THE GREEN BROTHERS - CFASI

THE GREEN BROTHERS

BUYRECOMMENDATION

Guglielmo Marco Ilaria Giuseppe Antonio

0

5

10

15

20

25

30

Sto

ck P

rice

(€

)

CLOSING PRICE€25.90

+12.74% change

BUYR E C O M M E N D A T I O N

ERG: a Forward-Thinking Company

1Y TARGET

PRICE

€29.20

A Successful Transformation Story

DIVERSIFIEDSUSTAINABLE

CONSERVATIVE

Programmable

sources

Non-Programmable

sources

Technological

Geographical

Portfolio Diversification confirms Soundness

BUSINESS DESCRIPTION INDUSTRY OVERVIEW FINANCIAL ANALYSIS VALUATION RISKS ESG

HYDROELECTRIC (12% of Revenues) SOLAR (7% of Revenues)

THERMOELECTRIC (40% of Revenues)WIND (41% of Revenues)

• Programmable Source

• Revenues in FY19: €132mln

• Installed Capacity: 527 MW

• Leading Operator in Italy



• Cogeneration Combined-cycle

Gas turbine (CCGT) Power Plant



• One of the Five Photovoltaic

Leading Operator




A Primary Independent Producer in Europe…

7 countries in Europe

Leadership Positioning

In Italy

Prominent Position

In France and Germany

Sustainable Economy

Operating Efficiency

Power Generation

Sustainable Development is the main

challenge of ERG business

Improve Operation

Efficiency through

O&M

…Aligned with the Transition Process of the Energy System

Greenfield & Co-

Development

Repowering &

Reblading

M&A


DECARBONIZATION


New Business Models Help Advance the Energy Transition…

DECENTRALIZATION

DIGITALIZATION

The transition towards a clean and carbon-free economy

ERG CORE BUSINESS STRATEGY

Reduction in Carbon Index

-87% from 2008

Energy Industry Trends

DECENTRALIZATION

DIGITALIZATION

DECARBONIZATION



DECENTRALIZATION

DIGITALIZATION


DECENTRALIZATION

DIGITALIZATION

Geographical distribution of electricity achieving universal access by 2030

ERG around the Europe

DECARBONIZATION



DECENTRALIZATION

DIGITALIZATION


DECENTRALIZATION

DIGITALIZATION

The widespread use of digital machines

ERG Project One ICT


…Accelerating the Industry Convergence

INCENTIVES TO

SUSTAINABILITY

OIL & GAS

PRICES

EUROPEAN

REGULATIONS

ELECTRICITY

PRICEGEOGRAPHICAL

DIVERSIFICATION

Market Drivers

Renewables: an Evolving Niche Industry


High Expected Growth

Regulated Framework

Cost Efficiency Improvements

Green Economy

Entry Barriers

CAGR 6.1%

2020-2025 DECARBONIZATION

INCENTIVESRecovery

Fund

M&A OperationsHIGH CAPITAL

REQUIREMENT

Repowering

& RebladingDIGITALIZATION

Regulated Framework

Cost Efficiency Improvements

Entry Barriers

ERG Stands Out from the Competitors


11.2%

9.0%7.3%

3.5%

3.5%3.4%

1.7%ERG

Edison

Enel

Alerion

RWE

Falck Renewables

CVA

ITALIAN MARKET SHARE

Hera Acea

Terna

Italgas

Falck Renew

Iren

EDP Renovaveis

ERG

0%

40%

80%

0% 10% 20% 30% 40% 50% 60%

EBIT

DA

Mar

gin

CAPEX to SALES

EUROPEAN POSITIONING

Specialized in the Production Process

Leading Wind Operator

M&A activities

A Business Model Oriented to Sustainable Development…


DIVERSIFIED

Stable Revenues

Strong Cash Flow

Generation

CONSERVATIVE

Sound Financial

Structure

SUSTAINABLE

…with a Steady and Well Balanced Portfolio…

STABLE REVENUES

STRONG CASH

FLOW GENERATION

SOUND FINANCIAL

STRUCTURE0

200

400

600

800

1,000

1,200

mln

€

Total Revenues

0

200

400

600

800

1,000

1,200

mln

€

Revenues by Segment

Wind Thermo Hydro Solar


Well Diversified

Portfolio

Programmable

sources

Low Revenues

Volatility

Non-Programmable

sourcesGrowth Opportunity

CAGR -0.1%

(€mln)

(€mln)

…a Continuous Discipline to Drive Cost Reduction…

STABLE REVENUES

STRONG CASH

FLOW GENERATION

SOUND FINANCIAL

STRUCTURE


Increasing margins...

