ERG Renew (EGR.IM) Update 9M 09: time to move on, 2010 should see some change November 12, 2009

Transcription

1 ERG Renew (EGR.IM) HOLD Sector: Energy / Renewable energies Update 9M 09: time to move on, 2010 should see some change November 12, 2009 Last results ERG Renew 9M 09 results are in line with those published YTD. The company 9M 09 results benefit from the positive contribution of the full operation of two wind parks (Vicari e Faeto) and are penalized by a lower energy production at the French parks and by Terna s ongoing upgrade works on the national grid in Puglia. Revenues increased 9.1% YoY equaling 34.1M ; the 9M 09 consolidated EBITDA reached 14.2M, up 31.6% YoY. The Wind businesses results (the EBITDA came out at 22.1M ), was reached thanks to a strong performance at the Italian wind parks (whose EBITDA increased 46.7% YoY) and despite the negative one at the French wind parks (whose EBITDA decreased 31.1% YoY). The Water Services and the Mini-Hydro businesses still contribute marginally to the consolidate results. The EBITDA at the holding level was negative for 8.6M (up15% YoY) reflecting higher costs of a non recurring nature connected to the capital increase, increasing expenses for legal consulting and higher staff and consulting services provided to the subsidiaries in connection with the development of the wind pipeline. The 9M 09 consolidated Net Result was negative for 10.3M (it was negative for 4.5M in9m 08). The result reflects higher financial charges, up 105% YoY, to 9M. Despite the Capex of the period (27.4M over the first nine months) the Net Debt increased only slightly to 257.8M at the end of September 2009 from 254.3M at the end of 2008 thanks to the collection of receivable worth 30M due from the GSE for the Green Certificates issued by ERG Renew. Valuation and forecasts Risks The 9M 09 results confirm our view on the company. ERG Renew has high holding costs, which up to date did not translate into a fast development of its pipeline, and weak operational performances, at least since the Q4 08. That said, despite the weaknesses highlighted and the poor results published year to date, we upgrade our rating up to HOLD from SELL (also) in light of the negative performance recorded by Erg Renew share price: our new target price is basically in line with the current share price. We expect the parent company, ERG, to take some strategic decisions in 2010 about its subsidiary. ERG Renew benefits from its listed status and thus could be an interesting vehicle to lead a market consolidation (ERG holds 77.4% of the outstanding shares and has room to dilute its stake without losing control of the company). On the other way, the cost for ERG to delist ERG Renew is manageable because of the limited free float (22.6%) and easily matched by a potential optimization of the cost structure. We revised our estimates to take into consideration the last results: we now expect sales equal to 46.6M, an EBITDA of 18.8M and a Net Result negative for 14.2M ; the Net Debt should reach 319.1M by the end of the year after the Capex planned for the full year. Unfavorable changes in the future Italian incentive scheme could negatively affect the profitability of the investments made into the renewable business. The current market conditions lead either to a lack of available financing or result in financing being more expensive. The authorization process is time consuming and expensive, causing capacity targets and profitability to be missed. Forecast 2008A 2009E 2010E 2011E Sales ( M) EBITDA ( M) EPS ( ) Valuation 2008A 2009E 2010E 2011E EV/EBITDA P/E Neg. Neg. Neg. Neg. Dividend yield 0.0% 0.0% 0.0% 0.0% ROCE after tax Neg. Neg. 0.4% 1.0% EV/CE Key Data Price ( ) 0.73 Target Price ( ) 0.74 Upside/(downside)(%) 1% Market cap. ( M) 96.9 EV ( M, FY 09) Investment Profile Stock data Liquidity Management Valuation Returns Growth Ticker Bloomberg from 1 worst to 5 best Jacopo Tagliaferri Equity analyst Tel: j.tagliaferri@twiceresearch.it EGR.IM N of shares (M) Free float 17% Main shareholder ERG Spa (77.4%) Daily trading volume Mibtel ERG Renew 102k shares Share Perf % 3M 6M 1Y Absolute -17.0% -24.7% -15.1% Rel. to FtseMib -26.4% -41.3% -30.1% TWICE S.I.M. S.p.A. P.za Affari, Milano Tel Fax Capitale sociale sottoscritto e versato Euro Trib. Milano 30058/84 Reg. Soc C.C. I. A.A Part. IVA Iscritta all Albo delle Sim al n. 80 tenuto dalla Consob Soggetta all attività di direzione e coordinamento di Medinvest International S.C.A.

