Semapa Holding Company / Portugal Reuters/Bloomberg: SEM.LS / SEM PT December 21, 2017 Semapa: The Navigator & more – Initiating coverage with a Buy Rating Buy vs. previous NR recommendation Target Price (€/sh.) We initiate coverage on Semapa (SEM PT) with a Buy rating and a target price of EUR 20.5/share, implying a 15% 8.0 20.5 upside from current levels. Current Share Price* (€/sh) 7.0 17.95 Semapa’s holdings include a 69.6% stake in The Navigator Company (NVG), the fully-owned Secil (cement and *18 /12/ 2017 aggregates) and the fully-owned ETSA (environment and waste management). Our valuation reflects the upside potential of the Navigator, driven by the positive conditions in the pulp and paper 6.0 Stock Data markets and NVG’s drive to expand to other lucrative segments and also expectations for an improving performance of Secil. Market5.0 Cap (€m) 1,449 EV (€m) Specifically, we are positive for the medium-term prospects of the Navigator as we consider the positioning of the 4.0 3,581 company in the global pulp and paper markets as well as the prospects and the pricing conditions in these markets. In Free Float 28% addition, we view that NVG’s new investments in pellets and tissue paper production will be adding to the value of the 3.0 company. Num. of shares (m) 80.7 For Secil we note the ongoing cost-cutting actions taken by the management but we also expect an improving 2.0 performance on the back of increased sales In Portugal and Brazil, as demand in these countries is expected to improve. Performance 1m 3m 12m We also note the medium-to-longer term economic prospects of the other markets in focus (Lebanon, Tunisia and Absolute (%) 15.3% 17.9% 40.3% Angola) as well as the positive demographics of these markets. 1.0 PSI 20 (%) 2.8% 2.4% 17.5% Finally, the contribution of ETSA to Semapa’s portfolio accounts is small but ETSA is the largest player in Portugal in the waste management segments where it operates and thus well placed to benefit from the further consolidation of the 0.0 local market but also as a regional consolidator (potential acquisitions in Spain). Trading Data Daily volume (3M avg)* Healthy top line growth 0.04 Semapa revenues for 2017 are estimated at EUR 2.17bn (+4.7% y-o-y), while for the 2017-21 period are forecasted to 12M high (€/sh) EDP18. 35RENOVÁVEIS S.A. PSI-20 Index (Rebased) grow at 1.8% CAGR. For the Navigator Company (accounting c75% of Semapa’s revenues), we expect sales to grow 2.0% 12M low (€/sh) 12.71 p.a. between 2017 and 2021. For Secil, sales are forecasted to grow 7.6% y-o-y in 2017 to EUR 506m, and at a 1.2% CAGR for the period 2017-21 on the back of the recovery of cement and clinker sales in Portugal and Brazil. * 000’s shares EBITDA and Net income 20,0 We forecast higher operating profitability from both the Navigator Company and Secil, supported by operating leverage 15,0 and cost containment. Semapa EBITDA is seen settling at EUR 508m in 2017 (+3.9% y-o-y), while we estimate a 2017- 21 EBITDA CAGR at 2.2%. Although net income attributable to shareholders is seen declining 9% y-o-y to EUR 105m in 10,0 2017 (tax benefits boosted net income in 2016), for the period 2017-21 is estimated to grow at a CAGR of 8%, reaching 5,0 EUR 143m at the end of the period. 0,0 Dividend yield estimated at 3.6% in 2017 and 4% in 2018 Semapa - Sociedade de Investimento e Gestão, SGPS, S.A. We expect Semapa to use the dividends to be received from the Navigator Company – cEUR 700m between 2017 and PSI-20 Index 2021 – to reduce net debt and distribute dividend to its shareholders. In our model we incorporate a dividend payout ratio for Semapa of 50% for the period 2017-21, which translates into a cumulative distribution of cEUR 300m over the Semapa – Sociedade de Investimento e Gestão, 5-year period. Dividend yield is estimated at c3.6% in 2017 and 4% in 2018. At the same time, although we incorporate SGPS, S.A., through its subsidiaries, produces a capex of cEUR 375m between 2017 and 2019, net debt to EBITDA is seen decreasing from 3.6x in 2016 to 2.2x in 2019. and sells cellulose pulp and paper, and related products. It operates through three segments: Upside potential of 15% - Initiating coverage with a Buy Pulp and Paper, Cement and Derivatives, and Our valuation exercise for Semapa results in a target price of EUR 20.5 per share. Based on our estimates, the