ELEA INVE : 13-10-2015 Pubblicato Report UBI - Target Price a 6,93 Visualizza documento

Elettra Investimenti 12 October 2015.dot

ELETTRA INVESTIMENTI

Initiation of coverage Buy
12 October 2015 MARKET PRICE: EUR5.10 TARGET PRICE: EUR6.93
Energy Services Data Shares Outstanding (m): 3.7 Market Cap. (EURm): 18.9 Enterprise Value (EURm): 14.4 Free Float (%): 22.5% Av. Daily Trad. Vol. (m): 0.001 Bombacci family Main Shareholder: 74.6% Reuters/Bloomberg: ELIN.MI ELIN IM 52-Week Range (EUR) 4.7 6.4 Performance 1m 3m 12m Absolute 2.0% -13.7% - Rel. to FTSE 1.7% -13.9% - IT Graph area Absolute/Relative 12 M Marco Cristofori [e-mail] Tel. [phone] Website: www.ubibanca.it	Attractive developments support our Buy rating Elettra Investimenti is a leading ESCO (Energy Service Company) and power generation company through Distributed Generation (DG). It has seven power plants with total installed capacity of 19.2 MW which should grow to 26 MW following recent acquisitions. The company is also active in oil trading (19% of sales in 2014) to secure vegetable oil fuel supplies and is diversifying its activities by entering the residential market (recent agreement for district heating), the highly profitable service sector and the photovoltaic sector (JV with a specialized operator). Despite recent acquisitions, the company has substantial cash resources (EUR5.2 million at June-15) which could be used to pursue further growth opportunities, replicating its successful business model. Consequently, we believe the current share price does not reflect the potential of Elettra Investimenti which is trading at >65% discount to the average 2015-16 EV/EBITDA of its peers. Our valuation of Elettra investimenti is EUR6.93 per share, 36% above the current market price which provides solid support for our Buy rating. > Elettra Investimenti seems well on track to take advantage of its IPO proceeds (EUR4.3 million): it has acquired a new power plant, entered the photovoltaic sector and has begun development of the residential segment through a leasing contract. > The company also reported a buoyant first half, with sales up 15% and a 60 bps improvement in its EBITDA margin despite the higher weighting of oil sales, which have a lower profitability. > We expect Elettra Investimenti's revenues to rise to EUR50 million in 2017 (from EUR27.6 million in 2014) with an EBITDA margin of 16.4% compared with14.3% of last year, due to the different product mix. The bottom line could exceed EUR3.9 million in 2017 (more than doubling 2014 net result) while the net financial position should remain positive for almost EUR8 million at Dec-17, excluding new acquisitions and after paying dividends with a pay-out ratio of 30%, implying a yield of about 2.4% in 2015 and 3.9% in 2016. > The main risk is clearly the low visibility of future acquisitions aimed at expanding the company's activities outside its current core activities.
Financials Ratios 2014 2015E 2016E 2017E 2014 2015E 2016E 2017E Revenues (EURm) 27.6 29.6 38.8 50.1 P/E(x) 11.6 12.3 7.7 4.8 EBITDA (EURm) 3.9 4.4 5.9 8.2 P/CF(x) 5.9 6.0 4.6 3.3 EBITDA margin (%) 14.3% 14.9% 15.1% 16.4% P/BV(x) 2.6 1.5 1.3 1.1 EBIT (EURm) 2.4 2.8 4.2 6.4 Dividend Yield 0.0% 2.4% 3.9% 6.2% EPS (EUR) 0.52 0.41 0.66 1.06 EV/EBITDA(x) 4.6 3.3 2.3 1.4 CFPS (EUR) 0.33 0.72 1.00 1.24 Debt/Equity (x) -0.0 -0.4 -0.4 -0.4 DPS (EUR) 0.00 0.12 0.20 0.32 Debt/EBITDA (x) -0.1 -1.1 -1.0 -0.9 Source: Company Data, UBI Banca Estimates Source: Company Data, UBI Banca Estimates

Key Financials
(EURm)	2014	2015E	2016E	2017E
Revenues	27.6	29.6	38.8	50.1
EBITDA	3.9	4.4	5.9	8.2
EBIT	2.4	2.8	4.2	6.4
NOPAT	1.5	1.8	2.6	4.0
Free Cash Flow	2.6	0.8	2.1	2.7
Net Capital Employed	6.8	8.0	8.8	10.6
Shareholders' Equity	6.9	12.7	14.7	17.8
Net Financial Position	-0.3	-4.9	-6.0	-7.4

