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CEZ GROUP 1 INVESTMENT RECOMMENDATION TO DECEMBER 21, 2010 1 CFA INVESTMENT RESEARCH CHALLENGE MARCH 3, 2011 MADRID.

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Presentation on theme: "CEZ GROUP 1 INVESTMENT RECOMMENDATION TO DECEMBER 21, 2010 1 CFA INVESTMENT RESEARCH CHALLENGE MARCH 3, 2011 MADRID."— Presentation transcript:

1 CEZ GROUP 1 INVESTMENT RECOMMENDATION TO DECEMBER 21, 2010 1 CFA INVESTMENT RESEARCH CHALLENGE MARCH 3, 2011 MADRID

2 CZECH CEZ GROUP 2 2 ASSUMPTIONSCEZ GROUP PEER GROUP COMPARISON FINANCIAL ANALYSIS VALUATION INVESTMENT RISKS RECOMMENDATION 2 CZECH REPUBLIC Technical University of Ostrava CEZ GROUP European power utility VALUATION 2 phases DCF equity method INVESTMENT RECOMMENDATION

3 CZECH VALUATION ASSUMPTIONS 3 3 VALUATION Company profile Industry profile Financial analysis Planned statements Free cash flow prediction Beta, cost of capital ASSIGNMENT Risk averse investor Three years perspective Valuation to 21.12.2010 TARGET PRICE807 CZK 2 phases DCF equity method Investment risks Actual issues RECOMMENDATIONHOLD ASSUMPTIONSCEZ GROUP PEER GROUP COMPARISON FINANCIAL ANALYSIS VALUATION INVESTMENT RISKS RECOMMENDATION 3

4 CZECH CEZ AS INTERNATIONAL UTILITY 4 Source: Company data, Czech team research MAJOR ELECTRICITY PRODUCER IN THE CZECH REPUBIC 74% of market70% MoF32.707 emp ONE OF TEN BIGGEST EUROPEAN POWER UTILITIES 65,3 TWh17 countries60 plants PRODUCTION BASED ON LIGNITE AND NUCLEAR POWER 45% lignite42% nuclear13% other 44% OF REVENUES IN POWER PRODUCTION 39% distribution4% mining14% other 4 ASSUMPTIONSCEZ GROUP PEER GROUP COMPARISON FINANCIAL ANALYSIS VALUATION INVESTMENT RISKS RECOMMENDATION 4

5 CZECH COMPANY COMPARISON 5 Source: Czech team estimates, Reuters 5 Industry average 7,6x 6x 43 Industry average 5,6% ASSUMPTIONSCEZ GROUP PEER GROUP COMPARISON FINANCIAL ANALYSIS VALUATION INVESTMENT RISKS RECOMMENDATION 5 Data to 21/12/2010

6 CZECH FINANCIAL ANALYSIS 6 6 Source: Company data, Czech team estimates ASSUMPTIONSCEZ GROUP PEER GROUP COMPARISON FINANCIAL ANALYSIS VALUATION INVESTMENT RISKS RECOMMENDATION 6

7 CZECH FINANCIAL ANALYSIS 7 7 Source: Company data, Czech team estimates ASSUMPTIONSCEZ GROUP PEER GROUP COMPARISON FINANCIAL ANALYSIS VALUATION INVESTMENT RISKS RECOMMENDATION 7

8 CZECH FINANCIAL ANALYSIS 8 8 Source: Company data, Czech team estimates ASSUMPTIONSCEZ GROUP PEER GROUP COMPARISON FINANCIAL ANALYSIS VALUATION INVESTMENT RISKS RECOMMENDATION 8

9 CZECH FINANCIAL ANALYSIS 9 9 Source: Company data, Czech team estimates ASSUMPTIONSCEZ GROUP PEER GROUP COMPARISON FINANCIAL ANALYSIS VALUATION INVESTMENT RISKS RECOMMENDATION 9

10 CZECH FINANCIAL ANALYSIS 10 Source: Company data, Czech team estimates ASSUMPTIONSCEZ GROUP PEER GROUP COMPARISON FINANCIAL ANALYSIS VALUATION INVESTMENT RISKS RECOMMENDATION 10

11 CZECH FINANCIAL ANALYSIS 11 Source: Reuters, Bloomberg, Company data, Czech team estimates ASSUMPTIONSCEZ GROUP PEER GROUP COMPARISON FINANCIAL ANALYSIS VALUATION INVESTMENT RISKS RECOMMENDATION 11

12 TEAM E 12 CZECH VALUATION BASE Source: Company data, Czech team estimates ASSUMPTIONSCEZ GROUP PEER GROUP COMPARISON FINANCIAL ANALYSIS VALUATION INVESTMENT RISKS RECOMMENDATION 12