company Environment. The company also produces and currently trades at an EV/EBITDA and PE ratio for 2017 and 2018 of 7x/6.6x and 13.8x/12.8x, respectively. sells cement, clinker, ready mixed, aggregates, At current price levels, the market seems to incorporate Semapa’s stake in NVG, the holding debt and a discount, but precast concrete, and mortar products. In apparently fails to assign any equity value to the other subsidiaries and mainly to Secil. We argue that although the addition, it is involved in environment related cement subsidiary has been impacted by adverse market conditions, it is taking steps to optimize its cost structure, activities. The company has operations in while it is well placed to benefit from the economic recovery in its markets. Portugal, Other European countries, the United EUR m 2014 2015 2016 2017E 2018E States, Africa, and Asia. Semapa was incorporated in 1991 and is headquartered in 1 998 2 132 2 075 2 168 2 224 Revenues Lisbon, Portugal. EBITDA 410 478 489 508 520 Shareholding structure: Grupo Queiroz Pereira Net Income 113 81.5 115 105 113 50.4%, Cimo Gestão de Participações 20.08%, Net Debt 1 386 1 803 1 780 1 648 1 483 Bestinver Gestión 8.05% and Santander Asset Management 2.81% P/E 9.89 14.94 9.45 13.8 12.8 EV/EBITDA 3.4 3.9 3.5 7.0 6.6 Analysts Maria Almaça, CFA Net Debt/EBITDA 3.4 3.8 3.6 3.2 2.8 [email protected] Dividend Yield 19.0% 7.7% 3.3% 3.6% 3.9% +351 21 936 4447 Source: AXIA Research Axia Ventures Group - Avenida da Liberdade 240, 4th floor, Tel: +351 219364444, Fax: +351 966049598, Web: www.axiavg.com Please refer to the last page for disclosures and analyst certification Semapa-Initiation of Coverage Table of contents Section Page Investment Case 3 Valuation 6 Company Overview 8 Business Segments 11 Capex, Capital Structure & Funding 23 Assumptions and Forecasts 26 Detailed Financials 28 Disclosures 30 AXIA Research Page 2 Semapa-Initiation of Coverage Investment case We initiate coverage on Semapa, a holding company with stakes in the Pulp & Paper, Cement and the Environment sectors, with a Buy rating and a target price of EUR 20.5 per share, implying a 15% upside from the stock’s current market price. The main driver of the company’s value lies within its 69.4% stake in the Navigator Company and its cash flow and growth prospects. Expectations for improved performance by the cement subsidiary (Secil) further supports the positive view on Semapa. The Navigator Company, is a significant player in the global pulp and paper market. We are positive on the prospects of the Navigator given: Its leadership position in the EU premium paper market, coupled with the recent improvement in the short-term pricing outlook for both pulp and paper. The new lines of growth within the tissue production segment and the pellets production in the US. Its attractive dividend distribution. Based on our forecasts the NVG’s dividend yield currently stands at 6.1% in 2017 and 5.8% in 2018. We expect NVG’s total sales in 2017 to come in at EUR 1,634m (+3.6% y-o-y), EBITDA at EUR 414m (+4.1% y-o-y) and net income at EUR 192m (-11.7% y-o-y). Between 2017 and 2021, revenues, EBITDA and net income are forecasted to grow at compound rates of 2.0%, 2.3% and 2.4%, respectively. Secil is expected to increase its contribution to Semapa’s results: Secil to benefit by the improved demand for cement and clinker in Portugal and Brazil. Revenues are forecasted to grow 7.6% in 2017 to EUR 506m on the back of some volume increase but mainly improved pricing of cement and clinker sales. The company is working towards further improving its expense structure Secil’s EBITDA is expected to reach EUR 87m in 2017 (+3% y-o-y), while we would expect a rather stable EBITDA margin over the period 2017-21 of c.17.5%. Dividends received from the Navigator Company to continue (i) to reduce Semapa’s debt levels and (ii) be used for the distribution of dividend to Semapa shareholders: We expect Semapa to receive almost EUR 700m in dividends from the NVG between 2017 and 2021. Semapa’s net debt is forecasted to decrease from EUR 1,780m in 2016 to EUR 1,648m in 2017, while net-debt to EBITDA to decline from 3.6x in 2016 to 2.2x in 2019. We incorporate a payout ratio for Semapa of 50% in our model, which translates into the payment of EUR 53m of dividends in 2017 and implies a dividend yield of 3.6%.