Greece Outlook
2019: The year of the elections
AXIA Research
Table of Contents Start of a new era ...... 3
Early elections or at the end of the government’s term? ...... 3
Unexciting economic performance, while fiscal space shrinks without pro-growth ...... 4
Elections is the key catalyst for the markets ...... 5
Top picks ...... 5 2019, the year of the elections ...... 6 The day after the Prespa Agreement ...... 6 Timing of elections: May vs. September/October ...... 7 Looking at recent polls ...... 9 Strategies by Syriza and ND ahead and after the elections ...... 13 Syriza to try to close the gap with ND as is already regrouping for the day after ...... 13 New Democracy is set to win the upcoming elections but some issues remain tricky...... 14 Limited prospects for a new wave of extreme populism ...... 16 The economy is improving but at an unexciting pace ...... 17 Getting ready to exceed the 2% growth mark for 2018 ...... 18 Improved economic growth in the first 9–months of the year ...... 19 Expectations for stronger growth in 2019...... 22 What can adversely impact the economy in 2019 ...... 23 Greece’s GDP growth could surpass Eurozone average over the coming few years ...... 24 Drivers of economic growth over the short to medium term ...... 25 Budget execution ...... 35 2018 target to be met ...... 35 The budget in 2019 and 2020 ...... 38 Reforms under the enhanced supervision framework...... 41 Greek debt: A plus size model ...... 43 Greek equity market outlook ...... 47 Performance in 2018: Greece remained a weak link ...... 47 The bottom up approach on non-financials points to a 20% upside for 2019, but is losing momentum in 2020...... 49 The upside potential of the financial stocks is more than 100% but confidence is the key word ...... 50 The election trades ...... 51 Top picks ...... 53 Outlook per sector ...... 56 Greek Banks ...... 56 Energy ...... 63 Real Estate ...... 70 Construction ...... 74 Retail Sector ...... 77 Telecoms ...... 79 Gaming...... 82 AXIA Universe – Screens of equities in our radar ...... 85 Disclosures ...... 112
All prices are as of the close of Wednesday, February 20th unless otherwise noted Please see important disclosures at the end of this report Produced and disseminated: Athens February 25th 2019, 08:00am GMT+2.
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Start of a new era
It has been more than 6 months since Greece exited its economic adjustment program. The economy is growing (albeit at a moderate pace), the budget continues to overperform the set targets and the country has managed to tap the markets again. Despite these positive developments, overall investor interest on Greece remains minimal, for an economy that private investments is currently the main channel of funding. The Greek story does not “sell” as investors continue to question the government’s resolve to push stronger towards market-friendly reforms that will allow for significant economic growth acceleration. So, it comes down to the elections that will take place this year, in October at the latest. A possible win of New Democracy (as all polls indicate) is seen as the main catalyst that could create a positive momentum for the country that if it is backed, as expected, by firm actions by the new administration, it could be maintained over the medium term.
Early elections or at the end of the government’s term? The prominent question is “when will elections be held?” The debate is mainly between early elections in May vs. the current administration running its full term in office and announcing general elections for late September/early October. A combination of factors, including i) the government accelerating efforts to present an expansionary social benefits package, ii) the hiccups in passing legislations since the administration does not have absolute majority in the Parliament (although votes of independent MPs could ensure Parliamentary majority), but mainly iii) the large hurdle of the double elections in May (elections for the European Parliament and the Municipalities), tilt in our view, the probability towards early elections in May.
Exhibit 1. AXIA poll of polls* Exhibit 2. Parliament composition evolution
36.6 No of MPs Sep'15 Today Syriza 145 145 25.8 ND 75 78 Golden Dawn 18 16 Democratic Coalition/Movement 8.3 17 19 7.9 6.9 of Change (PASOK) 5.2 2.7 1.9 1.7 1.0 2.1 Communist Party (KKE) 15 15 The River 11 N/A** Independent Greeks (ANEL) 10 N/A** Centrists Union 9 5 Independent MPs 0 22
*adjusted for valid votes Source: Marc, MRB, Pulse, Kapa, Metron Analysis, AXIA Research **according to the Parliamentary rules, political parties that control below 5 seats are not able to be represented as a Parliamentary group, so their MPs are considered Independent MPs
According to the polls, the main opposition party, right-wing New Democracy (ND), maintains a wide lead over the governing Syriza, and it remains to be seen if the efforts by the later, from now on, could help close the gap. The main question, at this point in time, is whether ND will be able to secure more than 151 seats in the Parliament in order to form an autonomous government. Current polls, as well as our own Poll of Polls, suggests that this is the prevailing scenario.
Exhibit 3. AXIA poll of polls seat allocation estimate Exhibit 4. When will election take place (poll)
20 NA, 6% 23 75
24
Early elections, 34%
Scheduled date, 60%
158
Syriza New Democracy Golden Dawn PASOK Communist Party
Source: Marc, MRB, Pulse, Kapa, Metron Analysis, AXIA Research AXIA Research Page 3
AXIA Research
What we would expect from a ND administration is a push towards market-friendly policies including the further lowering of business tax/contributions in order to spur investments. In parallel, as key reforms have already been voted, a thrust towards faster implementation of these reforms should have multiple positive effects on the economy (i.e. privatizations). So, the question comes down to the ability of ND administration to deliver, in a rather short period of time, despite significant obstacles, especially in respect of the reduced fiscal space.
Unexciting economic performance, while the government shrinks the fiscal space without pushing for pro-growth measures The local economy is expected to grow by c2.0% y-o-y in 2018, while for 2019 expectations call for a c2.3% y-o-y growth assisted by private consumption and a rebound in investments. The performance could further improve if popular measures like the increase of the minimum wage, lead to higher consumption. However, we stress that a stronger medium-term economic momentum could be built only based on the healthy growth of private investments, since the economy is tormented by high surplus requirements, inability of the government to extensively fund growth and the weak financial system. Focusing on investments we note that the investment gap in Greece accumulated during the crisis is above EUR 100bn.
The focus of the current administration has been on delivering on fiscal targets and this has been done successfully over the past 4 years, overperforming the targets. To a large extent this success is the result of high taxation (both personal income and corporate), while at the same time State arrears remain significant. We note that in 2018 the government proceeded with lower public investments vs. the target (thus improving the State balance). The extra money vs. the target over the past few years has been used mainly to finance one-off handouts. For 2019, the government is in the process of legislating a package of discretionary measures (mainly social benefits) thus significantly reducing the fiscal space to be generated under the current fiscal framework, without proceeding to growth-friendly measures. Although we are not concerned about Greece meeting its medium term targets, we stress that the main hindrance to the budget are potential adverse court rulings that could lead to very high disbursements (retroactive payments) as well as recurring expenses. On a positive note, these disbursements could, most likely, be spread over a long period of time, while new legislative amendments could reduce the size of any recurring expenditure steaming from the rulings. Presumably the next administration will be called to deal with these issues.
Despite its large size, Greek debt has very attractive characteristics including a maturity of 18.5 years, a fixed coupon for 85% of the debt and the fact that 80% of this debt is held by the official sector. On top of these characteristics, the stated support by the Eurogroup along with a sizable cash buffer, have driven the 10-yr GGB yield at 3.8% reflecting investors’ political and slow economic growth concerns.
Exhibit 5. ATHEX Exhibit 6. Greece 10-y yield (%)
950 8.0 900 7.0 850 800 6.0
750 5.0 700 4.0 650 600 3.0
550 2.0 500 1.0 450 400 0.0 Feb 17 May 17 Aug 17 Nov 17 Feb 18 May 18 Aug 18 Nov 18 Feb 17 May 17 Aug 17 Nov 17 Feb 18 May 18 Aug 18 Nov 18
Source: Capital IQ, AXIA Research
Yet, the most important obstacle for the economy is the weak financial sector, pressured by still very high stock of non performing exposures (NPEs). There is no easy way around dealing with the issue and only in the case of an acceleration of the NPE disposals, Greek banks’ NPE levels will be able to reach EU averages in 2020-25 (depending on the bank), assuming no substantial impact on capital. The valuation of the sector reflects these challenges with banks trading for 2019 between 0.07x P/TBV and to 0.45x P/TBV (adjusted to Eurobank-Grivalia deal).
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Elections is the key catalyst for the markets With the economic and fiscal outlook relatively supportive and the political risk on the upside, the next question is why investors remain in the sidelines. We view that this is partially because of the global de-risking mode but also, mainly, because of the Greek recovery story prospect which has tired investors, who are now seeking tangible results. We believe that the announcement of the elections is the main trigger that would help rejuvenate interest and create momentum (at least in the short-term) in all asset classes in Greece.
Focusing on the equity markets, the performance in 2018 was weak (Athex was down 23.6% y-o-y). The Athex underperformed the MSCI Emerging (down 16.6% y-o-y) and the major EU indices (i.e. DAX -18.3% y-o-y), mainly because of the strong underperformance of the financial sector.
2019 has started on a positive leg, with ATHEX going up 9.5%, while non-financials EPS is seen gaining momentum again and is expected to grow by ~20% in 2019 (vs. ~7.5% in 2018). The Greek market trades at a P/E of 13.4x (excluding banks), while incorporating the expected profits for 2019 the upside potential as indicated by analysts expectations stands above 20%.
We view that the announcement of the elections would lead to a rally for the equities driven by a rerating of the banks and increased interest in large, liquid caps. A second leg of the rally could be supported, as the new administration clearly articulates its program and starts taking specific actions. Pro-business, pro-growth measures, restructurings of public companies and the acceleration of privatizations are expected to be part of the stated policies. This second-leg rally should lead to the rerate of the market as investors become more confident over the country’s long-term economic growth. In parallel we would expect both banks and corporates to go ahead with updated business plans seeking ways to grow, while depressed M&A activity should pick up as well.
Regarding the global backdrop, it will continue to be a correlation of the Greek assets with EU markets as well as emerging markets, although it can be argued that Greece is in a different cycle. Still, we consider that elections as a strong catalyst that should allow the Greek market to move independently for a short period of time.
Top picks As we noted, we would expect the share prices of the four systemic banks to react positively to the announcement of the elections or even ahead of that as there are catalysts for the sector including i) the approval by the SSM of Greece’s APS scheme and at the same time regulatory steps to consider the BoG’s NPE reduction plan ii) the acceleration of the process of the Eurobank-Grivalia deal iii) new business plans to be announced from the new CEOs of Alpha bank and NBG aiming to accelerate NPE reduction iv) an agreement on the new household insolvency law and v) further disposals of NPE portfolios. Regarding non financials, we like the underlying fundamentals of OPAP and Jumbo, the growth prospects of Mytilineos and Terna Energy as well as the appealing investment case of Lamda Development
Finally, in respect of real estate, the positive trends we witnessed in 2018 should accelerate, especially in respect of prime office, followed by prime commercial and tourist-related real estate. The yields of all real estate markets remain significantly higher vs. those in other EU countries.
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2019, the year of the elections
General elections in Greece will take place, at the latest, in October 2019. The key question is whether there will be early elections and if so, when they will take place. The only person that can decide snap elections (assuming that the government is not forced by a defeat in a confidence vote) is the Prime Minister (PM), Alexis Tsipras. In our view, the scenario of early elections in May is that with the largest probability, as we believe that the hurdle of the upcoming EU Parliamentary and Municipal elections (that will take place in late May) remains formidable for the governing Syriza party. A potential weak performance of Syriza in these elections could cause an irreversible setback for the party. The Macedonia name-deal has polarized public opinion with the majority remaining against the deal, while on the other hand the government is initiating a number of “positive” measures aiming to support specific groups, but also other political actions in order to highlight its “left roots”. Therefore, we expect that the polls in the coming few months (end of March/early April) that will incorporate the full impact of the above and more clearly depict voter’s trends, to play a key role to Tsipras’ decision of whether to go ahead with early elections in May or not.
The day after the Prespa Agreement The Prespa Agreement (Macedonia name-deal) was a difficult proposition by the administration that eventually managed to pull it off. Its success in securing an absolute majority of votes in the Parliament, is allowing it to move ahead with its social agenda with one less destruction (new hurdles relate to reforms the government has committed to implement in the coming weeks). At the same time, the Macedonia vote has led to a political turmoil to the center-left of the political spectrum, something that the governing Syriza is trying to explore, especially as it seeks to make inroads towards this political space.
Exhibit 7. What is your view on the Prespa Exhibit 8. What is your view on the Prespa agreement? agreement?
75 72 71 70 72 67 Rignt 6 91 3
Center-Right 10 88 2
24 24 Center-Left 20 72 8 23 21 22 16
Center-Left 50 43 7
Left 54 35 11 Jun-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19
Agree Do not agree 0 20 40 60 80 100 Agree Do not agree NA Source: Metron Analysis, AXIA Research
On the other hand, there is no more coalition government. Syriza controls 145 MPs plus 1 MP that collaborates with the government. Still, the independent MPs that threw their support to the government in the confidence vote (in January, 2019) have officially sent letters to the Parliament notifying that from now on they will be supporting all legislations proposed by the government, thus providing it with the necessary 151 votes to control the Parliament. Even so, the effort by the government to show that we are back to “business as usual” is tested as significant reform- legations (i.e. privatizations, constitutional amendment) reach the Parliament for a vote.
Focusing on the decision by former junior coalition partner, Independent Greeks (ANEL), to withdraw their support from the government, we note that at this point in time, this serves both Syriza and ANEL since from now on, they can independently pursue their own agendas ahead of the elections (Syriza focusing on left and center-left and ANEL on the right of the political spectrum).
We mention that a number of MPs by ANEL and The River during the Prespa vote diversified their stance vs. party lines and they were expelled or quitted their parties. So the number of MPs controlled by ANEL and The River are now below 5 and according to Parliamentary rules these parties are not considered Parliamentary groups anymore and their MPs are accounted as Independent MPs.
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The day after the Prespa Agreement The government completes its 4-year term in September 2019, so hence, general elections to take place in October this year, at the latest. Nevertheless, recent Greek political history demonstrates that Prime Ministers prefer to call early elections in order to i) go to the polls at a time deemed most favorable for their party and/or ii) surprise political opponents. Keep in mind that early elections can be called only by the PM, unless his government is defeated in a vote of confidence or if it cannot secure the necessary votes to elect a President of the Democracy. If there are early elections (not forced by a confidence vote), the predominant scenario is that they will take place in late May, in parallel with the elections of the European Parliament and the Municipal elections. The potential of calling elections between late March and mid-April exists, but it is rather low given the political realities, while it is almost unlikely to go to the polls any time between June-July (August is a vacation-month), since this will be too close to the May elections.
Note that in the upcoming elections, the winner will receive 50 bonus seats (in the 300-seats Parliament). The change in the electoral law towards the proportional system (seats allocation will be proportional to the vote) will be applied to the elections following the next ones.
Timing of elections: May vs. September/October
PM Alexis Tsipras (and top government officials) have said that the aim is for the government to complete its full term although, in some instances, PM has left open the possibility of early elections. Despite these political statements, we view that the scenario of early elections gathers more probability at this point in time as under this scenario Syriza is optimizing the benefits from its ongoing political actions, while minimizing the risks from a potential defeat in the upcoming elections of the EU Parliament and the local Municipalities. In any case, we don’t expect any clarity on the matter until late March/early April as the government pushes its agenda and focuses on the impact of its ongoing initiatives on voters.
Exhibit 9. When the government will hold elections Exhibit 10. What would be best for the country
NA, 6% 44%
34%
Early elections, 34% 20%
Scheduled date, 60% 5%
Syriza to remain in Early elections Grand coalition with NA power another PM
Source: Metron Analysis, AXIA Research
The case for May elections There are two main arguments that make us view early elections in May as a probable scenario: i) the accelerating efforts by the government to introduce an expansionary social benefits package as well as other political actions and ii) the potential of adverse voters’ reaction towards Syriza from a potential significant defeat of the party in EU Parliament elections/Municipal elections. The vote for a President of the Democracy is an angle that Syriza might explore, albeit we view that this potential could be mitigated by the new administration. Specifically:
a) Social benefits package - As noted above, the government is rushing to implement a number of policies designed to support specific social groups but also to enhance its political profile (left roots). The political impact from these actions is expected to be positive and could create a momentum over the short term for the governing Syriza. Still this positive momentum should fade away, if elections take place 7-8 months later.
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The government introduces “positive” measures
i) increase of the minimum wage ii) subsidization of employers’ contribution for young employees iii) subsidization of the rent to those in need (concerns c 300,000 households) iv) introduction of a long instalment scheme for the arrears of corporates & entrepreneurs to Social Security Funds.
We also note that starting this year, taxpayers will file tax returns in March vs. in July the previous years. Note that the government has already announced a reduction of the property tax for those that have properties of lower value. In parallel, the government would seek to generate positive attention with efforts to proceed to specific amendments to the constitution that include among others i) a push towards reforming the relationship between the State and the Church ii) electing President of the Democracy without triggering snap elections iii) new accountability framework for Ministers and Parliamentary Members and iv) introduction of private universities (Syriza is against it). Finally, there are reports that in the coming weeks, specific case(s) could be brought to justice to showcase political mishandlings of previous administrations.
b) EU Parliamentary/Municipal elections - Drawing conclusions from previews election results for EU Parliament elections, Greek voters find the opportunity to cast a protest vote against the government. The Syriza party, that already trails in the polls to New Democracy, could run the risk of experiencing a bigger defeat in these elections vs. what polls currently indicate, not only because of the potential protest vote but also because the risk of a high number of party voters might decide to abstain. If the outcome of these elections suggests a low acceptance rate for the party, this could create a negative momentum and Syriza will have a rather short time period ahead (until October) to react.
At the same time, in respect of municipal elections note that based on available polls, Syriza candidates in the two major cities (Athens and Thessaloniki) trail significantly vs. the ND-backed opponents as well as other candidates. Therefore in both elections, Syriza is confronted with the prospect of significant defeats.