13 TEAM E 13 TEAM E VALUATION Ratio between phases of DCF equity Source: Company data, Czech team estimates Phase 1 : 2011 - 2017 Phase 2 : 2018 - ∞ Levered β0,99 RmRm 6,29%6,99% RfRf 3,64%4,00% ReRe 6,26%8,50% g 1,49% Values in mil. CZK Value of phase 1148 795 Continuing value (perpetuity)436 668 Value of phase 2285 405 TOTAL VALUE434 201 Number of issued shares (pieces) 537 989 759 VALUE OF SHARE (in CZK)807,080 Enterprise value532 200 Indebtness32,61% ASSUMPTIONSCEZ GROUP PEER GROUP COMPARISON FINANCIAL ANALYSIS VALUATION INVESTMENT RISKS RECOMMENDATION 13 Ratio between phases of DCF equity

14 TEAM E 14 Volatility of exchange rate Business with foreign countries Possible drop in rating Possible price increase of debt Unstable political situation In the Czech Republic and in other countries Low power prices Contra high fixed costs 14 CZECH INVESTMENT RISKS ASSUMPTIONSCEZ GROUP PEER GROUP COMPARISON FINANCIAL ANALYSIS VALUATION INVESTMENT RISKS RECOMMENDATION 14

15 CZECH POWER PRICES 15 Source: EEX, PXE, Czech team estimates ASSUMPTIONSCEZ GROUP PEER GROUP COMPARISON FINANCIAL ANALYSIS VALUATION INVESTMENT RISKS RECOMMENDATION 15

16 CZECH ACTUAL ISSUES 16 Development of subsidiary, taxed and bought emission allowances (mil. CZK) 16 Estimated prices of emission allowances (EUR) Source: Czech team estimates ASSUMPTIONSCEZ GROUP PEER GROUP COMPARISON FINANCIAL ANALYSIS VALUATION INVESTMENT RISKS RECOMMENDATION 16

17 CZECH SENSITIVITY ANALYSIS 17 Source: Czech team estimates ASSUMPTIONSCEZ GROUP PEER GROUP COMPARISON FINANCIAL ANALYSIS VALUATION INVESTMENT RISKS RECOMMENDATION 17

18 CZECH SENSITIVITY ANALYSIS 18 Source: Czech team estimates ASSUMPTIONSCEZ GROUP PEER GROUP COMPARISON FINANCIAL ANALYSIS VALUATION INVESTMENT RISKS RECOMMENDATION 18 Mean802 Variance10122 Standard deviation101 Min487 Max1126 PercentilVaRCVaR 1%-33,8%-38,8% 5% -20,6%-28,2% 10% -14,6%-22,8%

19 TEAM E 19 CZECH SUMMARY TICKER NYSE EURONEXT: CEZ HOLD TARGET PRICE: 807 CZK Good stable company with Czech political supportMajority of indexes around industry average or higherReasonable financial analysis indicatorsStable production of free cash flowUNDERVALUEDNecessity of cutting down costsUncertainity about allowancesExisting drop in dividendsInvestment risks ASSUMPTIONSCEZ GROUP PEER GROUP COMPARISON FINANCIAL ANALYSIS VALUATION INVESTMENT RISKS RECOMMENDATION 19

20 TEAM E 20 CZECH SUMMARY ASSUMPTIONSCEZ GROUP PEER GROUP COMPARISON FINANCIAL ANALYSIS VALUATION INVESTMENT RISKS RECOMMENDATION 20 TICKER NYSE EURONEXT: CEZ HOLD TARGET PRICE: 807 CZK Source: Czech team estimates Recommendation to 21 December 2010

21 TEAM E TICKER NYSE EURONEXT: CEZ HOLD TARGET PRICE: 807 CZK 21 CZECH RECOMMENDATION TO DECEMBER 21, 2010 ASSUMPTIONSCEZ GROUP PEER GROUP COMPARISON FINANCIAL ANALYSIS VALUATION INVESTMENT RISKS RECOMMENDATION 21

22 CZECH APPENDIX 22

23 Source: Czech team estimates, Company data CZECH APPENDIX - HIGHLIGHTS 23 Market profile 52 Week Price Range950,00 – 736,00 Average Daily Volume490 953,30 Beta0,99 Dividend Yield (Estimated)6,48% Shares Outstanding537 989 759 Market Capitalization415 059 Institutional Holdings79,86 % Insider Holdings0,84% Book Value per Share1 018,94CZK Debt to Total Equity35% Return on Equity21%

