Imagine someone is cutting off your energy/gas supply (QE) while pounding you with heavy artillery weapons (interest rates). The focus is on surviving the war with the help of your allies (ECB)*. Our mid-year strategy report is about which equities can get through stagflation with the least casualties. As we noted in our Feb note: ‘’ […] risk aversion will show up here too. And when it does, fundamentals will be the differentiating factor.’’

Getting through the crisis

We recommend you own OPAP, Jumbo, PPC, Alpha Bank, ADMIE; since our Feb note, we have added NBG and Motor Oil. Investors should consider adding OTE below E16; also, switch from TEN to MOH, PPC and/or ADMIE; from ELPE to MOH; from MYT to PPC; and from SAR and Fourlis to Jumbo. We favor cash flow generation and dividend yielders; energy infrastructure plays; plus, interest rate and oil price winners.

Early elections?
It is becoming consensus view the govt will go for early elections in Sep-Dec this year instead of July 2023 to a) preempt worsening macro conditions next year and b) to make sure political instability does not get in the way of the sovereign earning investment grade. The only positive market scenario would be for this government to be re-elected. This is our base case.

There will be two election rounds: the first one, lacking bonus seats for the first party, will surely yield a hung parliament; while the second round, could require a two-party coalition. The ruling party needs 37%-38% of second round votes vs. 31%-36% fetched in current polls.

The power of higher discount rates
Call it multiples de-rating or DCF hurdle rates going up. It is the same thing. With interest rates on the rise, the valuation on equities is going down. Banks can decouple given a) their CoE was elevated prior to monetary tightening and b) their NII and equity stand to benefit from higher interest rates – on the conditionality inflation does not dislocate asset quality.

10.9x P/E and 6.4x EV/EBITDA 2023E
Are the trading multiples of our Greek universe** (excl. banks). Down from 15.1x earnings and 6.7x EBITDA in 2022E terms (driven by energy stocks); slightly down vs 15.5x P/E and 7.4x EBITDA in Feb on 8% lower market cap (and +6% EPS revision). Banks trade 0.37x TBV 2023E down from 0.56x TBV in our Feb note, with our estimates broadly unchanged.

The calls that have not worked
Compared to our February strategy note: our OI calls on PPC, ADMIE Holdings and Alpha Bank have not worked. But, except for PPC (taxes, receivables), the miss is not attributed to weaker fundamentals or a change in strategy. Within our DOI calls, Terna Energy and Hellenic Bank have had a great performance on M&A grounds.

*Metaphorically speaking / with the utmost respect to the war raging in Ukraine

**Prices as of June 17

ADMIE Holdings: Investments Are On Track

What’s new? Q4/FY results confirmed the mismatch between regulated and actual depreciation (see our previous note attached). This, plus some smaller one-off items, drove net income and dividend 10%-12% lower compared to our estimates. More importantly though, capex spent (E412m in FY 2021) to interconnect the islands remains on track. The new 2022-2025 RAB is expected shortly and should lead to double the EBITDA by 2024 at E380m. Conclusion. We made slight changes to our 2022-2025 forecasts; the main one is increasing our non-regulated depreciation to E20m (from E15m p.a.) We still model for a lower RoRAB (vs. IPTO’s proposal to the regulator), closer to what the distribution operator (HEDNO) got a few months ago. We project 2025 EBITDA of E380m, which is 7% below IPTO’s proposal implied EBITDA of E407m.

RG_ADMIE Holdings_ Investments on Track __ Update

This note is about investing, not trading or event-driven ideas. We believe our OI rated stocks will outperform the market on a risk-adjusted basis in the next 12-18 months. We recommend you own OPAP, Jumbo, PPC, Alpha Bank and ADMIE. We downgrade OTE given it is trading at our target price. We assume the pandemic will be less of a risk; we consider the end of free money and elevated costs and reiterate cash flow conversion as our #1 criterion.

What’s new? We are incorporating IPTO’s RAB 2022-2025 proposal into our model. In the process, we believe we have found the ‘catch’ weighing negatively on the investment case: lower than regulated adjusted profits in 2018-2021, reducing distributable income and dividends. Although the delta is small, we believe this to be important given the visible cash flow / dividend profile of the investment case. This has been more acute in 2021, due to the lack of counterbalancing +ve one-off items witnessed in previous years.
Where is the delta coming from? The main source (underlying vs. RoRAB EBIT) is the…

Our positive call on ADMIE Holdings has not worked. The irony is that our positive conviction keeps going up. The case looks like a value trap but the risk/reward profile remains compelling. We have failed to spot a catch in the investment case. We maintain our OI rating with a higher PT of E3.4 (from E3.3). We analyze our approach…