40%

42%

44%

46%

48%

50%

0

100

200

300

400

500

600

2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E

mln

€

Ebitda Ebitda margin

COST OPTIMIZATION

-400

-200

0

200

400

600

2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E

mln

€

Cash Flow form Operations Change in Working Capital CAPEX D&A FCFO

...Leads the company to

STRONG Cash Flow generation

(€mln) (%)

…and Maintain a Conservative Capital Structure Policy

STABLE REVENUES

STRONG CASH

FLOW GENERATION

SOUND FINANCIAL

STRUCTURE


3.62.8 3.1 3.3 3.3 3.2 3.0 2.9 2.8 2.8 2.7

0

2

4

6

2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E

Net debt/EBITDA

With a sustainable footprint...

€1.1bln amount in

GREEN BONDS in FY19-20

0

100

200

300

400

2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E

mln

€

CAPEX

Maintenance &

Installed Capacity

Expansion

HIGH LEVEL

of CAPEX

Our Forecasting Methodology: Disentangling ERG’s Business


SPLIT REVENUES

Segments

HYDRO

SOLAR

THERMO

Geographic Area

BOTTOM-UP APPROACHWIND

TOP-DOWN APPROACH

Wind Revenues Determined by Two Main Channels


PRODUCTION

Decarbonization

Process

Greenfield

Co-Development

M&A

+563 MW FY21E-26E

+455 MW FY21E-26E

Repowering

&

Reblading

PRICE

-4.08% CAGR FY21E-26E

+0.53% CAGR FY21E-26E

ITALY Loss of Incentives

ABROADBenefits from

Geographical Diversification

€/MWh

0

100

200

300

400

500

0

50

100

150

200

2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E

MW

mln

€

Solar

Installed Capacity Revenues

0

200

400

600

0

200

400

600

2016 2017 2018 2019 2020E 2021E 2022E 2023E 2024E 2025E 2026E

MW

mln

€

Thermoelectric

Installed Capacity Revenues

Other Segments also Provide Significant Contribution


0

200

400

600

0

200

400

600

2016 2017 2018 2019 2020E2021E2022E2023E2024E2025E2026E

MW

mln

€

Hydroelectric

Installed Capacity Revenues(MW) (MW)

(MW) (€mln)

(€mln) (€mln)

In our opinion is

the sector with the

highest potential growth

in ERG’s portfolio

ERG’s Target Price as Combination of Two Methodologies…


€29.20

Multiples

Analysis

1/3

€30.27

2-Stage DCF

2/3

€28.67

EV/EBITDA P/E

10.42 18.8

15.24 45.5

12.27 42.7

10.60 23.8

Equally Weighted Average

12.13 32.70

Target Prices 32.41 28.12

EV/EBITDA32.41

P/E28.12

TARGET PRICE €30.27

…which Underweights the Multiple Analysis


2-Stage DCF

Weight: 2/3

Price: €28.67

Multiples

Weight: 1/3

Price: €30.27

Separating Valuation of Organic & Inorganic Growth


WACC Kd

Short-Run 4.67% 0.45%

Medium-Run 4.80% 0.95%

Long-Run 5.07% 1.93%

Other Parameters

Risk Free Rate 0.44%

Equity Risk Premium (ERP) 8.5%

Beta 0.7811

Cost of Equity (Ke) 7.08%

Leverage Ratio: D/(D+E) 35.77%

Tax Rate 24%

Growth Rate

1%2-Stage DCF

Weight: 2/3

Price: €28.67

Multiples

Weight: 1/3

Price: €30.27

2-STAGE DCF

PRICE

€28.67

ORGANIC

€27.33

INORGANIC

€1.34

Separating Valuation of Organic & Inorganic Growth


First Stage

Second Stage

WACC Kd

Short-Run 4.67% 0.45%

Medium-Run 4.80% 0.95%

Long-Run 5.07% 1.93%

Other Parameters

Risk Free Rate 0.44%

Equity Risk Premium (ERP) 8.5%

Beta 0.7811

Cost of Equity (Ke) 7.08%

Leverage Ratio: D/(D+E) 35.77%

Tax Rate 24%

Growth Rate

1%2-Stage DCF

Weight: 2/3

Price: €28.67

Multiples

Weight: 1/3

Price: €30.27

€m

ln

Inorganic Growth: Exploiting Good Opportunities Abroad


0

200

400

600

800

1000

1200

1400

2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E

mln

€

Inorganic Organic

The best inorganic growth opportunities:

