What’s new? With this note we are re-vising the investment case of Fourlis. Q4 marked a strong finish in what was overall a bad 2022, hit by supply chain constraints and cost inflation (incl. energy). But it also means we have one more full year of Trade Estates, the hopefully-soon-to-be-IPOed REIT subsidiary of the group. Therefore, a better way of assessing the value between the latter and the core, retail, business of Fourlis.
Conclusion. At E207m the current market cap of Fourlis equals the E194m NAV of its owned assets (through Trade Estates REIT = 92% stake x E211m total NAV), with the retail business (IKEA + Intersport) valued at E12.9m. The latter matches the 2022 reported net earnings of the retail business (including E8.5m of real estate revaluation gains).
Not exactly a surprise given the weak clean/adjusted performance of the latter in 2022, in part reflecting the transfer of value towards Trade Estates.

In this note we outline the investment summaries of all Greek names we cover. We start off with a few points on macro and politics and our OI rated names, highlighting any changes compared to our previous assessment in June 2022.

Inflation, inflation, inflation
Real GDP grew by +7.8% yoy in H1 reflecting strong domestic demand (+9.5% yoy) and rebounding tourism (beating record 2019), while the inflation rate ran +12% yoy in the 12 months to September, pushing nominal GDP even higher at +16.9% yoy. This is important because it dilutes the public debt/GDP ratio (from 199% in 2021 to 170% in 2023, IMF), without increasing the financing needs of the sovereign (1.5% GDP annual), as most of the sovereign debt is fixed at low rates (76% owed to official creditors), and it allows the government to spend both during the pandemic (20% of GDP) and the energy crisis (2% of GDP).

The catalysts for 2023 include GDP growth staying in positive territory, winning back investment grade and to avoid a political turmoil from scheduled elections. This is our base case scenario for Greece. However, we cannot escape our conservative disposition. Therefore, we keep a single OI rating among GR banks (NBG) while upgrading Bank of Cyprus to OI. We stick to our OIs on OPAP (dividend yield), PPC (renewables), Motor Oil (renewables) and Jumbo (valuation).
OTE looks more attractive below E16/share and the same goes for Hellenic Exchanges below E3/share, which we consider to be a proxy for the banks, assuming you can afford to invest in a such low market cap name. We urge readers to ignore any sirens singing ‘everything is a buy’ in Greece. We believe the day of reckoning is here and fundamentals play the key role. Our GR universe (x-banks) trades 6x EBITDA and 10x earnings 2023 while on a dividend yield of 5%. These multiples are cheaper than four months ago (6.7x EBITDA and 10.9x earnings) thanks -mainly- to the market de-rating.

What’s new? Fourlis reported weak H1 results last week with revenues and clean EBIT at E213m and E2.8m or +15%/-67% yoy, reflecting higher opex (+40%) and despite gross margin rising by +300bps yoy. Results are burdened by E5m-E6m additional energy costs and foregone revenues of E8m-E10m due to out-of-stock products.
Still, the big news was the guidance provided for 2025 in the conference call that followed. Management expects sales of E750m and EBIT margin of 7.5%-8.0% from the retail business alone (IKEA, Intersport, and Holland Barrett) post rental expenses paid to (equity consolidated by then) Trade Estates REIT. In other words, EBIT will reach c. E60m in 2025 without counting for any contribution from Trade Estates REIT.
Sales of E750m in 2025 (from E500m in 2022E; +50%) break down to E450m from IKEA (from c. E315m in 2022E), E250m from Intersport (from c. E185m in 2022E) and E50m from Holland Barrett (from E0m in 2022E); while retail EBIT of E60m in 2025 compares with E12.5m-E15.0m in 2022 (2.5%-3.0% margin; +4x higher); or E20m if we adjust for the higher energy costs (vs. 2021) which presumably should normalize going forward.
Fourlis guidance is based on a) three new, medium-sized, IKEA stores (8-10k sqm) in Patras, Heraklion and Ellinikon; b) E15m-E20m per new IKEA store; c) higher overall consumer spending; d) the addition of Holland Barrett; e) gross margin of 42% (from 45%); and f) opex at 35% of sales (from 42%).
Conclusion: We reiterate DOI with our PT at E3.6 (from E4.6). The business plan is obviously ambitious. Management is making a big bet on new sales per IKEA and Intersport stores with the resulting EBIT driven from operating leverage. If they pull it off, Fourlis is a great investment opportunity at current prices, trading at c.4.0x EBITDAL 2025E (guidance).

What’s new? Inspired by IMF’s recent blog, that places Greece among the 5 least affected EU countries from a full Russian gas cutoff, we outline our thoughts and arguments below as to why Greece is probably a better investment case than what is implied by the energy crisis, inflation- recession fears, and the ongoing impact from the pandemic.

Conclusion. Our base case scenario is that a) Greece can avoid a recession in 2023-2024 even if the war in Ukraine continues beyond 2022 and Russia cuts off the gas supply to Europe entirely; b) Greek banks should be net gainers from higher interest rates; c) ECB will continue to support the sovereign, lifting its chances to earn investment grade rating and d) New Democracy will win the elections whenever these take place (early or on time).

OI picks plus DOI picks at lower prices. In this context, we recommend investors own NBG, Alpha, OPAP, PPC, Jumbo and Motor Oil (our OI rated names) and consider OTE and Hellenic Exchanges below E16.0/share and E3.0/share respectively. We also reiterate our suggestions, flagged in our mid-year strategy update on June 2022 (‘War on Equities’), to switch from TEN (post M&A) and MYT to MOH and PPC; from ELPE to MOH; and from SAR and Fourlis to Jumbo.

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