TRAFICON – Energy Sector Services
Portfolio Analysis
Energetický a průmyslový holding &
CONSOL Energy Inc.
1
12 March 2015
Agenda
Part 1
1. Industry Analysis
2. EPH Analysis
3. CONSOL Analysis
Part 2
1. TIA
2. TCA
3. Summary/Reasoning
4. Final Comments and
Questions
2
Area
Major Points
Implications
Social
●
●
The minimum wage
Awarness of global warming
●
●
Higher GDP growth rate
Companies should adopt green
technologies
Hydro, solar, and wind power
Infrastructure supports more
renewable energy
●
Technological
●
●
Research and development are to
continue meeting goals
Koruna and Euro falling
Historically low interest rates
●
Economic
●
●
Importing goods is more
expensive
Less money for the consumer
Ecological
●
●
●
Political
●
●
Pollutants due to environmental
negligence
Reduce European carbon footprint
●
Abiding by Czech and European
Law
Utilizing legislation
●
●
Industry Analysis:
Central Europe
STEEP Analysis
Correct past mistakes and make
up for their actions in the future
Negative correlation towards
harming the environment
EU has passed a variety of
provisions aiding this industry for
future growth
3
Industry Analysis:
Central Europe
Porter’s 5 Forces
Buyer Power
Supplier
Power
Threat of
New
Entrants- 3
3.4
Substitutes
Porter’s
Five
Forces
Competitors
4
Industry Analysis:
Central Europe
Porter’s 5 Forces
Buyer Power
Supplier
Power- 4
Threat of New
Entrants
3.4
Substitutes
Porter’s
Five
Forces
Competitors
5
Industry Analysis:
Central Europe
Porter’s 5 Forces
Buyer
Power- 3
Supplier Power
Threat of New
Entrants
3.4
Substitutes
Porter’s
Five
Forces
Competitors
6
Industry Analysis:
Central Europe
Porter’s 5 Forces
Buyer Power
Substitutes1
Supplier Power
Threat of New
Entrants
3.4
Porter’s
Five
Forces
Competitors
7
Industry Analysis:
Central Europe
Porter’s 5 Forces
Buyer
Power
Supplier
Power
Threat of
New
Entrants
3.4
Substitutes
Porter’s
Five
Forces
Competitors-
2
8
● Reducing CO2 Emissions:
Carbon Trading Scheme
Industry Analysis:
Central Europe
Best Business Practices
● Continued investment in
R&D
● Keeping up with EU
Standards
9
Area
Major Points
●
Social
“Babyboomers” generation are
retiring
Increase the minimum wage
●
●
Smaller labor force
Labor becoming expensive
Technology to capture CO2
emissions
Investment in start-up energy
Nuclear power
●
●
US can reach 27% by 2030
Nuclear energy not as
essential
●
●
The US is out of its recession
Interest rates down and dollar
strong
●
●
Foreign investments in
market
Capital investment
●
Carbon Dioxide, coal and gas
●
Renewable resources
●
●
Technological
Economic
Ecological
Implications
●
●
Industry Analysis:
United States
STEEP Analysis
10
Political
3.6
●
Stable political environment
●
Direction of future energy
industry
Industry Analysis:
United States
Porter’s 5 Forces
Buyer Power
Supplier
Power
Threat of
New
Entrants- 3
3.8
Substitutes
Porter’s
Five
Forces
Competitors
11
Industry Analysis:
United States
Porter’s 5 Forces
Buyer
Power
Supplier
Power- 4
Threat of
New
Entrants
3.8
Substitutes
Porter’s
Five
Forces
Competitors
12
Industry Analysis:
United States
Porter’s 5 Forces
Buyer
Power- 1
Supplier
Power
Threat of
New
Entrants
3.8
Substitutes
Porter’s
Five
Forces
Competitors
13
Industry Analysis:
United States
Porter’s 5 Forces