2 Last results: ERG Renew 9M 09 results show signs of improvement if compared with 9M 08, driven by the full integration of the ex Erg Power & Gas assets, which positively contributed to the energy production of the Italian wind business. Nevertheless the company s economics have been penalized by a lower energy production at the French wind parks, due both to a technical problem and to a lack of wind on the overall park area. Furthermore the Italian wind parks located in Puglia are still producing less energy because of Terna s ongoing upgrade works on the national grid. The holding costs continue to weight on ERG Renew s bottom line whereas the Water Services and the Mini-Hydro businesses still contribute marginally to the consolidate results. The Wind businesses results (the EBITDA came out at 22.1M ), was reached thanks to a good performance at the Italian wind parks (the EBITDA increased 47% YoY) and despite the negative one recorded at the French wind parks (the EBITDA decreased 31% YoY). The EBITDA at the holding level was negative for 8.6M (up 15% YoY) reflecting the higher costs of a non recurring nature connected to the (not executed) capital increase, increasing expenses for legal consulting and higher staff and consulting costs provided to ERG Renew s subsidiaries in connection with the development of the wind pipeline (the costs for the development of an authorization are now fully expensed in the Profit and Loss statement until the authorization is granted). After increased depreciation costs (equal to 17.2M in 9M 09 against 11.2M in 9M 08), which reflect the increased fixed assets base, the 9M 09 EBIT resulted negative for 3M (it was negative for 0.4M in 9M 08). As a result of more than doubled financial charges (equal to 9.0M in 9M 09 against 4.4M in 9M 08) ERG Renew recorded a consolidated Net Result negative for 10.3M (it was negative for 4.5M in 9M 08). The Capex for the 9M 09 period were 27.4M : 15M refers to the Ginestra wind farm, 3.6M to Fossa del Lupo, 2.2M to Faeto, 1.6M to Vicari and 2M to Plogastel. The investments planned for the full 2009, confirmed at 93.5M, will be financed by the parent company (up to 70M ) and for the remaining part by debt. The fourth quarter will see the delivery of some wind turbines which belongs to the Italian Ginestra and Fossa del Lupo wind farms; the Capex expected in the 4Q 09 should be around 66.1M in order to reach the management guidance. Despite the Capex of the period (27.4M over the first nine months) the Net Debt increased only slightly to 257.8M at the end of September 2009 from 254.3M at the end of 2008 thanks to the collection of receivable worth 30M due from the GSE for the Green Certificates issued by ERG Renew in the period The management of ERG Renew expects to see a positive contribution to the full year s results from the Vicari and the Faeto wind farms despite declining electricity and Green Certificates prices. The wind farms located in Puglia (San Vincenzo, San Cireo and Faeto) will be again penalized by Terna s ongoing upgrade works on the national grid. 2

3 We have revised our estimates for the FY 09: we now expect sales equal 46.6M, an EBITDA of 18.8M and a net result negative for 14.2M. The PFN should be 319.1M at the end of the year. The development of the pipeline should be in line with the guidance provided by the management with the release of the last industrial plan. whereas our estimates which refer to the valuation remain unchanged in terms of MW installed. Table: 3Q 09 and 9M 09 results (in M ) M 3Q'09 3Q'08 Var. 9M'09 9M'08 Var. Sales % % EBITDA % % margin 47.8% 39.1% 41.6% 34.6% EBIT n.m n.m. margin neg. 1.0% neg. neg. NET INCOME Source: ERG Renew Table: 3Q 09 and 9M 09 of ERG Renew s Wind business (in M ) REVENUES 3Q'09 3Q'08 Var. 9M'09 9M '08 Var. Wind Italy % % Wind France % % Total Wind % % EBITDA 3Q'09 3Q'08 Var. 9M'09 9M 08 Var. Wind Italy % % Wind France % % Total Wind % % EBIT 3Q'09 3Q'08 Var. 9M'09 9M 08 Var. Wind Italy % % Wind France % n.m. Total Wind % % Source: ERG Renew 3

