TERNA ENERGY SA Price: € 1,85 Cap: € 202,3 M Target: € 4,00 Cap: € 436,9 M TENERGY GA Previous € 4,00 Potential 116% Industry: Energy October 17, 2011 Investment Opinion: BUY (5/5) PRICE & VOLUME vs ATHEX INDEX TERNA ENERGY SA 160.0 1,000,000 900,000 140.0 800,000 120.0 TENERGY GA /TENr.AT 700,000 100.0 600,000 80.0 500,000 400,000 60.0 300,000 Current Price (17/10): €1,85 40.0 200,000 20.0 100,000 Target Price: €4,00 0.0 0 Upside potential:116% Volume TERNA ENERGY SA ATHEX INDEX We update the coverage of Terna Energy keeping a BUY recommendation since our two- Terna Energy SA produces energy from Renewable Energy stages DCF model leads to a value of €436,9 M, that corresponds to a price of €4,0 per share, revealing an 116% upside potential. The company is among the five most important companies of the sector and has recently achieved a significant expansion Sources The company constructs and operates wind farms, abroad. The current year is one of the most important in the company’s history with more than 100 MW of RES expected to be installed within the second half of the year. small hydroelectric plants and integrated process units for the UPDATED COVERAGE •TERNA Energy S.A. was incorporated in 1997 parent company TERNA S.A. to undertake the TERNA Group's development of Renewable Energy Sources (RES) generation activities, in light of the overall management and energy utilization of wastes and opportunities arising from the Kyoto Protocol and the subsequent EU and national legislation prioritizing increased reliance on RES-generated electricity. The company focuses on developing wind biomass. power, and through locating and measuring wind conditions for suitable sites throughout Greece. •The first wind park (located in Evia) entered into operation in 2000, with an installed capacity of 11,22 SHARE DATA MW. In the following years, the installed capacity of the wind parks increased rapidly as the expansion of the wind park portfolio continued. In 2004, they began exploring opportunities in RES markets outside of Greece, and began the process of identifying suitable sites for wind projects principally in # Shares: 109,333,400 (Common Registered) the Balkans and China, and then in Central Europe in 2005. They began diversifying into different RES segments by starting the construction of the first two small hydroelectric plants in 2006. Currently, Capitalization (€ M): 202.27 they are also expanding their business in Solar and Biomass projects. •Its early entry into Greek RES allowed Terna Energy to secure some of the most attractive sites. 200d Mov.Avrg.Price(€): 2.82 Successful development has made Terna Energy the third biggest wind park operator in Greece behind Rokas Energy with 181,5 MW in operation and 231,5 MW under construction. The well-diversified 200d Mov.Avrg. Volume (#): 43,821 pipeline of domestic projects reaches 5,8 GW among which 909 MW belong to three Joint Ventures. •32 MW are in operation in Poland while other 34MW are under construction. •20 MW are under construction in Bulgaria. % Price change since 31/12/2010: -39.34% •The company is active in the US market after purchasing licenses for projects of 178MW. •The company has announced a target of 1200-1600MW installed or at late stages of construction for 52 wk high: 4.1 (18/02/2011) 2013-2014 which is considered too optimistic despite the market reform. The new legislation has simplified the application process for wind parks. However, we have not seen significant steps forward 52 wk low: 1.77 (24/08/2011) yet , as far as the application process pace and the new RES capacity installed is concerned. •The RES market in Greece is dominated by the following trends: -Large wind parks are expected to dominate. Major Shareholders: 70.20% -Increasing importance of small hydro projects. -Increasing importance of biomass and municipal organic waste. Free Float: 29.80% -There is a potential for photovoltaic boom with government long term target of 700 MW. OVERVIEW OF H1:11 RESULTS VALUATION (Working Hypotheses) .Sales of €27,9M in H1:11 decreased by 3,1% in comparison to H1:10, mainly due to lower revenue from the construction sector. Risk Free Interest Rate (Rf): 5.75% .71,7% of total sales comes from the Energy sector (€20M). This sector‘s results show an increase of 21,7% because of the addition of new capacity within the year. WACC: 9.08% .The other 28,3% of total sales comes from the sector of Constructions (€7,91M).This sector‘s results show a decrease of 36% in comparison to last year, affected by the general recession in the constructions sector in Greece and abroad. 