Source: Company data, UBI Banca estimates

Key Profitability Drivers
2014	2015E	2016E	2017E
Net Debt/Ebitda (x)	-0.1	-1.1	-1.0	-0.9
Net Debt/Equity (x)	-0.0	-0.4	-0.4	-0.4
Interest Coverage (%)	0.0	0.0	0.0	0.0
Free Cash Flow Yield (%)	14.5%	4.3%	11.2%	14.1%
ROE (%)	22.4%	12.1%	16.7%	22.0%
ROI (%)	20.4%	23.1%	29.9%	39.7%
ROCE (%)	22.3%	23.7%	30.7%	40.8%

Source: Company data, UBI Banca estimates

Key Valuation Ratios
2014	2015E	2016E	2017E
P/E (x)	11.6	12.3	7.7	4.8
P/BV (x)	2.6	1.5	1.3	1.1
P/CF (x)	5.9	6.0	4.6	3.3
Dividend Yield (%)	0.0%	2.4%	3.9%	6.2%
EV/Sales (x)	0.7	0.5	0.3	0.2
EV/EBITDA (x)	4.6	3.3	2.3	1.4
EV/EBIT (x)	7.4	5.1	3.2	1.9
EV/CE (x)	2.7	1.8	1.5	1.1

Source: Company data, UBI Banca estimates

Key Value Drivers
(%)	2014	2015E	2016E	2017E
Payout	0.0%	30.0%	30.0%	30.0%
Cost of Equity	7.5%	7.5%	7.5%	7.5%
WACC	7.5%	7.5%	7.5%	7.5%
NWC/Sales	-4.5%	-2.6%	-0.8%	1.6%
Capex/Sales	-5.9%	6.3%	4.1%	3.9%

Source: Company data, UBI Banca estimates

INVESTMENT CASE

We initiate coverage of Elettra Investimenti with a Buy rating and a target price of EUR6.93 per share (based on a DCF valuation and a multiple comparison), which implies potential upside of 36%.

Elettra Investimenti is a leading ESCO (Energy Service Company) active in Italy, mostly in the province of Latina (close to Rome). It manages seven power plants with total installed capacity of 19.2 MW which should grow to 26 MW following recent acquisitions. The company was listed on the AIM Italia market on April 21 at EUR6.0 per share.

Several key factors could drive share price performance in the coming months:

Growing core market: Although energy consumption in Italy has declined 13.6% since 2006, Italy's energy dependence remains one of the highest in Europe (76.9% vs. a European Union average of 53.2%, source: Eurostat) and it is therefore crucial to increasing the efficiency of the Italian grid. The easiest way is to move toward a 'smart grid' adopting a Distributed Generation (DG) approach (production sites close to consumption, exploitation of local renewable energy sources, cogeneration and/or trigeneration power plants), which is Elettra Investimenti's core market. We believe the DG market will grow significantly in coming years. Management expertise: over the past ten years the company has built up a network of seven profitable power cogeneration plants close to clients of primary standing (mostly pharma and chemical companies) thanks to the expertise of its management. We believe the capability to offer power and thermal energy at competitive prices should allow Elettra Investimenti to further expand its activity, as recent acquisitions have demonstrated. Sound fundamentals: Elettra Investimenti achieved an EBITDA margin of 11.4% in 2013, 14.3% in 2014 and 12.3% in 1H15. In addition, the company had net cash of EUR5.2 million at June-15. We forecast that revenues could rise to more than EUR50 million in 2017 (vs. EUR27.6 million in 2014) with a 16.4% EBITDA margin and a bottom line of EUR3.9 million. Strong cash generation should allow the company to distribute dividends on 2015 results, with attractive yields. External growth: Given IPO proceeds of EUR4.3 million and its sound financial structure (net cash position at Dec-14, before the IPO) Elettra Investimenti immediately embarked on expansion of its existing power plant network to areas outside central Italy and has already finalized the acquisition of one oil power plant near Pisa, a 6-year leasing contract for district heating and entry to the photovoltaic sector. Nevertheless, the company retains significant cash resources and we estimate it could invest up to EUR15 million, maintaining gearing at 50% while rapidly increasing the size of the company. Attractive valuation: The company is trading at >65% discount to peers on 2015-16 EV/EBITDA.

