Terna Energy – Company Update Terna Energy S.A. Renewable Energy / Greece Reuters/Bloomberg: TENr.AT / TENERGY GA October 16, 2018 Rating Buy Raising expectation and TP Previous Buy Terna Energy (TE) has posted a stellar performance, being one of the best performing names of the Greek market for 2018. The combination of sector dynamics, company fundamentals and management initiatives, Target Price 8.50 has driven TE’s share price up by 18.0% since our previous Buy recommendation (May 14th) and 36% ytd (EUR)Previous 6.50 (compared to Athex ytd losses of 21.0 %). During 1H18 results, management raised cash distribution guidance, Current Share Price* (EUR) 6.01 *15/10/ 2018 announcing EUR 0.30/sh capital return for Jan’19 (pending EGM approval) and pointing to annual cash distributions of EUR 50m (EUR 0.44/sh) in the coming years. At the same time 2018 is shaping, as we Stock Data highlighted in the beginning of the year (here), to an important period for the Greek RES sector, with maturing Market Cap (EUR m) 682.1 market conditions providing better clarity over the longer term and with the sector attracting significant Free Float 31% investment interest. Amid this environment we review our estimates and valuation on TE and we now raise EV (EUR m) 1,212 our TP to EUR 8.50/sh (vs. EUR 6.50/sh previously) and reiterate our Buy recommendation with a targeted Num. of Shares (m) 113m upside of 46% (including announced capital return). Having said that, we view the recent stock price decline due to the volatility in the domestic and global markets as an excellent opportunity to buy into the company. Performance 1m 3m 12m Absolute (%) -4.1 12.3 43.1 Greek wind market: Liquidity auctions and transactions ASE General -6.9 -17.1 -17.1 Following the introduction of new framework in late 2016, Greek RES sector liquidity has now been safely restored, reducing significantly payment time for RES producers (TE reported receivable reduction of EUR 85m over the last 18 months). With current framework providing stability for the sector remuneration, Greece is now ADV (000’s sh-3m) 169 moving ahead with RES capacity auctions, tendering in total 2.6GW of wind and solar capacity in 2018-20. The Price high-12 m (EUR) 6.54 first auction took place in July attracting participation from global sector names that abstained from the Price low-12m (EUR) 3.92 domestic market during the crisis years. Also in 2018 following the sector and macro de-risking, we saw the first 7.0 transactions in the private market depicting the strong underlying demand for RES assets in Greece. 6.0 Updating capacity expansion plan 5.0 TE at 1H18 had 986MW installed. It is expected that by the end of 2020 following the completion of the under 4.0 development parks (Fluvana II in the US, Evoia and Servouni in Greece) installed capacity will reach 1.263GW. 3.0 Additionally we now account for another ~200MW to be added by the end of 2022 under the Greek auctions 2.0 Oct 17 Dec 17 Feb 18 Apr 18 Jun 18 Aug 18 Oct 18 scheme. In parallel the company is continuing the development of two waste management projects that will add TERNA ENERGY SOCIETE ANONYME COMMERCIAL TECHNICAL COMPANY S.A. another cEUR 11.0m of EBITDA upon full ramp up (2022). The capacity expansion plan is backed by a total capex ATHEX Composite Index (Rebased) of EUR 734m in 2018-22 funded by i) available subsidy/tax equity (in the US); ii) project finance and iii) own cash. Terna Energy S.A. is active in the production Cash distributions expectations raised of energy from renewable energy sources Following a strong cash generation in 2017-18, supported also by receivables collection, the company raised by (RES). More specifically Terna Energy 15% y-o-y its cash distributions for 2019. As TE is now exceeding the critical mass of 1.0GW that allows to both constructs and operates wind parks, small hydroelectric plants, photovoltaic parks and fund new investment and reward shareholders, we estimate cash available for distribution (CAFD) to grow by recently has been involved in the waste 11.7% CAGR in 2017-22, with the company’s cash distributions growing by 18.6% CAGR during the same period. disposal facilities area. Its construction division undertakes mainly electromechanical Valuation projects both in house and third party developments. Based on our updated capacity expansion schedule, our valuation (SOP, DCF per project