4 Investment case ERG Renew, previously known as EnerTAD, is the result of the merger of ERG Power and Gas s assets with the former EnerTAD businesses. Today the company focuses on the production of electricity from renewable sources; mainly wind. ERG Renew has gained a single digit market share within the Italian wind market. ERG Renew currently holds the following renewable assets: 144MW of operating wind farms in Italy: the company runs 6 farms, 3 of which located in Puglia; 55MW of operating wind farms in France: the company runs 5 farms located in the North of the country; 2.2MW of Mini-Hydro plants: resulting from the merger of Erg Power and Gas s assets. In addition the company controls Sodai and DSI, two subsidiaries which belong to the Water Service division, active in the treatment of industrial waste. The division will be divested because no longer strategic. In March ERG Renew presented its new industrial plan for the period : the company expects to install new 169.9MW, investing approx. 302M. The industrial plan relies on: a solid pipeline of already authorized MW: 140MW of wind farms are under construction in Italy, 29MW in France. This new capacity will come on stream in 2010 and in 2011; an experienced (of the energy industry) management, which wrote the last industrial plan; the financing of the parent company: ERG Group pledged itself to underwrite pro quota (77.4%), the future capital increase thus guaranteeing ERG Renew a minimum cash-in of 70M. The financing has been already provided as (interest bearing) intercompany loan. There is still no evidence on the timing and the nature of the operation, which is absolutely needed to fund the Capex planned by the industrial plan. ERG Renew has faced few problems: the first industrial plan, released in May 2008, has been cancelled because of operational failures (i.e. delays in the achievement of authorizations and in the procurement of wind turbines) and weak financial markets (i.e. the 200M capital increase was cancelled); the integration of ERG Power and Gas structure into EnerTAD has been difficult and, at the management level, not functional. In addition we point out the following weaknesses: structurally high holding costs which also reflects the merger of two different structure (i.e personnel costs, expenses related to the development of greenfield projects and current lawsuits); weak operational results: since the beginning of 2009 the wind business was penalized by poor wind conditions at the French farms and grid connections problems at the Puglia s farms; the lack of diversification into different renewable sources. 4

5 Valuation Despite the structural weaknesses highlighted and the poor results published year to date, we upgrade our rating up to HOLD from SELL because: the stock has underperformed the market during the last quarter incorporating the poor results expected (now published); the industrial plan execution is going ahead and therefore the missed (YTD) investments planned for 2009 will be carry out in the fourth quarter; there will be new capacity installed in 2010 and in addition the operational problems faced this year should have been solved. Our new target price is equal to 0.74 per share (up from 0.65 ) which is basically in line with the current share price. We expect a significant newsflow in 2010: the parent company should take some strategic decisions. ERG Renew benefits from its listed status and thus could be an interesting vehicle to lead a market consolidation (ERG holds 77.4% of the outstanding shares and has room to dilute its stake without losing control of the company). On the other way, the cost for ERG to delist ERG Renew is manageable because of the limited free float (22.6%) and easily matched by a potential optimization of the cost structure. Risks Unfavorable changes in the Italian incentive scheme could negatively affect the profitability of the investments made in the renewable business. The current markets conditions lead either to a lack of available financing or result in financing being more expensive. The development of Greenfield projects in the wind business is particularly long: the authorization process is time consuming and expensive, causing capacity targets and profitability to be missed. Table: SWOT analysis Strengths - Geographical diversification - Equity provided by the main shareholder (ERG) Weaknesses - High holding costs - Difficulties in obtaining new authorizations Opportunities - Internal development of the pipeline - Sale of the Water Services unit Threats - Unfavorable changes in the incentive schemes - Execution risk Source: Twice Research. 5