Exhibit 11. Municipal elections-Voting intention Exhibit 12. Municipal elections-Voting intention (Athens) (Thessaloniki)
Other 11.6 Other 21.8
Undecided/Absention/invalid vote 32.2 Undecided/Absention/invalid vote 28.7
Bakogiannis Kostas 33.8 Tachiaos Nikos 21.6
Iliopoulos Nasos 6 Notopoulou Katerina 11
Kasidiaris Elias 7.9 Orfanos Giorgos 8.1
Geroulanos Pavlos 8.5 Vougias Spiros 8.8
Source: Opinion Poll, Marc, AXIA Research
c) Presidential elections - Another argument that could potentially support the May elections is related to the Presidential elections that are scheduled to take place in early 2020. According to the argument, assuming New Democracy wins the general elections in May but without been able to find support from the Parliament to secure 180 votes to elect a President, it could be forced to early elections (as it happened in January 2015). If so, holding the general elections in May, Syriza could be better positioned to pressure for early elections but this prospect would cease to exist if these take place later in the year (very short period between elections). We rebuff this argument later in the text, while we note that the current Parliament is discussing Constitutional changes that could eventually lead to the election of a President, without the risk of triggering early elections.
The drawbacks for the government holding early elections in May are: less time to take advantage from the rebounding economy relatively short period of time from the Prespa Agreement (should be a key issue in the upcoming elections as the majority of the population is against the agreement) the government will not be able to propose its choice for i) an EU Commissioner following the EU Parliamentary elections and ii) new head of the State Council
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The case for the elections in September /October Holding elections in September/October can be considered since i) the government will have more time to reap the benefits from the further strengthening of the economy and to take any opportunity to introduce additional “positive” fiscal measures ii) the government will have more time to push towards a strategy aiming to lure center-left voters (voters of the Movement of Change, The River and the Centrists). iii) traditionally, in September voters are more relaxed, following the summer vacations, giving some benefit to the incumbent governments (assuming that they that the prospects remain positive)
As we already noted, the most significant drawback of holding elections in the fall is the potential of a demoralizing defeat in the EU Parliamentary and the Municipal elections. Note that initially the Municipal elections were to be held in October 2019, but the government moved the timing so these elections take place in parallel with the European Parliamentary elections. We view that this was also aiming to optimize the performance of the party in the EU Parliament vote, since Greek voters seek to remain active in local governments, irrespective of how they might feel about political parties, thus making it easier for Syriza to prompt the party supporters to go to the polls (and vote in both the Municipal elections and the EU Parliamentary elections). To this end, Syriza is trying to find the “right” candidates and also to run alliances in order to improve the party’s performance in these elections. In any case, recent polls indicate a defeat for Syriza in most municipalities as well as in major cities across Greece.
Looking at recent polls As it has been indicated in the polls over the last 24 months, right-wing New Democracy (ND) is leading by a margin of 8.0%-10% on voting intention that translates into a lead of more than 10% if adjusted for valid votes.
Exhibit 13. Voting Intention (%), 5 polls moving Exhibit 14. Which party will win the elections average since 2015
45 62 63 64 61 59 59 59 56 56 58 57 58 57 40 54 55 55 50 52 35 44 40 30 32 25 29 26 26 25 23 23 23 22 23 24 22 23 22 20 20 18 18 17 15 8 8 8 5 7 6 6 7 7 6 7 6 5 5 6 5 6 5 5 10
5
0 Jan Apr Jun Sep Dec Mar Apr May Jan Jan Mar Apr May Jun Sep Oct Nov Dec Jan
2016 2017 2018 2019 2015 (I) (II) 2016 2017 2018 2019 Syriza ND GAP ND Syriza Other Source: Wikipedia, Marc, AXIA Research
The polls suggest that ND claims ~30% on voting intention, while Syriza ~22%. The key points in all polls conducted are: the number of the undecided vote remains high (>15%), keeping in mind the bulk of the undecided vote traditionally supports the perceived winner the consolidation of the voter base of Syriza remains significantly low (<60%) the consolidation of the voter base of New Democracy is relatively high (>80%) Syriza has managed to clinch higher after Greece’s exit from its adjustment program in August last year “Center” remains no man’s land with about 30% of voters being undecided
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Exhibit 15. Party cohesion vs. Sep’15 elections Exhibit 16. Undecided vote origin based on Sep’15 elections (%)
40
Syriza 53% 17% 5%3% 6% 16% 27
9 5 3 4 4 3 4 1
ND 6% 81% 5% 8%
Syriza ND Golden Dawn Movement of Change Other Undecided
Source: Pulse/SKAI TV (Jan’19),, AXIA Research
Exhibit 17. Most suitable PM-evolution Exhibit 18. Would you ever consider voting for this party
45 44 43 41 42 42 41 42 41 40 39 40 ND 50 48 38 37 35 35 36 35 33 34 33 34 33 34 34 31 32 32 31 31 32 32 32 Syriza 70 29 30 29 27 Movement of change 72 24
Communist party 76 23 25 24 24 24 24 25 24 23 22 22 22 23 22 23 22 20 19 18 19 Centrists 76 22
To Potami 82 16
Golden Dawn 85 14
Alexis Tsipras Kiriakos Mitsotakis None Independent Greeks 88 10
I would never vote I could vote Source: Pulse/SKAI TV (Jan’19), AXIA Research
Our Poll of Polls exercise suggests an outright win for New Democracy… Since a win of the ND in the upcoming elections is considered as the base case scenario, the focus is on whether the party will be able to form an independent government (that is to control at least 151 MPs in the 300-seats Parliament). This is not straight forward since it is a function of i) the votes the winning party will receive and ii) how many parties will be able to exceed the 3% threshold and enter the Parliament. The more parties enter the Parliament, the fewer MPs the winning party will be able to claim. Recall that in the upcoming general elections the winning party will receive 50 bonus seats (a change in the election law that calls for a proportional-to-the-vote allocation of seats in the Parliament will take effect in the elections that will follow the next ones).
Exhibit 19. Majority threshold for 1st party based on aggregate of parties <3.0%
38.5 38.5 38 38 38 37.5 37.5 37 37 37 36.5 36.5 36 36 36 35.5 35.5 35 35 35
34.5 34.5 Majority threshold for 1st party 1st for threshold Majority
5.0 5.5 6.0 6.5 7.0 7.5 8.0 8.5 9.0 9.5 10.0 10.5 11.0 11.5 12.0 12.5 13.0 13.5 14.0 14.5 15.0 15.5 Aggregate of parties below 3.0%
Source: Public Issue AXIA Research
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AXIA Research
Working on a Poll of Polls exercise over the key polls released since September 2018, our key finding suggest: New Democracy wins, gathering 35-40% of the total valid votes Syriza gathers 25-30% of valid votes Only 5 parties in total make it to the parliament (ND, Syriza, Golden Dawn, Communist Party, Movement of Change/PASOK) About 14.5% of total voters support smaller parties that do not make it to the Parliament
Based on the above findings, we estimate that ND will secure a comfortable absolute majority getting 155-160 MPs, while Syriza will get ~75 MPs. In respect of other parties, Golden Dawn and Movement of Change/PASOK are competing for the third place gathering ~8.0% (Golden Dawn seems to have a lead) and getting 20-25 MPs. Finally the communist party is getting ~7.0% and 15-20 MPs.
Exhibit 20. Poll of polls results (valid votes) Exhibit 21. Parliamentary seats based on poll of polls
Communist Communist Party, 7.3% Party, 20 PASOK, 23 PASOK, 8.3% Syriza, 75 Syriza, 27.2% Golden Dawn, 24 Golden Dawn, 8.7%
New Democracy, 38.6% New Democracy, 158
Source: Pulse, MRB, Metron Analysis, Kapa Research, Marc, AXIA Research
…but out of parliament vote and smaller parties stakes are also important At this point in time, polls indicate less likely the probability of a sixth party overreaching the 3.0% threshold. To this end only 2 recent polls have indicated such a possibility (Elliniki Lisi making the cut). In this context our poll of polls exercise points to a 14.5% of total votes supporting parties below the 3.0% threshold, something that has only been observed just one more time in elections over the last 20 years (May 2012 elections). Looking at the three most recent elections (Jun’12, Jan’15, Sep’15) the % out of parliament vote averaged 7.0%. Also, note that during the last elections (Sep’15), 8 parties managed to cross the 3.0% threshold.
According to the latest polls, the two smaller parties closer to the threshold are: i) Centrists Union, polling at 2.0%-2.7%. In Sep’15 elections, the party managed to reach parliament gathering 3.4%. As the name indicates, the party gravitates between center left and center right spectrum and is led by a flamboyant leader, Mr. Vasilis Leventis. ii) Elliniki Lisi (meaning Greek solution) that polls at 2.0%-2.8%. This is a new right wing populist political party (inaugurated in 2016), led by Mr. Kyriakos Velopoulos of orthodox-populist origins.
Taking the above into account we work on a scenario under which one more party manages to enter the Parliament gathering c3.5% of the votes, while out-of-Parliament votes come to 7.0%. In this context, the focal point of ND to secure absolute majority becomes the lead over Syriza, but also the aggregate % of parties below the 3% threshold. In such a case, although it becomes more difficult for ND to reach a comfortable absolute majority, it still remains the most likely scenario based on current polls with ND getting 152-157 MPs.
The table below illustrates the potential combinations in the performance of ND and Syriza and the outcome in terms of MPs.
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Exhibit 22. Majority threshold scenarios for ND assuming i) 6 parties in parliament and ii) 7.0% out of parliament vote
% of ND in total votes # of MPs for ND 33.0 33.5 34.0 34.5 35.0 35.5 36.0 36.5 37.0 37.5 38.0 38.5 39.0 39.5 40.0 25.0 148 149 150 151 152 153 153 154 155 156 157 157 158 159 160 25.5 148 149 149 150 151 152 153 154 155 155 156 157 158 158 159 26.0 147 148 149 150 151 152 152 153 154 155 155 156 157 158 159 26.5 147 147 148 149 150 151 152 153 153 154 155 156 157 157 158 27.0 146 147 148 149 149 150 151 152 153 154 154 155 156 157 158 27.5 145 146 147 148 149 150 150 151 152 153 154 155 155 156 157 28.0 145 146 147 148 148 149 150 151 152 152 153 154 155 156 156 % of Syriza 28.5 144 145 146 147 148 148 149 150 151 152 153 154 154 155 156 in total 29.0 144 145 146 146 147 148 149 150 151 151 152 153 154 155 155 votes 29.5 143 144 145 146 147 147 148 149 150 151 152 152 153 154 155 30.0 143 143 144 145 146 147 148 149 149 150 151 152 153 153 154 30.5 142 143 144 145 146 146 147 148 149 150 151 151 152 153 154 31.0 142 142 143 144 145 146 147 148 148 149 150 151 152 152 153 31.5 141 142 143 144 145 145 146 147 148 149 150 150 151 152 152 32.0 141 142 142 143 144 145 146 147 148 148 149 150 151 151 152 32.5 140 141 142 143 144 144 145 146 147 148 149 149 150 151 152 Source: AXIA Research estimates
In a similar context if 7 parties make it to parliament, ND’s chances for an absolute majority become thinner, with ND having to secure a lead of at least 10.5% over Syriza to be able to claim majority.
Exhibit 23. Majority threshold scenarios for ND assuming i) 7 parties in parliament and ii) 6.5% out of parliament vote
% of ND in total votes # of MPs for ND 33.0 33.5 34.0 34.5 35.0 35.5 36.0 36.5 37.0 37.5 38.0 38.5 39.0 39.5 40.0 25.0 144 145 146 147 148 148 149 150 151 152 153 154 154 155 156 25.5 144 145 145 146 147 148 149 150 151 151 152 153 154 155 155 26.0 143 144 145 146 147 147 148 149 150 151 152 153 153 154 155 26.5 143 143 144 145 146 147 148 149 150 150 151 152 153 154 154 27.0 142 143 144 145 146 146 147 148 149 150 151 151 152 153 154 27.5 142 142 143 144 145 146 147 148 149 149 150 151 152 152 153 28.0 141 142 143 144 145 146 146 147 148 149 150 150 151 152 152 % of Syriza 28.5 141 141 142 143 144 145 146 147 148 148 149 150 151 151 152 in total 29.0 140 141 142 143 144 145 145 146 147 148 149 149 150 151 151 votes 29.5 140 141 141 142 143 144 145 146 146 147 148 149 149 150 151 30.0 139 140 141 142 143 144 144 145 146 147 147 148 149 150 151 30.5 139 140 141 141 142 143 144 145 145 146 147 148 149 149 150 31.0 138 139 140 141 142 142 143 144 145 146 146 147 148 149 149 31.5 138 139 140 140 141 142 143 143 144 145 146 147 147 148 149 32.0 137 138 139 140 141 142 142 143 144 145 146 146 147 148 148 32.5 137 138 139 139 140 141 142 143 143 144 145 146 146 147 148 Source: AXIA Research estimates
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Strategies by Syriza and ND, ahead and after the elections
Syriza to try to close the gap with ND as it is already regrouping for the day after The social benefits packages currently pushed by the government (that we discusses earlier) aim at generating a positive momentum for Syriza with the objective of improving the party’s current standings in the polls and close the gap with ND. If so, Syriza would make it more difficult for ND to form an autonomous government strengthen it’s position in the next Parliament through a higher number of MPs, something that could potentially curb the ability of ND to negotiate an agreement over the upcoming Presidential elections and other important legislations.
More importantly, a strong showing by Syriza in the elections could suggest a weaker performance of the Movement of Change (PASOK) as Syriza established itself in the center left. This in turn would mean i) lower number of MPs by the Movement of Change (this could also hinder ND, if ND seeks allies in the Parliament), and ii) more essential weak performance in the polls by the Movement of Change/PASOK that would put Syriza in a stronger position in its quest to extend its influence over the center-left of the political scene, a political area that represents one of the largest voter-pockets. Taking this thought a step further, Syriza would be in a strong position to make an offer to the Movement of Change to form a center-left alliance/a new party, with Syriza being in control. This could change the dynamics both in the Parliament and in the Greek political scene.
Exhibit 24. % origin of voters that support Syriza Exhibit 25. % origin of undecided/abstention vote
Nothing, 9.1 Right, 3 Center-right, 3.8 Abstain 4.5 8.3 15.3 7.4 6.2 34.8 Left, 44.6 Center, 15.5
Undecided 4.2 9 14.7 7.7 5.3 23.4
Center-left, 40.7 Left Center-left Center Center-right Right Nothing
Source: Metron Analysis, AXIA Research
Tactics ahead of the elections As we move closer to elections we should expect: political rhetoric of the governing party to become more aggressive and confrontational, driven by its effort to mobilize and to consolidate its electoral base. headlines regarding potential misconducts by former politicians or businessmen. efforts by the government to lure voters from different political orientations (especially from center-left) This should be especially evident in the Municipal elections but also in general elections with Syriza trying to include politicians from different backgrounds in its voting lists.
In addition, it remains to be seen if the administration implements all its commitments towards the EU institutions or finds ways to minimize (or delay) the impact of their implementation over the short term. Still, to a great extent, this will be related to how firm the EU institutions will be in their approach, while also taking into account that the EU Parliamentary elections are approaching (which means EU officials could refrain from taking a confrontational stance).
All in all, we expect a vivid political period ahead from Syriza’s part.
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New Democracy is set to win the upcoming elections but some issues remain tricky As indicated by the polls, New Democracy has a strong lead over Syriza and is widely expected to win the upcoming general elections. Regarding the elections there are 2 important aspects for ND: gain absolute majority in the Parliament (151+ MPs) whether ND could be able to find common ground with other parties to secure 180 votes (in order to pass the President of the Democracy vote and other important legislations, including Constitutional amendments). To this end, assuming the top five parties suggested in polls make it to the Parliament, it is easier for ND to find some common ground only with the Movement of Change (PASOK). If more parties enter in the next Parliament, ND could potentially discuss and come to an agreement with parties from the center and/or parties from the right (but not far-right).
Regarding the day after the elections, we would expect the new administration to move swiftly and to start implementing its reform agenda as soon as possible in order to reap the benefits of its efforts at the earliest possible.
Although ND has yet to fully reveal its political agenda, its leader Kyriakos Mitsotakis is a social liberal reformist and once in power, he is expected to take the necessary steps to create a more business-friendly environment and accelerate actions that would boost the economy. As he has publicly indicated, his efforts will aim to form the conditions that induce private investments, while supporting disposable income and reducing the footprint of the State. These actions should drive the economic output higher and create a righteous cycle.
Exhibit 27. In which “direction” in the country moving Exhibit 26. Most important issue for the country (%)?
Economy 40% 72 70 69 67 Unemployment 18%
Foreign policy 11%
Political system 11% 26 26 23 24 Ethics 4% 5 5 7 6 Taxation 2%
Lack of investments 2% Oct-18 Nov-18 Dec-18 Jan-19
Imigrants 1% Right Wrong NA
Source: Metron Analysis, AXIA Research
To this end we should expect, among others, actions towards i) further opening the markets to create a more competitive environment, ii) accelerating privatizations, and iii) reducing corporate taxation and contributions to make businesses more competitive. Furthermore, we would anticipate efforts to push for the full implementation of structural reforms (public administration, judicial reforms) and eventually, to rationalize the levels of the personal income tax (given that the budget continues to meet the set targets).
We see two potential issues that could derail ND’s strategy The ability of the party to form an autonomous government. If not, it would need to form a coalition government and this could mean that Mitsotakis would need to water down or slow down his strategy to reform the economy Fiscal space. Since there are fiscal constraints in the budget (Greece needs to achieve a general government surplus of 3.5% of GDP), this curbs ND’s ability to proceed as quickly as it would have wanted with its strategy. Therefore, the size of the fiscal space that can be created is very important for the new administration. To this end, depending on the pace of the economy, ND could try to renegotiate the primary surplus target (as hinted by Manfred Weber the German politician, leader of the European People's Party (EPP) and candidate for President of the European Commission in the upcoming elections). On the other hand, what could further significantly complicate the new government’s efforts are the expected rulings by the State Council on retroactive payments to pensioners to public sector employees (bonus salaries – we discuss these issues later in the report).