Germany & France

0.00

0.50

1.00

1.50

2.00

2.50

Germany France U.K. Poland

0.750.98

2.15

1.40

Mea

nT.

V./

Mea

nM

W

OUR FORECAST METHODOLOGY• Transaction Value

• MegaWatt (MW)FROM PAST OPERATION

REVENUES

MEAN AND SOTP-DCF TARGET PRICE: 29.20

CLOSING PRICE

Montecarlo Simulation

±5% PERSISTENT SHOCK

Tornado Analysis

BUY > +10%HOLD ∈ [-10%, +10%]SELL < -10%

Sensitivity Analysis:TARGET PRICE

23.31 25.90 28.49 Working Capital

Tax Rate

Capex

D&A

COGS

Revenues

+5% Shock -5% Shock

Short-Term Sensitivity Analysis – DCF (€)

Gro

wth

Rat

e

WACC

4.07% 4.27% 4.47% 4.67% 4.87% 5.07% 5.27%

0.6% 26.76 26.53 26.31 26.09 25.88 25.66 25.45

0.7% 27.37 27.14 26.92 26.69 26.47 26.25 26.04

0.85% 28.34 28.11 27.88 27.64 27.42 27.19 26.97

1.0% 29.39 29.15 28.90 28.67 28.43 28.20 27.96

1.15% 30.51 30.26 30.01 29.77 29.52 29.28 29.04

1.3% 31.73 31.47 31.21 30.95 30.70 30.45 30.20

1.45% 33.04 32.77 32.50 32.24 31.97 31.71 31.45

Long-Term Sensitivity Analysis – DCF (€)

Gro

wth

Rat

e

WACC

4.47% 4.67% 4.87% 5.07% 5.27% 5.47% 5.67%

0.6% 29.98 28.56 27.27 26.09 25.02 24.04 23.13

0.7% 30.78 29.28 27.92 26.69 25.57 24.54 23.60

0.85% 32.05 30.43 28.97 27.64 26.44 25.34 24.33

1.0% 33.44 31.68 30.09 28.67 27.37 26.19 25.12

1.15% 34.95 33.03 31.31 29.77 28.37 27.11 25.95

1.3% 36.61 34.50 32.63 30.95 29.45 28.08 26.85

1.45% 38.43 36.11 34.06 32.24 30.60 29.13 27.80

Reinforcing our Analysis


How to Capture Additional Growth Opportunities?


Selling Thermo and Hydro

segment ERG will obtain

Faster Growth in Wind and

Solar Sectors

Higher installed capacity

Higher Revenues

0

1000

2000

3000

4000

0

200

400

600

800

1000

1200

2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E

MW

mln

€

Installed Capacity Revenues(MW) (€mln)

Additional

upside

8.29%

POTENTIAL PRICE

€31.62

TARGET PRICE

€29.20

Conservative strategy Aggressive strategy

upside

12.74%

CLOSING PRICE

€25.90

Risk-reward Analysis Shows Moderate Downside


5

4

3

2

1

Strategy RisksImpact

3.5

Likelihood

2.5

Financial RisksImpact Likelihood

2 1 4.5

Macro RisksImpact Likelihood

4.5

Regulatory RisksImpact Likelihood

4.5 4

IMPA

CT

5Weather Conditions;

IncentivesCovid-19; Brexit

4 Electricity Prices Concessions

3

2ITC; Credit Defaults;

CommodityLiquidity

1 Interest Rate

1 2 3 4 5

LIKELIHOOD

MITIGATION STRATEGY

• Sensitivity Analysis to assess the effect

of the main regulatory evolutions;

• Maintenance of effective and long-

lasting relations with local stakeholders

Diversification Strategy mitigates Risks


WEATHER

CONDITIONS

INCENTIVES &

CONCESSIONS

MITIGATION STRATEGY• Technological & Geographic diversification;

• Use of highly accurate weather forecasting instruments;

• Schedule the downtime of renewable facilities.

