EUR 356.26 For Business Accounts Only

Positive performance leads to revisions

Full force across operational segments – Mytilineos reported a strong set of 9m results, which in our view showcased the company’s profit generation capacity on the back of positive dynamics across all three operating segments. This solid operating backdrop will spill over to 2018 performance, in our view, thus leading to 30% and 60% upgrades in EBITDA and bottom-line profitability respectively.

Metallurgy exceeds expectations – As China delivers on its environmental commitments, demand and supply dynamics remain healthy, sustaining aluminium prices at high levels, while alumina is also on the rise creating favourable conditions for higher than we initially expected top-line growth. At the same time, despite the rising EUR/USD exchange rate, Mytilineos remains highly competitive in terms of production cash costs, at the 1^st quartile on the global cost curve. Solid nine-month performance implies that Mytilineos’ Metallurgy is on track to deliver record high profitability in 2017e, while current dynamics are likely to drive profitability to even higher levels in 2018e, leading to a c. 30% upgrade on our segmental numbers.   

Energy unaffected by ongoing regulatory revamp – The Power & Gas division is also recording solid performance, despite the volatile regulatory backdrop, amidst ongoing energy market reforms. The Capacity Assurance remuneration mechanism expired at the end of April and with the new Transitional Flexibility Remuneration Mechanism not yet in place, it has put May to December remuneration at risk. Despite this fact, current price levels are quite favourable (avg SMP +28% since Q2) while Mytilineos remains among the most efficient generators (highest growth momentum among conventional generators), implying that performance is unaffected by ongoing regulatory changes.

EPC backlog replenishment alleviates risks – Performance of the EPC arm is also picking up, as the company’s entry to the African region is starting to pay off. We had previously highlighted that backlog replenishment was key for this activity and mgt seems to be delivering on that front. Year-to-date, construction backlog is on the rise, with ex-Syria backlog estimated at EUR800mn at the end of 2017, from EUR550mn in 2016. Among new projects, the undertaking of a USD400mn energy project in Libya implies an upside to Mytilineos’ 2018e EBITDA vs. prior estimates.

Valuation – Following the strong 9m performance and positive prospects for the coming years, we upgraded our 2017e-2019e profitability assumptions (EBITDA +15% on avg) and raise our target price for Mytilineos to EUR13.40 from EUR10.40. Our new target price implies a sizeable upside from current levels and although the shares have exhibited quite a run ytd (+50% vs. +12% for the benchmark index), the company valuation stands at <5x in terms of 2018e EV/EBITDA, underpinning our Buy rating. On our new target price, Mytilineos would trade at an average 7.4x 2017-2019 multiple.