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? Q4/FY 2021 results were weak and below our estimates once adjusted for one-off items. FY sales/EBITDA/net income came in at E408m/E60m/E40m or +4%/-5%/+4% yoy. But if you take out E3.6m of revaluation gains (land plot sale in Romania), FY net income was E36.5m or -5.5% yoy; while H2 net income was down -25% yoy (adjusted).

What’s new? Ever since our last update (Dec 9), Russia invaded Ukraine and soon after SAR announced a E55m acquisition (enterprise value) in Poland, its biggest M&A deal in the last many years. Sarantis is present in Ukraine through its 90% owned subsidiary Ergopack (home and personal care products), contributing E28m of sales and E1.5m EBIT in 2020. This would be less than 7% of total sales and 3% of total EBITDA, and therefore seems manageable, both P&L and in valuation terms. The worst-case scenario would be for SAR to write-off the entire carrying value of Ergopack, which we estimate at E18m-E20m. Latest available financial accounts of Ergopack show equity of E19m (EUR/UAH at 32) with zero debt. If not a full write-off, SAR will not avoid an impairment, in our view.

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.