Mytilineos (AT:MYTr) reported solid Q1 results with EBITDA growing 20% y-o-y sustained by strong performances in the Power & Gas business and EPC & Infrastructure activities. We see Mytilineos as well positioned to reach our full year forecasts, on which basis the stock is trading on less than 7x FY19 P/E, less than 5x EV/EBITDA and offers an annual free cash flow yield of over 14% in the period FY19–22e.
Q1 results on track to reach our full year forecasts
Mytilineos reported Q1 results with EBITDA up 20% y-o-y to €92m, a strong growth rate that is consistent with the trend we expect for the full year (+24% yoy). EBITDA growth drove 21% y-o-y EPS growth to €0.348. The company does not provide divisional data, but we believe that the key contributors to growth were the Power & Gas business (higher margins thanks to higher power prices and gas imports at a discount to market prices; higher volumes, up 23% y-o-y for gas plants and 84% yoy for renewables; and higher supply market share) and the EPC & Infrastructure activity (new contracts in Ghana and Kazakhstan). The Metallurgy business achieved similar profitability to Q118 despite a decline in market prices for aluminium, thanks to cost control and hedging in place.
Growth projects could add to organic growth
Following Q1 results, we view Mytilineos as on track to reach our forecasts for FY19. The growth we forecast for this year is mostly organic, but as explained in our recent initiation Cash flow miner, growth generator, we estimate c €800m balance sheet headroom by 2022 to deploy for new investments. Mytilineos is evaluating the construction of a new alumina refinery plant and of a new gas-fired power plant. We estimate the projects would have a combined 20% project IRR, well above the cost of capital, and would boost current EBITDA by c 50%. The final investment decision on the power plant project has been taken and construction could start before the end of 2019, provided a construction licence is granted.
Valuation: 14%+ FCF yield, large discount to peers
Based on our unchanged estimates we forecast 14–16% free cash flow (FCF) yield (pre-growth capex) over 2019–22e. By applying the median valuation metrics of European diversified industrials, we calculate an average value of c €16.5/share for Mytilineos, a 70%+ premium to the current share price. Similarly, a SOTP valuation using the EV/EBITDA of comparable peers implies more than a 40% discount to fair value. Finally, our DCF-based SOTP is €12.3/share, implying c 30% upside, even assuming a 15% discount to reflect the diversified business model.
Business description
Mytilineos operates three main businesses: metallurgy (aluminium/alumina production), power & gas (power production/supply and gas trading) and large-scale infrastructure EPC. The company operates in 29 countries across Europe, the Middle-East and Africa and has a workforce of 2,700 employees.
