Value Track: Innovatec – Great, good, green bet

ValueTrack | Initiation of Coverage | 14 March 2022

Innovatec

Sector: Industrial Services

Great, Good, Green Bet

Innovatec is a pure play in the cleantech industry, active in both Energy Efficiency and Environmental Services & Circular Economy. The stock is listed on Euronext Growth Milan (since 2013) but it got to the current Group structure only in 2021, following a restructuring within the wider Sostenya Group and further M&A.

Well-positioned in an extremely attractive sector

Innovatec is active in two extremely attractive businesses due to face massive growth: the combination of strong demand driven by sustainability themes and major Government support (at national and EU level) should drive Innovatec business in Energy Efficiency and Circular Economy well beyond our forecast horizon. We see Innovatec as a good mix in terms of value, growth and liquidity to play this major opportunity. Also, the Russia- Ukraine war and the strong need to make European economy independent of Russian gas now add a factor of urgency to EU energy goals: the prompt launch of the REPowerEU plan is a first strong action in this direction.

Top line and EBITDA +20%, EPS +55% CAGR into 2024E

We expect Innovatec to post strong growth (ca. 20% CAGR) in the next three years in terms of top line and EBITDA: by 2024E the Group should be 1.7x bigger than today and Circular Economy/recycling should represent 34% of revenues and 18% of EBITDA. Also, thanks to the increasing contribution of the Energy Efficiency business (requiring much less capital than waste treatment & disposal), EBIT and EPS should grow even faster (+50/+55% CAGR) and €36mn FCF should be generated by 2024E.

Major short term concern is execution

We see execution of the Business Plan and M&A discipline as the key issues in the short term: the Company needs to build a good track record to trigger a sustainable re-rating and needs to be active but extremely disciplined in M&A, as the industry is facing a phase of tremendous changes, concentration and innovation. Regulation and competition represent potential element of risk too, but we see these more as medium term issues.

Initiating coverage with €2.70 Fair Value per share

We initiate coverage on Innovatec with a fair equity value of €2.70 p/s, based on two main methodologies: DFC model, returning €3.1 value p/s and peers' relative multiples, returning €2.3 p/s value.

Furthermore, we see additional value creation opportunities not factored in management targets nor in our forecasts and valuation. A rolling valuation model suggests that a seamless execution of the business plan, could drive share value towards €3.8 p/s in the medium term.

VALUETRACK

Valentina Romitelli [e-mail] Marco Greco [e-mail] Filippo Mazzoleni [e-mail] Davide Manco [e-mail]

		Fair Value (€)		2.70
		Market Price (€)	1.72
		Market Cap. (€m)	165.1
		KEY FINANCIALS (€mn)	2020PF	2021PF	2022E
		GROUP REVENUES	161.2	222.4	274.6
		EBITDA	18.1	30.4	41.2
		EBIT	7.8	9.6	19.7
		NET PROFIT	4.9	5.1	10.5
		EQUITY	19.1	29.1	46.7
		NET FIN. POS.	10.7	-3.5	-3.4
		EPS ADJ. (€)	0.08	0.08	0.14
		DPS (€)	0.00	0.00	0.00
		Source: Innovatec (historical figures)
		Value Track (2022E estimates)
	KEY RATIOS	2020PF	2021PF	2022E
	EBITDA MARGIN (%)	11.2	13.7	15.0
	EBIT MARGIN (%)	4.8	4.3	7.2
	NET DEBT / EBITDA (x)	nm	0.1	0.1
	NET DEBT / EQUITY (x)	nm	0.1	0.1
	EV/SALES (x)	1.0	1.0	0.8
	EV/EBITDA (x)	8.8	7.0	5.2
	EV/EBIT (x)	20.3	22.1	10.9
		Source: Innovatec (historical figures)
		Value Track (2022E estimates)
		STOCK DATA
		FAIR VALUE (€)			2.70
		MARKET PRICE (€)			1.72
		SHS. OUT. (m)			95.4
		MARKET CAP. (€m)			165.1
		FREE FLOAT (%)			55.0
		AVG. -20D VOL. (#)			2,837.742
		RIC / BBG		INC.IM / INC IM
		52 WK RANGE (€)		0.58 -2.53
		Source: Stock Market Data

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Innovatec | Initiation of Coverage | 14 March 2022

VALUETRACK

Table of Contents

Executive Summary	Pag.3
Valuation	Pag. 5
Business Description	Pag. 13
Corporate Profile	Pag. 20
Reference Market	Pag. 23
Historical Financials and Recent Events	Pag. 32
Growth Strategy and Business Plan	Pag. 34
Financial Forecasts	Pag. 37
Appendix	Pag. 43

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Innovatec | Initiation of Coverage | 14 March 2022

VALUETRACK

Executive summary

A pure Cleantech player: energy efficiency + environmental services

Innovatec is a pure play in the cleantech industry, active in both Energy Efficiency and Environmental Services & Circular Economy. The stock is listed on Euronext Growth (since 2013) but it got to the current Group structure only in 2021, following a restructuring within the wider Sostenya Group and further M&A. It reported 2021 revenues of €222mn on a pro-forma basis, of which €60mn in Energy Efficiency and €162mn in Environmental Services, €30mn EBITDA and a €3.5mn Net Financial Debt. So far in 2022 management has announced a further small but strategic acquisition and released the 2022E-24E Business Plan for the "New Innovatec".

