A preliminary balance of over 905 million EBITDA at the end of 2016 and a growth plan
This morning the Board of Directors of the Hera Group, which met to approve the 2020 Business Plan, also examined the 2016 preliminary results, which consolidate a gross operating margin at the end of the year in excess of 905 million euro (compared to 884 million as at 31 December 2015), higher than the consensus of analysts, fully offsetting the negative effects deriving from the cut in regulated revenues (WACC) and from the conclusion of some incentives on renewables.
On the solid basis of this excellent result achieved, the Plan approved today, in line with the previous strategic document, confirms the growth path that the Group has followed in recent years, centered on both organic growth and external development, with the The aim is to consolidate the competitive advantages acquired over the years and seize the new opportunities that will present themselves on the market.
Growing economic targets and improving financial equity indicators
From an economic-financial point of view, the Plan envisages a gross operating margin (EBITDA) of 2020 million euros by 1.080, with a net increase of approximately 200 million compared to the 884 million recorded at the end of 2015 and balanced growth of the portfolio of assets, maintaining a low risk profile. As always, the financial sustainability of the Plan will be guaranteed: despite the increase of more than one billion euro in invested capital (also determined by almost 2,5 billion in capex in the 2016-2020 period), the ratio between the net financial position and EBITDA at 2020 will further improve, falling to a value of 2,8 times, compared to a ratio equal to 3 times in 2015. In addition to the improvement in financial management with an expected average cost of debt decreasing from 3,7% to 3,5% and an average duration of eight years, benefits related to tax management are expected, which will take advantage of the recent stability law and related cut in IRES. One of the objectives of the Plan is also the maintenance of the credit ratings assigned to Hera by Standard&Poor's and Moody's, already today among the best in the sector and in Italy itself.
The actions envisaged by the Group will be based on the well-established cornerstones of efficiency, excellence, growth and innovation, but also on the new strategic lever of agility, a feature deemed indispensable for reacting effectively to the context in which utilities operate, increasingly dynamic and challenging.
Furthermore, the Plan to 2020 was drawn up to best respond to the main industrial trends emerging from the logic of Circular Economy and Shared Value, which see the Hera Group offering a tangible contribution to 10 of the 17 objectives of the UN Agenda, to the new of customers to be satisfied with new solutions, up to the most recent evolutions linked to Industry 4.0 and to all the processes of digitalisation, collection and analysis of data and dissemination of "intelligent" infrastructures in our cities. In a sector undergoing profound transformation, it becomes essential for the Group to leverage its solidity and efficiency in order to grasp these trends and continue to strengthen its leadership.
An increasingly dynamic context
Utilities find themselves operating in rapidly evolving market contexts or in any case characterized by significant discontinuities on several fronts. On the regulatory front, the regulatory framework offers greater opportunities in terms of development and stability than in the past, but requires sector operators to support more investments (e.g. electronic gas and electricity meters, gas tenders, quality of services), also to anticipate and follow the aforementioned evolutionary trends in the sector. The macroeconomic context, while not yet achieving the expected growth performance, shows encouraging signs, particularly in the main geographical areas served by the Group: Emilia Romagna and Veneto stood out in 2016 for GDP growth above the national average.
The competitive pressure between utilities will be increasingly strong, not only in "market" activities but also in most of the other activities in the portfolio, given the plurality of tenders envisaged over the course of the Plan for the assignment of Gas Distribution, Sanitation Urban, Public Lighting and protected/administered customer segments in the energy sales sector. Finally, the increase in competition combined with the thrusts deriving from the reform of the Public Administration and Local Public Services will be able to create the conditions for a progressive consolidation of the sector, so as to overcome the overall efficiency and industrialization deficit of the system.
Approximately 200 million of GOP growth, thanks to efficiency and external growth, and progressively growing dividends
The Group's business model is confirmed, with a 2020 EBITDA target of 1.080 million euros, i.e. 50 million more than the 2019 target of the previous Plan, with significant growth in the two-year period 2017-2018. An increase in GOM over the course of the Plan of almost 200 million compared to 2015, obtained thanks to the balanced contribution of internal and external growth.
