mixed bag (ELVO, Sometra).

Positive track record:

METKA: this was the first big and transformational acquisition by Mytilineos. The majority stake was acquired in 1998. In our view, METKA has clearly added substantial value for the shareholders. The current stake is worth c.EUR 343m, while the company has been a constant cash contributor over the past 15 years.

Aluminium: Mytilineos acquired 53% of Aluminium of Greece in 2005 for EUR 80m in cash. In 2007, it fully acquired Aluminium and bought out the minorities. Although there were substantial uncertainties surrounding this acquisition at the time (due to the electricity subsidy, contingent tax obligations and environmental concerns), Aluminium of Greece (at the parent level) has generated a total EBITDA of c.EUR 270m over 2007-13 and net profit of c.EUR 80m. In addition, we expect the substantial cost-cutting plans and

Metal & Metallurgy EPC Power & Gas

EBITDA 65 121 74

Depreciation 41 4 21

EBIT 24 117 53

Capex 31 3 1

Free cash flow 28 89 61


the co-generation plant to lift annual EBITDA from an average of EUR 40-50m annually over the past seven years to EUR 80-100m annually, all else being equal.

Thermal plants: the cost of the two thermal plants stood at a total of EUR 530m (EV). With the full operation of the two plants in 2013, the EBITDA exceeded EUR 80m and (from 2014E-onwards), we expect an EBITDA close to the capacity payment of EUR 60-65m. Thus, both plants will generate, on our numbers, a free cash flow of c.EUR 50m. This implies a stable ROIC of c.6-7% on the invested capital, which may not be as high as the METKA and Aluminium acquisitions, but decent for a utility-type investment.

Negative track record:

ELVO: Mytilineos acquired 43% of Hellenic Vehicle Industry in 2000 from the Greek state. In total, Mytilineos invested c.EUR 19m in the company. ELVO was a major supplier of the Hellenic Armed Forces of trucks, armoured vehicles and other appropriately modified military vehicles. However, the company remained loss-making and it was challenging to turn it around. Mytilineos gave its stake back to the state by 2010 without any cash payment.

Sometra Mines: Mytilineos acquired 60% of the lead and zinc smelter in 1998 (it increased its stake to 88% in 1999). The company spent more than EUR 20m in investments for upgrading the smelter. In 2009, however, Sometra suspended production activity in the lead-zinc production plant on the back of record-low prices for zinc in LME and a lack of raw materials.

ROIC above WACC from 2014E-onwards:

The group ROIC stood at 8% in 2013, which is slightly below our estimated group WACC of 8.5%. However, from 2014E, we expect the ROIC to reach 10%. The highest ROIC business is the EPC segment (c.18% in 2012-14E), but we expect it to drop gradually to 13% by 2017E, due to lower profitability and the accumulation of too much cash.

