CEZ GROUP TEAM E CFA INVESTMENT RESEARCH CHALLENGE FEBRUARY 1, 2011 PRAGUE 1 INVESTMENT RECOMMENDATION TO DECEMBER 21, 2010 1
VALUATION ASSUMPTIONS TEAM E Company profile ASSIGNMENT • Risk averse investor Beta, cost Industry • Three years perspective of capital profile • Valuation to 21.12.2010 • Investment recommendation TARGET PRICE 807 CZK VALUATION • Valuation based on 2 phases DCF equity method • Value drivers Free cash Financial • Investment risks flow analysis • Actual issues prediction RECOMMENDATION HOLD Planned statements PEER GROUP FINANCIAL INVESTMENT 2 2 ASSUMPTIONS CEZ GROUP VALUATION RECOMMENDATION 2 COMPARISON ANALYSIS RISKS
CEZ AS INTERNATIONAL UTILITY TEAM E MAJOR ELECTRICITY PRODUCER IN THE CZECH REPUBIC 74% of market 70% MoF 32.707 emp ONE OF TEN BIGGEST EUROPEAN POWER UTILITIES 65,3 TWh 17 countries 60 plants PRODUCTION BASED ON LIGNITE AND NUCLEAR POWER 45% lignite 42% nuclear 13% other 44% OF REVENUES IN POWER PRODUCTION 39% distribution 4% mining 14% other Source: Company data, Team E research PEER GROUP FINANCIAL INVESTMENT 3 3 ASSUMPTIONS CEZ GROUP VALUATION RECOMMENDATION 3 COMPARISON ANALYSIS RISKS
COMPANY COMPARISON TEAM E 20.0 P/E EV/EBITDA 15.0 14 Industry average 12,1x 12 9,7x 10 10.0 Industry average 7,6x 8 6 6x 4 5.0 2 0 0.0 14 50.0 EBITDA margin 12 Dividend yield 40.0 43 10 8 30.0 Industry average 25,5 6,48% Industry average 5,6% 6 20.0 4 10.0 2 0 0.0 Data to 21/12/2010 Source: Team E estimates, Reuters PEER GROUP FINANCIAL INVESTMENT 4 4 ASSUMPTIONS CEZ GROUP VALUATION RECOMMENDATION 4 COMPARISON ANALYSIS RISKS
FINANCIAL ANALYSIS TEAM E EBIT/Assets 250% EBITDA margin Revenues/Assets 200% 150% 100% ROCE Revenues/Current Assets 50% 2005 0% 2006 ROC Equity/Assets ROS ROE ROA Source: Company data, Team E estimates PEER GROUP FINANCIAL INVESTMENT 5 5 ASSUMPTIONS CEZ GROUP VALUATION RECOMMENDATION 5 COMPARISON ANALYSIS RISKS
FINANCIAL ANALYSIS TEAM E EBIT/Assets 250% EBITDA margin Revenues/Assets 200% 150% 100% ROCE Revenues/Current Assets 50% 2005 0% 2006 ROC Equity/Assets ROS ROE ROA Source: Company data, Team E estimates PEER GROUP FINANCIAL INVESTMENT 6 6 ASSUMPTIONS CEZ GROUP VALUATION RECOMMENDATION 6 COMPARISON ANALYSIS RISKS
FINANCIAL ANALYSIS TEAM E EBIT/Assets 250% EBITDA margin Revenues/Assets 200% 150% 100% ROCE Revenues/Current Assets 50% 2005 0% 2007 ROC Equity/Assets ROS ROE ROA Source: Company data, Team E estimates PEER GROUP FINANCIAL INVESTMENT 7 7 ASSUMPTIONS CEZ GROUP VALUATION RECOMMENDATION 7 COMPARISON ANALYSIS RISKS
FINANCIAL ANALYSIS TEAM E EBIT/Assets 250% EBITDA margin Revenues/Assets 200% 150% 100% ROCE Revenues/Current Assets 50% 2005 0% 2008 ROC Equity/Assets ROS ROE ROA Source: Company data, Team E estimates PEER GROUP FINANCIAL INVESTMENT 8 8 ASSUMPTIONS CEZ GROUP VALUATION RECOMMENDATION 8 COMPARISON ANALYSIS RISKS