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Are the upcoming Presidential election a real risk for an ND government? The term of the current President of the Democracy ends in early 2020 and according to the Constitution (as it stands now), the government has to put forward its choice for a President of the Democracy. This action entails political risk. If the proposed nominee is not able to gather 180 votes (following 3 voting rounds) the government will be forced to call snap elections. This is what happened in December 2014; the government failed to secure necessary votes that led to elections, with Syriza coming to power in January 2015.
Note that currently the Parliament discusses the potential of changing the system of electing a President. Both Syriza and ND agree in principle to prevent the election of the President to trigger snap elections but they disagree on how this should be done. Any tabled proposal that receives 180 votes from this Parliament will be effective in the next one with just 151 votes, while if it receives 151 in this Parliament it will need 180 votes in the next one to come into effect (although it is debated as to how binding this decision will be for the next Parliament). Clarity on the issue should be expected by mid-March.
Assuming the system does not change, whether ND could be able to secure the necessary votes to push its Presidential nominee, could be answered only after the final election results and the formation of the new Parliament.
The new administration could either propose for President a person that is viewed positively by other parties (i.e. Movement of Change/PASOK, the Communist party, other parties) propose the current President of the Democracy to remain on office. The current President, Prokopis Pavlopoulos (who was a member of ND) was proposed and voted President by Syriza that has stated that intends to support a second tenure of Pavlopoulos.
In any case, a government has the constitutional right to bring the Presidential elections a few months earlier. This means the process could take place before the end of this year. If general elections are held in September/October, all political parties will be forced to compromise, given the short period of time from the elections. We view that even if the new government is formed following early elections in May, the political parties would also be pressured to take a more conciliatory approach on the President, as the new government would bring the Presidential elections as early as possible, trying to benefit by the “grace period” granted to the new administration.
Finally, we view that the prospect of snap elections forced by the Presidential elections would be opposed by the EU (given the negative impact the political uncertainty would have on the economy), prompting EU leaders to push all political parties to reach an agreement.
Because of the above, at this point in time, the issue of the upcoming Presidential elections does not pose as a major political risk, assuming elections take place in May 2019 or later on. The above arguments become weaker if general elections take place before that.
New electoral law In respect to the electoral law, as we already noted, the proportional-to-the-vote allocation of seats in the Parliament will be introduced in the elections following the upcoming ones. We view that the new system possesses a significant political risk to the country since it makes it more difficult to form a functional government. This is because the Greek political system has little experience (as well as structure) to govern the country under a coalition government, formed by parties with different agendas, for a long period of time.
ND has stated that it will seek to amend the electoral law and this could happen early in its term. In respect of this, in order to have a new electoral law applied in the next elections, the relevant bill would need to be approved by 2/3 of the Parliament (200 votes). If not, it could pass with a majority vote but it will be introduced in the elections following the upcoming ones. Under the second scenario, there could be some short-term political uncertainty but this i) relates to the medium term (general elections in 2023 or earlier), and ii) would be a development known to the political system as well as markets, thus we view that the adverse fallout should be contained.
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Limited prospects for a new wave of extreme populism We view that the possibility of the country returning to a new “summer of 2015” is very low, mainly because Greece’s fiscal reforms have been completed, the country is overperforming fiscal targets (so limited prospect of new fiscal measures, while after 2022 the general primary surplus target is expected to be lowered allowing for extra social benefits). At the same time the economy has started growing and the unemployment is declining. These positive developments limit the appeal of populist views in a country that has been under three economic adjustment programs over the last 9 years.
More importantly, “Greece has been there and done that.” Syriza (and ANEL), came to power proposing an extremely populist agenda, vowing to terminate creditors’ economic-reform programs and to consider alternatives for the country. Although Syriza received huge support from the public (acceptance reached 70%-80% back in February 2015), eventually, the party leader, Alexis Tsipras, made a U-turn and pledged full support to the proposals of the institutions for fiscal consolidation and structural reforms.
Finally, the Greek public has become less confrontational vs. the beginning of the crisis (i.e. decline in the number and the intensity of strikes). Greeks welcomed the completion of the country’s third (and final) adjustment program, while the support of the Euro remains high at ~80%.
Exhibit 28. Euro or Drachma (%)? Exhibit 29. Origin of Euro vs. Drachma voters
NA, 3 Nothing 30 64 6 Drachma, 16
Right 24 73 3
Center-right 5 93 2
Center 7 92 1
Center-left 10 87 3
Left 21 67 12 Euro, 81
Drachma Euro NA
Source: Metron Analysis, AXIA Research
Although there are parties in the Parliament (the Communist Party, and the extreme-right Golden Dawn) that remain firm to their anti-EU views, these parties do not seem to be able to make any significant inroads to new voters. Moreover, smaller populist parties (from both the left and the right wing) have no clear momentum in the polls and currently remain below the 3% threshold that would allow them representation in the Parliament.
Focusing on the left-wing Syriza, the party has managed to grow from a 4.0% party a decade ago to 35% in the last elections by running a populist agenda. Now that Syriza has become a formidable political force, it is slowly moving to the center-left of the political spectrum. To appeal to the big audience of center-left, Syriza has to ease its rhetoric. Furthermore, the 44 year-old Alexis Tsipras, who will seek to remain relevant to Greek politics for years to come, has come to acknowledge the importance of Greece being a part of the EU and the benefits that the country can extract from this association. This reduces the possibility of Syriza returning to its anti-EU rhetoric.
That said, we would expect Syriza to run a socialist agenda in the upcoming elections focusing more on social issues and trying to appeal to specific groups of voters. Even though Syriza’s rhetoric could include statements like “Greece is now free to implement its own fiscal strategy”, we would need to distinguish between i) the efforts of the party to appeal to a certain voter base in the upcoming elections, ii) the short-term strategies of Syriza to expand its political space, and iii) the medium-term political aims and aspirations of Alexis Tsipras.
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The economy in improving but at an unexciting pace
Q3:18 marked the 9th quarter of growth of the Greek economy, while GDP is expected to have grown by c2% y-o- y in 2018. Keep in mind that 2018 was an inflection year for Greece with the country managing to exit its economic adjustment program and to receive a comprehensive set of debt relief measures that ensure debt sustainability and along with the strong budget execution, helped boost the confidence of the economy. Still, despite the acceleration of the economic activity, the projected expansion is rather unimpressive given the level of GDP contraction and the number of reforms voted all these years aiming to support the economy and to spur growth. Given the budget constraints and the weak local financial sector, growth over the medium term can mainly derive from a substantial increase of private investments and thus a different policy mix is needed to induce this capital.
The modest performance of the economy is, on some extent, the result of the restrictive fiscal policy Greece needs to implement (targets a high primary surplus over a number of years), but this is augmented by the government’s decision to achieve its fiscal targets, targeting primarily the revenue side, thus hindering disposable income and putting added burden on businesses through increased taxation and high contributions. In addition, increased State arrears (delayed payments) deprive liquidity.
Moreover, the government is not moving fast enough to create the conditions that could allow a strong investment- momentum, including a convincing push for privatizations, opening markets to competition, etc. Also the elevated political and economic risks over the past few years have deterred investments and despite these risks (according to our view) are fading away, the country has lost significant time, which is also reflected in the slow economic growth.
Beyond any governmental decisions and politics, the economy is burdened by a weak financial sector that has been consecrating its efforts almost entirely on how to reduce its NPEs, with very little attention paid on how to finance business. We note that the deleveraging of the banks is expected to continue for years to come.
Exhibit 30. GDP y-o-y evolution 2008-2018 (yearly) Exhibit 31. GDP y-o-y evolution (quarterly)
2.5% 2.1% 2.2% 2.0% 2.1% 1.5% 1.8% 1.7% 0.7% -0.3% 1.0% 0.6% 0.4% -0.4% -0.2% -3.2% 0.0% -4.3% -0.3% -0.1% -5.5% -0.7% -1.3% -7.3%
-9.1% -2.6% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018e 2015 2016 2017 2018
Source: Eurostat, ELSTAT, AXIA Research
Exhibit 32. Cyprus GDP y-o-y evolution Exhibit 33. Portugal GDP y-o-y evolution
8.0% 4.0% Mar'16 Jun'14 6.0% 3.0% MoU Exit MoU Exit 2.0% 4.0% 1.0% 2.0% 0.0% 0.0% -1.0% -2.0% -2.0% -4.0% -3.0%
-6.0% -4.0%
-8.0% -5.0% Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: EU Commission, AXIA Research
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We remain skeptical as to the ability of the economy to expand at a decisive pace over the medium term without a clear change in the economic policy-mix in order to create an investment shock. On a positive note, the framework is to a great extent already in place since deep reforms have been voted, while at the same time the reduction of the yields of the GGBs is a supportive development. Nevertheless, the full implementation of these reforms plus the layout of a clear pro-investment strategy are required in order to improve sentiment towards the economy and for this to start reflecting on investments.
An obvious push that could lead to a stronger activity relatively quickly is in the areas of privatizations, PPPs, construction and energy. There is already stated interest from local and international investors for investments in these areas. To this end note that Greece has been underinvested during the crisis years and the gap is above EUR 100bn.
Exhibit 34. Investment gap Exhibit 35. Public Investment program
12 100% 30.0% 10 80% 25.0% 8 60% 20.0% 6 40% 15.0% 4
20% 10.0% 2
0 0%
5.0%
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Public Investment program (EUR bn-lhs) Greece - GFCF % of GDP EU - GFCF % of GDP National part (%-rhs) Co-Financed (%-lhs) Source: ELSTAT, AXIA Research
We note that over the past few years the economic performance has been supported by private consumption despite the high tax burden on mid-incomes as i) consumer confidence slowly improves from very low levels, and ii) black economy remains vibrant. In order to support private demand going forward though, the State needs to proceed with the widening of the tax base (currently c20% of tax payers pay c90% of the total personal income tax), which along with the optimization of public expenses should allow for the lowering of personal income tax. Such a step would also assist the efforts of the banking sector to address portion of its non-performing loans.
Beyond local policies, over the short term, the tighter global financial conditions, the economic issues of key trading partners (Italy, Turkey), as well as other issues (geopolitical concerns, Brexit, etc) could weigh on the ability of the economy to fully perform but we stress the low starting point for Greece (especially in respect of investments), and the fact that the implementation of structural reforms over the past few years have allowed the economy to become more competitive and flexible.
Getting ready to exceed the 2% growth mark for 2018 According to preliminary data, the Greek economy grew 2.2% y-o-y in Q3:18 (+1.0% q-o-q), while for the 9-month period GDP was up by 2.1% y-o-y. Note that Q3:18 was the 9th consecutive quarter of economic growth for Greece supporting the view that Greece is entering into a sustainable upward path.
Exhibit 36. GDP evolution (q-o-q)
1.3% 1.2% 1.3% 1.0% 0.8% 0.5% 0.5% 0.4% 0.4% 0.4% 0.3% 0.1% 0.1% 0.1% 0.1% 0.2%
0.0% -0.2% -0.5% -0.6%
-1.1%
-1.9% -2.2% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 2013 2014 2015 2016 2017 2018 Source: ELSTAT, AXIA Research
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AXIA Research
Expectations now are that in 2018 Greece’s GDP expanded by c2%. Note though that in the beginning of 2018 the forecasts called for stronger economic performance that did not materialize, partially because investments were not as robust as initially anticipated.
The economy in 2018 to be driven by: Increased net exports. This is due to i) another record year for tourism ii) strong export activity, also to new destinations (Middle East, China, India, North Africa) and iii) slower growth of imports; and Increased private consumption driven by an improvement in consumer confidence.
While there is some traction in respect of gross fixed capital formation from specific market segments (mainly investments from export-oriented sectors, including tourism), investments remain low. For 2018, the gross fixed capital formation is projected to post negative growth, partially reflecting a base effect. This is despite some positive developments like better access of large corporates to capital markets and the acceleration of demand for private investments (including housing).
Exhibit 37. 2018 GDP estimates Greek gov. EU Commission OECD y-o-y 2016 2017 2018e GDP -0.2% 1.5% 2.1% 2.0% 2.1% Private consumption 0.0% 0.9% 1.0% 0.8% 1.1% Public consumption -0.7% -0.4% 0.2% 1.2% 0.5% GFCF 4.7% 9.1% 0.8% -2.1% 2.4% Imports 0.3% 7.1% 3.4% 3.6% 3.5% Exports -1.8% 6.8% 7.5% 8.4% 7.7% Source: Greek Budget 2019, EU Commission, OECD, AXIA Research
For 2018 we also note the economy’s (relatively) improved liquidity raising mainly from i) the reduction of State arrears (the aim of clearing State arrears to private sector by the end of the year was not met) ii) a rather low growth of gross loans (overall the banking system is deleveraging) and iii) continuing support/disbursements by the supranationals (EBRD, EIB, etc).
Improved economic growth in the first nine-months of the year The economic growth in the first 9 months of the year was up 2.1% y-o-y, driven by net exports, private consumption and inventories. However, gross fixed capital formation remained weak but to an extent this is mainly related to one- off negative base effects as indicated below:
Exhibit 38. GDP Components (y-o-y) Year 2016 2017 2018 Quarter Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 GDP -0.7% -1.3% 1.0% -0.1% 0.0% 1.8% 2.0% 2.1% 2.5% 1.7% 2.2% Private Consumption -1.3% -2.2% 3.2% 0.7% 1.1% 1.2% 1.5% -0.2% 0.5% 1.3% 0.7% General Government -0.7% -0.9% 0.3% -1.5% -3.0% -1.1% 0.4% 1.7% -0.6% -4.3% -4.1% GFCF -8.5% 14.0% 12.4% 3.2% 8.0% -8.5% 26.1% 12.2% -8.8% 19.2% -23.2% Imports -9.5% -1.9% 14.0% 5.2% 15.7% 5.8% 5.3% 3.2% -7.5% 2.7% 15.0% Exports -9.4% -10.2% 8.9% 4.9% 5.7% 9.1% 7.0% 5.9% 8.1% 9.2% 7.6% Source: ELSTAT, AXIA Research
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Private consumption: driven by consumer confidence Private consumption increased by 0.7% y-o-y in Q3:18, while for the 9-month period the increase reached 0.8%, thus contributing c.1/3 of the GDP growth for the period. The improved performance was supported by the declining unemployment, the increase in the disposable income, but also to the recovery of consumer confidence. In respect of the consumer confidence we note that Q3 also reflects i) the improved sentiment following Greece’s exit from its economic adjustment program, ii) the expectations for “positive” measures by the government in the coming months, and iii) another record year achieved for tourism sector. The improving confidence is depicted by the increased number of housing starts, higher retail sales and growth in new car registrations.
Retail sales (ex-fuel) were up 1.9% y-o-y on average over the first 11 months of the year whereas car sales grew at a strong pace, reaching 190,847 cars in 2018 (or +22.6% y-o-y). The growth of car sales is robust, even if you take into consideration the growth of car rental fleets (for Rent-A-Car and Car leasing), which are linked to the expectations for growth in the tourism sector and in the overall economy.
Exhibit 39. Private consumption vs. Consumer Exhibit 40. Economic sentiment vs. GDP growth Confidence
45 0 110 8%
40 -10 105 6% 35 -20 4% 100 30 -30 2% 25 -40 95 0% 20 -50 90 -2% 15 -60 85 -4% 10 -70 -6% 80 5 -80 -8% 0 -90 75 -10% Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 70 -12% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Private consumption (EUR bn) Consumer confidence indicator Economic sentiment (lhs) GDP growth (rhs)
Source: IOBE, ELSTAT, AXIA Research
Exhibit 41. Disposable Income Exhibit 42. Retail sales index ex-fuel (y-o-y)
200 10% 10% 173.3 159.7 160 145.9 5% 5% 133.6 122.2 121.1 115.5 116.9 114.2 0% 120 0%
-5% 80 -5% -10% 40 -10% -15% 0 -15%
2009 2010 2011 2012 2013 2014 2015 2016 2017 -20%
Feb Feb Feb Feb Feb Feb
Aug Aug Aug Aug Aug Aug Aug
Nov Nov Nov Nov Nov Nov Nov
May May May May May May May EUR bn y-o-y 2013 2014 2015 2016 2017 2018
Source: ELSTAT, AXIA Research
Net exports higher for the year Q3, was another quarter that net exports supported the economic growth. In particular, exports grew by 7.6% y-o-y in Q3 and by 8.3% for the nine-month period, driven by increased activity in both goods and services. Specifically, goods posted a 7.9% y-o-y growth in Q3 (+8.6% y-o-y in 9M:18), while services posted an 8% y-o-y increase in Q3 (+8.3% y-o-y in 9M:18). Exports of goods reached a record high as % of GDP in Q3:18 (at 18.7%), while in respect of tourism, 2018 was another record year (number of tourists up 9.3% in 9M18).
Imports posted a 15% y-o-y growth in Q3, while for the Jan-Sept period, import growth settled at 3.1% y-o-y. A one- off base effect (related to the acquisition of ships) led imports to post a slow growth over the first half of the year, while the increase in imports in Q3 reflects the improvement of the economy (replenishment of stocks and acquisition of raw materials for the industry) as well as a rise in the oil prices.
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Exhibit 43. Imports/Exports (y-o-y) Exhibit 44. Imports/Exports of goods and services (y- o-y) 20% 35% 15% 25% 10% 15% 5% 5% 0% -5% -5% -15% -10% -25% -35% -15% -45% -20% Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3 Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3Q4Q1Q2Q3 2012 2013 2014 2015 2016 2017 2018 2012 2013 2014 2015 2016 2017 2018 Exports of goods Exports of services Imports Exports Imports of goods Imports of services
Source: ELSTAT, AXIA Research
Investments Focusing on investments, we note that over the 9-month period they declined 6.2% y-o-y, while investments including inventories increased by 1.5% y-o-y. In Q3:18 the numbers are more perplex with gross fixed capital formation posting a 23.2% y-o-y decline, while including inventories, investments increased by 42.2%.