24 Source: Czech team estimates, Company data, Eurostoxx50 CZECH APPENDIX – INVESTMENT SUMMARY 24

25 Source: Czech team estimates, Company data CZECH APPENDIX – STATEMENT OF CASH FLOW 25 2010E2011E2012E2013E2014E2015E2016E2017E2018E EAT 47 16344 25942 87745 79049 14950 32052 86155 65558 669 Amortization 22 63422 86023 08923 32023 55323 78823 500 CASH GENERATED FROM OPERATIONS 69 79767 11965 96669 10972 70274 10976 36179 15582 169 CAPEX 67 75159 61061 46845 72347 70633 38035 000 50 000 ∆ Current assets 6 168774-4565 7448 9606 3196 1936 2976 564 ∆ Current liabilities 7 011880-5186 52910 1857 1837 0397 1587 462 ∆ Working capital -843-10562-785-1 225-863-847-860-897 Financial investments 8 0783 0352 30042600000 CASH USED IN INVESTING ACTIVITIES 74 98662 53963 83045 36346 48132 51634 15334 13949 103 Dividends 28 52025 94024 34223 58325 18427 03227 67629 07330 610 Part payment of debts 5 797 CASH USED IN FINANCING ACTIVITIES 34 31731 736,5130 13929 37930 98132 82933 47334 87036 407 DIFFERENCE OF CASH FLOW -39 506-27 156-28 003-5 633-4 7608 7638 73410145-3 341 Net debts 39 50627 15728 0035 6344 760-8 763-8 734-10 1463 341 Condition of debts 190 519211 879234 086233 922232 886218 325203 794187 851185 395 Statement of Cash Flows (in millions CZK)

26 Source: Czech team estimates, Company data CZECH APPENDIX – BALANCE SHEET (ASSETS) 26 Balance Sheet (in millions CZK) 20092010E2011E2012E2013E2014E2015E2016E2017E2018E ASSETS 530 259584 179621 702659 626687 773720 886736 796754 489772 286805 351 NON-CURRENT ASSETS 414 955462 707499 457537 836560 239584 392593 984605 484616 984643 484 Plant in service 509 618577 369636 979698 447744 170791 876825 256860 256895 256945 256 Less accumulated provision for depreciation 266 377-289 011-311 871-334 960-358 280-381 833-405 621-429 121-452 621-476 121 Net plant in service 243 241288 358325 108363 487385 890410 043419 635431 135442 635469 135 Nuclear fuel, at amortized cost 5 4396 000 Construction work in progress 80 125 Investment in associates and jointventures 17 25017 400 Investments and other financial assets 49 42350 000 Intangible assets, net 18 65320 000 Deferred tax assets 824 CURRENT ASSETS 115 304121 472122 246121 790127 534136 494142 812149 005155 302161 867 Cash and cash equivalents 26 72738 53743 25842 33347 88456 42961 81567 08372 44978 063 Receivables, net 47 347410003700037500380003850039000395004000040500 Materials and supplies, net 4 9595 2245 2585 2385 4855 8706 1426 4086 6796 962 Fossil fuel stocks 2 9443 1013 1213 1103 2563 4853 6463 8043 9654 133 Emission rights 1 2121 400 70000000 Other financial assets 29 70629800 Other current assets 2 409

27 Source: Czech team estimates, Company data CZECH APPENDIX – BALANCE SHEET (LIABILITIES) 27 Balance Sheet (in millions CZK) 20092010E2011E2012E2013E2014E2015E2016E2017E2018E EQUITY AND LIABILITIES 530 259584 179621 702659 626687 773720 886736 796754 489772 286805 351 TOTAL EQUITY 206 675219 861235 146251 381273 162297 127320 415345 599372 181400 240 Equity attributable to equity holders of the parent 200 361214 361229 646245 881267 662291 627314 915340 099366 681394 740 Stated capital 53 799 Treasury shares -5 151-4 600 Retained earnings and other reserves 151 713165 162180 447196 682218 463242 428265 716290 900317 482345 541 Non controlling interests 6 3145 500 TOTAL LIABILITIES 323 584364 317386 557408 245414 611423 759416 382408 890400 105405 111 LONG-TERM LIABILITIES 177 181211 238232 598254 805254 641253 605239 044224 513208 570206 114 Long-term debt, net of current portion 118 921152 630173 990196 197196 033194 997180 436165 905149 962147 506 Accumulated provision for nuclear decommissioning and fuel storage 37 15237 500 Other long-term liabilities 21 108 DEFERRED TAX LIABILITY 15 33515 000 CURRENT LIABILITIES 131 068138 079138 959138 441144 970155 162 337169 376176 535183 997 Short term loans and current portion of long-term debt 37 889 Trade and other payables 78 21287 67088 55088 03294 561107 250116 436125 077133 518142 005 Accurated liabilities 14 96712 520 10 0168 0136 4105 1284 103