PPA lifetime assuming no repowering) returns a TP of EUR 8.50/sh (vs. EUR 6.50/sh previously) pointing to a total upside of 46% Shareholders: Gek Terna 37.9%, Peristeris (including announced capital return). Terna Energy currently trades at 7.5x on our 2018-19 EV/EBITDA Georgios 22.4%, York Global Finance 9.02% estimates, compared to EU peers trading at 8.9x-8.7x and US peers trading at 12.0x-10.7x. In respect of cash returns, TE screens at the higher end of its peer universe with 2019-20 dividend yield at 4.4%-5.0%. Note that based on latest relevant private transactions, market implies a 9.5x-10.5x EV/EBITDA multiple and a mid-single Argyrios Gkonis - Analyst digit cash yield. On out TP, the company would trade at 8.6x-8.0x on 2020-21 EV/EBITDA, with a CAFD yield of [email protected] 6.4%-7.9% and a dividend yield of 4.7%-5.6%. +30 210 7424462 EUR m 2016 2017 2018f 2019f 2020f Constantinos Zouzoulas – Head of Revenues 225.6 276.8 290.5 287.1 308.9 Research EBITDA 115.8 147.9 168.9 179.2 197.9 [email protected] Net Income 20.2 37.4 45.1 48.4 60.3 +30 210 7424460 Net Debt 554.5 563.9 543.8 622.2 700.0 P/E (x) 14.7 x 12.3 x 15.1 x 14.0 x 11.3 x EV/EBITDA (x) 6.9 x 7.2 x 7.5 x 7.5 x 7.2 x Div. Yield 3.2% 5.6% 4.4% 5.0% 6.7% Net Debt/EBITDA (x) 4.8 x 3.9 x 3.2 x 3.5 x 3.5 x Source: The Company, AXIA Research AXIA Research Page 1 Terna Energy – Company Update Greek wind market: Liquidity, auctions and transactions As we have highlighted in the beginning of the year (here), 2018 turns to be a stepping stone year for the Greek wind market. Driven by the ongoing restructuring of the domestic energy sector, wind market is entering a mature phase having resolved its legacy issues (liquidity) and a mechanism in place to support growth (capacity auctions). As global trends pushing investors towards RES accelerating in the last 3-4 years and driving energy sector restructurings globally, the revamped Greek RES market, a newcomer with significant upside, is gradually reaching investors radar. With Greece’s wind sector capacity scheduled to grow by ~15% CAGR in the coming 3 years, and improving macro providing a positive backdrop, investment interest in the sector is gaining momentum on all fronts: i) public side (TENERGY and ANEMOS are up 17%-36% ytd vs. ASE -21%); ii) private side (sale of wind and solar portfolios of Libra); and iii) greenfield investments (global RES names active again following the July auction). RES account stabilized and turned to a surplus According to the latest available data from the market operator (LAGIE) in July 2018 the RES account had a surplus of EUR 101.9m. This compares to a deficit of EUR 105m in July 2017, and a deficit of EUR 241.7m at the end of 2016. The sharp swing is attributed to the restructuring of the RES account that took place in October 2016, with the introduction of the suppliers’ fee as well as to the increased inflows from i) CO2 rights auction, due to the rally in CO2 prices and ii) higher wholesale market price (SMP). Actually, in early 2018, Ministry of Energy reduced the suppliers’ fee for the year. Looking forward, LAGIE projections call for the account surplus at the end of 2018 to stand at EUR 245m and grow to EUR 346m at the end of 2019. According to the framework in place, an amount of EUR 70m out of the year end-2018 surplus is expected to be kept in an escrow account as a safety cushion, while the Ministry of Energy is expected to proceed with a further reduction of the supplier’s fee and potentially of the ETMEAR (fee paid directly by consumers). Chart 1. RES account (deficit)/surplus (EUR m Chart 2. RES account dynamics (EUR m) 300 200 1,969 100 217 1,807 1,848 194 1,857 0 212 Other 152 394 -100 299 CO2 411 -200 190 189 89 245 RES fee -300 32 -400 ETMEAR 870 -500 889 760 950 Market pool -600 -700 Total RES compensation Dec June June June June June 486 540 570 March March March March March 366 December December December December December September September September September September 2016 2017 2018E 2019E 2013 2014 2015 2016 2017 2018 Source: LAGIE, AXIA Research This improvement in the RES account liquidity has benefited RES producers, with the industry reporting a significant reduction in payment times and a de-escalation receivables. For Terna Energy specifically in FY2017 receivables declined by almost EUR 40m, while in 1H18 a further decline of EUR 45m has been booked.