The overall negative performance of investments in the first nine months reflects the negative one off base effects related to construction (excluding housing) and transportation. Specifically: regarding the sharp decline in construction, apparently this is related to the statistical reclassification of unfinished public works that became eventually finished work in Q3:17. This led to a sharp increase in inventories in Q3:18 vs. the same period the previous year. The adjustment from inventory to investments should lead to little impact on GDP. regarding the decline in investment in transportation, this is mainly related to the acquisition of ships in Q1 and in Q2 of 2017, a performance that has normalized since.
In regards to the components of the investment category we highlight the fact that housing posted a 12.8% y-o-y growth (Dwellings +12.3%, Other buildings -15.6%) in 9M:18, while IT & Telecoms (ICT) and other machinery posted a 19.1% and 20.4% y-o-y growth, respectively.
Exhibit 45. GFCF by Asset 9M18 (y-o-y) Exhibit 46. GFCF by Asset evolution (y-o-y)
250% 26.1% 30% 19.2% 200% 19.1% 20.4% 14.0% 12.4% 12.2% 20% 150% 8.0% 12.3% 3.2% 10% 100% -8.8% 4.3% 50% -8.5% -8.5% 0% 0% -10% -50% -0.6% -20% -100% -23.2% -150% -30% -15.6% Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 -22.3% 2016 2017 2018
Dwellings Other buildings Dwellings Other Biological Transport ICT Other Intellectual buildings resources equipment machinery property Transport equip. ICT and equip. Other machinery Total GFCF
Source: ELSTAT, AXIA Research
Overall, the Q3 performance points to an economic growth of closer to 2.1% for 2018, which is in line with the latest expectations of the Greek government as presented in the 2019 budget tabled in the Parliament in late November 2018.
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AXIA Research
Expectations for stronger growth in 2019 For 2019 the economy is expected to grow between 2.0% and 2.5%. Nevertheless, we note that this is an election year and this could influence the performance of the economy in terms of both consumption and investments.
Private consumption is expected to grow in 2019. This to be supported by further reduction in unemployment in conjunction with expectations for growth in salaries. Focusing on salaries we note the government’s decision to extend the sectoral agreements (initiated in September 2018) for a number of sectors is leading to wage increases (for those that were compensated at levels below the sectoral agreements). proceed with the increase of the minimum wage as of February 2019. The increase will come to ~11% (and ~27% in respect to younger people getting paid sub-minimal wage) and this is estimated to have a direct and indirect positive impact on c900k employees. On the other hand, the minimum wage would lead to an estimated average increase of 3% on the employers cost (the increase of employment cost for businesses is ranging from c1% to to c5% for businesses in the service sector offering low added value services). It is unclear how businesses will react to the increase while there is increased concern this sharp adjustment could eventually slow down the pace of the unemployment reduction.
In addition, private consumption should be positively influenced by the upcoming elections. Traditionally, pre- election periods lead to improvements in confidence, partially because of actions taken by the government aiming to enhance disposable income/increase employment in the public sector. Recall that the private consumption in Greece continues to represent c70% of the economic activity.
Public consumption is also expected to increase in 2019, partly because of the increased social spending already included in the budget and also because of the potential of some employment expansion in the public sector.
The main driver of the economy though for the year is expected to be investments that are expected to grow between 8.8% and 14.6% y-o-y in 2019. We would expect investments i) to support the production of goods, especially for export-oriented businesses as well as ii) towards the tourism sector. Privatizations (including Hellenikon) along the tender of significant public-private-partnership projects (i.e Kasteli Airport, expansion of the Athens metro and other infrastructure projects) are additional areas that could help support investments during the year.
On the other hand, businesses focusing mainly on the internal market (and not in tourism), seem to remain skeptical in increasing their capital expenditure. In order to prompt these businesses to invest, access to bank financing and the introduction of a business-friendly framework that incentivize investments are essential.
Net exports are not expected to be supportive to the GDP as the expected growth of the exports (goods and services) is seen to be more than counterbalanced from the growth of imports both to replenish depleting inventories as demand increases but also to use for raw materials in the exports drive.
Exhibit 47. GDP growth forecasts 2019e Exhibit 48. GDP components (Budget 2019)
2.5% 11.9%
2.4% 9.1% 7.5% 7.1% 6.8% 2.3% 5.8% 5.2% 3.4%
2.2% 2.2% 1.0% 0.8% 0.9% 1.1% 0.2%0.6%
-0.4%
Private Public Gross fixed Exports Imports IMF EC OECD ECB Greek Gov. consumption consumption capital formation 2017a 2018e 2019e
Source: IMF, EC, OECD, ECB, Ministry of Finance (Budget 2019), AXIA Research
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AXIA Research
What can adversely impact the economy in 2019 Internal and external developments could hinder the economic activity. Focusing on the Greek-specific issues, we note that the positive outlook incorporates the continuation of reform implementation that is offering credibility to the country and supports a positive investment climate. Any backtracking of reforms (or the intention to do so) will send a negative message to the markets. Among the actions the government needs to take in the coming weeks/months is to proceed with key privatizations (Hellenikon, Hellenic Petroleum, Egnatia Odos). We note that such actions are politically sensitive and no government would want to deal with them in a period close to elections. Thus, even though the EU institutions continue to pressure Greece to fully comply with its commitments, further delays of the processes are likely to occur.
Among the external factors that could negatively influence the country’s economic performance in 2019 we highlight A potential slowdown in the economic activity in the Eurozone and also in specific Eurozone economies (i.e. Italy which is a key exports destination and is also important for tourism) The slowdown of global trade The slowdown of the economy in Turkey (Turkey is among the top 3 export destinations for Greece) The prospects of Brexit Geopolitical developments The relative strength of the Euro that could hinder exports for goods and services The oil prices (Greece’s economy remains among the most oil-dependent countries in the EU) Focusing on the impact of a slowdown of the Eurozone economy on Greece we note that c37% of Greece’s exports of goods in 2017 are towards the Eurozone and c33% of the country’s tourist arrivals come from the Eurozone. Germany, Italy and Turkey remain Greece’s main export destinations with the 3 countries comprising c24.6% of the total exports of goods (in 2017) and 22.5% of total tourists visiting the country, while Italy and Turkey alone comprise c17.5% of goods exports and 8.9% of tourists visiting the country.
On a positive note, over the past few years, exports outside the Eurozone have increased at a fastest pace vs. those in the Eurozone. Similarly, tourist flows from outside the Eurozone have increased at a faster rate than from within. Also, a slowdown in the Eurozone could lead to the depreciation of the Euro vs. other currencies and this should give some additional advantage to exports.
Exhibit 49. Exports by region (EU) Regions 2016 2017 y-o-y 11M:17* 11M:18* 11M:18/17 Ε.U. (28) 14,020 15,101 7.7% 13,844 15,888 14.8% % of total 55.7% 53.1% 53.4% 52.1% N.America 1,403 1,440 2.6% 1,327 1,537 15.8% % of total 5.6% 5.1% 5.1% 5.0% Other American Countries 279 204 -26.9% 190 330 73.1% % of total 1.1% 0.7% 0.7% 1.1% M.East & N.Africa 3,680 4,279 16.3% 3,900 4,973 27.5% % of total 14.6% 15.0% 15.1% 16.3% Asian Countries 1,311 1,807 37.8% 1,610 2,097 30.2% % of total 5.2% 6.3% 6.2% 6.9% African Countries 123 153 24.6% 136 157 15.5% % of total 0.5% 0.5% 0.5% 0.5% Oceania (or Australia) 142 167 17.6% 152 161 5.6% % of total 0.6% 0.6% 0.6% 0.5% Other Countries 396 503 26.9% 449 488 8.7% % of total 1.6% 1.8% 1.7% 1.6% Total 25,150 28,463 13.2% 25,911 30,466 17.6% *Jan-November period, Source: Panhellenic Exporters Association, AXIA Research
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AXIA Research
Exhibit 50. Total Exports (EUR bn) Exhibit 51. Exports EU vs Third countries (EUR bn)
25 15.0% 15.0 13.4 12.7 10.0% 12.1 20 11.0 11.2 10.9 10.3 10.7 10.7 5.0% 9.1 15 7.2 0.0% 6.5 6.1 6.3 6.6 5.6 5.7 5.9 6.0 6.0 10 5.4 -5.0%
5 -10.0%
0 -15.0% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017* 2018* 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017* 2018*
Total exports (ex-oil) y-o-y EU Third countries
*provisional data, Source: ELSTAT, AXIA Research
Exhibit 52. Tourist Arrivals
2010 2011 2012 2013 2014 2015 2016 2017 2010-17 11M:18 11M:18/17 Euro area 6.1 6.6 5.9 6.4 7.5 8.2 8.9 9.9 60.4% 11.3 16.2% EU (ex-euro area) 4.1 4.1 3.9 4.1 5.8 6.8 8.3 8.7 114.5% 9.8 14.2% Other countries 4.8 5.7 5.7 7.4 8.8 8.6 7.6 8.6 79.6% 8.4 0.5% Total 15.0 16.4 15.5 17.9 22.0 23.6 24.8 27.2 81.2% 29.5 10.6% Source: Bank of Greece, AXIA Research
Greece’s GDP growth could surpass Eurozone average in the coming few years Assuming the country maintains its reforms path, expectations are that its economic output after 2019 will continue to expand with growth to be driven mainly by investments. Private consumption is forecasted to accelerate but at a moderate rate since the high primary surplus target should continue to restrict the pace of the increase of the disposable income, while part of this increase needs to be used to meet financial obligations (c.39% of the population has arrears towards the State based on Independent Revenue Authority Nov’18 data, while as the level of NPEs of the banking sector remain high at EUR 84.7bn in Sep’18, auctions accelerate and insolvency protection becomes more restrictive). Although exports of goods and services are expected to remain robust, imports should also increase at a solid pace as both disposable income and investment demand increases. Thus, net exports, at best, will be marginally contributing to growth.
Exhibit 53. GDP growth Greece vs EU (EU Commission Exhibit 54. GDP growth forecasts 2020-22e forecasts) 2.3% 2.3% 2.2% 2.2% 2.2% 2.1% 2.1% 2.4% 2.3% 2.2% 1.8% 2.0% 1.9% 1.6% 1.6% 1.5% 1.2% 1.3%
n.a. n.a. n.a. n.a. n.a.
2017 2018f 2019f 2020f 2020f 2021f 2022f
Greece Euro area IMF Greek Gov. ECB EC OECD
Source: IMF, EC, OECD, ECB, MTFS 2019-22, AXIA Research
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AXIA Research
Exhibit 55. GDP components forecasts (2018-20e) Greek EU Greek EU Greek EU gov.1 Commission3 OECD gov. 1 Commission3 OECD gov.2 Commission3 OECD y-o-y 2018e 2019e 2020e
GDP 2.1% 2.0% 2.1% 2.5% 2.2% 2.2% 2.3% 2.3% 2.1%
Private consumption 1.0% 0.8% 1.1% 1.1% 0.4% 1.2% 1.2% 0.7% 1.3%
Public consumption 0.2% 1.2% 0.5% 0.6% 0.2% 1.2% 0.6% 0.3% 1.2%
GFCF 0.8% -2.1% 2.4% 11.9% 14.6% 8.8% 9.4% 9.6% 7.6%
Imports 3.4% 3.6% 3.5% 5.2% 6.1% 5.0% 4.2% 3.9% 3.0%
Exports 7.5% 8.4% 7.7% 5.8% 5.7% 4.7% 4.4% 4.4% 2.7% Source: OECD, 1Budget 2019, 2MTFS 2019-22, 3 EU Commission (GDP components forecasts Nov’18), AXIA Research
Drivers of economic growth over the short to medium term
Greek economy has become more competitive but still key issues remain A key aspect of the country’s economic adjustment program since 2010 was to introduce structural reforms aiming to significantly add to the labor market flexibility and to the cost competitiveness of the economy. The largest advancement towards this effort was achieved in the first years of the economic adjustment, while since then reforms have moved broadly in the right direction. The main actions taken to foster competition and to increase the pace of productivity growth, included steps to liberalize closed professions, to reduce the time / cost to set up a new business and to simplify licensing procedures.
Exhibit 56. Wages Index Evolution Exhibit 57. Unit labour costs (by hours worked, 2010=100) 120 120
110 110
100 100
90 90 80 80 70
60 70 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 2010 2011 2012 2013 2014 2015 2016 2017 2010 2011 2012 2013 2014 2015 2016 2017 2018 Euro area (19 countries) Germany Greece Italy Portugal Spain
Source: ELSTAT, OECD, AXIA Research
The reforms are bearing fruit and as the economy has refocused on the external demand. This has led to the expansion in exports as % of GDP from less than 20% in 2009 to more than 30% in 2017. At the same time, these efforts have contributed to employment creation with unemployment falling from 27.5% in 2013 to 18.3% by the end the end of Q3:18. Nevertheless, Greece lags significantly the Euro area in terms of exports as % of the GDP. To this end, despite the reforms implemented, the country continues to trail advanced countries in competitiveness, partially because of higher financing costs, bureaucracy and taxation. Also, the low investments over the past few years to incorporate new technologies have widened the country’s disadvantage.
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AXIA Research
Exhibit 58. Exports as % of GDP Exhibit 59. Imports as % of GDP
47 46 46 44 45 42.6 44 41.7 41.2 42 40.4 40.8 40.5 40.9 40 40 39 35 38.1 46 38.9 44 44 37.6 41.9 43 43 43 40.2 41 38.6 40.4 40 40.1 40.4 40.4 38 39 39 37.3 33.7 37.6 35 32 32 33 36 33.5 30 30 35 34.8 29 34 33.1 33.2 26 32.3 23 31.5 23 22 30.7 30.8 19 28.8
2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Greece EU (28 countries) Euro area (19 countries) Greece Euro area (19 countries) EU (28 countries)
Source: Eurostat, AXIA Research
Greece continues to fall further behind in the World Bank Ease of Doing Business Index. Further regulatory streamlining as well as public sector and judicial reforms are needed in order for the country to sustain the improvement in the business environment and to elevate investment activity.
Exhibit 60. Competitiveness by segment 2018 Exhibit 61. Productivity – GDP per hour worked (Rank/140) (2010=100) 110
114th 107th 105 87th 83th 72th 100
38th 39th 95
90 Skills 85
2010 2011 2012 2013 2014 2015 2016 2017
Institutions
stability
Infrastructure
Labour market Labour Macroeconomic Financial system Financial Greece Italy Portugal Spain Business dynamism Business
Source: IMF WEO (Oct’18), OECD, AXIA Research
The government’s decision to reintroduce collective bargaining agreements to a number of sectors (as of September 2018) and also to increase minimum wage, starting in early 2019, create concerns since higher salaries could negatively impact the overall competitiveness of Greece, thus hampering the fragile economy. The fact that the added value of the majority of the Greek export products is rather low, with no strong branding and towards developing countries is adding to the concerns. This has slowly improved, although the small size of the majority of businesses and the difficulty of these businesses to receive adequate financing remains an obstacle.
Tourism to remain a key driver of the economy The tourism sector has been the key driver of the economy over the past several years. The strong growth observed since 2013 was partially the result of the increased competitiveness of the economy as well as the investments that took place and added capacity (while also attracting a different mix of tourists). Adverse developments and geopolitical concerns regarding other countries have also significantly benefited Greece by diverting tourism flows to the country.
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AXIA Research
Exhibit 62. Contribution of Tourism to GDP Exhibit 63. Contribution of Tourism to Employment
Source: WTTC, AXIA Research
The number of tourists reached 30.2m (including Cruises) in 2017 from 16.9m in 2012 and is anticipated to have grown by c10% y-o-y in 2018. For 2019 the tourists’ flows are expected to either stabilize or post a rather small drop. This outlook mainly reflects the expected rebound of tourism in neighboring countries, especially in Turkey, since because of the weakness of the local currency it has become a more attractive destination. In any case, apart from the demand from EU countries, Greece should continue to benefit by increasing flows of tourist from China, Russia and India.
Exhibit 64. Tourist arrivals (m) Exhibit 65. Travel Receipts
15.8* 35 40% 16 14.6 30% 30.2 14.1 29.5* 13.4 13.2 28.1 35% 14 25% 30 26.1 12.2 24.3 30% 20% 12 10.4 10.5 10.4 25 25% 15% 20.1 9.6 20% 10 10% 20 16.4 16.9 14.9 15.0 15% 8 5% 15 10% 6 0% 5% -5% 10 4 0% -10% 5 2 -5% -15% 0 -10% 0 -20% 2009 2010 2011 2012 2013 2014 2015 2016 2017 11M:18 2009 2010 2011 2012 2013 2014 2015 2016 2017 11M:18
No of tourists y-o-y Travel receipts (EUR bn) y-o-y
*Jan-Nov’18 period, Source: Bank of Greece, AXIA Research
Exhibit 66. Impact of Tourism on the Greek economy Economic Contribution of Travel & Tourism
GDP: DIRECT CONTRIBUTION The direct contribution of Travel & Tourism to GDP was EUR14.3bn, 8.0% of total GDP in 2017 and is forecast to rise by 5.6% in 2018, and to rise by 3.5% pa, from 2018-2028, to EUR21.3bn, 9.1% of total GDP in 2028.
The total contribution of Travel & Tourism to GDP was EUR35.0bn, 19.7% of GDP in 2017, and is forecast to rise by GDP: TOTAL CONTRIBUTION 5.3% in 2018, and to rise by 3.7% pa to EUR52.8bn, 22.7% of GDP in 2028.