Buyer Power
Supplier
Power
Threat of
New
Entrants
3.8
Substitutes1
Porter’s
Five
Forces
Competitors
14
Industry Analysis:
United States
Porter’s 5 Forces
Buyer Power
Supplier
Power
Threat of
New Entrants
3.8
Substitutes
Porter’s
Five
Forces
Competitors3
15
● Continuing increased trend
in renewable energy
Industry Analysis:
United States
Best Business Practices
● Keeping up with US energy
standards
● Efforts to decrease costs
16
● Founded as a subsidiary
of J&T Finance Group
● Private company
● Comprised of 40
companies and
subsidiaries
● Centrally located in
Europe
EPH
EPH
17
Other
0.15%
EPH
Product/Service Portfolio
Mining
20%
Power
Distribution
and Supply
47%
Renewables
0.29%
Heat and
Power
32%
38
● Natural monopoly in the
heat business
● Vertically integrated
EPH
SWOT Analysis
● Diversified portfolio
19
4.1.1
● Liquidity
● Recent acquisition of
E.ON
EPH
SWOT Analysis
● Stock capital market
is poorly developed
20
4.1.1
● EU Energy Goals Renewable Energy
● Eggborough Power
Acquisition
EPH
SWOT Analysis
● Government
providing incentives
21
4.1.1
● Providing alternative energy
sources
● EU heighten sanctions
against Russia
EPH
SWOT Analysis
● Stricter EU environmental
regulations
22
4.1.1
EPH
Recommendations
• Plan today for long term sustained growth.
• Leverage strong balance sheet to pursue
diversification strategy.
• Comply with EU renewable energy policy of the
future.
23
Financial
Perspective
Customer
Perspective
Internal
Perspective
Learning &
Growth
Perspective
4.1.3
Productivity
Improve Cost
Structure
EPH
Business Strategy: EPH w. TRAFICON
Revenue Growth
Increase Asset
Utilization
Enhance Customer
Value
Product/Service Attributes
Expand Revenue
Opportunity
Positioning
Price
Products
Branding
Reliability
Reliability
Customer Retention
Operations
Customer
Innovation
Regulations
- Vertical Integration
of the value chain
- Few Suppliers to
rely on
- Keeping prices
affordable
- Acquiring new
customer base
through M & A
- Renewables
- Modernization of
old plants
- EU Renewable
Energy Act
-Clean technology
- Emission regulations
- Corporate Social
Responsibility
Human Capital
Information Capital
Organizational Capital
- Reassign employees
- Train employees about
environmental sustainability
- Information Technology
- Information sharing
systems
- Improve company website
- Decentralized corporate
structure
- Share more information to
customers about the corporation
24
EPH
Strategy Canvas
25
4.1.4
Specific Ratio
2009
2010
2011
2012
2013
5 Year
Average
Peer Group
Average
Liquidity Ratios
Current Ratio
0.88
0.44
0.39
2.18
1.33
1.04
2.2
Quick Ratio
0.37
0.32
0.21
1.19
0.45
0.508
1.36
Financial Analysis
EPH
Ratio Analysis - EPH
Solvency Ratios
Total Debt to Equity
147.00%
79.20%
86.10%
41.60%
68.63%
84.51%
64.46%
Interest Coverage
1.93
15.90
0.80
3.71
7.74
6.02
9.48
0.39
0.52
0.85
Asset Management Ratios
Total Asset Turnover
0.61
0.51
0.55
Profitability Ratios
Return on Assets (%)
1.69%
17.07%
9.97%
12.01%
5.02%
9.15%
4.46%
Return on Equity (%)
13.90%
73.20%
31.10%
46.50%
59.40%
44.82%
10.72%
Net Profit Margin (%)
7.12%
35.15%
19.23%
26.85%
20.66%
21.80%
11.1%
27
(in billions)
JSW
KBTK
LWB
CNX
Total Assets
91 Kč
12 Kč
25 Kč
226 Kč
36 Kč
7 Kč
9 Kč
127 Kč
55 Kč
6 Kč
16 Kč
99 Kč
