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Agenda Part 1 Part 2 Industry Analysis TIA TCA EPH Analysis CONSOL Analysis Part 2 TIA TCA Summary/Reasoning Final Comments and Questions 2
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TRAFICON – Energy Sector Services Portfolio Analysis
Energetický a průmyslový holding & CONSOL Energy Inc.
12 March 2015
1
Part 21. TIA 2. TCA3. Summary/Reasoning4. Final Comments and
Questions
AgendaPart 1
1. Industry Analysis2. EPH Analysis3. CONSOL Analysis
2
STEEP AnalysisIndustry A
nalysis: C
entral Europe
Area Major Points Implications
Social● The minimum wage● Awarness of global warming
● Higher GDP growth rate
● Companies should adopt green technologies
Technological● Hydro, solar, and wind power● Infrastructure supports more
renewable energy
● Research and development are to continue meeting goals
Economic● Koruna and Euro falling ● Historically low interest rates
● Importing goods is more expensive● Less money for the consumer
Ecological● Pollutants due to environmental
negligence
● Reduce European carbon footprint
● Correct past mistakes and make up for their actions in the future
● Negative correlation towards harming the environment
Political ● Abiding by Czech and European Law
● Utilizing legislation
● EU has passed a variety of provisions aiding this industry for future growth
3
Porter’s 5 ForcesIndustry A
nalysis: C
entral Europe
3.4
4
Porter’s Five
Forces
Threat of New
Entrants- 3
Supplier Power
Buyer Power
Substitutes
Competitors
Porter’s 5 Forces
3.4
5
Porter’s Five
ForcesThreat of New
Entrants
Supplier Power- 4
Buyer Power
Substitutes
Competitors
Industry Analysis:
Central E
urope
Porter’s 5 Forces
3.4
6
Porter’s Five
ForcesThreat of New
Entrants
Supplier Power
Buyer Power- 3
Substitutes
Competitors
Industry Analysis:
Central E
urope
Porter’s 5 Forces
3.4
7
Porter’s Five
ForcesThreat of New
Entrants
Supplier Power
Buyer Power
Substitutes- 1
Competitors
Industry Analysis:
Central E
urope
Porter’s 5 Forces
3.4
8
Porter’s Five
Forces
Threat of New
Entrants
Supplier Power
Buyer Power
Substitutes
Competitors- 2
Industry Analysis:
Central E
urope
Best Business Practices
● Reducing CO2 Emissions: Carbon Trading Scheme
● Continued investment in R&D
● Keeping up with EU Standards
Industry Analysis:
Central E
urope
9
STEEP AnalysisIndustry A
nalysis: U
nited States
Area Major Points Implications
Social● “Babyboomers” generation are
retiring● Increase the minimum wage
● Smaller labor force● Labor becoming expensive
Technological● Technology to capture CO2
emissions● Investment in start-up energy ● Nuclear power
● US can reach 27% by 2030● Nuclear energy not as
essential
Economic● The US is out of its recession● Interest rates down and dollar
strong
● Foreign investments in market
● Capital investment
Ecological● Carbon Dioxide, coal and gas ● Renewable resources
Political ● Stable political environment ● Direction of future energy industry
3.6
10
Porter’s 5 ForcesIndustry A
nalysis: U
nited States
3.8
11
Porter’s Five
Forces
Threat of New
Entrants- 3
Supplier Power
Buyer Power
Substitutes
Competitors
Porter’s 5 ForcesIndustry A
nalysis: U
nited States
3.8
12
Porter’s Five
Forces
Threat of New
Entrants
Supplier Power- 4
Buyer Power
Substitutes
Competitors
Porter’s 5 ForcesIndustry A
nalysis: U
