What’s new? Despite several (small and big) one-offs, Q4 results marked a solid closing (Q4 ref margin: $20/bbl, FY: $19/bbl) to a very strong P&L and cash flow FY 2022. YTD MED margins are strong, comparable to 2022 levels, plus MOH’s naphtha reformer and full year contribution from acquired renewables suggest EBITDA will remain above historical levels. In short, management’s strategy is working.
Which translates to using E1.6bn of adjusted EBITDA in 2022 (o/w E1.4bn refining) and E1.3bn of net income (adjusted for E358m in solidarity taxes) to spend E260m in refining capex and invest E880m in renewables, while paying shareholders E180m/7% in dividends. Net debt +E300m higher yoy (1.0x EBITDA).

What’s new? Q3 results confirmed there is no sign of slowing down for the strong refining earnings witnessed in 2022 (Q3: $22/bbl, 9M: $19/bbl). Difficult to predict 2023 but we are factoring in $14/bbl, i.e. lower yoy, albeit higher-than-historical refining margins ($7/bbl). Windfall/solidarity taxes do not seem enough to alter the positive picture.
Ahead of electrification, the best thing refineries could do is to re-invest these earnings to diversify their models away from refining. This is exactly what MOH is doing as per their 2030/E4bn energy transition strategy. In the meantime, valuation benefits from lower net debt and higher dividends.

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).