Less: Total Liabilities
Net Assets
Financial Analysis
EPH
Net Asset Value – Market Value Multiplier
Market Value Analysis (in millions)
Price Per Share
351.00 Kč
33.11 Kč
831.09 Kč
754.24 Kč
Shares Outstanding
117 Kč
99 Kč
34 Kč
229 Kč
Market Value
41,211 Kč
3,286 Kč
28,265 Kč
172,676 Kč
Net Assets/Market Value
133%
180%
57%
57%
Average
107%
NAV Analysis (billion CZK)
Market Value Multiplier
Net Assets/Market Value
EPH
High
180%
211 Kč
Average
107%
125 Kč
Low
57%
67 Kč
28
Financial Analysis
EPH
Guideline Company Method
Market Valuation Method
Comparable Company
CNX
JSW
KBTK
LWB
Industry
AVERAGE
P/E
P/B
P/Sales
P/CF
38.20
1.39
2.04
7.24
33.33
0.32
0.34
1.51
19.22
0.99
0.45
4.57
11.99
1.37
1.68
4.54
34.78
2.14
1.65
7.97
27.50
1.24
1.23
5.17
*All ratios
current
as of 28/2/15
Fair Market Value (billion CZK)
P/E
27.50
Net Income
17 Kč
471 Kč
P/B
1.24
Net Assets
117 Kč
145 Kč
P/Sales
1.23
Revenues
83 Kč
102 Kč
P/CF
5.17
Free Cash Flow
43 Kč
223 Kč
*Comparable
Company Avg.
*EPH Financials
Fair Market Value =
235 Kč
29
Cost of Equity
Czech Equity Risk Premium
Beta
Risk Free Rate
Rf + Beta(Equity Risk
Premium)
Add: Country Risk Premium
Re=
Cost of Debt
7.16%
1.45
0.45%
Average Financing Cost
4.52%
Add: Country Risk Premium
1.41%
10.83%
Add: Risk Free Rate
0.45%
1.41%
12.24%
Rd=
6.38%
Financial Analysis
EPH
Discounted Cash Flow Analysis: WACC
Final WACC Rate
Average Weight of Debt
Average Weight of Equity
(1-Tax Rate)
re(E/V)+rd(D/V)(1-t)
WACC =
50%
50%
81%
8.71%
30
2010
50,000 Kč
40,000 Kč
2011
2012
2013
Financial Analysis
EPH
Discounted Cash Flows: Historical FCF
Billion CZK
30,000 Kč
20,000 Kč
10,000 Kč
- Kč
-10,000 Kč
-20,000 Kč
31
Czech Republic GDP
4.00%
3.00%
Financial Analysis
EPH
Discounted Cash Flows: Growth Rate
2.00%
1.00%
0.00%
2009
-1.00%
-2.00%
2010
2011
2012
2013
2014
2015
2016
2017
Historic GDP
Projected GDP
-3.00%
-4.00%
-5.00%
32
Financial Analysis
EPH
Discounted Cash Flows: Future Cash Flows
60,000 Kč
50,000 Kč
Million CZK
40,000 Kč
30,000 Kč
Historical Cash Flows
20,000 Kč
Future Cash Flows
10,000 Kč
- Kč
2010
-10,000 Kč
-20,000 Kč
2011
2012
2013
2014
2015
2016
2017
2018
2019
33
Present Value Discount
Discounted Cash Flows (billion CZK)
Year
2014
2015
2016
2017
2018
Cash Flows
(mult.) PV Discount
= Discounted Cash Flows
44 Kč
0.92
40 Kč
45 Kč
0.85
38 Kč
46 Kč
0.78
36 Kč
47 Kč
0.72
34 Kč
49 Kč
0.66
32 Kč
Sum of Discounted Cash Flows =
180 Kč
Discounted Terminal Value (TV)
Last Projected Cash Flow
49 Kč
Growth Rate
2.70%
WACC
8.70%
TV = (Last Future CF*1+LTGR)/(WACC-LTGR)
Terminal Value (TV)
834 Kč
Multiply: PV Discount
0.66
Discounted Terminal Value
549 Kč
Financial Analysis
EPH
Discounted Cash Flows:
34
Fair Value (billion CZK)
Sum of Discounted Cash Flows
Add: Discounted Terminal Value
180 Kč
549 Kč
Sum: Enterprise Value
730 Kč
Less: Net Debt 2013
107 Kč
Fair Value
Financial Analysis
EPH
Discounted Cash Flows: Fair Value
622 Kč
35
• Valuations indicate a sizeable net worth
• European Quantitative Easing -- Debt Financing
to become cheaper
• Global Oil Overproduction -- Producing more coal
helps to mitigate risk
• EPH is a profitable, growing company with a
sizeable footprint in Central Europe
Financial Analysis
EPH
EPH Financial Analysis Summary
36
CONSOL
CONSOL Energy Inc.