nited States
3.8
13
Porter’s Five Forces
Threat of New Entrants
Supplier PowerBuyer Power- 1
Substitutes
Competitors
Porter’s 5 ForcesIndustry A
nalysis: U
nited States
3.8
14
Porter’s Five Forces
Threat of New Entrants
Supplier PowerBuyer Power
Substitutes- 1
Competitors
Porter’s 5 ForcesIndustry A
nalysis: U
nited States
3.8
15
Porter’s Five Forces
Threat of New Entrants
Supplier PowerBuyer Power
Substitutes
Competitors- 3
Best Business PracticesIndustry A
nalysis: U
nited States
● Continuing increased trend in renewable energy
● Keeping up with US energy standards
● Efforts to decrease costs16
EPH● Founded as a subsidiary
of J&T Finance Group● Private company● Comprised of 40
companies and subsidiaries
● Centrally located in Europe
17
EP
H
Mining20%
Heat and Power 32%
Renewables 0.29%
Power Distri-bution
and Supply 47%
Other 0.15%
Product/Service Portfolio
38
EP
H
SWOT Analysis
4.1.1
● Natural monopoly in the heat business
● Vertically integrated
● Diversified portfolio
19
EP
H
SWOT Analysis
4.1.1
● Liquidity● Recent acquisition of
E.ON
● Stock capital market is poorly developed
20
EP
H
SWOT Analysis
4.1.1
● EU Energy Goals - Renewable Energy
● Eggborough Power Acquisition
● Government providing incentives
21
EP
H
SWOT Analysis
4.1.1
● Providing alternative energy sources
● EU heighten sanctions against Russia
● Stricter EU environmental regulations
22
EP
H
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
EP
H
Business Strategy: EPH w. TRAFICON
4.1.3
24
EP
H
Productivity
Improve Cost Structure
Increase Asset Utilization
Revenue Growth
Enhance Customer Value
Expand Revenue Opportunity
Price
Reliability
Products
Reliability
Product/Service Attributes PositioningBranding
Customer Retention
Operations- Vertical Integration
of the value chain- Few Suppliers to
rely on
Customer- Keeping prices
affordable- Acquiring new customer base through M & A
Innovation- Renewables
- Modernization of old plants
-Clean technology
Regulations- EU Renewable
Energy Act- Emission regulations
- Corporate Social Responsibility
Information CapitalHuman 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
Financial Perspective
CustomerPerspective
InternalPerspective
Learning & Growth Perspective
4.1.4
25
Strategy CanvasE
PH
Ratio Analysis - EPHSpecific Ratio 2009 2010 2011 2012 2013 5 Year
AveragePeer Group
AverageLiquidity 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
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
Asset Management RatiosTotal Asset Turnover 0.61 0.51 0.55 0.39 0.52 0.85
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
Financial Analysis
EP
H
Net Asset Value – Market Value Multiplier (in billions) JSW KBTK LWB CNX
Total Assets 91 Kč 12 Kč 25 Kč 226 Kč
Less: Total Liabilities 36 Kč 7 Kč 9 Kč 127 Kč
Net Assets 55 Kč 6 Kč 16 Kč 99 Kč
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
EP
H
Guideline Company Method
*All ratios current
as of 28/2/15
Market Valuation MethodComparable Company P/E P/B P/Sales P/CF
CNX 38.20 1.39 2.04 7.24JSW 33.33 0.32 0.34 1.51KBTK 19.22 0.99 0.45 4.57LWB 11.99 1.37 1.68 4.54
Industry 34.78 2.14 1.65 7.97AVERAGE 27.50 1.24 1.23 5.17
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
Financial Analysis
EP
H
Discounted Cash Flow Analysis: WACCCost of Equity
Czech Equity Risk Premium 7.16%Beta 1.45