FINANCIAL ANALYSIS TEAM E EBIT/Assets 250% EBITDA margin Revenues/Assets 200% 150% 100% ROCE Revenues/Current Assets 50% 2005 0% 2009 ROC Equity/Assets ROS ROE ROA Source: Company data, Team E estimates PEER GROUP FINANCIAL INVESTMENT 9 9 ASSUMPTIONS CEZ GROUP VALUATION RECOMMENDATION 9 COMPARISON ANALYSIS RISKS
FINANCIAL ANALYSIS TEAM E EBIT/Assets 250% EBITDA margin Revenues/Assets 200% 150% 100% ROCE Revenues/Current Assets 50% 2005 0% 2010 ROC Equity/Assets ROS ROE ROA Source: Company data, Team E estimates PEER GROUP FINANCIAL INVESTMENT 10 ASSUMPTIONS CEZ GROUP VALUATION RECOMMENDATION 10 10 COMPARISON ANALYSIS RISKS
FINANCIAL ANALYSIS TEAM E ROE Enel 35 CEZ 30 25 EDF 20 EBIT/Assets RWE 100% 15 EBITDA margin Revenues/Assets 95% 10 Iberdrola 5 90% E.ON 0 85% Revenues/Current ROCE 2005 2006 2007 2008 2009 2010* Assets 80% 75% 12 ROA 2010* 10 ROC Equity/Assets 8 6 4 ROS ROE 2 0 ROA 2009 2010 Source: Reuters, Bloomberg, Company data, Team E estimates PEER GROUP FINANCIAL INVESTMENT 11 ASSUMPTIONS CEZ GROUP VALUATION RECOMMENDATION 11 11 COMPARISON ANALYSIS RISKS
VALUATION BASE TEAM E TEAM E Estimated free cash flows to equity (mil. CZK) 40,000 35,000 30,000 25,000 20,000 Relative changes of chosen value drivers Y.oY.change of EBITDA margin Y.oY.change of sales Y.oY.change of dividends Y.oY.change of Price Y.oY.change of EAT 10.00% 8.00% 6.00% 4.00% 2.00% 0.00% -2.00% 2,010 2,011 2,012 2,013 2,014 2,015 2,016 2,017 2,018 2,019 2,020 -4.00% -6.00% -8.00% -10.00% Source: Company data, Team E estimates PEER GROUP FINANCIAL INVESTMENT 12 12 ASSUMPTIONS CEZ GROUP VALUATION RECOMMENDATION 12 COMPARISON ANALYSIS RISKS
VALUATION TEAM E TEAM E Share price as for 21/12/2010 (in CZK per diluted share) Phase 2 : 2018 - ∞ Phase 1 : 2011 - 2017 max, 942 950 In 52 weeks Levered β 0,99 0,99 900 R m 6,29% 6,99% R f 3,64% 4,00% 850 R e 6,26% 8,50% Target price, 807 800 g 1,49% Market price, 772 750 Values in mil. CZK min, 741.5 700 Value of phase 1 148 795 Ratio between phases of DCF equity Ratio between phases of DCF equity Continuing value (perpetuity) 436 668 Value of phase 2 285 405 TOTAL VALUE 434 201 1. PHASE 34% Number of issued shares 537 989 759 2. PHASE (pieces) VALUE OF SHARE (in CZK) 807,080 66% Enterprise value 532 200 Indebtness 32,61% Source: Company data, Team E estimates PEER GROUP FINANCIAL INVESTMENT 13 13 ASSUMPTIONS CEZ GROUP VALUATION RECOMMENDATION 13 COMPARISON ANALYSIS RISKS
INVESTMENT RISKS TEAM E TEAM E Volatility of Possible Unstable Low power exchange drop in political prices rate rating situation • Contra high • Possible • In the Czech fixed costs price Republic increase of and in other debt countries PEER GROUP FINANCIAL INVESTMENT 14 14 ASSUMPTIONS CEZ GROUP VALUATION RECOMMENDATION 14 COMPARISON ANALYSIS RISKS