Elettra Investimenti is exposed to few risks; these are mostly related to low visibility on future acquisitions, possible changes in the regulatory framework, fluctuation in the USD/EUR exchange rate and the company's concentration in a small geographic area.

Recent Developments

>After a positive 2014, with sales up 30% (of which +7% organic), an EBITDA margin of 14.3% and a net profit of almost EUR1.6 million, Elettra Investimenti reported a buoyant 2015 first half. Revenues rose by 15% and the EBITDA margin rose 60 bps despite the higher weight of oil sales, which have lower profitability. Net profit increased by 46% and the net financial position turned positive with net cash of EUR5.2 million at June-15, augmented by the EUR4.3 million capital increase achieved through the IPO.

>The company is currently upgrading two cogeneration plant: one increasing its electrical capacity by 1MW (about 5% of Elettra Investimenti's total capacity) and another in development of a thermal power plant.

>In June Elettra Investimenti invested EUR0.7 million to acquire a power generation plant near Pisa fuelled by vegetable oil. The new plant has a capacity of 0.88 MW and is expected to generate EUR1.5 million revenues with an EBITDA of EUR0.25 million (16.6% margin) making the acquisition price particularly attractive (2.8x EBITDA).

>In September, the company signed an agreement for the 6-years lease of a business consisting of 4 cogeneration plants in Umbria (5.9 MW of electrical capacity and 7.5 MW thermal capacity) for district heating (29 Km). This new business should generate sales for EUR5 million p.a. with an EBITDA margin of

>40% with a leasing cost of EUR0.42 million p.a. plus a variable cost related to the EBT generated.

>The company also entered the photovoltaic sector last July through a newco (called 'Alea Quotida', 52% owned by Elettra Investimenti and 48% owned by the company controlling Quotidia) which will be active in project management and general contractor activities in setting up photovoltaic plants with SEU characteristics (direct connection between the power plant and the final customer without passing through the national grid, thereby saving transmission and distribution costs). These plants, when operational, may be acquired by Elettra Investimenti. According to management, this new business could generate consolidated revenues of almost EUR12 million in the next 30 months with an EBITDA contribution of EUR2.9 million.

>Elettra Investimenti has recently been awarded two revamping contracts, which will augment its service activity and is currently in talks with new clients to develop new cogeneration and trigeneration plants (some contracts could be finalized already this month).

2014 and 1H15 Results

2014 revenues rose 30% driven by the positive trend in both electrical energy sales (+9.1%) and the development of the oil activity that now account for EUR5.9 million of sales while thermal energy was broadly stable (+1.7%). Although the gross margin was substantially stable (26.4% vs. 26.7% in 2013), the company increased its EBITDA margin to 14.3% by applying strict controls on fixed costs (lower labour and SG&A costs).

EBIT in 2014 was EUR2.4 million (a margin of 8.8%), giving a net result of EUR1.56 million after tax of EUR0.47 million (23.1% tax rate compared with 54.6% in 2013).

Figure 1 - 2014 results

While revenues in 2014 rose by 30%, EBITDA was up 63% and EBIT doubled. The net

result benefitted from a much lower tax rate.

(EURm)	2013A	2014A	% Chg.
Sales Energy	15.07	16.45	9.1%
Sales Thermal	4.71	4.79	1.7%
Sales Oil	0.26	5.19	nm
Sales Other	1.19	1.16	-2.4%
Sales total	21.23	27.58	30.0%
EBITDA	2.42	3.94	62.9%
% margin	11.4%	14.3%
EBIT	1.17	2.44	109.0%
% margin	5.5%	8.8%
Pre tax profit	0.84	2.05	144.1%
Net profit	0.38	1.56	308.8%
Net debt (cash)	0.74	-0.32	nm
Source: Company data

Net cash flow was positive for EUR1.1 million in 2014 giving net cash of EUR0.32 million at December 2014 (vs. net debt of EUR0.74 million at December 2013).

The Balance Sheet benefits from structural negative net working capital (- EUR1.5 million at Dec-14, representing 4.5% of sales) due to the absence of inventories (limited to less than 1% of revenues) and payment terms to suppliers of about 70 days compared to customer receivables with an average of about two months. Fixed assets of EUR8.19 million, are mainly represented by machinery.

As a result, invested capital at Dec-14 was limited to EUR6.8 million (equal to Dec-13 despite a 30% increase in revenues) with a turnover of 4.1x, resulting in ROI of >20%.