6 Valuation We update the valuation rolling over our models into The assumptions behind our DCFs are basically unchanged. In order to evaluate Erg Renew we made a SOP, valuing the Wind Italy assets and Wind France assets with 25 years DCFs without any terminal value; the Water assets and Mini Hydro assets are added to the valuation at their book value. We then subtract the net present value of the holding costs and the NFP expected at the end of The DCF model we used to value the Italian wind business is based on the following assumptions for the period : The cumulated capacity will reach 284MW. In details, we forecast operating 144MW in 2009, 144MW in 2010, 194MW in 2011, 254MW in 2012 and 284MW starting 2013; The useful life of a wind farms is set equal to 25 years; Plant efficiency: on average 20% (1,752 annual operating-hours); Energy price and Green Certificates: taking a conservative view, we set the sum of the two at 160 /MWh; Capex: on average 1MW costs 1.750M ; the amortization period is 18 years starting at the end of the construction period; The investment is 75% financed by debt; the interest on the debt is 6.0%; Ebitda margin equals to 79%; Wacc equals to 6.99%. The model returns an enterprise value for the Italian wind business of 388.5M and an IRR equals to 9.4%. 2. The DCF model we used to value the French wind business is based on the following assumptions for the period : The cumulated capacity will reach 84MW. In details, we forecast operating 55MW in 2009, 55MW in 2010, 64MW in 2011 and 84MW starting 2012; The useful life of a wind farm is set equal to 25 years; Plant efficiency: on average 22.5% (1,971 annual operating-hours); Energy price: 83.8 /MWh in 2009 (annual inflation equal to 2%); Capex: on average 1MW costs 1.750M ; the amortization period is 8 years starting at the end of the construction period; The investment is 75% financed by debt; the interest on the debt is 6.0%; Ebitda margin equals to 79%; Wacc equals to 6.71%. The model returns an enterprise value for the French wind business of 90.4M and an IRR equals to 10.8%. 3. We evaluate the Water Services business on the basis of its book value (19.4M ). Erg Renew is willing to sell it in the medium term because no longer strategic. 4. We evaluate the Mini Hydro business on the basis of its book value (7.4M ). Erg Renew will only marginally invest in its development. 6

7 5. We don t consider the photovoltaic business in our SOP, even if ERG Renew is targeting to install 0.7MW within 2010, which correspond to a capex of 2.5M, equal to less than 1% of the total capex planned by the company s industrial plan. 6. To our valuation we subtract the net present value of the holding costs (87.9M, despite we expect a reduction at the end of the industrial plan), mainly personnel and SG&A costs, not allocated to the different divisions but strategic to manage the business and to develop the pipeline. 7. To our valuation we also subtract the NFP expected at the end of SOP (M ) Per share Method EV Wind Italy DCF EV Wind France DCF EV Water services Book Value EV Mini-hydro Book Value EV total Holding costs NPV NFP (FY 09e) Minorities -0.2 EQUITY VALUE

8 FINANCIALS Income statement ( M) 08A 09E 10E 11E Balance sheet ( M) 08A 09E 10E 11E Sales COGS LONG LIVED ASSETS Gross Profit WC EBITDA CAPITAL EMPLOYED Depreciation, Amortisation EBIT EQUITY Net Financial Results MINORITY INTEREST Income tax PROVISIONS Net result PENSIONS (e.g. TFR) NET DEBT EPS ( ) CAPITAL INVESTED DPS ( ) Margin (%) 08A 09E 10E 11E Ratios 08A 09E 10E 11E Gross Margin 99.1% 99.1% 99.3% 99.5% ROCE after tax Neg. Neg. 0.4% 1.0% EBITDA Margin 22.3% 40.3% 47.3% 54.2% ROE Neg. Neg. Neg. Neg. EBIT Margin -37.4% -10.3% 5.9% 12.4% Capital Turnover Net Margin -54.7% -30.5% -16.1% -9.7% Net Debt / EBITDA Gearing 189.0% 265.0% 401.0% 458.3% Growth (%) 08A 09E 10E 11E WC / Sales 94.6% 14.1% 14.3% 14.6% Sales growth 17.6% 4.8% 22.2% 27.7% Amortisation / Sales 59.7% 50.6% 41.4% 41.8% EBIT growth n.m % % 168.8% Capex / Sales -68.1% % % -72.2% Net growth n.m % -35.6% -23.1% Cash Flow statement ( M) 08A 09E 10E 11E Valuation 08A 09E 10E 11E Cash Flow EV/Sales /- Var. Working Capital EV/EBITDA Operating Cash Flow EV/EBIT n.m. n.m. n.m. n.m. Op. Cash Flow / Sales -29.4% 96.3% 22.5% 28.8% P/E Neg. Neg. Neg. Neg. Capex P/B FCF EV/CE FCF / Sales Neg. Neg. Neg. Neg. P/FCF FCF Yield Neg. Neg. Neg. Neg. Stock data 08A 09E 10E 11E Dividend yield 0.0% 0.0% 0.0% 0.0% Number of Shares (M) Average share price TTM ( ) Market cap ( M) See Legend for all definitions Enterprise Value ( M) Sources: Company data, Twice Research estimates 8