Net debt to EBITDA (x) ROIC


0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

4.00

4.50

5.00

0%

5%

10%

15%

20%

25%


Financial tables

Mytilineos: income statement


Mytilineos: growth, margins, returns, per-share data


EUR m 2010 2011 2012 2013 2014E 2015E 2016E 2017E

Revenues 1,001 1,571 1,454 1,403 1,322 1,269 1,212 1,227

Cost of sales -782 -1,323 -1,251 -1,135 -1,043 -991 -937 -948

Gross profit 219 248 202 268 280 278 275 279

G & A -65 -77 -82 -96 -90 -87 -83 -84

EBITDA 172 193 168 235 252 254 255 257

Depreciation -21 -31 -64 -68 -66 -65 -65 -65

EBIT 151 161 104 167 186 189 190 192

Net financial result -25 -49 -50 -71 -55 -43 -32 -25

PBT 131 110 55 80 131 146 158 167

Taxes -33 -25 -10 -13 -26 -29 -32 -33

Tax rate 25% 23% 18% 16% 20% 20% 20% 20%

Net income (100%) 98 85 45 67 105 117 126 134

Minority interests -30 -43 -26 -45 -47 -40 -35 -30

Net income shareholders' part 68 42 19 23 58 77 91 104

2010 2011 2012 2013 2014E 2015E 2016E 2017E

Sales growth 51% 57% -7% -3% -6% -4% -4% 1%

EBITDA growth 91% 12% -13% 40% 7% 1% 0% 1%

EBIT growth 116% 7% -35% 60% 11% 2% 0% 1%

Net income growth 407% -38% -55% 20% 152% 34% 19% 13%

Adjusted EPS growth 407% -35% -55% 13% 144% 34% 19% 13%

EBITDA margin 17.2% 12.3% 11.6% 16.7% 19.0% 20.0% 21.0% 21.0%

EBIT margin 15.1% 10.3% 7.2% 11.9% 14.0% 14.9% 15.7% 15.7%

Net margin 6.8% 2.7% 1.3% 1.6% 4.3% 6.1% 7.5% 8.5%

ROCE 7.7% 7.6% 4.7% 8.0% 9.8% 10.4% 10.3% 10.2%

ROE 9.6% 5.7% 2.4% 2.7% 6.4% 8.1% 9.0% 9.5%

Adjusted EPS (EUR) 0.61 0.39 0.18 0.20 0.49 0.66 0.78 0.89

DPS (EUR) 0.00 0.00 0.00 0.00 0.15 0.20 0.23 0.27

Payout 0% 0% 0% 0% 30% 30% 30% 30%

BVPS (EUR) 6.19 6.41 6.84 7.39 7.88 8.39 8.98 9.63


Mytilineos: balance sheet


Mytilineos: cash flow sheet


EUR m 2010 2011 2012 2013 2014E 2015E 2016E 2017E

Cash and cash equivalents 209 268 137 182 135 135 135 135

Inventories 111 175 151 128 121 116 111 112

Receivables 781 616 768 679 660 654 644 664

Net PPE 981 1,084 1,098 1,082 1,051 1,021 993 973

Intangible assets 517 527 553 579 579 579 579 579

Goodwill 8 8 8 8 8 8 8 8

Other non-current assets 18 13 16 13 13 13 13 13

TOTAL ASSETS 2,619 2,684 2,724 2,664 2,560 2,534 2,570 2,633

Trade payables 868 1,113 1,420 775 567 490 474 480

Tax liabilities 0 0 0 0 13 16 19 20

Accrued and other current liabilities 72 63 80 50 50 50 50 50

ST loans 179 508 839 256 62 0 0 0

LT loans 562 335 23 435 435 385 335 285

Provisions / Other long term liabilities 344 336 305 356 356 356 356 356

Minority Interest 121 152 176 233 280 320 355 385

Shareholders' equity 724 749 800 864 922 981 1,050 1,126

TOTAL LIABILITIES & EQUITY 2,619 2,684 2,725 2,664 2,560 2,534 2,570 2,633

Net debt/(cash) 531 574 722 508 360 234 104 -7

Net debt/equity 73% 77% 90% 59% 39% 24% 10% -1%

Net debt/EBITDA 3.08 2.98 4.30 2.17 1.43 0.92 0.41 -0.03

EUR m 2010 2011 2012 2013 2014E 2015E 2016E 2017E

Pre-tax income 131 110 55 80 131 146 158 167

Depreciation & amortisation 21 31 64 68 66 65 65 65

Net financial income/expense 25 49 50 71 55 43 32 25

Other non-cash items in p&l 106 26 48 13 0 0 0 0

Tax paid -17 -33 -25 -5 -13 -26 -29 -32

Gross cash flow 267 183 192 228 239 228 226 226

WCR change 13 17 -151 49 -1 -6 -4 -17

Operating cash flow 279 200 41 277 238 222 222 209

Capex -354 -194 -97 -58 -35 -35 -37 -45

Free cash flow -74 6 -56 219 203 187 185 164

Capital related movements 0 0 0 0 0 0 0 0

Debt related movements 91 101 19 -170 -194 -112 -50 -50

Dividends to shareholders 0 0 0 0 0 17 23 27

Other dividends 0 0 0 0 0 0 0 0

Other -1 0 -40 65 0 0 0 0


Important disclosures This investment research is published by Wood & Company Financial Services, a.s. (“Wood & Co”) and/or one of its branches who are regulated by the Czech National Bank as Home State regulator and in the UK by the FCA and in Poland by the KFN as Host State regulators. Wood’s 12‐month ratings and price targets for Mytilineos

07/07/2014 BUY – initiation of coverage

07/07/2014 EUR 8.50

Explanation of Ratings BUY: The stock is expected to generate total returns of over 15% during the next 12 months as measured by the target price. HOLD: The stock is expected to generate total returns of 0‐15% during the next 12 months as measured by the target price. SELL: The stock is expected to generate a negative total return during the next 12 months as measured by the target price. RESTRICTED: Financial forecasts, and/or a rating and/or a target price is restricted from disclosure owing to Compliance or other regulatory/legal considerations such as a blackout period or a conflict of interest. NOT RATED: Suspension of rating after 30 consecutive weekdays where the current price vis‐à‐vis the target price has been out of the range dictated by the current BUY/HOLD/SELL rating. COVERAGE IN TRANSITION: Due to changes in the Research team, the disclosure of a stock’s rating and/or target price and/or financial information are temporarily suspended.

Equity Research Ratings (as of 07 July 2014) Buy Hold Sell Restricted Not rated Coverage in transition

Equity Research Coverage

46% 31% 21% N.A. 2% N.A.

IB Clients 1% 1% N.A. N.A. N.A. N.A.

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Valuation & Risks Analysis of specific risks to set stock target prices highlighted in our investment case(s) are outlined throughout the report. For details of methodologies used to determine our price targets and risks related to the achievement of the targets referred to in the main body of the report or at http://www.wood.com in the Section Corporate Governance or via the link http://www.wood.com/research.html

Users should assume that the investment risks and valuation methodology in Daily news or flash notes not changing our estimates or ratings is as set out in the most recent substantive research note on that subject company and can be found on our website at www.wood.com

Wood Research Disclosures (as of 07 July 2014) Company Disclosures

CETV 5

CEZ 5

Erste Group Bank 5

Fortuna 5

S.C. Fondul Proprietatea S.A. 4, 5

ITG 3

KGHM 5

Komercni 5

New World Resources 5

Orco Property Group 5

Pegas Nonwovens 5, 9, 10

Philip Morris 5

PKO BP 1, 2, 3

RC2 4

SIF2 10

SNP 3

Telefonica 5

Transgaz 1

Unipetrol 5

Warimpex 1

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RECENTLY PUBLISHED REPORTS Date Company Title Analyst 02/07/14 Hellenic Exchanges Upgraded EPS on strong 2Q volumes Alex Boulougouris 02/07/14 Rear-View Mirror: CEE markets Investors applaud Draghi, but suffer from Iraq turmoil Research Team 30/06/14 Folli Follie Growth story revisited Erik Hegedus 27/06/14 EME Strategy Fund Flows EME bond inflows drive yields to record lows Carsten Hesse 24/06/14 CEE/SEE Financials Biweekly BRD raised to BUY; negative newsflow in AUT Marta Jezewska-Wasilewska Although the information contained in this report comes from sources Wood & Company believes to be reliable, we do not guarantee its accuracy, and such information may be incomplete or condensed. All opinions and estimates included in this report constitute our judgment as of this date and are subject to change without notice. This report is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.

mytilineos: quick snapshot

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