What’s new? Hellenic reported record adjusted EBITDA and net income, but its cash flow has yet to capitalize on the remarkably high, energy (war) crisis driven, refining margins witnessed in 2022. EBITDA rose 4x yoy at E1.6bn (adjusted) while net debt remained unchanged at E1.9bn. Add the slow take up on RES, and Motor Oil remains the best choice between the two Greek refineries.
Conclusion. If refining margins >$20/bbl do not show up in cash flow, we will not include them in our valuation either. In other words, we reiterate our DOI rating with our price target at E6.4 (from E5.9). Unless margins stay >$20 and working capital tuns positive (as in inflow), we do not expect cash flow to improve much in 2023. Which makes us wonder about next year’s ordinary dividend. Shares trade at 8.8x our clean, normalized, EBITDA estimate for 2024.

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? This update can be best summarized by adding ‘Solidarity Tax’ to our latest note titled ‘Unprecedented Earnings’, published two weeks ago on Q2 results. The European Commission used a different term: ‘Solidarity Contribution’ on excess profits generated from activities of oil, gas, coal, and refinery sectors. Equal to a 33% charge against 2022 pre-tax profits >20% of the last three-year average (2019-2021).
Although not exactly a surprise to see refineries paying windfall taxes on their huge earnings generated (so far) in 2022, we admit we expected the Greek government to pre-empt such a move, the same way it did with the electricity companies. Instead, it was the European Commission recommending the tax.
Conclusion. Bottom line, this is bad news for Motor Oil and Hellenic Petroleum, with their share prices down c.10% compared to Sep 1 (our previous update). Not sure about the final bill but pretty sure it will be in the hundreds of EURm. In the table below we show our estimates on different scenarios (group or refining-only earnings, adjusted or reported etc.) and outline our thoughts. Member states have the final saying on implementing this solidarity tax.
We conclude…

What’s new? Motor Oil and Hellenic Petroleum reported astonishingly strong Q2 results, with their adjusted EBITDA at E500m (each) and free cash flow at E300m (MOH) to E500m (Hellenic). The outstanding performance is attributed to the remarkable refining margins recorded in Q2 ($22/bbl for MOH and $26/bbl for Hellenic), driven by solid demand, the short squeeze caused by sanctions to Russian oil products, and the stronger dollar vs the euro. Increased contribution from power and gas segments was quite notable.
Nevertheless, investors should not expect big, special, dividends out of 2022 refining earnings. Hellenic will be paying 50% of the proceeds coming from the sale of DEPA Infrastructure (completed today) but will not be sharing its record refining earnings. Both companies want to deleverage their balance sheets and invest in renewables, which is the sector chosen to diversify away from refining.
We expect renewables to be the differentiating factor once the refining outlook normalizes. For this reason and because of MOH’s leaner structure, better cash flow management, naphtha reformer economics, and more attractive valuation, we rate MOH with an OI and (continue to) prefer it over Hellenic (DOI).

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.