Value Investors Club / Anemos (ANEMOS GS)

Description

A mid-cap company that is not followed and trades at absolutely the wrong price. We believe this to be the cheapest wind stock globally at this point in time (and would be happy to be shown cheaper ones if anyone can point them out!), and the upside to be around 200% with the catalyst being the company being sold to a strategic or financial investor as the pipeline completes in a couple of years. The visibility and predictability of cash-flows is outstanding, and the management excellent and highly incentivised.

Company presentation

Anemos is a pioneer in the wind renewable energy sector in Greece, and the only listed pure player in

this highly attractive market as of today. It started operating its first windfarm of 9MW in 2003, and

has been growing capacity since then to a current installed capacity of 289MW (of which 98% are

windfarms, and 2% are hydro and solar). Anemos is currently significantly scaling up its capacity by

70% over the next 18 months to reach 491MW by 2020, based on the current pipeline under

construction. We consider that Anemos’ current share price (c. EUR 1.8) significantly discounts the

strong operating performance of its current installed base and completely ignores the company’s

already secured pipeline. We have a c. EUR 5.6 target price providing a 3x return on investment, over

a 2 year period during which the company will have developed its already secured current pipeline

and will start distributing dividends. We expect the company is likely to be sold to a strategic or

financial investor at the right time fully crystallizing the valuation of the asset.

Shareholding structure

Anemos is a subsidiary of Ellaktor, the leading Greek construction and infrastructure conglomerate,

which owns 64.5% of the shares. Most importantly, the management owns a significant amount of

shares. The Chairman and CEO, Mr Sietis owns c. 2.6% shares, the COO Mr Frangoulis owns c. 1.5%

shares, and Mr Kallitsantsis, the chairman of Ellaktor and former Chairman of Anemos, owns c. 7% of

shares. The management has been working at Anemos since creation in 2001, which further

demonstrates their commitment to the business. The free float represents the remaining 24.4% of the

market cap. Due to its small free float, Anemos is thinly traded and not really covered by the sell-side.

Overview of the Greek RES market

The GreekRESsector benefits from longterm secured prices, which make it very attractive for

investors.

Until December 2013, RES operators could secure a 20-year PPA with feed in tariff. In 2014, there was

a restructuring plan launched to reduce the deficit of the market operator LAGIE. Against a 5%

reduction in the tariff, 7 additional years of operations were granted to operators on projects already

installed. This has actually been a value-accretive transformation for Anemos and for other market

participants as project durations were extended by 35% 20 years forward against a 5% reduction in

the revenues for the pre-2013 wind farms. This has been the only retroactive change in regulation.

Other changes in regulation discussed below only apply to future windfarms projects.

In 2016, the regulation for new projects changed from a feed in tariff to a feed in premium. Contrary

to what the name suggests, this still represents a secured tariff for 20 years and not a secured premium

on a volatile wholesale price.

Whilst there are always questions about the future regulatory changes, we believe that with the Greek

electricity reform having undergone already major reforms under the supervision of the Troika, and

with Greece having very ambitious targets in terms of new renewable installations, and generally

being desperate to attract foreign investment as a means to exit the crisis, the likelihood of a retro-

active cut is extremely low. Also, wholesale prices are very high in Greece (c. EUR 55 recently), so at

this stage new renewable capacities are not putting a lot of strain on the system due to very limited

subsidies required.

Since 2017, the feed in premium is awarded via an auction, through which operators are able to secure

a 20-year PPA. In the latest auction in June, Anemos was able to secure a 20 years PPA at EUR70/MWh

for 28.8MW out of 491 MW projected capacity. One should highlight that:

• EUR70/MWh is amongst the highest numbers we have seen in auctions globally, especially in

a country where load factors are traditionally solid.

• Whilst a drop from previous levels of c. EUR 90/MWh, capex per MW has significantly reduced

(by a comparable c. 30% since 2013), therefore the project IRR is not worse at EUR70, and we

expect Anemos will secure double digits unlevered IRRs which is unheard of in the EU in 2018

• The remaining Anemos windfarms have a guaranteed tariff between EUR82 and EUR107, yet

will benefit from lower capex levels, making Anemos’ development portfolio highly attractive

The government has planned to auction 2.6GW of renewable energy licences over the next 2 years.

The next auction will be in December. Recent press reports have mentioned that the government

could start the auction at a higher price for the next auctions which should continue to support high

IRRs.