Figure 2 - 1H15 results

The increase in energy sales is particularly positive in our view, given that electricity

prices fell 5% compared with last year.

(EURm)	1H14A	1H15A	% Chg.
Sales Energy	7.55	7.73	2.4%
Sales Thermal	2.36	2.68	13.9%
Sales Oil	1.63	2.98	83.0%
Sales Other	0.46	0.39	-14.8%
Sales total	11.99	13.79	15.0%
EBITDA	1.40	1.70	21.2%
% margin	11.7%	12.3%
EBIT	0.71	0.90	27.5%
% margin	5.9%	6.5%
Pre tax profit	0.55	0.72	31.5%
Net profit	0.32	0.46	46.7%
Net debt (cash)	0.25	-5.21	nm
Source: Company data

The positive trend continued through 1H15, with the development of the oil trading business (sales up 83%) which lifted revenues by 15%. Gross margin fell slightly compared with 1H14 (25.5% vs. 26%) due to a different sales mix (oil trading activity has a lower margin compared with the ESCO business) but, once again, lower fixed costs led to an improvement in the EBITDA margin to 12.3% compared with 11.7% in 1H14.

At June 2015, net cash increased by EUR4.89 million (to EUR5.21 million), of which EUR4.6 million came from the capital increase through the IPO, reaching EUR5.21 million after capex of EUR1.8 million.

Figure 3 - 2014 sales breakdown by sector

Compared with 2013 Energy increased by 9.1% and

Thermal by 1.7%. Oil was not present in 2013.

Figure 4 - 1H15 sales breakdown by sector

The weighting of the oil trading sector significantly

increased compared with last year.

Sales Oil 13,6%

Sales Thermal 19,6%

Source: Company data

Sales Other 3,8%

Sales Energy 62,9%

Sales Oil 21,6%

Sales Thermal 19,5%

Source: Company data

Sales Other 2,8%

Sales Energy 56,1%

Financial Projections

>Management has not disclosed specific guidance for the rest of the year but confirmed that it is confident of a positive second half with further profitability improvements. For the rest of the year our forecasts anticipate sales growing by 2% (to EUR15.8 million) with an EBITDA margin of 17.2%, in line with 2H14. However, the bottom line could be lower than 2H14 which benefitted from an unusually low tax rate (17% vs. 40% expected in 2H15). Net cash should remain broadly stable at EUR5 million, excluding further potential acquisitions.

> Our 2016-17 estimates have changed significantly compared with our IPO research ('Energy Efficiency' February 19th 2015) as they incorporate recent acquisitions (one oil power plant near Pisa, the 6-year leasing contract for

district heating and entry to the photovoltaic sector), which should lead to strong sales growth over the next two years (+31% in 2016 and +29% in 2017). Our revenues estimates imply organic growth of 12% in 2016 and 11% in 2017. Altogether, we expect CAGR in sales of >20% in 2014-17.

>The EBITDA margin is expected to rise in 2015 (to 14.9% from 14.3%) and again in 2016-17 due to the different product mix. Although oil trading margins are lower and its weight on consolidated sales is expected to grow from 15% in 2015 to 18% in 2017, income from the photovoltaic sector should boost the profitability of the Electrical Energy division when the photovoltaic plants have been acquired from Alea Quotidia. Net attributable profit should exceed EUR3.9 million in 2017 (CAGR of 36%). Net cash, assuming nearly EUR 2 million of capex per annum in 2015-17, should progressively grow to at least EUR7.4 million in 2017. This gives Elettra Investimenti sufficient financial firepower to pursue new opportunities (gearing of 50% in 2017 would translate to >EUR15 million of available resources for new acquisitions).

>Robust cash flow generation should support attractive dividend pay-outs in coming years. Assuming a pay-out ratio of 30%, we forecast a dividend of EUR0.12 per share for 2015 rising to EUR0.20 per share in 2016 and EUR0.32 per share in 2017, with an attractive dividend yield at current market prices (2.4% in 2015, 3.9% in 2016 and 6.2% in 2017).