DECREASE IN PRICE

OF ELECTRICITYDECREASE IN

ELECTRICITY DEMAND

MITIGATION STRATEGY• Exposed to commodities cfd

Covid-19 Proves Strong Resilience for ERG


ERGItaly

Spain

Belgium

Austria

France

Portugal

UK

Germany

-27%

-21%

-17%

-16%

-16%

-15%

-14%

-8%

Covid-19 Impact on Electricity Demand

Coronavirus

heavily

affected global

economy

Energy Industry

NECESSARY MEASURES

Health of its employees

Operational Continuity

Low Impact on ERG

RESILIENCY TO COVID-19

NEGATIVE IMPACT ON PRICE

SHUTDOWN OF WIND FIRM

DELAYS IN CONSTRUCTIONS & AUTHORIZATIONS PROCESS

SUSTAINABLE

ERG at the Forefront of the Fight Against Climate Change…


0

100

200

300

2015 2016 2017 2018 2019

231

161157

135 145

Gco

2/K

Wh

Carbon Index

Sustainability

REDUCTION in

CARBON INDEX

REPOWERING &

REBLADINGPLASTIC FREE

PROJECT

15t Avoided

CORE BUSINESS ACTIVITY

2,500Kg

Plastic Saved

Sustainability Ratings

CDP MSCI


…Engaging People that Contribute to Environmental Protection

Code of EthicsLAWFULNESS

INTEGRITY

HONESTY

EQUALITY

2017

2018

2019

87%

90%

93%

Human Capital

Coverage Ratio

It represents a way to

understand the value of

the Human Capital

H C C

ESSENTIAL FACTOR

FOR SUCCESS

ERG Is Oriented to a Sustainable Business Management…


Edoardo GarroneFounder &

Chairperson

A. GarroneDeputy

Chairperson

Luca BettonteChief Executive

Officier

G. MondiniChairperson

M. BelcrediDirector

M. CaverniNon-Executive

Director

B. CominelliNon-Executive

Director

M. CostagutaNon-Executive

Director

P. LanzoniNon-Executive

Director

S. MerloNon-Executive

Director

E. OlivieriNon-Executive

Director

M. PanterliniNon-Executive

Director

…in Full Compliance with Legality, Transparency and Fairness


Gender Balance

Age

Professional Carrier

33%

67%

Female

Male

8%

17%

58%

17% 45-49

50-54

55-59

60-67

40%

48%

12%

Entrepreneurial Professional Academic

Age

Professional Carrier

Our ESG Framework Includes Several Factors…


GovernanceSocialEnvironmental

• CO2 emissions (gCO2/kWh)

• Energy from clean sources [%]

• Waste recycled [%]

8 Parameters 31 Parameters10 Parameters

0

1500

3000

2015 2016 2017 2018 2019

979

2993 2901 3029 3086

Gco

2/

Kw

h

CO2 Avoided

• Gender mix [%]

• Employee training hours [h/year]

• Employee turnover [%]

• Communities

79.2%

20.8%

Gender Mix

Male

Female

• Board Structure

• Remuneration Policy

• Shareholders Interests

12 of BoD

…Signaling ERG’s Strong Adherence to ESG Criteria


Score

Strength in the

Environmental

Dimension

Improvements for

Social & Governance

0

5

10

15

20

25

30

gen

-17

apr-

17

lug-

17

ott

-17

gen

-18

apr-

18

lug-

18

ott

-18

gen

-19

apr-

19

lug-

19

ott

-19

gen

-20

apr-

20

lug-

20

ott

-20

gen

-21

apr-

21

lug-

21

ott

-21

gen

-22

Sto

ck P

rice

(€

)

CLOSING PRICE

€25.90

+12.74% change

A Successful Story with Potential Additional Benefits

Target

Price

€29.20

SUSTAINABLE

CONSERVATIVE

DIVERSIFIED

RECOMMENDATION

Potential

Price

€31.62

+8.29% change

Conservative strategy

Aggressive strategy

Q&ATHE GREEN BROTHERS

Guglielmo Marco Ilaria Giuseppe Antonio

THE GREEN BROTHERS - CFASI

Documents

Transcript of THE GREEN BROTHERS - CFASI