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

What’s new? Sarantis announced the sale of its 49% stake in the joint venture with Estee Lauder for E55.2m in cash. Back in July 2019, the shareholding agreement was modified and extended to 2028; and EL had the option to raise its stake gradually in set dates during this period. It seems EL could not wait.

· The money paid is equal to 6x actual earnings reported by the JV (Elca Cosmetics) in 2021; higher than the carrying value on Sarantis books (E29.6m) and higher than our valuation input (E29m) based on the PV of dividends + buyout proceeds in 2022-2027 (= E11m + E18m).

· It would not be irrational to assume…

What’s new? We upgraded Motor Oil to OWN IT (OI) on May 3 on the back of its breakthrough expansion deal in renewables (report re-attached). But so far in the year, it is the refining business that has been thriving; with the adjusted refining margin at $85/MT in Q1 (from $47/MT in 2021) and Q2 outlook implying higher even numbers. If anything, this development raises our conviction regarding leverage and dividend payments following the RES deal.

What’s new? OPAP released Q1 results showing GGR/EBITDA/net income at E457m/E169m/E88m with equity cash flow at E147m. The latter drove net debt down to E42m, reflecting the absence of capex. This is not the correct run rate for the full year given a c. E115m earn-out related to Stoiximan acquisition will be paid in H2 (last one).

FY reported cash flow will be closer to E420m on our estimates or a yield of 8.3% on current market cap. Adjusted FY 2022 equity cash flow will reach E532m or 10% yield. There is no point comparing yoy performance, given the lockdown imposed in Q1 last year. We focus on assessing the quarterly trends and run rate against our full year forecasts.

Management reiterated full year guidance for E720m-E740m EBITDA but now considers the high end of this range to be challenging, given that underlying macro/geopolitics conditions have not improved. We believe the GGR guidance for E2.175bn–E2.215bn is most likely off, with management initially expecting bigger contribution from on-line gaming into the GGR mix. Off-line comes with a higher margin, which probably explains how EBITDA guidance was maintained.

What’s new? We summarize the main points from Q1 2022 results released last week. Clean PPP for the 4 banks stood at E765m, unchanged from E762m in Q4 2021. Clean pre-tax income came in at 533m from E469m in Q4 (+13% qoq) thanks to an equivalent reduction in impairments.

Three things stood out: a) big one-offs for yet another quarter with their equity impact partially offset by OCI movements, b) normalizing or already normalized CoR and c) anemic (excluding Alpha) net lending growth. Needless to say, all banks reiterated pre-war/crisis RoTE targets towards 10% in 2022-2024 and painted a bullish picture for NII in case of rising rates (not included in RoTE guidance).