We have estimated sales and EBITDA for each division:

> Electrical energy: this division represents the bulk of consolidated turnover. Our revenue forecasts are based on stable energy output for the existing plants with the addition of a fourth contributor in the Borgo

S. Michele plant (EUR1.2 million of capex for 1 additional MW), the new oil plant recently acquired which should contribute sales of about EUR1.5 and EBITDA of EUR0.25 (margin of almost 17%), and the forthcoming acquisitions from Alea Quotidia (photovoltaic sector) which should deliver an EBITDA margin of >80%. The EBITDA margin could therefore increase to 24.5% in 2017 from 18.5% in 2014;

> Thermal energy: we expect a sharp increase in revenues in 2016-17, when the 6-year contract for the lease of 4 thermal plats in Umbria is fully operational. Sales could exceed EUR11 million in 2017 from less than EUR5 million in 2014. We expect the EBITDA margin to remain stable at about 15%;

> Oil: we expect Elettra Investimenti to expand this activity significantly. It has a long-term revenue target of EUR10 million due to its sunrise oil trading company in Bulgaria (90% controlled) and new agreements (still to be finalized) with large oil traders to share sources of supply. We

expect the EBITDA margin to stabilise at about 4-5%. If the sunrise oil price exceeds EUR1,000 per metric ton (currently EUR880) it is no longer economic for use in fuelling cogeneration plant and therefore the company is looking for new oil type through the aforementioned agreements;

> Photovoltaic: this new business is expected to generate revenues of EUR9.5 million in the next 30 months, approximately EUR0.3 million per month. However, for the current year we estimate less than two months of activity with revenues of less than EUR0.3 million, rising to >EUR3 million in 2016 and to EUR5.8 million in 2017. The EBITDA margin could be in the region of 7% and this new sector might therefore dilute the consolidated EBITDA margin in future;

> Services: this activity started this year following the acquisition of a small service company and could contribute revenues of about EUR0.6 million in 2015. We expect this business to develop rapidly and to generate an EBITDA margin of >25%.

Figure 5 - 2015-17 forecasts by division

2013A	2014A	2015E	2016E	2017E
Electrical Energy
Sales	15.07	16.45	17.09	19.22	20.45
% growth	6.4%	9.1%	3.9%	12.4%	6.4%
EBITDA	2.56	3.04	3.30	4.05	5.01
% margin	17.0%	18.5%	19.3%	21.1%	24.5%
Thermal energy
Sales	4.71	4.79	5.30	6.36	11.43
% growth	3.1%	1.7%	10.7%	20.0%	79.8%
EBITDA	0.47	0.65	0.74	0.92	1.72
% margin	10.0%	13.5%	14.0%	14.5%	15.0%
Oil trading
Sales	0.26	5.19	5.95	7.80	8.88
% growth	14.6%	31.1%	13.9%
EBITDA	0.01	0.25	0.27	0.35	0.39
% margin	5.0%	4.8%	4.5%	4.5%	4.4%
Photovoltaic
Sales	0.26	0.25	3.20	5.80
% growth	1180.0%	81.3%
EBITDA	0.01	0.00	0.23	0.42
% margin	5.0%	0.0%	7.0%	7.2%
Services
Sales	0.01	0.01	0.69	1.38	2.77
% growth	7592.2%	100.0%	100.0%
EBITDA	0.00	0.00	0.12	0.30	0.66
% margin	25.0%	18.0%	22.0%	24.0%
Other sales	1.18	1.15	0.35	0.79	0.79
Total sales	21.23	27.58	29.63	38.75	50.12
% growth	6.4%	30.0%	7.4%	30.8%	29.3%
Total EBITDA	3.05	3.94	4.43	5.85	8.20
% margin	14.4%	14.3%	15.0%	15.1%	16.4%

Source: Company data, UBI Banca estimates

In summary, Consolidated sales could grow at a CAGR of approximately 22% in 2014-17 (about 10% organically). The consolidated EBITDA margin is expected to rise to 16.4% in 2017 from 14.9% this year, due to the different product mix. After D&A costs, which are not expected to exceed EUR2 million, the EBIT margin could rise to 12.8% in 2017.

Below the operating level, the company's financial charges are expected to be minimal (given its net cash position). The tax rate, which was particularly low in 2014 (23.1%) due to the cancellation of the so called 'Robin Hood tax' and benefiting from a tax credit from the disposal of GiavaUno, could rise to about 38%. Consequently, attributable net profit could increase from EUR1.56 million in 2014 to EUR1.54million in 2015 and to EUR3.92 million in 2017 (36% CAGR).