● Founded in 1864
● Coal Mining and Natural Gas Extraction Company
● Operations in the Central U.S. throughout the
Appalachian Mountains
● Produce 6.5% of total energy consumed in U.S.
● Why CONSOL Energy Inc.?
o Issue of parent country size
o Revenue, Asset, and Debt similarity
o Core Operations
36
CONSOL
Product/Service Portfolio
2013 Revenue
12%
Coal
22%
66%
Natural Gas
Other
2014 Revenue
8%
Coal
31%
Natural Gas
61%
Other
38
● Largest private R&D facility
● Marine terminal
CONSOL
SWOT Analysis
● Longwall mining
technology
● Marcellus shale and
bituminous coal
38
5.1.1
● Warmer winter weather’s
● Product/service portfolio
CONSOL
SWOT Analysis
● Not fully integrated
vertically
39
5.1.1
● Joint venture with Noble
Energy
● Water division
CONSOL
SWOT Analysis
● First mover in water
segment
● International coal demand
40
5.1.1
CONSOL
SWOT Analysis
● Natural Gas prices
● Long term resource
● Waning domestic coal demand
contracts expiring
● Environmental regulations
41
5.1.1
CONSOL
Recommendations
● Continue to grow domestic natural gas
operations and temper coal operations
● Increase international export of coal to meet
growing demand
● Invest in water division and related
technologies
42
Productivity
Financial
Perspective
Customer
Perspective
Increase Resource
Utilization
Expand Consumer
Base
Expand Service
Portfolio
Product/Service Attributes
Positioning
Price
Products
Branding
Reliability
Reliability
Customer Retention
Operations
Internal
- Efficient operations
Perspective - Focus operations
on new
vision/direction
Learning &
Growth
Perspective
Revenue Growth
CONSOL
Business Strategy- CONSOL
Customer
Innovation
Regulations
- Reach out to
new
international
customers
- Continuous
focus on R&D
- Water Segment
first mover
-Adhere to state and federal
regulations
-Project and uphold green
image
-Manage resources responsibly
Human Capital
Information Capital
Organizational Capital
- Train employees about
environmental sustainability
and overall services provided
- Knowledge of overseas markets
- Water recycling
- R&D developments
- Company culture
- Strong leadership structure
44
CONSOL
Strategy Canvas
44
5.1.3
Financial Analysis
CONSOL
Financial Analysis - CONSOL
45
Financial Analysis
CONSOL
Comparable Company Analysis
46
CAPM -- CONSOL Energy
Company Beta
Risk Free Rate
Expected Market Return
Cost of Equity
*CAPM=Rf + B(Rm - Rf)
Cost of Debt (in millions)
1.73
1.82%
9.01%
14.26%
Exchange Rate 31/12/13 Weights Rate
19.86
29,790
24,825
4,965
Calculating Expected Return on the Market - Rm
Geometric Averages
1928-2014
9.60%
1965-2014
9.84%
2005-2014
7.60%
AVERAGE
9.01%
2,046
218
199
62,043
Wd
Financial Analysis
CONSOL
WACC Inputs
0.4802 8.00% 3.84%
0.4001 8.25% 3.30%
0.0800 6.38% 0.51%
0.0330 5.75% 0.19%
0.0035 7.93% 0.03%
0.0032 6.19% 0.02%
47
7.08% 7.89%
WACC (in millions) -- CONSOL ENERGY
Total Equity
99 Kč
Debt (Long + Short Term Borrowings)
63 Kč
Total Debt and Equity (V)
Weight of Equity (E/V)
