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Q1’20 Trading Update: Mytilineos-EUROXX

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Q1’20 Trading Update: good performance, with group sales, EBITDA and net profits of €533m, €80.6m and €36.4m, +3.7%, -12.4% and -26.8% y-o-y, respectively, at the high end of our estimates; Overall, Mytilineos made a good start to the year and seems on track for a resilient performance in 2020e; impact of Covid-19 pandemic seems manageable and the group has solid liquidity of c€1.5bn (€700m cash & €800m stand-by facilities).

Mytilineos (MG) released an overall good trading update for Q1’20, 1-10% above our estimates. In more detail, MG’s Q1’20 group sales grew by 3.7% y-o-y to €532.7m (Exx at €526m), driven primarily, in our view, by Power & Gas (driven by resilient electricity production despite the drop in SMP) and to a lesser extent Metallurgy (as LME aluminium & alumina prices recorded declines y-o-y); that said, the EPC division had a rather softer start to the year. Q1’20 group EBITDA reached €80.6m, exceeding our estimates by 3.6%. This implies a 12.4% y-o-y decline mainly due to negative base effects (as Q1’19 was particularly strong) but a 24% sequential improvement compared to Q4’19. According to Mytilineos, this good performance was primarily driven by a) profitability resilience at the Metallurgy division, as lower y-o-y aluminium/alumina prices were offset by significant cost cutting and reduced raw material costs, and b) the higher y-o-y profitability of the Power & Gas division, aided by the group’s competitive natural gas portfolio, despite the overall lower SMP prices in the wholesale electricity market. Note that EPC made a rather soft start to the year, while the new International Renewables and Storage Development –RSD– BU had a good contribution, accounting also for the sale in Feb’20 to Motor Oil of a portfolio of solar power parks in full operation located in Northern and Central Greece of an aggregate 47MW capacity for a consideration of €45.8m. Further down the P&L, group net profits reached €36.4m (10% above Exx), implying a 26.8% y-o-y decline and a 49.8% sequential improvement. Also important, in our view, Group Net Debt stood at €530m (up from €421m at end-2019, we believe the increase is due to CapEx and higher WC needs, typical for the beginning of the year), leading to a comfortable Net Debt/EBITDA ratio of 1.76x on a last twelve months (LTM) basis.

According to MG’s announcement, in Metallurgy, aluminium/alumina prices were down 8.9%/26.3% y-o-y in Q1’20, but cost cutting and significantly reduced raw material costs (esp. natural gas prices) have improved cash costs by a run-rate of 30%/22.5% y-o-y, hence leading to a resilient profitability. Note that the latest cost optimization programme (“Hephaestus”) is in full implementation with a target benefit of €62m, out of which €35m are recurring EBITDA improvements and the rest refer to one-off items. In Power & Gas, the improved y-o-y profitability in Q1’20 was driven by both thermal power plants (as MG’s consumption profile, scale and access to competitive and diversified gas supply led to an increase of the clean spark spread by 55% y-o-y and despite the c26% drop in the SMP to €50.4/MWh) and RES (more than 200MW in operation). Moreover, Protergia increased its market share in March’20 to 6.5% and is steadily strengthening its presence, with its customer base now approaching 250k households and businesses in electricity and natural gas. In EPC, the underperformance was driven by the fact that many projects were in a completion phase while new projects have not yet been contracted or given a notice to proceed. Regarding outlook, Mytilineos’ management believes that the new structure and strategic direction of EPC will soon start delivering, starting possible with the rest of 2020. Finally, in RSD, during Q1’20, the execution of solar PV projects continued uninterrupted in countries like Spain, UK, Chile and Kazakhstan, while as already mentioned, in Feb’20 the BU concluded its first solar development project sale, which is the first out of a total pipeline of 600MW in such projects to be developed, constructed and disposed within the next 18-24 months. Note that the division’s current signed backlog of 3rd party EPC projects amounts to €155m, with another €160m in the final phases of contracting.

Covid-19 Update: In operational terms, all group production facilities are currently fully operational, while both the Alumina refinery and the Aluminium smelter operate in full capacity and without any customer or supply chain issues from the pandemic. Moreover, the group faces no major issues regarding the receipt of basic raw materials or natural gas and electricity, while there are no issues regarding the group’s supply chain and the delivery of its products to its end-customers in Greece and abroad; finally, there seem to be no major delays regarding customer receivables. In financial terms, Mytilineos is taking the maximum benefit of the collapse in raw materials and natural gas prices, while it aims at more cost-cutting i.e. in addition to the €35m recurring benefit of “Hephaestus”, it is assessing another €35m of cost optimization initiatives across all BUs; a fair portion of this €70m is expected to fall in 2020e and the rest in 2021e. Regarding CapEx, c70% of MG’s investment programme is going ahead, with the remaining 30% put on hold, awaiting for more clarity regarding the effect of the pandemic. Finally, in liquidity and credit position terms, Mytilineos currently retains a cash balance of €700m and a total liquidity of c€1.5bn including the c€800m in stand-by facilities. On top, MG enjoys a comfortable credit maturity profile and no major maturities until 2022.

New CCGT plant and planned alumina project: a) with respect to the new CCGT unit with a total capacity of 826MW, the construction continues as planned and is on track for commissioning during Q4’21e, b) regarding the new alumina production plant, there has been no change since the last update provided along with FY’19 results; further information with respect to this project will be provided when circumstances are normalized and there is more clarity.

Overall, based on the Q1’20 performance and the overall manageable impact, in our view, of the Covid-19 pandemic, we believe that although the remainder of the year will be more challenging, Mytilineos seems on track for a resilient performance in 2020e.

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