10-Year CAGR of EBIT 26,8% .Gross profit at €13,1M. This corresponds to a gross margin of 47,1% much higher than last year. This implies a much higher margin of the Energy sector since the participation of low margin Construction Perpetuity after 2020: 1,5% sector in total sales was much lower during H1:11, as mentioned above. .EBITDA of €13,3M increased by 35,6% compared to H1:10, mainly due to increased participation of SECURITIES 10-Year CAGR of Sales: 20,95% the energy sector. EBITDA margin of the Energy sector increased also to 61,7% from 54,6% in prior period due to the increased capacity. Effective Tax Rate 10: 40.67% .EBIT of €9,22M (Constructions €0,86M, Energy €8,36M), increased by 43,2% while EBT stand at €3,8M increased by 35%. This result can be attributed to lower financial income than the prior period. .EATAM of €6,98M increased by 138,3%. Minorities rights increased to €0,45M from €0,22M. FINANCIAL DATA .EAT of Energy sector at €7,44M while these of Constructions sector were marginally negative. .Positive operational cash flows at €8,2 from €25,46M in prior period due to higher working capital € M 2010 A 2011 E 2012 F 2013F needs. .Cash remained at high levels despite an expected decrease to €135,4M. The cash position of the SALES 59 64 100 147 company seems high enough to finance a big part of the under construction projects. .Total debt at €235,4M and net debt at €100M. EBITDA 21.4 36.8 70.0 103.9 Y-o-Y changes 2010 A 2011 E 2012F 2013F Total Τurnover -19,52% 7,54% 57,45% 47,36% EBITDA -9,02% 54,05% 90,14% 48,39% EATAM 9.6 14.7 25.4 37.0 EBT -47,82% 20,14% 66,37% 42,63% EAT & Minorities -39,66% 53,96% 72,25% 45,86% MERIT Securities S.A., Research & Analysis Department 3 Souri str., 105 57, Tel: 210.36 71 800, Fax: 210.36 71 830, E-mail: [email protected] MERIT Chris A. Samothrakis [email protected] , Nikolaos V. Christodoulou [email protected] 2/18 SWOT ANALYSIS Strengths FUTURE TARGETSWeaknesses o Experience in the market of RES since it has o Little potential of the construction sector. been active for many years in the market. o Specialization in the market of RES. oLarge pipeline of projects. oRecent expansion abroad. oHigher Load Factors than the market average. Opportunities Threats o Large growth in Renewable sources market o Slow licensing procedures in Greece. which is in its infancy in Greece. oLimits set by government in installed capacity. oEntry to new Energy Sources such as oAn unfavorable change in tariffs. Geothermal energy and Biomass. oLack of liquidity of Greek banks may cause oEntry to new markets such as the USA. affect the financing of local projects. INVESTMENT RISKS -LIQUIDITY RISK: Low due to the kind of the product. -INTEREST RATE RISK: Medium but it will increase in the following years due to new debt that will be received. The company is able to borrow at relatively low cost. -CREDIT RISK: Medium due to a relative small number of clients. -CURRENCY RISK: Low for the moment. The expansion of the company abroad may increase this risk. The first revenue from Poland have already received. SHAREHOLDER’S STRUCTURE SECURITIES MAJOR SHAREHOLDERS FREE FLOAT SHAREHOLDER'S STRUCTURE % GEK TERNA 47,64% PERISTERIS G. 22,54% Source: ASE, The Company MERIT 3/18 ENERGY -SECTOR ANALYSIS Greek Energy market’s liberalization began in 1999 but it is still an oligopoly with one major player, the Public Power Company. The largest part of the produced energy comes from thermal power plants, mainly from coal (lignite) units which are not friendly to the environment while only a small part is produced through renewable sources plants. Greece currently covers around 4-5% of its gross electricity consumption by RES but these numbers will definitely increase substantially in the following years. Up to end 2010 Greece holds the 11th place among the European Union countries and 17th in the World. However, there will be soon radical changes in the market in favor of the use of Renewable Sources and of Natural Gas. According to a EU directive, RES must cover 20% of total energy consumption by 2014 and 40 % by 2020. 1736 MW of RES were installed in Greece up to the end of 2010 while it is estimated that €1,35B will be spent in 2011 for the installation of 518 MW of RES projects. This is an improvement in comparison to 2010 during which only 290 MW of RES were installed. Prices per MW/h are among the highest in EU although a recent change in the leadership of the relevant Ministry may lead to changes.