Weight of Debt (D/V)
162 Kč
61.19%
38.81%
WACC = (E/V)(Re) + (D/V)Rd(1-T)
E/V
61.19%
Re=
14.26%
D/V
38.81%
Rd=
7.89%
T
23.25%
WACC
Financial Analysis
CONSOL
WACC
11.08%
48
2009
15
2010
2011
2012
2013
2014
Financial Analysis
CONSOL
Historical Free Cash Flow (billions)
10
Billions
5
(5)
(10)
(15)
(20)
49
Historical Capital Expenditures (in millions)
Segment Weights
GAS
74%
CAPEX
FY 2011
FY 2012
FY 2013
FY 2014
GUIDANCE 2015
(13,130)
(10,131)
(19,237)
(25,264)
(24,610)
-22.8%
89.9%
31.3%
-2.6%
(12,610)
(9,110)
(8,705)
(5,414)
-5.7%
-27.8%
-4.4%
-37.8%
% Change
COAL
26%
CAPEX
(13,367)
% Change
Billions
30
Financial Analysis
CONSOL
Capital Expenditure Forecast
Forecasted Capital Expenditure
25
Growth Rate
20
Gas
Coal
% Change 2014-2015 % Change 2013-2015
-2.59%
-23.33%
15
10
5
2010
2012
GAS
2014
GAS (Forecasted)
2016
2018
COAL (Forecasted)
2020
COAL
50
2015
2016
2017
2018
8
2019
Financial Analysis
CONSOL
Forecasted Free Cash Flow
6
Billions
4
2
(2)
(4)
(6)
(8)
(10)
51
EV / EBITDA Multiple Analysis
Financial Analysis
CONSOL
EV / EBITDA Multiples Analysis
12.00
Mean
10.00
8.00
6.00
2020 EBITDA
EV / EBITDA Multiple
2020 Enterprise Value in
32,628
7.82
millions
255,155
4.00
2.00
0.00
CONSOL
ENERGY INC
ALLIANCE
HOLDINGS GP
LP
EBITDA 2019 in millions
31,555
PEABODY
ENERGY CORP
NATURAL
RESOURCE
PARTNER
Growth Rate
3.40%
CLOUD PEAK
ENERGY INC
2020 Enterprise Value
Discounted by WACC
2015 Enterprise Value
2020
32,628
in millions
255,155
(1+ .1108)^5
150,878
52
EPH & CONSOL
Threats Benchmark
53
6
Area
Social
Technological
Economical
Ecological
Political
6
Major Points
Implications
• Hofstede’s cultural dimensions
• Altered business culture
• New technologies are growing
• Confidence in decisions
• More demand for IT consulting
• Recessions
• Economic changes
• Globalized consulting
TRAFICON
Industry Analysis
STEEP
• No money to hire consultants
• Development of renewable
energy sources
• European Union reform of
energy efficiency
• Oversee development
• European wide commitment and
reform
• Government Incentives
• Uncertainty with governments
• Changes in Policies
• Additional funding to hire
consultants
• Creates uncertainty for
companies
54
• Clean Energy focus in the European Energy Industry
• STEEP implications for TRAFICON
TRAFICON
Industry Analysis
Recap
Koruna/Euro depreciating, low interest rates
Political opportunities and threats
• Porter’s 5 Forces
• TRAFICON Best Business Practices
• EPH vs. CNX
CNX- main business irrelevant to TRAFICON, strategic direction not aligned
with TRAFICON’s expertise, not enough financial capacity for green energy
push, unnecessary costs
EPH- going towards green energy, geographically feasible, more capable
financially
55
CONSOL
●
●
●
Continue to grow domestic
natural gas operations and
temper coal operations
EPH
●
Formulate long term financial
stability blueprints
●
Strengths and opportunities
outweigh weaknesses and
threats
●
Long run sustainability over