EMPLOYMENT: DIRECT CONTRIBUTION In 2017 Travel & Tourism directly supported 459,000 jobs (12.2% of total employment). This is expected to rise by 5.2% in 2018 and rise by 2.1% pa to 592,000 jobs (13.3% of total employment) in 2028. In 2017, the total contribution of Travel & Tourism to employment, including jobs indirectly supported by the EMPLOYMENT: TOTAL CONTRIBUTION industry was 24.8% of total employment (934,500 jobs). This is expected to rise by 5.6% in 2018 to 987,000 jobs and rise by 2.5% pa to 1,266,000 jobs in 2028 (28.5% of total).
VISITOR EXPORTS Visitor exports generated EUR17.1bn, 28.4% of total exports in 2017. This is forecast to grow by 5.1% in 2018, and grow by 4.5% pa, from 2018-2028, to EUR28.1bn in 2028, 28.9% of total.
INVESTMENT Travel & Tourism investment in 2017 was EUR3.1bn, 15.9% of total investment. It should rise by 3.6% in 2018, and rise by 5.5% pa over the next ten years to EUR5.5bn in 2028, 17.4% of total. Source: WTTC, AXIA Research
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AXIA Research
Unemployment is sliding lower but it still remains high The labour market situation continues to improve, though the unemployment rate remains high. The recovery of employment began at the second half of 2014, much earlier than the recovery of growth, suggesting that labour market reforms have had a positive impact.
According to ELSTAT, the unemployment rate further declined in Q3:18 reaching 18.3% vs. 19.0% in Q2:18. Although the rate of decline is significant, Greece’s unemployment rate remains very high, being the highest among EU countries. The declining trend is continuing but it should take several years before it reaches the EU average (in 2023 the scenario run by the government estimates that the unemployment rate will settle at 13.2%), while actions like the increase of the minimum wage could hinder unemployment reduction. Unemployment rate is at high levels, especially for youth (37% for under 25s) and long-term unemployed (72% of all unemployed in the second quarter of 2018). Given such a slack in the economy, wage increases have been modest. Wages as approximated through compensation per employees are expected to have remained below 1% in 2018 and rise only very gradually going forward.
Turning focus on the employment side, according to the employment registry of the Ministry of Labor, (Ergani) 141,003 new jobs were created in 2018 down from 143,545 jobs created in 2017. According to Ergani, the increase in employment is characterized by part-time contracts rather than permanent full-time positions.
The service sector (catering, room & board) that mainly reflects growth in tourism is driving demand for employment. Note that this is the segment that will be impacted the most by the 11% increase of the minimum wage as well as from the introduction of collective bargaining agreements. Positive employment trends are also observed in the healthcare & social work and the agriculture sectors. On the other hand, construction and manufacturing have been adversely impacted by the prolonged economic crisis.
Exhibit 67. Unemployment rate evolution (%) Exhibit 68. Employment evolution (000s)
30 27.5 4,800 26.5 24.4 24.9 23.5 4,600 25 21.5 20.1* 4,400 17.9 20 4,200
4,000 15 12.7 9.6 3,800 10 8.4 7.8 3,600
5 3,400
3,200 0
Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 3,000
2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2008 Annual average Quarterly
*Average 1H18, Source: ELSTAT, AXIA Research
Exhibit 69. Employment flows 2018 (000s) Exhibit 70. New hirings 2018
308 268 283 272 239 230 12.74% 196 187 196 185 154 150 100 109 55 34 17 7 6 -17 -9 -8 -33 -120 45.66%
-134 -141 -170 -168 -199 -195 -179 -250 -248 -229 -265 41.60% -350
Full-time Part-time Occasional Hirings Dismissals Net flows
Source: Ministry of Labor (Ergani registry), AXIA Research
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AXIA Research
Consumer Confidence & Economic Sentiment have grown sharply Although it has somehow eased over the last few months, the economic sentiment index has increased sharply vs. the lows registered in 2015. At the same time, consumer confidence is at the highest point since early 2015, even though it still remains below its historical average.
Focusing on the consumer confidence, the performance is driven by the improved economic outlook. The highs the index is currently registering are coinciding with Greece’s exit from its economic adjustment program and the more optimistic view about the future. In addition, the expectations for “positive” fiscal measures ahead of the general elections enhance sentiment. Also, traditionally, the period up to elections, lead to improvements in consumer sentiment. Finally, additional supportive measures (like the increase of the minimum wage) are expected to register in the next months’ surveys.
Exhibit 71. Economic Sentiment/Consumer Exhibit 72. Confidence Indicators Confidence
120 110 0 105 -10 100 100 -20 95 -30 80 90 -40 85 -50 60 80 -60 75 -70 40 70 -80 65 -90 20 60 -100
0
Apr-14 Apr-13 Apr-15 Apr-16 Apr-17 Apr-18
Dec-15 Dec-13 Dec-14 Dec-16 Dec-17 Dec-18
Aug-13 Aug-14 Aug-15 Aug-16 Aug-17 Aug-18
Apr-17 Apr-13 Apr-14 Apr-15 Apr-16 Apr-18
Dec-17 Dec-13 Dec-14 Dec-15 Dec-16 Dec-18
Aug-17 Aug-13 Aug-14 Aug-15 Aug-16 Aug-18
Economic sentiment (lhs) Consumer confidence (rhs) Industrial Construction Retail Trade Service Sector
Source: IOBE, AXIA Research
Exhibit 74. Vehicles Licences Evolution (New Exhibit 73. Retail Sales Evolution passenger cars)
300 50% 15% 40% 250 30% 5% 20% 200 -5% 10% 150 0% -15% -10% 100 -25% -20% -30% -35% 50
-40%
Feb Feb Feb Feb Feb Feb
Aug Aug Aug Aug Aug Aug Aug
Nov Nov Nov Nov Nov Nov Nov
May May May May May May May 0 -50% 2013 2014 2015 2016 2017 2018 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Overall index (ex-fuel) Furniture/Household/Electr. Equipment Vehicle licenses (in k) y-o-y
Source: ELSTAT, AXIA Research
Economic Sentiment Index shows a continuous increase over the previous quarters, reaching a post-crisis high in Q3:18.
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AXIA Research
The latest trends of the economic sentiment, sub-indices i) The industry index is registering some weakness over the past few months, reflecting the rather low order book for the period, whereas expectations are that sales will increase in the coming months. According to ELSTAT, the industrial production index is forecasted to have recorded a continuing growth in 2018 following increases in 2017 and in 2016. At the same time Markit’s PMI index, after reaching multi-year highs in early 2018, remains at high levels driven by order volumes and client demand. Demand comes from both foreign (albeit latest data show some easing) and domestic clients. According to Markit’s business confidence of Greek manufacturing firms is registering a more robust degree of optimism. This is leading manufacturing firms to expand their workforce numbers, with the rate of job creation after the summer 2017 being one of the quickest since the firm began data collection in 1999.
Exhibit 75. Industrial Production Index Exhibit 76. Markit PMI
130 15% 125 10% 120 115 5% 110 105 0% 100 -5% 95 90 -10% 85
80 -15%
Jul Jul
Jan Jan
Jun Jun
Oct Oct
Apr Apr
Feb Sep Feb Sep
Dec Dec
Aug Aug
Nov Nov
Mar Mar
May May 2010 2011 2012 2013 2014 2015 2016 2017 2018 IPI index y-o-y
Source: ELSTAT, Markit, AXIA Research
ii) On the construction sector the sentiment is on an upward trend driven by private construction and despite the weakness in public projects. Note that according to ELSTAT new private building activity in terms of issued permits increased by 10.9% y-o-y in the January-October 2018 period (+20.2% in terms of surface, 18.7% in terms of volume) iii) In respect of the retail sector, the index has posted significant growth over the past few years both in terms of value and volume and currently is hovering at high levels. The increase was driven by the reduction of the unemployment and the increase of the GDP, while oven the first three quarters of 2018 the gross disposable income of households has posted a gradual increase. Specifically, in 9M18 the gross disposable income increased by 3.4% y-o-y vs. a 1.1% increase in the same period the previous year. Going forward, further strong growth of retail will be conditional to the growth in retail lending (although not expected to take place at a significant extent), while the household savings gap remains large. iv) Finally, the service sector also is showing signs of easing, reflecting mainly reservations regarding demand over the short term.
Exhibit 77. Private building activity evolution Exhibit 78. Production Index in Construction
60 40% 200 140% 180 30% 50 160 20% 140 90% 40 10% 120 100 0% 40% 30 80 -10% 60 -10% 20 -20% 40 20 -30% 10 0 -60% -40% Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 0 -50% 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2010 2011 2012 2013 2014 2015 2016 2017 11M:18 Index y-o-y No of permits (in k) y-o-y
Source: ELSTAT, AXIA Research
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AXIA Research
Inflation increasing but at a moderate pace Inflation is slowly increasing, but price pressures remain moderate. The Consumer Price Index for the January- December 2018 period posted an increase of 0.6% y-o-y with the pace of increase decelerating vs. 2017 (in 2017 up 1.1% y-o-y). The slowdown is related to the weakening of the inflationary pressures from the hikes of indirect taxation and the higher energy bill in 2017. Excluding the tax and the energy prices impact increases are observed in other categories as well, pointing to a mild increase in demand. For 2019 expectations are that inflation will accelerate as energy prices adjust higher, but for 2020 a more moderate increase of the energy prices should lead to a more paced increase of inflation.
Exhibit 79. CPI 12-month MA Exhibit 80. CPI sub-indices (2009=100)
1.5% 140
1.0% 130
0.5% 120 0.0% 110 -0.5% 100 -1.0% 90 -1.5%
-2.0% 80
-2.5% 70
Jun Jun Jun Jun Jun
Sep Sep Sep Sep
Sep 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Dec Dec Dec Dec Dec
Mar Mar Mar Mar Mar 2015 2016 2017 2018 Food Clothing & footwear Housing Durable Goods
Source: ELSTAT, AXIA Research
Investments: the investment gap remains large As discussed earlier there is an investment gap that has been created because of the crisis (Greece's annual fixed investment fell by 65% between its peak in 2007 and trough in 2017). Though gross investment started to grow over the last couple of years, net investment rates are still negative, as the capital stock of the country is still shrinking. Regarding the profile of investors, while we have seen domestic investments slowly taking place over the last two years, domestic savings remain insufficient to meet the investment needs of the economy. As a result, FDI is crucial for the economy. The effort should continue towards the introduction of policies aiming to make the country more attractive to foreign investors (including actions that relate to lower taxation, reducing red tape and accelerating judicial decisions).
The fact that the state is falling short to implement it’s investment program is problematic. In 2018 the country invested below the targeted amount; out of EUR 6.750bn targeted investment expenditure the country spent EUR 6.237bn or 7.6% lower than the target (or c0.3% of GDP lower). For 2019 the budget incorporates public investments at the level of EUR 6.750bn or similar levels as in the previous year.
The IMF notes that the experience of Cyprus shows that the gap in investment flows can be corrected within a few years and this allows for optimism that under the right conditions we could witness a strong rebound in investments.
Exhibit 81. Net FDI evolution in Greece (EUR, bn) Exhibit 82. Net FDI by sector
4.3 4,000
3,000 3.2 3.1 2,000
2.5 1,000 2.1 2.0 1.8 0 1.5 1.4 1.1 -1,000 0.8 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017*
0.2 Manufacturing Electricity, Gas, Steam & A/C supply Construction Transportation & storage 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017* Accommodation & food services Financial/Insurance activities Real estate
Source: Bank of Greece, AXIA Research
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AXIA Research
Liquidity in the economy is improving, albeit at a slow pace Important steps have been taken to ease the liquidity pressure on the economy but the financing conditions remain difficult and this further hinders robust economic recovery.
Starting with the banks, the deleveraging of the sector continues with net credit reduced by another 38% in 2018. On the contrary, we understand that new lending disbursed by the banks is estimated to have reached c. EUR 8bn - 10bn in the same year. For 2019, we don’t expect the pattern to significantly change, with new lending projected to slightly surpass the amount of EUR 12bn (although the easing of capital controls, and economic growth should lead to an increase in deposits) as banks continue to focus primarily on managing their NPE portfolios and to extend credit only on specific segments of the economy. Also, despite the improvement in Greece's sovereign credit ratings, external financing conditions remain challenging and this may hinder banks' capacity to raise capital and therefore may increase the cost for corporates of borrowing to finance investment.
Exhibit 83. Greek Banking System Deposits - Private sector Exhibit 84. Greek banking System Loans - Private sector (EUR (EUR bn) bn)
180 10% 250 -3.0%
150 200 -4.0% 0% 120 150 -5.0% 90 -10% 100 -6.0% 60 -20% 50 -7.0% 30
0 -30% 0 -8.0%
Jun-14 Jun-17
Jun-17 Jun-16 Jun-18
Sep-13 Sep-16
Dec-12 Dec-15 Dec-18
Dec-18 Dec-15 Dec-16 Dec-17
Mar-12 Mar-15 Mar-18
Households NFCs System Deposits (HHs & NFCs) y-o-y (rhs) Households NFCs System loans (HHs and NFCs) y-o-y (rhs)
Source: Bank of Greece, AXIA Research
The reduction of the State arrears is improving the liquidity of the economy. State arrears to the private sector have been reduced by EUR 1.282 during 2018 (a prior action of the country’s program). Still, another EUR2.039bn (c1.1% of GDP) of State arrears towards businesses and tax returns remain to be paid. This did not happen in 2018 (although this was the original plan) and is unclear how fast the government will proceed with disbursements in 2019.
Exhibit 85. Arrears towards the private sector 2018 (EUR, bn)
3.39 3.43 3.36 3.16 2.97 3.03 0.68 0.78 0.74 2.72 2.72 0.69 2.61 2.63 2.58 0.59 1.06 0.71 0.79 0.63 2.04 0.70 0.73
0.51
2.62 2.75 2.62 2.46 2.38 2.01 1.93 1.97 1.91 2.00 1.84 1.53
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
General government Tax refunds
Source: Ministry of Finance, AXIA Research
On a positive note supranationals (EBRD, EIB) continue to provide support either through direct investments or through the banking system.
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Exhibit 86. EBRD Investments (EUR m) Exhibit 87. EBRD Current portfolio composition
846 900 25
Infrastructure 12% 700 614 20
485 500 13 15 15 Industry, Commerce & Agribusiness 22% 320 11 300 10 6 Financial Institutions 39% 100 5
-100 2015 2016 2017 2018 0 Energy 28%
Annual Investment Number of projects
Source: EBRD, AXIA Research
Exhibit 88. EIB Investments (Signed amount, EUR bn) Exhibit 89. EIB Investment in 2018 (EUR m)
2.1 Innovation 1,071
1.6 1.5 1.6 1.3 1.3 Environment 92
1.0
0.7 SMEs 645
Infrastructure 62 2011 2012 2013 2014 2015 2016 2017 2018
Source: EIB, AXIA Research
The privatization process remains slow despite the importance to the economy Since Greece’s privatization agency was formed in 2011 it has proceeded to 44 agreements of a total amount of EUR8.9bn and has generated revenues for the Greek State of EUR5.4bn. The acceleration of the privatizations program is necessary to the efforts of the country to attract private investments in order to provide financing to the State, to increase efficiency, and importantly to signal to investors that the country “is open for business.” The impact of recent privatizations (i.e. regional airports) to the economy has been significant. Just focusing on the upcoming privatization of Hellenikon, is are expected to provide a boost to the economy for years to come given the size of project (EUR 7.0bn of investment of 3.8% of GDP) and as the investment is expected to support exports of services (reshape the position of Athens as full-year tourist destination).
Greece’s new umbrella privatization agency (Hellenic Corporation of Assets and Participations - HCAP) was created to gather under a single institutional structure a significant portfolio of assets and shareholdings in public companies. A portfolio of companies was transferred to HCAP, while it has provisionally identified and proposed a list of c10,000 real estate assets to be transferred to the Hellenic Properties Company.
Exhibit 90. Hellenic Corporation of Assets and Participations (HCAP) structure
Source: HCAP SA, Axia Research
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For 2018 some significant privatizations were concluded including that of the Natural Gas Transmission System Operator (DESFA) as well as the extension of the concession agreement of the Athens International Airport (AIA) and the Rolling-Stock Maintenance Company (ROSCO) but overall the pace was below forecasts.
For 2019 the program provides for the privatization, among others, of i) Hellinikon (development of the site of the former Athens International airport). The authorities need to complete the conditions precedent (including a tender for a casino license) to allow the transfer of shares to the developer ii) the privatization of Hellenic Petroleum (jointly selling a 50.1% stake with the main shareholder) iii) the privatization of the Egnatia motorway. Additional actions of the HCAP should also include (among others) the sale of its stake in PPC (17%), the sale of stakes in Athens Water (11.0%) and Thessaloniki Water (24%), the privatization of the national Gas Company (DEPA), the concession agreements of 10 ports and the privatization of marinas.
Exhibit 92. Privatization receipts vs. estimates (EUR Exhibit 91. Privatization receipts (EUR m) m)
4,000 2,153 3,500
3,000
2,500 1,379 1,171 2,000 1,040 1,500
1,000 498 420 289 500
0 2013 2014 2015 2016 2017 2011-12 2013 2014 2015 2016 2017 2018 Revenues-Actual Revenues-Target
Source: Ministry of Finance, AXIA Research
Balance of Payments The economy over the past eight years have led the current account towards equilibrium. The current account deficit as a percentage of GDP has fallen by 15 pp since the beginning of the crisis with the current account effectively being broadly balanced over the last few years.
Focusing on 2018, the current account recorded a deficit of EUR5.3bn (against a deficit of EUR3.2bn in 2017), mainly attributable to the higher net oil import bill. The non-oil goods (ex-ships) deficit also increased but to a lesser extent, although the relevant exports rose by 10.8% outpacing the corresponding imports, which grew by 9.3%. However, in absolute terms, imports grew more than exports. Note that travel receipts in 2018 increased by 10.1% y-o-y reaching EUR16.1bn, amid a 10.8% increase in tourist arrivals.