The strong focus on the extraction of efficiencies and synergies will predominantly fuel the organic growth of the Group between 2015 and 2020, with over 20 million in synergies expected from the most recent changes in the perimeter and efficiency measures for more than 80 million, distributed on all the Group's activity chains as well as on "corporate" activities. Efficiency will also be pursued thanks to the introduction of innovative technologies: from the use of data collected in the field to optimize collection and sweeping activities, to the search for leaks in the water networks with advanced satellite monitoring systems. A further boost to growth will come in the two-year period 2017-2018 from the activities of the electricity safeguard and gas default services and, subsequently, from the leverage of gas tenders, with an expected EBITDA of 27 million euros in the hypothesis of reconfirmation of the Group as manager in the reference territories.
Thanks to these results, Hera will be able to absorb and more than compensate for the negative effects (for over 50 million euro) associated with the reduction of incentives on the production of renewable energy and the rate of return on capital invested in regulated businesses (WACC). Net of these extraordinary items, even more significant organic growth would have been recorded.
As far as external development is concerned, the Plan envisages an average annual contribution from M&A in line with the past. In a potential basin identified with a logic mainly of territorial contiguity for merger operations (Mergers) with multi-utility companies, the Hera Group will be able to leverage its role as aggregator within the reference territories, thanks to the multiple acquisition and integration that characterized the first fifteen years of its life. Also in the liberalized sectors, the Group intends to continue to seize, already from the beginning of 2017, the opportunities to acquire single-business companies (Acquisition), as it did in 2016 in the environment and energy sectors.
Lastly, a strong focus on the creation of value for shareholders is reconfirmed, with a progressive improvement over the Plan of financial returns on invested capital (ROI) and equity (ROE), earnings per share growing by around 5% on average and a transparent dividend policy that is growing compared to the historical trend. In fact, from 2017, the dividend per share is expected to rise to 9,5 cents and, starting from 2019, to 10 cents (+11%).
Almost 2,5 billion investments in five years
The Plan is supported by very important investments of approximately 2,5 billion euros (250 million more than in the previous strategic document), which will serve to fuel the growth of the five-year period, but also to trigger the transformation of the business towards the new industrial paradigms of the Circular Economy and Industry 4.0. The network chain will absorb approximately 70% of 2016-2020 investments, including approximately 350 million dedicated to gas tenders and other important infrastructure modernization interventions such as the replacement of meters with electronic devices or the completion of the Rimini bathing protection plan and of the Servola purifier.
The investment program is confirmed as sustainable from a financial point of view, thanks to a positive and growing generation of cash flow, sufficient to cover the same investments and the payment of dividends as well as allowing for an improvement in financial solidity, thus leaving the flexibility to support other single-business acquisition transactions not included in the Industrial Plan.
Networks: smart infrastructures at the basis of the Industry 4.0 model
From an industrial point of view, the greatest growth is expected from the networks area: the GOM attributable to electricity and gas distribution services, the water cycle and district heating will go from 428 million euros in 2015 to 533 million in 2020, the year in which it will represent almost half of the Group's overall margins.
The growth of the supply chain will be based on the extraction of operational efficiencies and synergies, on the rewards of the water cycle reserved for operators capable of providing an excellent service, but also on the optimization of existing district heating assets. Through the progressive digitization of network infrastructures and the application of latest generation technologies (smart metering, IoT, network modelling, use of drones, etc.), the Group will reach new levels of excellence, which will translate into a reduction operating costs, optimizing resources and improving the quality of service.
Then the appointment with the gas tenders is approaching and the Group aims to reconfirm itself in the territories already covered, for an overall increase in its gas network of approximately 290.000 redelivery points, which will correspond to a greater value of the managed distribution networks (RAB). Investments of almost 1,7 billion euro will be allocated to the network chain over the course of the plan.
Environment: business development increasingly based on recovery
By 2020, the environment supply chain will contribute 27% of the margins generated by the Group, with a GOM expected to grow from 230 million euros in 2015 to 289 million in 2020.
The Group's attention to issues related to the Circular Economy is reconfirmed: although in 2015, with the transfer of 9% of urban waste to landfills, Hera had already achieved the goal that the European Union has set itself for 2030, the Group expects to drop to 2020% by 6. Similarly, the Plan substantially envisages reaching 2020% of packaging recycling by 75, 10 years ahead of the deadlines set at EU level.