Risk Free Rate 0.45%Rf + Beta(Equity Risk
Premium) 10.83%Add: Country Risk Premium 1.41%
Re= 12.24%
Cost of DebtAverage Financing Cost 4.52%
Add: Country Risk Premium 1.41%Add: Risk Free Rate 0.45%
Rd= 6.38%
Final WACC RateAverage Weight of Debt 50%
Average Weight of Equity 50%(1-Tax Rate) 81%
re(E/V)+rd(D/V)(1-t)WACC = 8.71%
30
Financial Analysis
EP
H
Discounted Cash Flows: Historical FCF
31
Financial Analysis
EP
H2010 2011 2012 2013
-20,000 Kč
-10,000 Kč
- Kč
10,000 Kč
20,000 Kč
30,000 Kč
40,000 Kč
50,000 Kč
Billi
on C
ZK
Discounted Cash Flows: Growth Rate
32
Financial Analysis
EP
H
2009 2010 2011 2012 2013 2014 2015 2016 2017
-5.00%
-4.00%
-3.00%
-2.00%
-1.00%
0.00%
1.00%
2.00%
3.00%
4.00%Czech Republic GDP
Historic GDPProjected GDP
Discounted Cash Flows: Future Cash Flows
33
Financial Analysis
EP
H
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 38,000 Kč
40,000 Kč
42,000 Kč
44,000 Kč
46,000 Kč
48,000 Kč
50,000 Kč
Historical Cash FlowsFuture Cash Flows
Milli
on C
ZK
Discounted Cash Flows: Present Value Discount
Discounted Cash Flows (billion CZK)Year Cash Flows (mult.) PV Discount = Discounted Cash Flows2014 44 Kč 0.92 40 Kč 2015 45 Kč 0.85 38 Kč 2016 46 Kč 0.78 36 Kč 2017 47 Kč 0.72 34 Kč 2018 49 Kč 0.66 32 Kč
Sum of Discounted Cash Flows = 180 Kč Discounted Terminal Value (TV)
Last Projected Cash Flow 49 KčGrowth Rate 2.70%WACC 8.70%
TV = (Last Future CF*1+LTGR)/(WACC-LTGR)Terminal Value (TV) 834 Kč Multiply: PV Discount 0.66Discounted Terminal Value 549 Kč
34
Financial Analysis
EP
H
Discounted Cash Flows: Fair ValueFair Value (billion CZK)
Sum of Discounted Cash Flows 180 Kč
Add: Discounted Terminal Value 549 Kč
Sum: Enterprise Value 730 Kč
Less: Net Debt 2013 107 Kč
Fair Value 622 Kč 35
Financial Analysis
EP
H
EPH Financial Analysis Summary
• 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
36
Financial Analysis
EP
H
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 sizeo Revenue, Asset, and Debt similarityo Core Operations
CO
NS
OL
36
66%22%
12%2013 Revenue
CoalNatural GasOther
61%31%
8% 2014 Revenue
CoalNatural GasOther
Product/Service Portfolio
38
CO
NS
OL
SWOT Analysis
● Largest private R&D facility ● Marine terminal
● Longwall mining technology
● Marcellus shale and bituminous coal
5.1.1
38
CO
NS
OL
SWOT Analysis
● Warmer winter weather’s● Product/service portfolio
● Not fully integrated vertically
5.1.1
39
CO
NS
OL
SWOT Analysis
● Joint venture with Noble Energy
● Water division
● First mover in water segment
● International coal demand
5.1.1
40
CO
NS
OL
SWOT Analysis
● Natural Gas prices ● Waning domestic coal demand
● Long term resource contracts expiring
● Environmental regulations
5.1.1
41
CO
NS
OL
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
CO
NS
OL
Business Strategy- CONSOL
44
CO
NS
OLProductivity
Increase Resource Utilization
Revenue Growth
Expand Service Portfolio
Expand Consumer Base
Price
Reliability
Products
Reliability
Product/Service Attributes Positioning
Branding
Customer Retention
Operations- Efficient operations- Focus operations
on new vision/direction
Customer- Reach out to
new international
customers
Innovation- Continuous
focus on R&D- Water Segment
first mover
Regulations-Adhere to state and federal
regulations-Project and uphold green
image-Manage resources responsibly