All in all the improved performance over the past few years was supported by the improved competitiveness of the economy following wide spread structural reforms (including labor market reforms) and the strong rebound of tourism.
Exhibit 93. Current account deficit 2009-2023e (% of Exhibit 94. Goods & Services balance (EUR bn) GDP)
15.1%
12.3% 11.4% 19.4 10.0% 16.3 18.0
-18.0 -19.8 -22.5 3.8%
2.0% 1.6% 1.1% 0.8% 0.8% 0.2% 0.4% 0.3% 0.2% 0.1% 0.0% 2016 2017 2018
Goods Balance Services Balance
Source: IMF (WEO Oct’18), Bank of Greece, AXIA Research
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Budget execution
Expectations are that in 2018, once more, Greece will be able to easily surpass the targeted general government surplus of the year. Actually, the government estimates that the general government primary surplus will reach 3.98% of GDP (vs. a target of 3.5%), despite the increased spending on public salaries (court ruling regarding retroactive salary payments to uniformed personnel) and the distribution part of the excess surplus (once more) as “social dividend.” For 2019, the Budget targets a general government primary surplus of 3.60% of GDP. This already incorporates the implementation of a comprehensive package of discretionary measures with a surplus-reducing impact of around 0.5% of GDP. These measures mainly relate to social support actions. Also following the approval by the Eurogroup, the government proceeded to the non-implementation of the legislated pension cuts for the year. Although the combination of no-pension cuts and the introduction of some fiscal easing put a strain on the budget, it is expected that the country will continue to meet its targets, assisted by the growing economy. On the other hand, the reduced fiscal space limits the ability of the government to proceed to pro-growth actions, thus impacting economic expansion.
Exhibit 95. General government primary balance
4.13% 3.98% 3.77% 3.60%
3.50% 3.50% 3.50% 3.50% 3.50%
2.20% 0.70% 1.75%
0.30% 0.50%
2015 2016a 2017a 2018e 2019e 2020e 2021e 2022e 2023-2060e
Primary surplus Target
Source: Budget 2019, EU Commission, AXIA Research
What represent a clear danger to the budget performance are court rulings that could overturn measures adopted by Parliament (cases regarding pension cuts and the bonus-salary cuts of public sector employees and the pensioners). Such rulings could not only jeopardize the effort to achieve fiscal targets by substantially increasing the expense side but also (most likely) could come attached to very high retroactive payments. It is unclear when the State Council (highest court) will decide on these issues and how the government will be able to respond to this potential. Still, because of the substantial impact on the country’s financials and the complexity of the matters, it is possible that even if there are adverse court decisions, these issues could drag for some time before final solutions are implemented.
2018 target to be met Focusing on the State Budget, based on the data released for December, the State budget reversed course and after strong overperformance against the targets during the first 11-months of the year, the balance for 2018 came in below the target. The underperformance was due to lower revenues, with the State budget net revenue reaching EUR 1.483bn below the target (or by 2.7% vs. the target). This drop mainly reflects a delay to privatization proceeds from the extension of the Athens International Airport (AIA) concession agreement. Regarding AIA, the EUR1.115bn related to the extension of the concession agreement of the airport, for the period 2026-2046 were collected in February 2019, instead of December 2018 for which it that was originally budgeted. According to the MoF this delay has no fiscal impact for 2018 as it is related to revenues of later years.
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Exhibit 96. State Budget Execution Jan-Dec'18 EUR m, modified cash basis Outcome 2019 Budget estimates Difference State Budget Net Revenue 53,682 55,164 -1,483 Ordinary Budget Net Revenue 51,042 51,309 -267 Revenue before Tax Refunds 54,488 54,584 -96 Privatization proceeds 234 1,366 -1,133 Tax refunds 3,680 4,642 -962 PIB Net Revenues 2,639 3,855 -1,216 EU Funds 2,098 3,555 -1,457 Own resources 541 300 241 State Budget Expenditure 55,998 57,075 -1,077 Ordinary Budget Expenditure (A+B) 49,761 50,325 -564 PIB Expenditure 44,207 44,810 -603 State Budget Balance -2,316 -1,911 -406 State Budget Primary Balance 3,237 3,604 -367 Source: Ministry of Finance, AXIA Research
Apart from the underperformance in the privatization proceeds, which is a technical issue, in respect of the State revenues we highlight (slight) overperformance in respect of direct taxes (both personal income tax and corporate tax); (slight) overperformance in respect of indirect taxes (partially reflects efforts to curb black economy); lower tax refunds by c21% or by EUR962m that helped drive revenues higher (the MoF though stresses that additional funds related to the arrears clearance program have been disbursed); lower proceeds for public investments from EU funds.
Regarding expenditure side, there is overperformance vs. the target by cEUR1.0bn for 2018, of which: half of the overperformance relates to the ordinary expenditure this mainly concerns i) lower allowances for salaries and pensions of central government personnel ii) lower consumption expenditure and iii) lower grands towards the Social Security Fund; the other half relates to lower public investments (by 7.6% vs. the target).
In any case, the State expenditures sharply increased in December because of the distribution of the social dividend and the retroactive payments to uniformed personnel.
All in all, in 2018 State primary surplus came to EUR 3.237bn (or c1.8% of GDP), that is EUR 367m lower (c0.2% of GDP) than the target.
Note however that the 3.5% primary surplus target the government has agreed to deliver until 2022, refers to the general government budget and not to the State budget, and specifically to the definition of the adjustment program as presented by the institutions and not the definition Eurostat is using to calculate the general government primary surplus.
According to Parliamentary Budget Office (PBO), General Government primary balance in 2018 is estimated to have improved by EUR 700m (or c0.4% of GDP) vs. the pervious year to stand at EUR 6.682bn (final and official data to be compiled by Ministry of Finance). The main driver of the 2018 performance has been the treatment of privatizations: all privatizations are exempted (since only those that involve the exploitation of assets with the ownership remaining in the state, i.e., concessions, are reported both in ESA and program definition terms). Last year the budget had reported privatizations of EUR1.3bn, while this year the receipts were at EUR234m. Apart from the impact of privatizations, Local Governments primary balances posted y-o-y increases in 2018, while the Extra-budgetary Funds and Social Security balance posted a decline.
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Exhibit 97. Consolidated General Gov. Primary Balance incl. Adjustments on a monthly cumulative basis, 2018 (EUR m)
9,000 1,300 1,236 1,234 8,000 1,200
7,000 1,100
6,000 1,001 987 1,000 5,000 953 900 838 4,000 800 800 702 3,000 697 700 700 665 2,000 600 561 1,000 500
0 400 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
2017 2018 y-o-y (Difference)
Source: Parliamentary Budget Office, AXIA Research
Exhibit 98. Adjusted General Government Budget 2018 (EUR m) EUR m 2017 2018 Difference State Budget State Budget Net Revenue 51,422 53,682 2,259 Total Tax Revenue 47,564 48,853 1,289 Non-Tax and Non-Recurring Revenue 6,769 5,869 -899 Tax Refunds 5,360 3,680 -1,680 Public Investment Budget Revenue 2,449 2,639 190 Total State Budget Expenditure 55,690 55,998 308 Primary Expenditure 43,532 44,207 676 Interest Payments 6,208 5,554 -654 Public Investment Budget Expenditure 5,950 6,237 287 Clearance of previous years' obligations -2,123 -3,169 -1,046 State Budget Primary Balance -183 68 251 Extra-budgetary Funds Revenue 12,351 11,602 -749 of which transfers 7,051 6,568 -482 Expenditure 8,137 7,509 -628 of which Interest 398 325 -73 Extra-budgetary Funds Primary Balance 4,611 4,417 -194 Local Governments Revenue 6,760 7,279 519 of which transfers 4,306 4,733 427 Expenditure 6,208 6,650 441 of which Interest 60 62 3 Local Governments Primary Balance 612 692 80 Social Security Funds Revenue 43,182 44,029 847 of which transfers 21,673 21,959 287 Expenditure 41,102 42,074 972 of which Interest 4 3 -1 Social Security Funds Balance 2,084 1,957 -126 General Government Primary Balance General Government's Primary (cash, non-consolidated) 7,124 7,134 10 Inter-Governmental Interest Payments -1,110 -1,186 -75 Effect of arrears’ clearance 1,609 1,282 -327 SMP and ANFA Revenue -345 -314 30 Privatization revenues -1,296 -234 1,062 Consolidated General Government's Primary Balance incl. Adjustments 5,982 6,682 700 Source: Parliamentary Budget Office, AXIA Research
Taking into account the above, recall that the general government primary surplus in 2017 reached 4.2% of GDP, despite the c0.8% of GDP spending for “social dividend” and other one-off specific payments that took place at the last month of the year. In cyclically adjusted terms, the primary surplus in 2017 reached 5.2% of GDP, the largest among EU countries.
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The above leads us to assume that the budget is on course of overperforming for 2018 despite i) the one-off adjustment related to the retroactive payment of salaries of uniformed personnel (net payment of EUR600m or c0.32% of GDP) as well as ii) the distribution of EUR710m (c0.4% of GDP) as social dividend. To this end, Ministry of Finance’s Council of Economic Advisors in its latest bulleting (Feb’ 19) notes that the 2018 general government primary surplus outturn is expected to safely exceed the target of 3.5% of GDP.
The budget in 2019 and 2020 For 2019 the budget forecasts a general government primary surplus of 3.60% driven by estimated growth in net revenues through higher indirect tax proceeds, while it also accounts for an increase in expenses mainly through increased transfers for social causes.
Exhibit 99. Primary surplus estimates vs. targets
4.5% 4.13% 3.98% 7.0 3.77% 4.0% 3.60% 5.7 3.50% 3.50% 6.0 3.5% 5.0 3.0% 4.3 2.5% 4.0 2.0% 1.75% 3.0 1.5% 0.9 2.0 1.0% 0.50% 1.0 0.5% 0.2 0.0% 0.0 2016a 2017a 2018e 2019e
Primary surplus (% of GDP) Primary target (%) of GDP Fiscal space (EUR bn)
Source: Ministry of Finance (Budget 2019), AXIA Research
Recall that the final 2019 budget approved by the European authorities and voted by the Greek Parliament i) it did not include further pension cuts, since the Eurogroup decided that this was not necessary, and ii) it included a package of discretionary measures of EUR 910m.
Specifically: On the revenue side, the 2019 budget projects total revenues at 27.5% of GDP, down from 29.0% of GDP expected in 2018, where the reduction is largely due to the denominator effect. In level terms, revenues are projected to grow moderately in 2019 assisted by the improving macroeconomic environment, albeit this effect is partly offset by the cuts in the property tax and social contributions for the self-employed. In respect of expenditures the budget projects total expenditure to reach 30.0% of GDP in 2019, down from 30.7% of GDP expected for 2018. Primary expenditures are set to grow mainly reflecting the new policy package, while continued savings from past reforms (including ceilings on healthcare spending and the size of the public sector) support an overall moderate expenditure dynamics.
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Exhibit 100. Budget 2019 EUR m, cash basis 2017a 2018e 2019e Revenues 50,696 53,824 53,022 y-o-y 6.2% -1.5% Ordinary property taxes 3,100 3,063 2,801 Personal income tax 10,623 10,988 11,070 Corporate tax 4,225 4,284 4,420 Social contributions 66 71 58 Expenses 57,422 57,032 57,796 y-o-y -0.7% 1.3% Employee benefits 12,018 13,527 13,016 Social benefits 2,305 1,190 246
State balance -6,726 -3,209 -4,774 % of GDP -3.7% -1.7% -2.5% State Primary balance -518 2,306 1,826 % of GDP -0.3% 1.2% 0.9%
General government primary balance (under MoU) 7,442 7,383 6,945 % of GDP 4.13% 3.98% 3.60% General government primary target 3,154 6,498 6,746 % of GDP 1.75% 3.50% 3.50% Fiscal space 4,288 885 199 % of GDP 2.38% 0.48% 0.10% Source: Ministry of Finance (Budget 2019), AXIA Research
Focusing on the pension cuts that did not go ahead, recall that the Greek Parliament had voted cuts of 1% of GDP to be introduced as Jan 1, 2019 aiming i) to ensure the country’s fiscal trajectory, and ii) to allow the government some further fiscal space to be used for social and growth-oriented initiatives.
While the pension cuts were not implemented, the government used most of the expected fiscal space generated under the current structure to introduce social-friendly reforms. These include i) the reduction of the real estate taxes for lower-value properties, ii) the reduction of social security contributions to entrepreneurs, and iii) housing allowance for specific households (reduction of the taxation of the property tax by 30% to those with property values below 200k with the largest cuts to those with properties below 150k).
Note that the government has voted the reduction of the corporate tax rate gradually from 29% currently, to 28% in 2019 and eventually to 25% by 2022. The cost from the reduction of the corporate income tax will affect public finances in 2020 and not that of 2019 (the 1% reduction of the corporate tax rate in 2019 will have a EUR142m impact on the 2020 budget, while for the gradual reduction by 1% each year to 25%, the impact will be EUR247m for 2021, EUR371m for 2022, EUR515m for 2023 and EUR450m thereafter per year).
Expectations are that Greece will continue to perform and meet the 3.5% of GDP primary surplus target for 2019, assuming that the economy continues to grow at a healthy pace. There are two significant concerns on the budget for 2019 which are i) the upcoming elections and ii) potential decisions by the State Council on litigations regarding pension and salary cuts in the public sector. Specifically:
i) Traditionally pre-election periods in Greece strain budgets as governments tend to increase expenditures. We stress that the European institutions continue to scrutinize closely the country’s financial position and they can ask for adjusting actions if there is divergence (although there could be some deviations over the short term). ii) More importantly, there are a number of class actions against Parliamentary measures implemented over the past 5-7 years mainly related to pension cuts and salary cuts of public sector employees. To this end a. an initial State Council ruling in 2015 ruled unconstitutional the pension cuts enacted in 2012 but the timing that the annulment will take effect has been debated, while at the same time the authorities have appealed against the ruling; b. a State Council decision is expected to be published in 2019 related to the main features of 2016 pension reform (recalibration process, new replacement rates, and elimination of the personal differences). If those aspects of the 2016 reform are ruled unconstitutional, it would have a significant impact on public finances and on the long-run sustainability of the pension system;
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c. a department of the State Council ruled unlawful the abolition of the bonus salaries (13th and 14th monthly salaries) of public sector employees and has reverted the case to the plenary. The case was heard by the plenary on February 1, 2019.
The timing of the final rulings on the cases above is unclear but will most likely take place within 2019.
The fiscal costs of the above claims is still uncertain since it also depends on the timing that will take effect a potential annulment of these claims. According to Kathimerin: if the State Council reverses decisions for cuts in pensions (direct cuts plus cuts of the bonus salaries) the total cost for one-off payments could amount to o EUR 9.0bn-12bn (c4.8%-6.5% of GDP) if it is decided that the payments will concern the period from 2015 (first related to the case ruling of the State Council) until 2018 o EUR 24bn (c12.9% of GDP) if the adverse scenario plays out and the period runs from 2012 to 2018
if there is a final ruling upholding the abolition of the bonus salaries of public sector employees o the annual recurring cost on the budget is estimated at EUR 640-800m (c0.3%-0.4% of GDP), while o the one-off retroactive payment for these salaries could amount to . EUR 1.9bn-2.4bn or c1.0%-1.3% of GDP (if the ruling sets 2015 as the starting year) or to . EUR 3.8bn-4.8bn or c2.0-2.6% of GDP (if 2012 is set as the starting year)
It is unclear how the government (and the EU institutions) will react to the potential State Council rulings in favor of the pensioners and/or the public sector employees.
In respect of the retroactive payments, we note that the government could decide to make these payments gradually, over a long period of time. Regarding the recurring costs of the bonus salaries, the government could decide to introduce new legislation to minimize their impact, while such legislation could be introduced rather swiftly.
We note here that in 2020 there could be more fiscal space. This is because the Greek Parliament has already voted for the reduction of the tax-free threshold to be implemented as of January 1, 2020. This adjustment amounts to 1% of GDP or cEUR1.8bn. If court decisions lead to higher expenses, we would expect the extra revenues generated by the reduction of the tax-free threshold to be partially used to counterbalance the impact of the State Council decision(s). Furthermore, we note that most likely the targeted primary surplus for Greece will be reduced after 2022. If the target is reduced from 3.5% to 2.5% to GDP this could release cEUR2.0bn annually from the budget (adjusting for the expected level of the economy that year).
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Reforms under the enhanced supervision framework
Greece officially concluded its third economic adjustment program on August 20, 2018. Although this gives the country more room to proceed with its own policies, Greece remains under a supervision framework administered by the EU, while the IMF has a consultation role. Specifically, the country will be under an enhanced surveillance (stricter supervision when compared to the other countries that exited their adjustment programs) until 2022. After 2022, the surveillance will continue but under a framework similar to the other countries that exited their respective programs and until 75% of the debt towards the ESM is repaid.
The enhanced surveillance process and what the institutions will be looking for Under the enhanced supervision, over the next four years, technical teams of the EU institutions (IMF in a consultation roll) will perform quarterly reviews and will be producing reports over how quickly the country advances with the agreed steps.
In any case, the focus of the reviews will remain on the ability of the country to maintain general government primary surpluses of 3.5% of GDP over the medium term, but also on the pace of introduction of measures to “support a robust and sustainable economic recovery, in light of the legacy effects of several factors.”