The implications for the Balance Sheet are that we expect Fixed assets to grow following recent acquisitions while ordinary capex is likely to be limited to about EUR0.6 million p.a. Net working capital (negative for EUR1.3 million in 2014) could rise gradually as payment periods to suppliers are reduced.

Elettra Investimenti should be able to generate significant net cash flow leading to an increase in net cash (EUR7.4 million expected by December 2017 vs. EUR5.2 million reported at June 2015).

Elettra Investimenti has given no clear indications of its dividend policy although management has not ruled out a dividend payment on 2015 results. Our estimates assume a pay-out ratio of 30%, which is in line with that of Elettra Investimenti's largest Italian peers, Enel GreenPower and Falck Renewables. Based on the current market price this implies a dividend yield of between 2.4% and 6.2%. In our view, the Group focus is on investing in new installed capacity rather than offering a higher return to its shareholders.

Figure 6 - NOPAT margin, Capital Turnover and ROCE trend

While we expect the NOPAT margin to remain mostly flat, while a strong improvement in capital turnover could boost ROCE.

45,0%

40,0%

35,0%

30,0%

25,0%

20,0%

15,0%

10,0%

5,0%

0,0%

2012A 2013A 2014A 2015E 2016E 2017E

Nopat margin (LH) ROCE (LH) Capital turnover (RH)

5,00

4,50

4,00

3,50

3,00

2,50

2,00

1,50

1,00

0,50

0,00

Source: Company data, UBI Banca estimates

Valuation

>Our target price of EUR6.93 per share is based on the average of a DCF (fair value of EUR7.19 per share) and a relative valuation (applying a 20% discount to the values of large companies to factor in the limited size and limited liquidity of Elettra Investimenti) based on both the average of the multiples of small companies and the average of larger international companies. This gives a fair value of EUR6.67 per share using small peers and EUR6.92 per share using large companies.

>At its current market price (EUR5.10, down 18% vs. the IPO price), Elettra Investimenti is trading at a significant discount to peers: 67% on 2015-16 EV/EBITDA and 40% on P/E, while trades at a 46% premium in terms of P/BV. This reflects Elettra Investimenti's low invested capital compared to other companies which manage large power plants.

>Given the current estimated upside potential of >35%, we initiate coverage with a Buy rating. At the target price, the company would trade at 4.8x 2015 EV/EBITDA, which is still well below the average multiple for the industry (8.4x), at 16.7x P/E (the average of the industry stands at 20.1x) and at 2.0x P/BV (vs. 0.96x).

>Subscribers to the IPO received one free warrant for every share with duration of three years. The strike price is equal to EUR7.50 up to April 21 2016, EUR7.80 up to April 21 2017 and EUR8.10 up to April 21 2018. The outstanding warrants are therefore currently out of the money.

Figure 7 - Valuation summary

(EUR)	Weight
DCF valuation	7.19	33%
Relative valuation (large companies, 20% discount)	6.92	33%
Relative valuation (small companies, 20% discount)	6.67	33%
Target Price	6.93
Current price	5.10
Potential upside	35.8%
Source: UBI Banca estimates

Discounted Cash Flow

Our conservative DCF model gives a fair value of EUR7.19 per share; it incorporates the following assumptions:

> a risk-free rate of 3.0%, which is our long-term assumption for the interest rate on Italian bonds;

> a market risk premium of 4.5%;

> a beta of 1.0, which is broadly in line with the average of the comparable companies listed on AIM (0.96, source: Bloomberg) but well above the European average for the green & renewable energy sector (0.59, source: Damodaran) and Utilities (0.71, source: Damodaran);

> a terminal growth rate of 1% and an operating margin of 9.0% at terminal value, which is above the 6.5% EBIT margin reported in 1H15,

but below the margin of 9.6% expected for the full year 2015.

Figure 8 - WACC and embedded DCF assumptions

WACC assumptions	Embedded DCF assumptions
Risk-free rate	3.0%	Revenue CAGR 2015-2023 (%)	7.3%
Debt spread (%)	2.0%	EBIT CAGR 2015-2023 (%)	7.1%
Cost of debt [net] (%)	3.3%	EBIT margin 2015 (%)	9.6%
Market risk premium (%)	4.5%	Target EBIT margin 2023 (%)	9.0%
Beta (x)	1.00	D&A. on sales (avg. 2015-2023) (%)	4.5%
Cost of equity (%)	7.5%	Capex on sales (avg. 2015-2023) (%)	4.7%
Weight of Debt	0%
Weight of Equity	100%
WACC	7.5%
Source: UBI Banca estimates

We estimate a WACC of 7.5%, obtaining a theoretical value of EUR7.19 per share.