We initiate coverage with a fair value of €2.70 per share

We initiate coverage on Innovatec with a fair equity value of €2.70 per share, based on our explicit forecasts by averaging two main methodologies: DFC model, returning a €3. 1 fair equity value per share and peers' relative multiples, returning a value of €2.3 per share.

However, we see many positive additional growth opportunities not factored in our estimates, and this, together with a seamless execution of the business plan just released, could drive Innovatec shares to perform well beyond our forecasts and fair value in the medium term. On a Rolling Valuation model we estimate the share value may post a surge of over 2.2x in the next two years (from current mkt price of €1.73 p/s). At fair value the stock would trade at 1.1x-0.9xEV/Sales and

7.5x-6.5x EV/EBITDA over FY2022E-FY2023E.

Sector extremely attractive: secular growth ahead and few plays around

Innovatec is active in two businesses and both appear extremely attractive and likely to face massive growth. The combination of strong demand driven by sustainability themes and major Government support (at national and EU level) should drive Innovatec business both in Energy Efficiency and Circular Economy well beyond our forecast horizon, as EU target for 2030 towards a "zero emission" and "zero waste" society are very challenging and will require massive investments. Despite the attractive environment, we see only few potential plays to invest in this theme and consider Innovatec a good mix in terms of value, growth and liquidity. Finally, we see the stock as a restructuring play, too, following the issues linked to financial stress and debt restructuring faced over last years, we expect good business execution to trigger further stock re-rating.

In addition, in the last weeks the Russia-Ukraine war has made clear that EU economies do need to become independent of Russian gas as soon as possible. This in turn implies that the medium term EU energy goals have become much more urgent - and this is even more the case for Italy, given its dependence upon gas imports. The EU Commission has just launched its REPowerEU plan to seek stronger energy suppliers' diversification and to change gear in the development of renewable energy sources. In brief we may see the environment to become more favorable for players in the Energy Efficiency business and in renewable energy sources in particular, compared to just a few weeks ago.

Strong top line and EBITDA growth into 2024E

We expect Innovatec to post strong growth (ca. 20% CAGR) in the next three years in terms of both top line and EBITDA: by 2024E the Group will be 1.7x bigger than today (2021 pro-forma). The key driver of the growth is the top line, while EBITDA margins are seen relatively flattish over the forecast period, due to i) decreasing contribution of the disposal business (landfills) in favour of recycle/circular economy (still much less profitable) and ii) normalizing profitability of the B2C Energy Efficiency business (HouseVerde), currently supported by extremely favorable fiscal incentive (110% Superbonus). By 2024 the Group Revenues and EBITDA will be almost equally split over the two BUs: ca 45% Energy Efficiency and 55% Environmental Services and Circular Economy and recycling activities will contribute to 34% of revenues and 18% of EBITDA by 2024E.

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Innovatec | Initiation of Coverage | 14 March 2022

EBIT and EPS due to accelerate further

VALUETRACK

As the contribution of the landfill business is expected to reduce, mostly in favour of recycling but even more in favour of the Energy Efficiency projects, which are the fastest growing part of the business, we expect a strong positive effect in terms of capital intensity. In fact in this business unit Innovatec operates as General Contractor, that requires little capital, and this will bring a material improvement in terms EBIT and net profit, which are seen to grow much faster than EBITDA: +50% 3yrs CAGR for EBIT, +55% CAGR for EPS. This change in business mix will also improve returns on capital and we forecast RoCE at 42% in 2024E (after tax).

Good FCF and plenty of reinvestment opportunities

The business growth described above will stop absorbing cash from next year (2023E) and we forecast by 2024 the Group will generate ca. €36mn of free cash flow, equal to 22% of its market cap.

While we do not expect management to use leverage in the next future, we reckon that it is likely they use this pile of cash and we see substantial value accretion coming from opportunities not factored in our estimates. Among these we mention

• Extension of Bedizzole landfill residual life;
• Direct financing from EU Green Deal and PNRR of Group's projects and industrial investments;
• Additional M&A, given recent track record to finalize accretive deals (post-synergies integration).