Exhibit 101. Greece’s key commitments to ensure continuity and completion of the 3rd program Area of reforms Measures to be taken Fiscal and fiscal structural Ensure the 3.5% of GDP primary surplus over the medium term Update property tax values until 2020 Staff with personnel the Independent Authority of Public Revenue Complete the implementation of reforms identified by the Hellenic Court of Auditors Social welfare The setup of the single pension fund EFKA will be completed by mid-2020 The main body responsible for central procurement (EKAPY) will be set up by end-2018 with a view to achieving a share of
centralized procurement in total hospital expenditure of 30% in mid-2020 and 40% in mid-2022 Complete the reform of social safety nets launched under the programme Financial stability Continue to implement reforms aimed at restoring the health of the banking system, including NPL resolution efforts Implement the comprehensive action plan on household insolvency with the objective to eliminate the backlog of cases, including
the process of pending applications, by end-2021 The HFSF will by end-2018 develop an exit strategy for the sale of its stakes in the systemic banks Continue the relaxation of capital controls in line with the published roadmap Labour and product markets Safeguard competitiveness through an annual update of the minimum wage in line with the provisions of Law 4172/2012 Complete the investment licensing reform Complete the cadaster project by ratifying the complete cadastral mapping and forest maps by mid-2021 The agreed divestment of PPC's lignite-fired capacity will be completed by end-2018. The Target Model will be fully launched by mid-2019, while the measures agreed as part of the joint assessment on the NOME auction system will be implemented by end- 2019. The Asset Development Plan and the Strategic Plan of HCAP (Hellenic Corporation of Assets and Participations) will be Privatizations implemented on a continuous basis Implement specific privatizations at a set time table Public administration Complete reforms to modernize human resource management in the public sector by mid-2019 Complete the integrated HR Management by end-2019 Source: EU Commission
The first post-program review was concluded in September of 2018 and the second one in late January, 2019. These reviews focus on the structural reforms the country has pledged to implement. Specifically, the checklist includes 16 prior actions that have yet to be delivered. These reforms apply to different areas and so far none of these reforms have been concluded, with some of them progressing satisfactorily, others not so much and others facing substantial issues.
Reportedly, the attention of the second review was primarily placed on: i) the slow pace in the repayment of arrears, ii) the new Household Insolvency Law (Katseli law) iii) the minimum-wage increase, and iv) the slow pace of privatizations.
The report related to the second review to be published on February 27, 2019. The Commission has made it clear that the government would need to perform and has reiterated that the activation of the debt relief measures will depend upon the positive second review. This refers to the return of the ANFAs and SMPs to Greece, with the instalment expected to amount to EUR650m.
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Recall that the total amount of ANFAs and SMP profits to be distributed over the four year period stands at EUR5.8bn, offering substantial support to the budget. The Greek side is moving ahead to meet its commitments but specific reforms including the Household Insolvency Law and the privatization (concession agreement) of Egnatia Odos are politically challenging and the administration is trying to strike a difficult balance. There is concern that the stance and the overall approach on these issues will be dictated primarily be the fact that we are in an election year. To this end, it is unclear how the EU institutions will react if the outcome of the reform efforts falls short of their expectations.
What if Greece does not meet its agreed commitments? If Greece fails to comply the Eurogroup could consider posing the medium term debt relief measures approved for Greece in the June 2018 Eurogroup. This could o delay the distribution of ANFA/SMP profits (adversely impacting the budget), but mainly o increase the medium-term financial obligations of the country (the ESM has decided to differ the interest and amortization of the EFSF loans. If this is adjusted, Greece will be faced with a lump sum of cEUR13bn of interest payments in 2022, potentially exhausting the country’s own financing capabilities). becoming more demanding on how the Greek government could use the cash buffer. The use of cash buffer that amounts to cEUR 24bn will be jointly decided with the institutions, while the funds are in an escrow account. In any case, any frictions between the Greek government and the institutions will limit the country’s ability to gradually tap the markets to refinance upcoming maturities, while impacting the confidence towards the country. Therefore, we would expect that no Greek government will be willing to test the markets by backtracking, or by not implementing agreed reforms.
The medium-term debt measures agreed for Greece
The abolition of the step-up interest rate margin related to the debt buy-back tranche of the 2nd Greek programme as of 2018. This refers to a 2.0% interest margin foreseen from 2017 onwards to amount of EUR 11.3bn that was used during the second financing program for debt buyback. This saves Greece roughly EUR 200m annually of interest payments.
Return of SMP and ANFA profits. In the beginning of the crisis in the context of the SMP and ANFA programs run by the ECB, central banks of EU countries purchased Greek bonds from the market. Since 2012 EU finance ministers have agreed that the profits they made from acquiring Greek debt at low market rates would be returned to Greece. According to PDMA about EUR 5.8bn can be returned to Greece over the next 5 years. The amounts will be transferred to Greece in equal amounts on a semi-annual basis in December and June (starting in 2018 until June 2022), via the ESM segregated account and will be used to reduce gross financing needs or to finance other agreed investments.
A further deferral of EFSF interest and amortization by 10 years and an extension of the maximum weighted average maturity (WAM) by 10 years, respecting the programme authorized amount. The total amount disbursed by EFSF to Greece in the course of the 2nd program amounts to EUR 130.9bn with maturities spanning from 2023 up to 2056. Out the total amount, EUR 33.4bn were used as a “sweetener” during the PSI exercise. As per the 2012 decision, interest on EUR 96.6bn of EFSF debt (ex. PSI “sweetener”) was deferred until 2022. It is estimated that the total deferred amount by 2022 would reach about EUR 13bn. As per the Eurogroup decision, interest on the EUR 96.6bn of EFSF loans is deferred for another 10 years (2032). Note that the interest paid by Greece on the EFSF loans averages 1.6%. Looking on the maturities of EFSF loans, about EUR 23.5bn mature in 2023-2032 (cEUR 2.3bn annual maturities).
Eurogroup agreed to review the sustainability of the Greek debt at the end of the EFSF grace period (2032). At this time the Eurogroup will examine whether additional debt measures are needed to make sure the agreed debt threshold criteria are met (GFN-to-GDP <15% for the medium term and below 20% after). In this context, the Eurogroup also recalled the May 2016 agreement on a contingency mechanism on debt which could be activated in the case of an unexpectedly more adverse scenario. If activated by the Eurogroup, it could entail measures such as a further re-profiling and capping and deferral of interest payments of the EFSF to the extent needed to meet the GFN benchmarks defined above.
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Greek debt: A plus size model
Despite its nominal size, Greek debt’s structural characteristics provide an attractive backdrop for investors, which have not been fully priced in yet, in our view affected by both global market volatility but also domestic political developments. Taking into account the defensive characteristics of the debt pile (18.5-years maturity, 85% fixed coupon, weighted average cost at 1.7% for 2018) and the outlook of a sensible domestic political environment, we believe there is room for further yield compression vs. the 3.8% range that 10Y GGB is currently trading.
2018 debt deal provided clarity and dismissed sustainability issues… With its graduation from the third economic adjustment program, Greece’s official creditors provided a final set of debt relief measures (medium-term) that are estimated to reduce the country’s debt-to-GDP ratio by 30% by 2060 and gross financing needs-to-GDP ratio by 6.0% in the same period. This comes on top of the effect of short-term debt relief measures already implemented in late 2017 and provided a 20% reduction of debt-to-GDP and 5.0% in GFN-to-GDP terms. Recall also that a rendezvous clause was agreed with official creditors for 2032 whether additional debt measures are needed in respect of Greece’s agreed gross financing needs (GFN) targets.
Reflecting the above, EU Commission’s debt sustainability analysis estimate that GFN will hover around 10% of GDP until 2032. Later on, GFN is expected to increase slowly, but to remain around 18% of GDP at the end of the forecast horizon. On a similar tone, the IMF, taking a more conservative view, on long term growth and fiscal performance foresees no sustainability breach for up to 2038, welcoming thereafter commitment for additional help by EU partners.
Exhibit 102. Debt sustainability exercise EU vs. IMF
Source: IMF, EU Commission, AXIA Research
…while cash buffer and fiscal performance mitigate any short term risk Apart from the debt relief envelope, Greece graduated its MoU with a sizable cash buffer of EUR 24.1bn in August 2018 that according to the latest data of the debt management agency stood at EUR 265bn in September 2018. The cash buffer is comprised of EUR 15bn of the final program tranche to Greece as well as market operation in 2017-18 and fiscal surplus.
According to the estimates the available cash buffer fully covers Greece’s gross funding needs for the next two years, or assuming T-Bills are rolled over is adequate for the debt maturities of the next four years. The cash buffer has already benefit Greece and is expected to continue to do so, providing a shield against refinancing rates and risks. In addition, as it has been discussed, it is a resource the country can use to implement liability management operations in order to further improve its debt profile.
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Exhibit 103. Cash buffer (EUR bn) Exhibit 104. Debt maturities 2019-32
12.2 12.3 26.5 11.7 24.1 9.8 9.0 7.7 6.7 6.7 15.9 15.6 6.3 6.2 5.6 5.9 5.0 5.1
2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032
Mar-18 Jun-18 Aug-18 Sep-18 ECB and NCBs Market GGBs Bank of Greece EIB IMF ESM/EFSF/GLF Other
Source: PDMA, AXIA Research
In 2019 Greece is facing maturities totalling EUR 11.7bn, with main expirations relating to: 1. EUR 4.0bn of GGBs expiring in April (issued in 2014); 2. EUR 5.8bn due to ECB (SMP and ANFA) expiring in July (EUR 3.7bn) and October (EUR 2.0bn); 3. EUR 2.0bn due to IMF, split in six instalments around the year.
With the country’s net financing needs for 2019 estimates at EUR 9.2bn (taking into account primary surplus and expected privatization receipts), PDMA laid out its funding strategy for the year, including three scenarios to raise EUR 3.0bn-7.0bn in total from new medium and longer term issuances. According to the PDMA plan, new money combined with the available cash buffer (EUR 26.5bn as of Sep’18) and expected cash receipts from SMP&ANFA will be utilized to cover the year’s funding needs.
Exhibit 105. Overview of 2019 financing needs and sources Scenario A Scenario B Scenario C Medium and short term amortization* 11.0 11.0 11.0 Interest 5.6 5.6 5.6 Primary deficit/(surplus) -7.4 -7.4 -7.4 Other cash requirements - - - Total financing needs 9.2 9.2 9.2
Medium and long term issuance (new money) 3.0 5.0 7.0 Net change in outstanding T-Bills 0.0 -0.8 -1.5 Change in cash reserves-decrease/(increase) 5.0 2.4 1.1 Return of SMP&ANFA profits 1.2 1.2 1.2 Privatization receipts 0.0 1.4 1.4 Total funding sources 9.2 9.2 9.2 *ex-EUR 0.8bn in intra-government debt, Source: PDMA, AXIA Research
Also the Minister of Finance Euclid Tsakalotos has in various occasions iterated that Greece could use part of the available cash for the buyback of part of the remaining IMF’s loans to Greece (EUR 9.3bn) given that they carry a high interest (~3.5% vs. average cost of ~1.7%). In this context pending on the market environment, according to press, in 2019 Greece could buy back up to EUR 3.3bn of IMF debt (on top of EUR 2.0bn maturity in 2019). In the same context speaking to press recently, Euclid Tsakalotos said that an LME exercise could also include part of ECB and NCBs held GGBs (EUR 11bn bonds that were excluded from 2012 PSI and carry coupons of 5.0%-6.0%).
Note that 2020-21 maturities are significantly smaller (EUR 10.0bn in total), at a time when primary surplus target remains at 3.5% (cEUR 8.0bn), while additional receipts form SMP&ANFA profits are due to be disbursed. PDMA estimates that assuming the primary surplus target of 3.5% is hit for 2020-22, the available cash buffer adequately covers maturities even with no new medium/long term issuance.
Positive Outlook by rating agencies… Taking into account the underlying conditions, credit rating agencies in 2018 following the graduation of the country from the MoU, proceeded with an initial round of upgrades. The agencies apart from the set of debt relief measures implemented by EU creditors in 2018, also highlight the improved predictability in the Greek macro situation and the positive structural characteristics of the Greek debt.
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Currently, Greece stands three to six notches from investment grade rating. In the next round of reviews for 2019, agencies are expected to focus on the consistent fiscal performance but also the efforts to unlock growth. On the other hand any volatility on the political landscape that could result to slippages on the fiscal path and affect economic activity could affect the country’s credit profile.
Exhibit 106. Greece’s debt ratings Next Last Review Rating Previous Notches to Rating Agency Outlook Review Date (Current) Rating IG Date Moody’s Feb’18 B3 Caa2 Positive 01-Mar-19 6 Fitch Feb’19 BB- B Stable 02-Aug-19 3 S&P Jan’19 B+ B+ Positive 26-Apr-19 4 Rating and Investment Sep’18 B CCC+ Stable NA 5 DBRS Jun’18 B (High) B Positive 03-May-19 4 Source: Rating Agencies, PDMA, AXIA Research
…while new issue seems to be around the corner Greece’s 10-year benchmark has fully recovered and is moving below the lows seen last summer following a period of elevated volatility in the global markets that had an impact on the investor’s appetite. We have to note that following the successfully executed swap of GGB strip to 5 benchmarks in late 2017, yields have contracted by 150bps registering also significant increase in trading volumes. Also the Greek yield curve has steepened in 3m-10y maturities suggesting better growth prospects for the economy in the short to medium term but also the lower risks to debt sustainability.
Exhibit 107. Benchmark GGBs performance (yield) Exhibit 108. GGBs yield curve
5.0 6.0
4.5 5.0
4.0 4.0 3.5 3.0 3.0 2.0 2.5
2.0 1.0
1.5 0.0 0.2Y 4Y 6Y 9Y 14Y 18Y 23Y
YTW (T) YTW (T-6M) 5Y 7Y 10Y
Source: Bank of Greece, Capital IQ, AXIA Research
On 29 January 2019, Greece priced a new 5-year bond raising in total EUR 2.5bn. The transaction benefited from strong demand with the participation of more than 290 accounts, and a final orderbook north of EUR 10bn. This positive outcome allowed Greece to price the new bond at the lower range of guidance, 3.60%, after starting from IPTs of 3.750% to 3.875%. Coupon was set at 3.45%. This issue covered 35% of the base scenario target of EUR 7.0bn of new money in 2019. Expectations are that PDMA would look for one more issue in 1H19 targeting a 10-year issue for a higher amount that would eventually mark the full return of Greece to the markets. Finally a 7-year issue could follow in 2H19.
Yet, apart from global market environment, any decisions for new debt issue will be premised on the political developments in the country. In this context, we note that any new issue in the near term could be utilized by the current government as another success in the field of the economy. In a similar backdrop, a new administration taking over could try to capitalize on the potential positive hype of its early days with a new issue.
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Exhibit 109. Investors profile in 5Y bond issue Exhibit 110. 10-year sovereigns benchmarks
Insurance 12.0 Hedge Fund, Pension, 2.50% 11% 10.0
8.0
6.0 Bank/Private Bank, 19% 4.0
2.0
Fund Manager, 0.0
67.50%
22/12/2016 22/02/2016 22/04/2016 22/06/2016 22/08/2016 22/10/2016 22/02/2017 22/04/2017 22/06/2017 22/08/2017 22/10/2017 22/12/2017 22/02/2018 22/04/2018 22/06/2018 22/08/2018 22/10/2018 22/12/2018 Greece Italy Germany Portugal
Source: PDMA, Capital IQ, AXIA Research
Exhibit 111. Greek debt composition (Sep’18) Type Investor Subtype EUR bn % of total Debt securities Private T-Bills 15.1 4.2% Debt securities Private GGBs 41.0 11.5% Debt securities Official GGBs held by ECB/NCB (SMP/ANFA) 11.0 3.1% Loans Official IMF 9.4 2.6% Loans Official GLF 53.0 14.8% Loans Official ESM/EFSF 191.0 53.5% Loans Official EIB 7.7 2.2% Loans NM BoG 2.4 0.7% Loans NM Other loans 4.4 1.2% Repos NM Repos 22.0 6.2% Total Gross Debt 357.0 Official sector / Total Debt 76% Source: PDMA, MinFin, AXIA Research
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Greek equity market outlook
Performance in 2018: Greece remained a weak link
2018 started with increased interest and expectations for a strong year for Greek assets as the country was in course of exiting its economic adjustment program, while multiple catalysts for the banking sector would offer improved visibility and sentiment. Despite the fact that Greece exited the MoU and banks had positive regulatory assessments, global market volatility, especially relating to Italy and Turkey, had an impact on the Greek sovereign and the equity market. The hit was further exaggerated by the Folli Follie case and mounting concerns over the capital adequacy and profitability outlook of the Greek banks. Athex closed 2018 with losses of 23.6%, with Greek banks losing on average c50% amid a 10% average drop for non- financials names.
Exhibit 113. ATHEX FY performance 2006-18 (% Exhibit 112. ATHEX performance change)
% change FY2018 YTD 33.4 28.1 22.9 24.7 19.9 ATHEX Composite Index -23.6 +9.5 17.9 1.9 MSCI Emerging Markets -16.6 +8.7
DAX -18.3 +8.1 -23.6 -23.6 -28.9 EURO STOXX Index (EUR) -14.8 +9.4 -35.6
-51.9 S&P 500 -6.2 +11.1 -65.5 FTSE 100 Index -12.5 +6.9 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Source: Capital IQ, AXIA Research
Exhibit 114. ASE Large Cap and Banks performance in Exhibit 115. ASE Large Cap and Banks performance 2018 (% change) YTD (% change)
Alpha Bank A.E. -38.4 Alpha Bank A.E. 2.3 Eurobank Ergasias S.A. -36.5 Eurobank Ergasias S.A. 2.5 National Bank of Greece S.A. -65.5 National Bank of Greece S.A. 16.8 Piraeus Bank S.A.-72.6 Piraeus Bank S.A. -5.4 Terna Energy 27.0 Terna Energy 16.1 Motor Oil 11.8 Motor Oil 0.7 Gr. Sarantis S.A. 10.4 Gr. Sarantis S.A. 2.9 GEK Terna 8.4 GEK Terna 4.2 Thessaloniki Port 2.8 Thessaloniki Port -3.9 Coca-Cola HBC AG -0.5 Coca-Cola HBC AG 12.8 Hellenic Petroleum S.A. -3.0 Hellenic Petroleum S.A. 6.2 Piraeus Port Authority S.A. -5.4 Piraeus Port Authority S.A. 12.1 Autohellas SA -6.0 Autohellas SA 0.9 Grivalia Properties REIC -9.1 Grivalia Properties REIC 2.6 Aegean Airlines S.A. -10.5 Aegean Airlines S.A. 7.3 Jumbo S.A. -14.6 Jumbo S.A. 17.3 Titan Cement Company S.A. -15.4 Titan Cement Company S.A. 0.5 OTE -17.2 OTE 12.4 LAMDA Development S.A. -17.4 LAMDA Development S.A. 13.9 EYDAP -20.1 EYDAP 9.6 Mytilineos -20.2 Mytilineos 24.4 Viohalco S.A. -21.5 Viohalco S.A. 18.1 Ellaktor S.A. -23.2 Ellaktor S.A. 25.4 OPAP -27.7 OPAP 17.8 Fourlis Holdings S.A. -28.7 Fourlis Holdings S.A. 11.8 Hellenic Exchanges -29.7 Hellenic Exchanges 2.7 PPC -33.6 PPC 3.6 Intralot -61.6 Intralot 19.7
Source: Capital IQ, AXIA Research
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The global risk-off mode had a significant impact on the liquidity of the ATHEX as well, with both trading volumes and value subsiding to recent historical lows in 2018. It is also worth noting that Greek stock exchange trading interest is skewed towards the banking sector. More specifically banking stocks ADV in 2018 accounted for 38% of ATHEX total volume compared to an average of 50% over the past five years. Yet in respect of MCap, the banking sector accounted for just 12% of the total market in 2018 compared to a 10-year average of 30%.