In the context of collection services, an important challenge will be represented by the tenders for the assignment of urban hygiene services in Emilia Romagna. The Group aims to reconfirm itself in the territories served, also thanks to the important innovative projects already introduced to increase the efficiency of the service and thus allow cost containment for users with an increase in the separate waste collection target, set for 2020 at approximately the average 66% in the Group's territory. The plant equipment for the disposal, treatment and recovery of waste will be developed in order to respond to the increase in separate collection and the further development of recycling. Indeed, thanks to a unique plant park on the national scene, the Group has for years now been on the market as a point of reference, capable of offering all-round services to its customers, even the most demanding. The development of commercial activities in 2020 will then also be able to count on the relationships already maintained by the recently acquired companies, with synergies that can be extracted on some customer segments not previously covered by the Group. New waste treatment and recovery initiatives are taking the same direction, such as the S. Agata Bolognese plant, one of the first in Italy for the production of biomethane. Investments dedicated to the environment will amount to 546 million euros.
Energy: the solidity of the customer base will be strengthened by attention to the customer experience
The energy sector will increase its margins from 205 million in 2015 to 226 million in 2020, as a result of the commercial strategy, an energy context expected to recover slightly in the coming years and the growing interest of domestic, industrial and public customers in services and the energy efficiency offers that the Group is able to offer. Hera's attention to energy saving also drives the Group itself to set consumption reduction targets within the corporate perimeter, with the intention of reducing its consumption by 2020% by 5.
Hera can already count on almost 2,2 million energy customers and the actions that will be implemented in the next few years will increase this number to around 2,4 million, for a growth target in line with the pace already maintained in the past (about 50.000 units per year). To these will be added the contracts linked to growth opportunities for external lines. In the two-year period 2017-2018, the results will also be supported by the recent awarding of tenders for safeguarded customers for electricity and gas default, in which Hera has conquered the leadership position, with an important economic and cash flow contribution. Hera customers have demonstrated their satisfaction over time, with abandonment rates decidedly lower than those of national competitors. However, customer needs are changing rapidly, thanks to digitization and the technological revolutions underway, and the Group has therefore developed its Plan with this awareness. Customers will be increasingly attentive to the possibility of obtaining information from a plurality of contact channels (smartphone, PC, ...) or of receiving services and offers increasingly tailored to their specific needs: Hera will be able to respond to these expectations with greater attention to customer experience and the introduction of innovative technologies to support the evolution of its CRM system.
Tomaso Tommasi di Vignano, Executive Chairman of Hera
“The recently approved Plan confirms a growth path, supported by the traditional levers of efficiency and external development and strengthened by the use of new technologies. The improvement in our financial solidity allows us on the one hand to reconfirm and further improve the dividend policy pursued in recent years, on the other hand to consider the profound transformation underway in the sector as a further development opportunity also in terms of possible M&As, as already experienced in the past".
Stefano Venier, Chief Executive Officer of Hera
“Innovation, sustainability and energy efficiency are just some of the themes of our Business Plan, careful to take advantage of the new trends of Industry 4.0, Circular Economy and Customer Experience. The confirmation of our leadership in the reference markets is supported by the competitive advantages that we have built up over the years and we are always ready to face new challenges. This Plan too was drawn up in compliance with the financial equilibrium that has characterized us up to now, with the aim, on the one hand, of strengthening our credit standing together with maintaining a low risk profile, and on the other, of continuing to create value for all our stakeholders, ensuring the appropriate financial flexibility for new developments.”
Operation Aliplast
Herambiente has signed a binding agreement with Aligroup Srl for the acquisition of the Aliplast Group, a leading company operating in Italy in the segment of plastic waste collection and recycling and consequent regeneration, with an integrated process that transforms waste into products available for reuse. The transaction concerns the acquisition of Aliplast shares, through a process that envisages the purchase of 40% during the current year, a further 40% by March 2018 and the remaining 20% by June 2022. The enterprise value of the transaction is approximately 100 million euro and implies an EV/Ebitda multiple of approximately 6,5x, non-dilutive for Hera shareholders.