Information CapitalHuman 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
Financial Perspective
CustomerPerspective
InternalPerspective
Learning & Growth Perspective
Strategy Canvas
5.1.3
44
CO
NS
OL
Financial Analysis - CONSOL
45
Financial Analysis
CO
NS
OL
Comparable Company Analysis
46
Financial Analysis
CO
NS
OL
WACC InputsCost of Debt (in millions)
Exchange Rate 31/12/13 - 19.86
Weights Rate Wd
29,790
0.4802 8.00% 3.84%
24,825
0.4001 8.25% 3.30%
4,965
0.0800 6.38% 0.51%
2,046
0.0330 5.75% 0.19%
218
0.0035 7.93% 0.03%
199
0.0032 6.19% 0.02%
62,043 7.08% 7.89%
CAPM -- CONSOL EnergyCompany Beta 1.73Risk Free Rate 1.82%
Expected Market Return 9.01%Cost of Equity 14.26%
*CAPM=Rf + B(Rm - Rf)
Calculating Expected Return on the Market - RmGeometric Averages
1928-2014 9.60%1965-2014 9.84%2005-2014 7.60%AVERAGE 9.01% 47
Financial Analysis
CO
NS
OL
WACC
WACC (in millions) -- CONSOL ENERGY
Total Equity 99 Kč
Debt (Long + Short Term Borrowings) 63 Kč
Total Debt and Equity (V) 162 Kč Weight of Equity (E/V) 61.19%Weight of Debt (D/V) 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 11.08%
48
Financial Analysis
CO
NS
OL
Historical Free Cash Flow (billions)2009 2010 2011 2012 2013 2014
(20,000,000,000)
(15,000,000,000)
(10,000,000,000)
(5,000,000,000)
-
5,000,000,000
10,000,000,000
15,000,000,000
49
Financial Analysis
CO
NS
OL
Capital Expenditure ForecastHistorical Capital Expenditures (in millions)
Segment Weights FY 2011 FY 2012 FY 2013 FY 2014 GUIDANCE 2015
GAS 74% CAPEX (13,130) (10,131) (19,237) (25,264) (24,610)
% Change -22.8% 89.9% 31.3% -2.6%
COAL 26% CAPEX (13,367) (12,610) (9,110) (8,705) (5,414)
% Change -5.7% -27.8% -4.4% -37.8%
2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 -
5,000,000,000
10,000,000,000
15,000,000,000
20,000,000,000
25,000,000,000
30,000,000,000 Forecasted Capital Expenditure Growth Rate
Gas Coal% Change 2014-2015 % Change 2013-2015
-2.59% -23.33%
50
Financial Analysis
CO
NS
OL
Forecasted Free Cash Flow2015 2016 2017 2018 2019
(10,000,000,000)
(8,000,000,000)
(6,000,000,000)
(4,000,000,000)
(2,000,000,000)
-
2,000,000,000
4,000,000,000
6,000,000,000
8,000,000,000
EV / EBITDA Multiple Analysis51
Financial Analysis
CO
NS
OL
EV / EBITDA Multiples Analysis
CONSOL E
NERGY IN
C
ALLIANCE H
OLDINGS G
P LP
PEABODY E
NERGY C
ORP
NATURAL R
ESOURCE P
ARTNER
CLOUD PEA
K ENER
GY INC
0.00
2.00
4.00
6.00
8.00
10.00
12.00
EBITDA 2019 in millions Growth Rate 2020 31,555 3.40% 32,628
2020 EBITDA 32,628 EV / EBITDA Multiple 7.82
2020 Enterprise Value in millions 255,155
2020 Enterprise Value 255,155 Discounted by WACC (1+ .1108)^5
2015 Enterprise Value in millions 150,878
Mean
52
Financial Analysis
CO
NS
OL
Threats Benchmark
6
EP
H &
CO
NS
OL
53
STEEPTR
AFIC
ON
Industry Analysis
6
Area Major Points ImplicationsSocial • Hofstede’s cultural dimensions • Altered business culture
Technological • New technologies are growing • Confidence in decisions• More demand for IT consulting
Economical • Recessions• Economic changes• Globalized consulting
• No money to hire consultants
Ecological• Development of renewable
energy sources • European Union reform of
energy efficiency
• Oversee development• European wide commitment and
reform
Political• Government Incentives• Uncertainty with governments• Changes in Policies
• Additional funding to hire consultants