POWER PRICES TEAM E Historical power prices (EUR) 90 70 50 30 1/1/2005 1/1/2006 1/1/2007 1/1/2008 1/1/2009 1/1/2010 Estimated power prices (EUR) 70 65 65 63 61 60 59 PXE 57 56 55 EEX 54 52 52 52 51 50 ČEZ 45 40 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: EEX, PXE, Team E estimates PEER GROUP FINANCIAL INVESTMENT 15 15 ASSUMPTIONS CEZ GROUP VALUATION RECOMMENDATION 15 COMPARISON ANALYSIS RISKS
ACTUAL ISSUES TEAM E Development of subsidiary, taxed and bought emission allowances (mil. CZK) 19950 Emission allowances - gift tax 17955 15960 Emission allowances - buy 13965 11970 9450 6344.8 4569.6 4636.8 4004 Estimated prices of emission allowances (EUR) 70 Dividend per share (CZK) 60 20 19 50 18 40 17 30 16 15 20 14 10 13 12 0 Source: Team E estimates PEER GROUP FINANCIAL INVESTMENT 16 16 ASSUMPTIONS CEZ GROUP VALUATION RECOMMENDATION 16 COMPARISON ANALYSIS RISKS
SENSITIVITY ANALYSIS TEAM E Influence of 1% change of Sensitivity of value to the factor (mil. CZK) the factor to the value of 100,000 Equity (mil. CZK) 80,000 60,000 40,000 4,290 20,000 0 -766 -20,000 Return on capital -40,000 8,889 -60,000 -4,811 -80,000 -100,000 -9% -5% -2% 0% 2% 5% 9% Return on capital Sales Dividends Emmision allowances Sales Return on capital Emmision Allowances Dividends Source: Team E estimates PEER GROUP FINANCIAL INVESTMENT 17 17 ASSUMPTIONS CEZ GROUP VALUATION RECOMMENDATION 17 COMPARISON ANALYSIS RISKS
SUMMARY TEAM E TEAM E Good stable company with Czech political support Majority of indexes around industry average or higher TICKER Reasonable financial analysis indicators NYSE EURONEXT: Stable production of free cash flow CEZ UNDERVALUED HOLD Necessity of cutting down costs TARGET PRICE: Uncertainty about allowances 807 CZK Existing drop in dividends Investment risks PEER GROUP FINANCIAL INVESTMENT 18 ASSUMPTIONS CEZ GROUP VALUATION RECOMMENDATION 18 18 COMPARISON ANALYSIS RISKS
SUMMARY TEAM E TEAM E 1050 Target price 807 CZK / Share to 21 December 2010 TICKER 950 NYSE EURONEXT: 850 CZK CEZ 750 HOLD 650 TARGET PRICE: 550 807 CZK 1/7/2010 20/8/2010 9/10/2010 28/11/2010 17/1/2011 Date Source: Team E estimates PEER GROUP FINANCIAL INVESTMENT 19 ASSUMPTIONS CEZ GROUP VALUATION RECOMMENDATION 19 19 COMPARISON ANALYSIS RISKS
SUMMARY TEAM E TEAM E 2002.12 Extreme 1942.37 Extremely optimistic TICKER 1822.6 Very optimistic NYSE EURONEXT: 1404.6 Optimistic CEZ 807.08 Neutral HOLD 508.32 Pesimistic TARGET 299.19 Very pesimistic PRICE: 807 CZK 239.44 Extremely pesimistic 209.56 Extreme 0 20 40 60 80 100 120 Source: Team E estimates PEER GROUP FINANCIAL INVESTMENT 20 ASSUMPTIONS CEZ GROUP VALUATION RECOMMENDATION 20 20 COMPARISON ANALYSIS RISKS
RECOMMENDATION TO DECEMBER 21, 2010 TEAM E TEAM E TICKER NYSE EURONEXT: CEZ HOLD TARGET PRICE: 807 CZK PEER GROUP FINANCIAL INVESTMENT 21 ASSUMPTIONS CEZ GROUP VALUATION RECOMMENDATION 21 COMPARISON ANALYSIS RISKS
TEAM E APPENDIX 22
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