9 LEGEND EV or Enterprise Value = Market capitalization + Net Debt + Pension (i.e. TFR) CE or Capital Employed = Fixed Assets + Working Capital Fixed Assets = Tangible + Intangible + Financial assets WC or Working Capital = Stocks + Trade Accounts Receivables + Other current assets + Deferred and prepayment Trade Accounts Payables - Other current liabilities - Deferred and prepayment Net Debt = Interest Bearing Liabilities Cash Securities IC or Invested Capital = Shareholders Equity + Minorities + Net Debt + Pension (i.e. TFR) DA = depreciation and amortization CF or cash flow = net result + depreciation and amortization FCF = free cash flow NOPAT = net operating profit after tax COGS = cost of goods sold Gross Profit Margin = net sales cost of goods sold EBITDA = Earning before interests, taxes, depreciation and amortization EBIT = Earning before interests, taxes ROCE = return on capital employed after tax ROE = return on equity ROA = return on assets Capital Turnover = Sales / Capital Employed Gearing = Net Debt / Shareholders equity PE = price to earnings PB = price to book FCF yield = FCF / market capitalization EPS = Earnings per share (fully diluted) DPS = dividend per share (fully diluted) Risk free rate = 10 years Italian Government Bond (e.g. BTP) Unlevered Beta = Beta / [ 1 + ( 1 t ) ( D / E ) ] WACC = Ke * E / EV + Kd ( 1 t ) * D / EV 9

10 DISCLAIMER Analyst Certification The analysts who prepared this report write their own opinions and their remuneration has not been, and will not be, geared to the recommendations or views expressed in this study, neither directly nor indirectly. The financial analysts or their relatives are not manager, company director or adviser of the Issuer. TWICE SIM S.P.A. and TWICE RESEARCH Srl have adopted internal procedures to ensure the independence of their financial analysts and to prescribe appropriate rules of conduct. Disclaimer This recommendation has been prepared by TWICE RESEARCH s financial analysts; TWICE RESEARH is a company of TWICE GROUP. This analysis is based on information deemed to be reliable and originating from the company under analysis or other reliable sources, for the completeness and accuracy of which TWICE RESEARCH Srl assumes no liability. TWICE RESEARCH Srl is used to show a draft of the study to the Investor Relations Office of the Issuer to check the information contained, not to valuating them. The financial instruments herein are valorized at the reference price of the day before the publication, where the valorization is different it is indicated. Coverage policy TWICE RESEARCH Srl intends to provide continuous coverage of the financial instrument analyzed in this document and to produce additional reports in conjunction with the release of periodic financial data and related significant company and market events occurring within the sphere of activities of the issuing company. During the last 12 months TWICE RESEARCH Srl did draw recommendations about the instrument as follow: September 15, 2009 Update Rating SELL Target Price 0.65 May 26, 2009 Initial Coverage Rating SELL Target Price 0.65 Specific disclosures Pursuant to Article 69-quarter and 69-quinquies of CONSOB regulation no /99 we hereby declare that TWICE GROUP has a specific interest in the issuing company, as well as the financial instruments and transactions mentioned in the analysis, as a result of: - Its occasional long and short positions in the financial instruments mentioned in the analysis or the execution of related transactions; - Issuing of recommendation - Business relations. The analysis is drawn up with care, clearness and disclosure. It is released solely for information purposes and is in no way to be considered an offer to sell, underwrite, or trade, or a recommendation of any kind to purchase, underwrite, or trade financial instruments or, in general, to invest in the related securities. TWICE RESEARCH Srl may not be held liable for any effects resulting from the use of this report. In particular, and in consideration of the fact that past performance is not an indicator of future earnings, TWICE RESEARCH Srl provides no guarantee that investments goals will be met, nor does the company assume responsibility for any imprecision in the data report and/or elaborated upon in the report. Any reproduction, in whole or in part, of this report without the express written consent of TWICE RESEARCH Srl is prohibited. It is not intended for and should in no way be transmitted or otherwise distributed neither in the United States, Canada, Australia, or Japan, nor in any other nation in which distribution requires prior authorization by the proper authorities. Valuation methodology Company valuations are based on the following valuation methods: discounted cash flow method (DCF), asset-based evaluation method and multiplesbased models (for examples PE, P/BV, PCF, EV/Sales, EV/EBITDA, EV/EBIT etc.). The financial analyst chooses the valuation method that prefers.. 10