Figure 9 - DCF Valuation

Our DCF valuation implies an EV/EBITDA of 3.0x at terminal value

Valuation (EUR m) % Weight Per share (EUR)

Sum of PV 2015-23 FCF	12.61	48%	3.40
Terminal value	13.75	52%	3.71
Total Enterprise value	26.36	100%	7.11
- minorities	0.00	0.00
- Pension Provision	(0.01)	(0.00)
- Net cash (debt)	0.32	0.09
Total Equity value	26.68	7.19
Number of shares outstanding (m)	3.71
Fair value per share (EUR)	7.19
Source: UBI Banca estimates

Our valuation shows limited sensitivity to the terminal growth rate and WACC although a lower beta and/or stronger growth would increase our DCF target price

Figure 10 - Sensitivity analysis

g / WACC	0.50%	0.75%	1.00%	1.25%	1.50%
7.05%	7.21	7.37	7.53	7.71	7.91
7.20%	7.11	7.25	7.41	7.59	7.78
7.35%	7.01	7.15	7.30	7.47	7.65
7.50%	6.91	7.04	7.19	7.35	7.52
7.65%	6.82	6.95	7.09	7.24	7.40
7.80%	6.73	6.85	6.98	7.13	7.28
7.95%	6.64	6.76	6.89	7.03	7.17

Source: UBI Banca estimates

Relative Valuation

Elettra Investimenti has several comparable peers that are listed, although none of them are solely active in the management of cogeneration plants even from renewable sources. Moreover, many of the companies have an international presence and are much larger than Elettra Investimenti. For these reasons we have decided to divide our peer sample into two groups:

> Large caps: companies with a market capitalization of between EUR4 billion and EUR40 billion. These companies are broadly active in several geographical markets with operations throughout the entire energy production chain. We have selected Iberdrola. Fortum. Enel Green Power. Verbund. EDP Renovaveis and Acciona;

> Small caps: this group is composed of Italian companies with a market capitalization of less than EUR350 million. This sample includes Falck Renewables, Alerion Clean Power and Terni Energia. We did not consider micro-cap companies such as Kinexia as the consensus forecasts for these companies are not reliable.

Figure 11 - Relative valuation based on large caps companies

Based on a simple average of large caps companies, Elettra Investimenti has a valuation of EUR8.65 per share (EUR6.92 applying 20% discount) while using the median of multiples the fair value would be EUR8.29 per share.

Company	Market Cap (EURm)	P/ 2015E	E 2016E	EV/EBITDA 2016 2015E E		P/BV 2015E	2016E
Enel Green Power EDP Renovaveis Iberdrola Acciona Fortum Verbund	8.820 5.516 39.162 4.116 12.819 4.324	20.3 x 38.4 x 16.3 x 22.5 x 16.4 x 18.8 x	20.3 x 29.7 x 15.3 x 19.5 x 17.8 x 21.1 x	8.6 x 9.0 x 8.9 x 8.2 x 9.1 x 9.4 x	8.5 x 8.0 x 8.4 x 7.9 x 10.5 x 9.7 x	1.06 x 0.93 x 1.06 x 1.23 x 0.86 x 0.90 x	1.03 x 0.92 x 1.03 x 1.18 x 0.89 x 0.88 x
Average Median		22.1 x 19.6 x	20.6 x 19.9 x	x x	8.8 x 8.4 x	1.01 x 1.00 x	0.99 x 0.97 x
Based on simple average Based on median	(EUR) (EUR)	9.17 8.11	13.58 13.11	9.34 9.44	12.44 11.80	3.45 3.41	3.91 3.84

Source: Factset, UBI Banca estimates

It should be noted that peer multiples have fallen compared with our original IPO report ('Energy Efficiency' on February 18th): the average 2015 P/E was 24.2x vs. 20.1x today and 2015 EV/EBITDA was 9.8x vs.

the current 8.4x.

Based on the average of 2015-16 P/E, EV/EBITDA and P/BV of the large companies used as a peer group, and applying a 20% discount to factor in the limited size and low liquidity of the company, Elettra Investimenti would be valued at EUR6.91 per share. Applying the multiples of the group of smaller companies (without discount) produces a valuation for the company of EUR6.67 per share.