short run profitability
Increase international export
of coal to meet growing
demand
Invest in water division and
related technologies
TRAFICON
Company Analysis
Comparison Companies W/ TRAFICON
(Strategies)
56
●
●
●
●
Strengths- Diversified portfolio
Weaknesses- Uncertainty of industry
Opportunities- E.ON acquisition
Threats- Pressure for EU standards, long-term
financial stability
TRAFICON
Company Analysis
EPH SWOT Analysis in TRAFICON’s Eyes
57
Main Services
1) M & A Advisory
2) Structure Financing
3) Strategic Advisory
TRAFICON
Company Analysis
Existing Service Portfolio
Main Territories
1) Central Europe
2) Russia
3) United Kingdom
Main Industries
1) Energy
2) Real Estate
3) Logistics
58
● Small, independent company ● Individual attention to clients
● Expertise in their areas of
● International contactsconsulting
Partnerships, Membership in
● Professional understanding of
associations (CGBC, AREM,
clients’ business psychology
EUEA)
TRAFICON
Company Analysis
SWOT Analysis - TRAFICON
59
8.2.2
TRAFICON
Company Analysis
SWOT Analysis - TRAFICON
● Matching funding requirements ● Information
to particular investors
accessibility/Credibility
● Cyber-presence- website
● Territorial/Geographical
● Cyber-presence- social media
reach
60
8.2.2
• Market development- AsiaOceania region
• Market developmentTechnology sector (Prague,
Berlin, Lithuania, Estonia)
TRAFICON
Company Analysis
SWOT Analysis - TRAFICON
• Internet presence- social
media (FB, LI, Seznam),
website, 3rd party B2B
digital marketing
company
61
8.2.2
• Internet presence
• Difficulty in starting a
company (140) and weak
investor protection
(83rd/188) in CR
•
TRAFICON
Company Analysis
SWOT Analysis - TRAFICON
Decentralization  Default
in Communication 
Corruption
62
8.2.2
Long-Term Profitability
Financial
Perspective
Expand Revenue Opportunity
Target EPH
Customer
Perspective
Internal
Perspective
Learning &
Growth
Perspective
8.1.3
Market Development
Market Penetration
Service Attributes
Quality
Service Development
Positioning
Availability
Brand
Partnership
Service
Customer Management
Innovation Processes
Regulatory/Social Processes
- On-site visits
- Expertise
- Hire someone with experience
in technology sector
- Hire a web/app designer
- Research feasibility of
expansion into AsiaOceania/technology Sector
- EU and Czech Republic Renewable
Energy initiatives
- Three association memberships
collaboration with local law firm
- Information
Accessibility
- Join more associations
Human Capital
Information Capital
Organizational Capital
- Skills
- Knowledge
- Streamlined Systems
- Cyber Presence
- Culture
- Teamwork
- Leadership
- Training
TRAFICON
Company Analysis
Strategy Map- TRAFICON
63
1. Internal improvements
2. Market penetration
3. Market development
TRAFICON
Company Analysis
Summary and Recommendations
• TRAFICON should help EPH diversify into renewables
• TRAFICON should help CONSOL partner with a strong renewables
company
64