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

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.

Considering that circa 9% RoTE guidance: a) is based on pre-tax or core operating income and b) circa usually means ‘lower than’… we reiterate our DOI rating because the risk-reward profile of NBG at current 0.50x TBV 2021E is not cheap/attractive enough. Clarity provided on the E6bn Frontier securitization, NPE reduction plan, loan moratoria update and clean operating income evolution – All confirmed that NBG, together with Eurobank, stand out in terms of asset quality and hitting RoTE 9%+ already in 2022. We believe the above are…

Piraeus announced it targets 10% RoTE by 2024: Based on -10% NII, +40% fees, +70% other income, -12% cost cutting and -50% impairments vs. 2020 – or a normalized CoR of 70bps. The bank seems comfortable operating at 8%-9% fully loaded CET1 in 2021-2022 in order to get rid of E21bn of NPEs in the next 12 months. Achieved via Hercules securitizations (E18bn, o/w E7bn completed), outright sales (E1.4bn) and organic actions (E3.5bn) – slightly offset by inflows of E1.7bn including pandemic related ones. Management confirmed it will be raising E1.0bn of equity within April via a book-building process; new shares (issue price unknown) to commence trading in May. Combined with bond gains of E400m, merchant card sale gains of E300m and organic earnings of E1.4bn (2021-2024) to absorb P&L/equity losses of E4.0bn from NPE reduction.
Reconciling RoTE targets with P&L earnings we infer net income is guided at c. E600m in 2024 on TBV of c.E6.0bn. The above imply shares currently trade…

BoC reported FY 2020 results (Feb 24) but our focus is not on Q4 reporting but the medium-term targets shared by the bank. Especially the underlying assumptions. Management seems to have a cautious and realistic approach on future performance. Our conclusion: the -yet- unknown pandemic effect on NPEs, the still high real estate exposure and the strain on NII by low L/D make us reiterate our…. – on a risk/reward basis, it still makes more sense to own the bank’s debt instruments offering YtM of 8.9%-9.2%.