Mytilineos leverages its low-cost structure and strong competitive positioning to generate robust cash flow (FCF yield of 14–16% in 2019–22e), supporting both dividends (3.7% FY18 yield with 13% CAGR) and large growth investments with potentially double-digit returns, which could boost current EBITDA by c 50% (in addition to our current forecasts). The stock trades at more than a 40% discount to other European diversified industrial companies on P/E and EV/EBITDA and at more than a 40% discount to a SOTP based on international peers’ multiples.
Cost leadership is the key feature the three businesses (power generation/supply, alumina/aluminium production, infrastructure engineering, construction and procurement, EPC) have in common. In particular, the highly efficient gas-fired plants and the access to cheap natural gas allow the Power & Gas business to achieve high load factors and higher-than-average margins. Production costs for both alumina/aluminium, which are in the first quartile globally, allow Metallurgy to be profitable and strongly cash flow generative. Overall, we forecast a 13% EPS CAGR in 2018–22e, driven by a tightening power market and growth for the EPC & Infrastructure business.
Even assuming a relatively low statutory payout ratio of 35%, we calculate an FY18 dividend yield of 3.7% growing at 13% CAGR. We expect net debt/EBITDA of 1.4x to fall rapidly thanks to cash flow generation and EBITDA growth, and forecast the company to have net cash by 2022 in the absence of new large investments. 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 CCGT power plant. We estimate that both projects would have double-digit returns (combined 20% project IRR), well above the cost of capital, and would boost current EBITDA by c 50%.
Based on current forward commodities prices, we forecast strong cash flow, with 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. Key risks include higher/lower alumina/aluminium prices, an increase in power costs post-2020 and lower thermal margins.