• Creates uncertainty for companies
54
Recap• Clean Energy focus in the European Energy Industry• STEEP implications for TRAFICON
Koruna/Euro depreciating, low interest ratesPolitical 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
TRA
FICO
N Industry A
nalysis
Comparison Companies W/ TRAFICON (Strategies)
CONSOL
● 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
EPH
● Formulate long term financial stability blueprints
● Strengths and opportunities outweigh weaknesses and threats
● Long run sustainability over short run profitability 56
TRA
FICO
NC
ompany A
nalysis
EPH SWOT Analysis in TRAFICON’s Eyes● Strengths- Diversified portfolio● Weaknesses- Uncertainty of industry● Opportunities- E.ON acquisition● Threats- Pressure for EU standards, long-term
financial stability
57
TRA
FICO
NC
ompany A
nalysis
Existing Service PortfolioMain Services1) M & A Advisory2) Structure Financing 3) Strategic AdvisoryMain Territories4) Central Europe5) Russia 6) United KingdomMain Industries7) Energy8) Real Estate9) Logistics
58
TRA
FICO
NC
ompany A
nalysis
● Small, independent company● Expertise in their areas of
consulting● Professional understanding of
clients’ business psychology
● Individual attention to clients● International contacts-
Partnerships, Membership in associations (CGBC, AREM, EUEA)
8.2.2
59
SWOT Analysis - TRAFICONTR
AFIC
ON
Com
pany Analysis
● Matching funding requirements to particular investors
● Cyber-presence- website● Cyber-presence- social media
TRA
FICO
NC
ompany A
nalysis
● Information accessibility/Credibility
● Territorial/Geographical reach
8.2.2
60
SWOT Analysis - TRAFICON
SWOT Analysis - TRAFICON
8.2.2
• Market development- Asia-Oceania region
• Market development- Technology sector (Prague, Berlin, Lithuania, Estonia)
• Internet presence- social media (FB, LI, Seznam), website, 3rd party B2B digital marketing company
61
TRA
FICO
NC
ompany A
nalysis
• Internet presence• Difficulty in starting a
company (140) and weak investor protection (83rd/188) in CR
TRA
FICO
NC
ompany A
nalysis
• Decentralization Default in Communication Corruption
8.2.2
62
SWOT Analysis - TRAFICON
Strategy Map- TRAFICON TRA
FICO
NC
ompany A
nalysis
8.1.3
63
Service
Target EPH Market Development
Expand Revenue Opportunity
Market Penetration Service Development
Quality Availability
Service Attributes PositioningBrand Partnership
Customer Management- On-site visits- Expertise
- Information Accessibility
Innovation Processes- Hire someone with experience
in technology sector- Hire a web/app designer- Research feasibility of
expansion into Asia-Oceania/technology Sector
Regulatory/Social Processes- EU and Czech Republic Renewable
Energy initiatives- Three association memberships
collaboration with local law firm- Join more associations
Information CapitalHuman Capital Organizational Capital- Skills
- Knowledge- Training
- Streamlined Systems- Cyber Presence
- Culture- Teamwork- Leadership
Financial Perspective
CustomerPerspective
InternalPerspective
Learning & Growth Perspective
Long-Term Profitability
Summary and Recommendations1. Internal improvements 2. Market penetration 3. Market development
• TRAFICON should help EPH diversify into renewables• TRAFICON should help CONSOL partner with a strong renewables
company
64
TRA
FICO
NC
ompany A
nalysis