Repositioning and improved Corporate Governance

The news flow from Innovatec has materially intensified over the last months and we had the clear perception that the renewed BoD impressed acceleration on the launch of new projects, to selective M&A and to a step change in Corporate Governance.

All this has come following the completion of the restructuring of larger Sostenya Group and Innovatec debt and in combination with the Government approvals of significant resources - PNRR and other EU and national funds - in favour of the industries where the "New Innovatec" operates.

So far in 2022, Innovatec management undertook two key steps towards an improved corporate governance and transparency relative financial markets and minorities: 1) a private placement reserved to a group of primary institutional investors trough an accelerated book building process in January 2022; 2) the presentation to the financial community of the "New Innovatec" 2022-2024Business Plan, with the commitment for an active investor relation policy.

Key Concerns

Key Concerns #1: Execution risk

The major risk for the stock at the moment lays in our view in the execution of the Business Plan and in the M&A discipline: the Company needs to build a good track record in terms of execution to trigger a sustainable re-rating and needs to be active but extremely disciplined in M&A, as the industry is facing a phase of tremendous changes, increasing concentration and technological innovation. Last but not least, the financial discipline has to be spotless to avoid any financial stress, also considering that these businesses are directly or indirectly regulated and, as such, they are subject also to external risks (not only opportunities, as PNRR funds).

Key Concerns #2: Increasing pressure from larger players

The Company is currently operating in a situation of very limited competition on both businesses. However, we might have a deterioration of the competitive scenario as long as concentration increases, large players enter the arena and the positive effects of fiscal incentives diminish. While we believe this to be a medium term issue, it may affect Innovatec strategy also in the next years as for the M&A, as the increasing appetite of large players (as the listed multi-utilities) could make increasingly difficult to finalize highly accretive acquisitions.

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Innovatec | Initiation of Coverage | 14 March 2022

VALUETRACK

Valuation

We are starting coverage on Innovatec (INC) at a fair €2.70 equity value per share, emphasizing that given the many positive additional growth opportunities not factored in our estimates, INC shares may perform well beyond our forecasts and fair value in the medium term. In this case we estimate the share value may post a surge of over 2.2x in the next two years (from current mkt price). However, these opportunities (described further below) bring also a lower visibility and higher execution risks and are not factored in our fair value at this stage.

Based on our explicit forecasts and on shorter-term and more visible catalysts, we calculate a fair equity value per share of €2.70, by averaging two main methodologies:

• DFC model, with rolling WACC and 7.2x TV/EBITDA exit multiple, returning a €3.1 fair equity value per share;
• Peers' analysis, considering both energy efficiency and waste management Italian and international players, returning a €2.3 fair equity value per share.

At fair value INC stock would trade at 1.1x-0.9x EV/Sales and 7.5x-6.5x EV/EBITDA over FY2022E-FY2023E.

Innovatec: Sensitivity of implicit stock trading multiples between €1.8 and €3.6 share price

	Equity Value p/s			EV / Sales (x)		EV / EBITDA (x)		EV / EBIT (x)		P / E (x)
			2022E		2023E		2022E		2023E		2022E		2023E	2022E		2023E
	€ 1.8	0.8		0.6		5.4		4.6		11.3		8.0		16.4		11.4
	€ 2.1	0.9		0.7		6.1		5.2		12.7		9.0		19.2		13.2
	€ 2.4	1.0		0.8		6.8		5.9		14.2		10.1		21.9		15.1
	€ 2.7			1.1		0.9		7.5		6.5		15.7		11.2		24.7		17.0
	€ 3.0	1.2		1.0		8.2		7.1		17.1		12.3		27.4		18.9
	€ 3.3	1.3		1.1		8.9		7.7		18.6		13.4		30.1		20.8
	€ 3.6	1.4		1.2		9.5		8.4		20.0		14.4		32.9		22.7

Source: Value Track Analysis

Discounted Cash Flow Model

Our model returns a €3.1 fair equity value per share and derives WACC from the Capital Asset Pricing Model approach, relying on the following assumptions:

• 2.0% risk free rate in line with medium / long term target inflation;
• 0.7 unlevered Beta (weighted average between INC two business lines) and 6.4% Equity Risk premium (Damodaran online web site);
• 1.0% small/mid cap additional risk premium;
• 3.0% after-tax cost of debt implicitly calculated taking into account the above-mentioned 2.0% risk free rate, a 2.0% credit spread and 24% corporate tax rate;

Hence, we calculate a 7.5% WACC, equal to INC cost of equity, as our free-cash flows calculation starts from 2023E, when the Group Net Financial Position is expected to turn positive.

For the terminal value, we applied an exit 7.2x TV/EBITDA multiple to INC EBITDA 2030E, in line with peers' "normalized average", i.e. prior to recent stock markets' weakness following the Russian- Ukraine war.

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