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TERNA ENERGY | Growth optionality

Conducive environment for RES capacity additions – Considering Greece’s de-lignitisation program, which increases the need for RES additions to meet demand currently covered by lignite units, Terna Energy has no major hurdles in carrying out its capacity roll-out program, on top of healthy market dynamics (ELAPE due to register surplus in 2021/2022e) and improved licensing procedures. In our view, it is well placed to benefit from the favourable backdrop that helps accelerate both “traditional” RES as well as niche projects, such as floating offshore, pump storage and waste management. Being one of the leaders in the Greek RES space, Terna Energy is well-positioned to take up a significant part of needed capacity additions in the coming years, in view of the lignite phase-out program and NECP targets.

Cash flow visibility; virtually no merchant risk – Terna Energy’s existing and under development capacity operates under a Govt support scheme ensuring long-term cash flow visibility (long-term PPAs with the market operator, regulated tariffs, priority in the system). As such, the group enjoys long-term and stable revenue streams, having minimal exposure to spot price volatility. Looking ahead, the market is likely to move away from FiT/FiP type contracts towards corporate PPAs, whereby off-takers will be purchasing power directly from clean energy producers as part of their commitment to reduce CO2. In the case of Terna Energy, such agreements may be established with any corporate off-taker, including GEK TERNA’s electricity supplier Heron. In the latter case Terna Energy will continue to operate with virtually no merchant risk while Heron will benefit from a balanced portfolio of own gas-generation assets and RES.

Installed capacity expected to more than double by 2026e – Against this background, our model conservatively incorporates operating capacity of 1.3 GW by 2023e, which suggests +17% EBITDA CAGR over 2021-2024. Our valuation also takes into account the value creation from an additional 1 GW in the long run (i.e. peak capacity of 2.3 GW by 2026e, 700 MW lower than mgt target of 3 GW). This means there is upside risk to our numbers/valuation from a potential faster roll-out of RES projects than our model incorporates.

Recalibrating numbers to deconsolidate Texas; Buy – We have recalibrated our model deconsolidating the US business and reflecting other implementation delays, thus lowering 2022-23e EBITDA by >30% on average. We also amend our valuation framework, switching to a SOTP, now valuing: 1) Terna Energy’s existing and under development portfolio at an EV of €1.8bn (c10x 2022e EV/EBITDA), and 2) now assigning an additional €446m value for future pipeline (1GW), based on an implied EV/IC ratio of 1.4x. The latter translates to c30% addition to the MCap. On our estimates at the current price the market assigns limited value to capacity beyond the existing and under development portfolio. Although pipeline projects are certainly not commensurate with future growth, they do provide a useful indication of the growth optionality, and as such, we expect the stock to gradually incorporate a component related to growth beyond known projects.