A proven business model and operating excellence

Anemos has a solid track record of operational excellence. Anemos has consistently exceeded average

load factors in Greece thanks to its portfolio of excellent sites. The company boasts high availability

rate of 98.7%.

The company has lean operations and a scalable business model. Anemos had 32 employees as of

June 2018 amidst a significant development phase of the company, versus 18 employees in 2014.

Another example is that admin costs have been flat over the past 4 years while topline has doubled.

The company’s lean operations allow for margins of over 70%.

The company cash conversion is excellent. The company does not need any capex besides capex

related to new project. It does not pay cash taxes in its current phase of expansion, but will be, once

the projects are completed. Cash conversion is expected to further improve as Anemos gains scale, as

the cost of debt will significantly reduce as a percentage of operating cashflows.

While windfarms load factors fluctuate on an individual basis, Anemos’ large installed base is

geographically diversified across various Greek regions, which reduces volatility of Anemos revenues.

Excellent disclosure and transparency with shareholders

Despite its small size, Anemos is very proactive with investors and provides a lot of operating metrics

on each of their windfarms. The company publishes quarterly accounts, and updates the market every

quarter by hosting a results call and releasing a detailed results presentationavailable on their

website. Additionally, the company regularly releases a deck of slides with many insights on the

company strategy, education materials on the RES market as well as a lot of transparency on their

operating performance since they listed in 2014. All these efforts really help investors to form a view

on the company’s expected results, and allows them to precisely model each individual windfarm,

which we did to frame our valuation.

P&L is now reaching an inflection point…

When one puts together all the information the company provides to forecast expected profits, we

see the company is at a turning point in its history, confirmed by strong H1 results which printed black

on white the profitability of its most recent installed base. Fast forward 18 months from now, we

expect the company to reach over 100m EUR in revenues and an EBITDA in the 75-80m range when it

will benefit fully from operating its 491MW portfolio. Speaking extensively with management, these

are also the numbers they have in mind it seems as indicated in their latest investor presentation.

2015A 2017A 2018E 2020E

Capacity 197 236 289 491

Revenue 40 50 63 102

EBITDA 28 33 45 77

… Funded by mix of increasing cashflows and debt

Since January 2018 until December 2019, the pipeline projects require EUR176m of capex, which will

be covered by:

• 83m EUR of cumulated FCF to Equity

• 93m EUR of additional debt

Consequently, we expect net debt to increase from 172m to 265m EUR by December 2019. While

leverage was standing at 5.2x EBITDA as of December 2017, it is expected to be reduced to 3.4x run-

rate as of December 2019 as quite a few capex have already been engaged that are not yet generating

any revenues. The company is not expected to pay cash taxes until that point in time, from which it

will be able to pay a dividend while repaying debt and paying taxes of c. 13m per year.

Valuation

Valuation of a company in such a strong expansion phase is a challenging exercise. The first point we

want to make is that the pipeline is reasonably secured, and the works have broadly already started,

with very little construction risk involved. The company is yet to finalise a refinancing of its debts, but

all the checks we made suggests that Greek banks are actually dying for such a high quality exposure,

and there is also availability from EIB funds and even a bond issuance, so the debate is really how low

can they bring their cost of debt from the current c. 4.5%.

The other question one can ask is how to value the in all likelihood many years of accretive growth

ahead of us as the company is likely to get a significant share of the wind farms that will be installed

in Greece over the next 5 years.

Our approach is simple – we value the company based on its existing committed pipeline, and ignore

the value creation of likely future projects, hence building up some conservatism in our assumptions.

Anemos is currently trading at EUR 1.8 per share, representing a c. 5x EBITDA multiple and a 36% FCF

to equity yield based on PF 2020 numbers (assuming a FY contribution of all the projects, even though

some might actually slip a few weeks or months into 2020).

Due to its absurdly low valuation, Anemos has been approached by a number of spontaneous bidders

in the past and over the years (multiple press reports on this). The previous board of Ellaktor then

decided to initiate a competitive sale process. Based on our checks with Greek bankers and with

management, we believe the expectations were for a bid price of c. EUR 3 / share. Mr. Kallitstantis,

one of the controlling shareholders of Ellaktor and of Anemos took the strong view that this price

would be way too low and opposed the sale process as a result. He felt that by waiting until the

significant pipeline was built and ideally the cost of capital in Greece was a bit lower, he could attract

much higher valuations, probably closer to EUR 6 / share. Largely because of this, he imitated a well-

documented proxy fight which he won and is now the controlling shareholder and the CEO of Ellaktor.

