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Mytilineos | The path to €1bn EBITDA; top pick

Premium growth, compelling valuation – Mytilineos reported record-level FY results with FY’22 EBITDA surging to €823mn (+129% yoy) on account of robust growth across all segments. Although the share price has moved in tandem with fundamentals (c80% rally since September 2022), we reckon there remains significant latent value to be crystallized as the valuation remains very compelling: the stock is trading at 20% growth yoy. Although the target may sound bullish, credible pillars underpinning the further re-basement will be: 1) increased natural gas import volumes (with the respective EBITDA at c€110-120m), 2) the commercial operation of the new CCGT unit in Q1’23, 3) the accelerated execution of the RES rollout, and 4) the cost efficiency of the metals division, which remains in the first quartile of the global aluminum cash cost curve.

Material upgrades, with room for more – In the light of record-level profitability across all segments and the massive beat vs our (and market estimates), we have proceeded to material upward revisions to our numbers (26% at EBITDA for 2023-24). On Metals, we argue that Mytilineos will maintain the increased level of profitability (€250-300m) on account of favorable Aluminum dynamics, active hedging and decreased electricity cost (incl. Co2) starting 2024, by electrifying the smelter through Green PPAs. On Energy, we expect the commercial operation of the new CCGT to contribute incremental spark spreads of c€15/MWh, while the earlier phasing-in of RES capacity (and faster backlog roll-out) will be c€90m accretive to EBITDA on our estimates. Overall, we have reprofiled our numbers estimating €907m EBITDA in 2023 and >€1bn by 2024e (i.e. one year after mgt guidance), preferring to err on the side of caution at the current juncture, but with risk lying on the upside given the impressive execution. The strong balance sheet, with net debt/EBITDA falling below 1x in 2022, and the re-based profitability will enable the Group to comfortably implement its enhanced investment program of >€700m p.a.

Valuation: PT to €30.5; reverse engineering highlights valuation dislocation – We estimate the current price values spark spreads of just c€20/MWh (c30% lower vs our estimates), electricity costs for the smelter >40% higher than current levels, while assigning no value to the Natural Gas Trading activity and recognizing no additional value from the growth in foreign renewables (6.7GW backlog). Our new PT (SOTP-based) of €30.5 implies a 1yr fwd EV/EBITDA