28 Source: Czech team estimates, Company data CZECH APPENDIX – INCOME STATEMENT 28 Income statement (in millions CZK) 2 0092010E2011E2012E2013E2014E2015E2016E2017E2018E REVENUES 196 352206 855208 173207 397217 179232 436243 196253 742264 466275 644 Sales of electricity 173 494188 050189 248188 543197 453211 305221 088230 674240 423250 585 Heat sales and other revenues 22 85818 80518 92518 85419 74421 13122 10923 06724 04225 059 Operating costs 128 153118 155116 577116 142121 620130 164136 190142 095148 101154 361 Gift tax 4 5704 637 Allowances 4 0046 3459 45011 97013 96515 960 OPERATING COSTS AFTER ALLOWANCES 128153 118 155121 146120 779125 624136 509145 640154 065162 066170 321 Amortization 22 87622 63422 86023 08923 32023 55323 78823 500 EBITDA 97 07588 70087 02686 61891 55595 92797 55699 676102 400105 323 EBIT 68 19966 06664 16663 52968 23572 37473 76876 17678 90081 823 Interests 3 3037 8419 52610 59411 70411 69611 64410 91610 1909 393 EBT 64 94658 22654 64052 93556 53160 67862 12465 26068 71072 431 Income tax 13 09111 06310 38210 05810 74111 52911 80312 39913 05513 762 EAT 51 85547 16344 25942 87745 79049 14950 32052 86155 65558 669 Dividends 26 89928 52025 94024 34223 58325 18427 03227 67629 07330 610 EAR 24 95618 64218 31918 53522 20723 96523 28825 18526 58228 059

29 Source: Czech team estimates, Company data CZECH APPENDIX – FREE CASH FLOW 29 FCFF2010E2011E2012E2013E2014E2015E2016E2017E2018E EAT47 16344 25942 87745 79049 14950 32052 86155 65558 669 ODPISY22 63422 86023 08923 32023 55323 78823 500 změna ČPK-843-10662-785-1 225-864-847-861-897 INV67 75159 61061 46845 72347 70633 38035 000 50 000 úroky7 8419 52610 59411 70411 69611 64410 91610 1909 393 úroky(1-t)6 3517 7168 5819 4809 4749 4328 8428 2547 608 FCFF9 24015 33113 01733 65235 69551 02451 04953 27040 674 FCFE2 0102 0112 0122 0132 0142 0152 0162 0172 018 EAT47 16344 25942 87745 79049 14950 32052 86155 65558 669 Odpisy22 63422 86023 08923 32023 55323 78823 500 ČPK-843-10662-785-1 225-864-847-861-897 INV67 75159 61061 46845 72347 70633 38035 000 50 000 Saldo U33 70921 36022 206-163-1 037-14 560-14 531-15 943-2 456 FCFE36 59828 97526 64224 00925 18427 03227 67629 07330 610 Free cashflow (in millions CZK)

30 Source: Czech team estimates, Company data CZECH APPENDIX – VALUATION 30 DCF method 2 0102 0112 0122 0132 0142 0152 0162 0172 018 Free cash flow to the equity36 59828 97526 64224 00925 18427 03227 67629 07330 610 Discounted free cash flow 27266,723594,020008,419751,219950,719222,119002,3 Values in CZKPhase 1 : 2011 - 2018Phase 2 : 2018 and more Value od phase 1148 795Levered β0,99Levered β0,99 Continuing value (perpetuity)436 668ReRe 6,26%ReRe 8,50% Value od phase 2285 405RmRm 6,29%RmRm 6,99% Total value434 201RfRf 3,64%RfRf 4,00% Number of issued shares537989759 CZ/A32,61%CZ/A23,02% Value of share807,080E/A37,64%E/A49,70% Counted growth in the second phase was 1,49% based on planned growth of sales

31 Source: ČEPS CZECH APPENDIX 31 STATETRANSMISSION SYSTEMPLANFACT Germany50 Hertz Trans.-3720 GWh-1400 GWh TenneT-4077 GWh-6321 GWh PolandPSE Operator-726 GWh5849 GWh SlovakiaSEPS-5229 GWh-5825 GWh AustriaAPG-1997 GWh-6599GWh Czech RepublicČEPS-14297 GWh-14296GWh Cross-border power flows (2009) DE - 51,14€/MWh SK – 49,15€/MWh HU - 51,05€/MWh PL – 50,25€/MWh

32 Source: Comapny data, Czech team estimates CZECH APPENDIX 32

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