All the management team of Anemos sided with him, and they all seemed to prefer selling their shares

at c. 6 in 2 years than at 3 this year.

Whilst from a short-term trading perspective, this was probably detrimental as some ‘spec’ had built

into the shares, we feel that this is absolutely the right strategy, and fully support the management

team in their decision to wait for a couple of years before putting the company up for sale.

Anemos being a pure player in the Greek wind RES market, we cannot help but noticing the increasing

interest by private investors in that space. A month ago, Fortress acquired 181MW, part of which were

still under construction, for 300m EUR of EV (https://www.euroenergy.com/news/euroenergy-

completes-the-sale-of-wind-asset-portfolio-in-greece-in-transaction-valued-at-approximately-

300m/). Applying the same EV/MW multiple (1.66x), Anemos would be valued at 814m EUR EV. Using

peak net debt of 265m EUR, this transaction would value Anemos shares at EUR 6.64 per share.

In Spain, Saeta Yield was acquired by TerraForm for a total EV of 2.4bn EUR, representing a 10x EBITDA

multiple. Using this multiple, Anemos would be valued at EUR 6.5.

While Anemos is the only listed pure player in the Greek renewable energy sector, its closest peer is

Terna Energy, which also has other activities such as waste management and construction, as well as

windfarms in the US. On 2020 multiples (Terna Energy does have a pipeline of wind project in the US

and in Greece), Terna Energy trades at c. 7x EBITDA, 22% FCFE Yield. Anemos would need to trade > 4

EUR per share to be at equivalent multiples.

As a side-note, we are also shareholders of Terna Energy, which we deem to be a very cheap and high

quality stock, and also a much more liquid one, even though there is much less upside than for

Anemos.

A DCF is possibly the most appropriate way of correctly valuing Anemos’ portfolio of finite lifetime

assets. Conservatively, we are assigning a terminal value of 0 to Anemos. However, the windfarms

should still be able to generate energy at the expiry date. Therefore we assume that each windfarm

will keep producing energy for an extra 5 years, but instead of selling it at the feed in tariff, it will be

sold at the wholesale price of c. EUR 50/MWh. Running the DCF from 2020 onwards with a 7.3% WACC

(maybe low for Greece, but extremely high for every other European country) gives us a 725m EUR

EV, which translates into 5.62 EUR per share using peak net debt, which we use as our target price.

We expect bidders are likely to have a lower cost of capital in a couple of years, which could lead to

even higher take-out prices.

We also would like to highlight that Anemos is an environment-friendly investment which is therefore

likely to attract an ever growing number of investors, who are increasingly focussing on ESG besides

traditional financial metrics.

We therefore believe that Anemos is an attractive investment case which will deliver significant

growth over a 2 years horizon. Anemos’ highly regulated environment provides strong visibility to

investors in a global context where they probably need it most.

Significant additional potential

Capitalizing on over a century of innovation in wind power, wind turbines are becoming more and

more efficient year after year. Not only has the cost per MW significantly decreased over the past

years, there is also significant retrofit opportunities for old windfarm to be equipped with bigger

power plants. The reason why existing windfarms are not retrofit yet is that each windfarm has a

licenced capacity under its 20/27 years PPA, and Anemos is therefore not able to upgrade them with

current licences. However this is a significant opportunity for Anemos post expiration of its PPAs. With

20 years of operating metrics on its geographically diverse portfolio, Anemos will be able to upgrade

its most productive windfarms and further enhance its performance. This is not captured in our

numbers, but represent a significant long term opportunity we believe.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

1) Execution on the strong growth pipeline

2) Obtaining new projects in the upcoming auctions

3) Refinancing of the debt

4) Ultimately - sale of the company....

-1 show sort by

			2018	2019
Price:	1.80	EPS	0.17	0.21
Shares Out. (in M):	83	P/E	10.8x	8.8x
Market Cap (in $M):	180	P/FCF	0	0
Net Debt (in $M):	200	EBIT	0	0
TEV (in $M):	380	TEV/EBIT	7.8x (EBITDA)	6x (EBITDA)