Exhibit 117. Foreign investor net flows in ATHEX(EUR Exhibit 116. ATHEX average traded volume & value m)
2332
192.9
1357 127.1 913 95.2 96.4 86.6 85.7 606 72.7 60.5 58.8 400 51.9 56.3 286 49.5 43.6 37.3
-84 2012 2013 2014 2015 2016 2017 2018 2012 2013 2014 2015 2016 2017 2018 Average traded volume (m. shares) Average traded value (EUR m)
Exhibit 118. ATHEX ADV (EUR m)
692.1
481.3
402.5 549.8 341.7 316.5 273.9 210.2 205.1 164.7 340.1 169.5 193.2 161.1 141.4 141.2 139.4 127.1 100.3 82.5 82.5 86.6 85.7 137.2 51.9 60.5 58.8 56.3 98.2 134.2 207.4 54.8 58.6 115.1 97.1 155.4 142.3 87 148.5 122.6 40.9 59.5 36.5 66.5 62.4 73 84.6 26.3 68.5 25.3 28.9 34.3 35.3 13.3 26.3 44.1 41.6 25.6 27.1 49.2 35.2 29.9 22.0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 ADTV Banks ADTV Ex-Banks
Exhibit 119. ATHEX MCap (EUR bn)
197.5 195.5
157.9
123 117.7 114.2 148 96.9 92.1 84.5 93.6 83.7 67 68.3 66.6 65.7 77.2 81.1 54.1 53 54.2 46.8 45.2 46.2 70.6 60.4 49.9 33.9 61 26.9 45.7 46 38.6 50.2 36 31.4 33 35.3 44.9 40.6 21.3 49.5 36.6 26.3 15.5 23.5 31.7 45.8 64.3 81.3 22.3 33.8 18.1 22.24.7 3.930 28 21.6 13.8 9.9 9.3 5.6
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 Mkt Cap Banks Mkt Cap Ex-Banks
Source: ATHEX, AXIA Research
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The bottom up approach on non-financials points to a 20% upside for 2019, but is losing momentum in 2020.
Large Greek corporates are expected to continue improving their profitability, building upon the normalization of domestic macro and supported by growth and operational streamlining initiatives implemented over the previous years. These positive prospects are expected to further enhance healthy balance sheets through higher profitability levels and cash generation. For smaller corporates, based on the improving macro backdrop, coupled with pro-growth business plans and some additional liquidity in the system, 2019 could prove to be an inflection year. Two other points that will assist the business environment are i) the pressure by corporates to deal with NPEs, which could lead to pulling the plug to business with limited turnaround potential, thus giving extra boost to corporates with stronger balance sheets and ii) the gradual reduction of the corporate tax rate (1% each year over the next 4 years, with the tax rate dropping from 29% to 28% starting in 2019). On the other hand, the prospect of employee-cost inflation and increased energy costs could present a concern, depending on the sector/company.
Amid this environment in 2019 EPS growth of the major FTSE-25 participants is expected to accelerate again to ~20% y-o-y compared to an estimated growth of 7.5% in 2018 and 30% in 2017. This is driven primarily by improved profitability of companies levered to consumer spending, while also specific cases that are expected to benefit from initiatives taken in the previous period. The expected EPS growth for 2019 is in sync with the implied upside based on target prices for the names under our sample. Valuations metrics are also supportive of our thesis. Our sample is seen trading on 1 year forward P/E of 13.4x compared to a 5-year average of 14.5x and 2018E of 13.5x. In respect of EV/EBITDA 1-year forward multiple is estimated at 6.9x compared to the 5-year average of 7.6x and 2018E of 7.3x. Looking on shareholders remuneration, following a period of increased profitability, improved balance sheet dynamics and improved macro visibility, Greek corporates have ramped up their distributions in 2018, with market yielding 4.1%, while high payout is expected to be maintained for 2019. Looking further ahead though, EPS momentum is seen losing steam at this point (+9.9% EPS growth for 2020E) reflecting, on our view, the low expectations for meaningful underlying economic growth. It would take an investment-focused government policy to maintain the profitability momentum in the market. In this context any decision taken for faster reduction of the corporate taxation/employee contributions/dividend taxation, would have an immediate positive effect in market profitability, benefitting both retail and the industry. Moreover investment acceleration would enhance the profitability of construction sector.
Exhibit 120. EPS growth vs. MCap growth of selected large cap names (ex-banks)
32.0% 29.7% 30.4%
21.5% 22%
9.9% 9.3% 9.9% 7.8% 6.3%
-11.3% FY2015 FY2016 FY2017 FY2018 FY2019* FY2020*
EPS % change y-o-y MCap % change y-o-y
*2019 EPS is consensus median and 2019E MCap is estimated by median of consensus TP. Source: AXIA Research, Capital IQ
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AXIA Research
Exhibit 121a. EV/EBITDA (x) Exhibit 121b. P/E (x) Exhibit 121c. Dividend yield
17.1 8.2 7.5 4.3% 7.3 14.5 4.1% 4.1% 6.9 13.5 13.4 6.3 12.0
2.7% 2.4%
5Y LTM CY2018 CY2019 CY2020 5Y LTM CY2018 CY2019 CY2020 average average FY2016 FY2017 CY2018 CY2019 CY2020
Source: Capital IQ, AXIA Research
The upside potential of the financial stocks is more than 100% but confidence is the key word
With the size of the NPEs the key overhang concern and the consensus for lower ROEs over the medium term vs. initially expected, bank stocks started 2019 on the left foot, continuing the weak performance of H2:18. Since the end of January the momentum has changed partially we believe because the sector seems to be trying to find ways to accelerate its efforts to reduce their stock of NPEs. Still confidence remains in short supply. We view that the elections will be the main short-term catalyst for the sector, while another strong boost should come from individual efforts by the banks to deal with the specific issues and to provide a convincing path forward. With the sector trading at a 2019 P/TBV between 0.07 and 0.45, the upside potential can be significant as the visibility improves.
Elections with the prospect of accelerating economic growth and dealing with the pressing sector issues in a more direct manner is the main catalyst for banks over the short-term The APS plan pushed forward by HFSF/Greek government is under consideration by the SSM and this can provide banks with a significant tool to deal with a portion of the NPEs at hand. An approval of this plan, most likely by the end of Q1:19, will be a catalyst for the sector if the implementation cost on the banks’ P&L comes at reasonable levels. Similarly, albeit more ambitus, is the plan by BoG that on top of the NPE reduction, tries to tackle the DTC issue. Still, we understand that the consideration of the BoG plan is in early stages, thus should not have any imminent impact on the sentiment. The deal of Eurobank-Grivalia has changed the dynamics in the sector. Assuming smooth execution of the plan, the bank will be able to reduce their NPE stock below 10% by 2021 and generate double digit ROE, starting that year. So the focus is on timely approvals and execution of the plan while the market better understands its merits. Alpha Bank and NBG with new CEOs at the helm have the ability to accelerate their NPE reduction and the presentation of such plans (expected at the end of Q1:18) should reflect positively on the share prices if the impact on capital is contained. Piraeus Bank remains in a weak spot, despite the efforts to deal with its issues. The pace of NPE reduction as well as, efforts to raise a EUR500m Tier II raises concerns and this weights on the bank’s valuation. If the efforts bear fruit this will be a strong signal that will be echoed throughout the sector. RoTE expectations for the sector for 2019 and over the medium term are low, but as the Eurobank-Grivalia case portray this can change (at least for Alpha Bank and NBG) if the NPE issue is addressed at a more constructive way. 2019 P/TBV for Alpha Bank and NBG is estimated at 0.22 and 0.23 respectively, while if the Eurobank’s numbers are adjusted for the Grivalia deal, the bank trades at a 2019 P/TBV of 0.45. 2019 P/TBV of peers like BCP (Portugal emerged from its adjustment programme in 2014) is estimated close to 9%, with an NPE ratio at 12.3% as of 3Q18 (estimated to drop below 10% in 2019). The lack of confidence in sector has led investors on the sidelines with banks’ share prices testing lows on thin volume. Short positions also remain open. On a technical aspect, once confidence returns, short covering could further support prices.
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The election trades
Investors remain in the sidelines partially because they are on risk-off mode and partially because of Greek specific reasons. Regarding the latter, visibility is the key, since they remain unimpressed about the growth of the economy, while in parallel they need to see the financial sector dealing faster with its issues. Elections should act as a trigger to revisit the Greek case, with expectations building up for policies that will enhance growth. The market has yet to factor in the prospect of the elections, chiefly because of the uncertainty of the timing that they will take place (if take place in October, this is seen as a long period of time to play the elections card now). We view that the reaction of the market on elections will come in 2 plus 1 stages:
We would expect a rally in the market upon the announcement of the elections. Bank stocks and large liquid names are expected to lead this rally. The elections results (including the specifics: whether ND will be able to secure at least 151 seats in the Parliament and the scenarios regarding the upcoming Presidential elections) and the first 100-day plan of the new government should determine the next leg of reaction in the market. Under a positive scenario the market will react to statements regarding reductions of the i) effective tax rate of businesses ii) tax rate on dividend and iii) the corporate contributions to Social Security. If so, the rally will continue, spilling over to smaller caps. Overall we would expect the rerating of the entire market to continue. Under a negative scenario we could see a quick pull back, with the market remaining ready to react on the developments. In parallel to the first two stages the market should start pricing in the prospect οf the new government moving fast to deal with a number of pressing issues, including privatizations, acceleration of large construction projects and dealing with the energy sector. These prospects should bring to investor focus specific listed companies that will be impacted by upcoming decisions, while on top of that expectations for corporate actions, should maintain the momentum in the market.
The first leg We would expect the initial reaction following the announcement of the elections to be for investors to hold banks and large liquid names. Regarding banks, we note that Eurobank is already working on a comprehensive NPE plan, while it remains to be seen how Alpha Bank and NBG will decide to proceed on top of their current NPE plans. Piraeus Bank will remain a wild card but with a potentially improved economic backdrop. Regarding corporates, large liquid names with strong fundamentals and/or catalysts ahead should also experience a first-leg rally. In this category we view the likes of: OTE OPAP Mytilineos Jumbo Motor Oil
Second leg Under the positive scenario we would expect smaller or less liquid stocks to rerate. The focus will be on those companies that offer direct exposure to the economy. Terna Energy, Fourlis, Sarantis, EXAE are among the shares that should benefit, while gradually attention to be placed on smaller caps as well. A unique case is that of Lamda Development. The company to benefit from the privatization of Hellenikon. Few more boxes need to ticked to complete the privatization (Lamda Development to acquire the shares of Hellenikon SA), with the tender for a casino license, a key prerequisite already launched.
Third leg / “the Mitsotakis trade” This part will be related to the new government’s (assuming new Democracy prevails as polls suggest) resolve to push forward a number of issues including privatizations, acceleration of the construction of large public projects as well as the reform of corporates in which the public holds majority of stakes. We distinguish this trade into two categories: easy wins and difficult cases with no visibility at this point in time.
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As easy wins we consider Hellenic Petroleum - Driven by the completion of the sale of the State’s/Latsis-family stake Gek Terna – Driven by expectations for acceleration of infrastructure projects Ellaktor - Driven by expectations for acceleration of infrastructure projects
Regarding the more difficult cases we point to: PPC – Driven by expectations for the implementation of a comprehensive business plan that will allow the State to divest part of its 51% stake (17% is already under privatization agency) Athens Water - Driven by expectations for the implementation of a comprehensive business plan that will allow the State to divest 11.3% stake Thessaloniki Water - Driven by expectations for the implementation of a comprehensive business plan that will allow the State to divest 24% stake ADMIE Holdings - Decisions regarding the Attica-Crete interconnection project. Change in company structure
We understand that the investors were trying to project the sharp positive reaction of the Argentinian stock market to Greece by drawing parallels to a similar political change (in both cases a pro-reform, pro-market government replaces a populist one). This has also been the case in Brazil in 2018, also leading to a sharp rebound in the market.
Still, the global risk-off mode, the size of the Greek market as well as the fact that currently non-financial stocks are currently trading at par with their previous highs in 2014 (highs reached before the current administration took office) lead us to assume that the early rally in the market might not be as big as originally thought (especially compared to the rally seen in Argentina before and after the Macri win).
Exhibit 122: Brazil IBOVESPA Index 2018-td Exhibit 123: Argentina Merval index 2014-td
100,000 Elections 40,000 95,000 35,000 Elections 90,000 30,000
85,000 25,000
80,000 20,000
75,000 15,000
70,000 10,000
65,000 5,000
60,000 0
20/10/2016 20/02/2017 20/12/2017 20/02/2014 20/04/2014 20/06/2014 20/08/2014 20/10/2014 20/12/2014 20/02/2015 20/04/2015 20/06/2015 20/08/2015 20/10/2015 20/12/2015 20/02/2016 20/04/2016 20/06/2016 20/08/2016 20/12/2016 20/04/2017 20/06/2017 20/08/2017 20/10/2017 20/02/2018 20/04/2018 20/06/2018 20/08/2018 20/10/2018 20/12/2018
11/06/2018 17/01/2019 22/01/2018 11/02/2018 03/03/2018 23/03/2018 12/04/2018 02/05/2018 22/05/2018 01/07/2018 21/07/2018 10/08/2018 30/08/2018 19/09/2018 09/10/2018 29/10/2018 18/11/2018 08/12/2018 28/12/2018 06/02/2019
Source: Capital IQ, AXIA Research
On the other hand, global liquidity will be key to how the Greek market will perform. If global sentiment is positive, it should be easier for investors to become more involved to the Greek trade and in a market that lacks liquidity the price movement, especially for specific stocks, could be significant. Adding to the above, is the fact that profitability of non-financial names is significantly higher vs. 2014 (market high in March 2014).
Exhibit 124. AXIA non-financials universe aggregate metrics vs. previous peak EUR m Mar-14 Dec-18 2018 vs 2014 % change ATHEX Index 1,369 613 -55.2% 10Y GGB yield 6.9% 4.8% -210bps EBITDA 6,012.1 6,972.0 16.0% Net Income 1,162.0 2,128.7 83.2% Mcap 36,043.2 35,826.4 -0.6% P/E (x) 31.0 16.8 -45.7% EV/EBITDA (x) 9.7 7.4 -23.6% Net Debt/EBITDA (x) 2.9 2.2 -31.8% Source: AXIA Research estimates, Capital IQ
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AXIA Research
Top picks
OPAP (TP EUR 11.20/sh, 24.4% upside) – OPAP is the third largest stock in the ATHEX with 77% free float. The company is expected to continue to post strong operating profitability growth and net income growth driven by the expansion of its VLT game, and at a second stage by the company’s efforts towards online gaming. 2017-21F EBITDA CAGR is forecasted at 10.5%, while EPS CAGR over the same period at 17.2%. The company is expected to continue to distribute its entire FCF as dividend. The company is trading at a 2019F P/E and EV/EBITDA of 14.9x and 8.9x respectively, while dividend yield for the year is estimated at 8.4%
Exhibit 125. OPAP share 12M performance Exhibit 126. OPAP 12M FRW P/E (x)
11.0 25.0
10.5 23.0 21.0 10.0 19.0 9.5 17.0 9.0 15.0
8.5 13.0 11.0 8.0 9.0 7.5 7.0
7.0 5.0
13/02/2016 13/05/2016 13/11/2018 13/02/2014 13/05/2014 13/08/2014 13/11/2014 13/02/2015 13/05/2015 13/08/2015 13/11/2015 13/08/2016 13/11/2016 13/02/2017 13/05/2017 13/08/2017 13/11/2017 13/02/2018 13/05/2018 13/08/2018
19/10/2018 21/02/2018 13/03/2018 02/04/2018 22/04/2018 12/05/2018 01/06/2018 21/06/2018 11/07/2018 31/07/2018 20/08/2018 09/09/2018 29/09/2018 08/11/2018 28/11/2018 18/12/2018 07/01/2019 27/01/2019 16/02/2019 Forward P/E 5Y average
Source: Capital IQ, AXIA Research
Jumbo (TP EUR 18.50/sh, 25.0% upside) – Jumbo is Greece’s largest retailer (toy, home and seasonal products), generating 65% of its revenues domestically, while the rest are generated from Cyprus, Bulgaria and Romania. Top line is expected to significantly benefit from the growth of the Greek economy (at the same time competition is weak, while Jumbo is positioned as a low priced proposition) and also from the efforts to continue to expand organically, especially in the Romanian market (double the size of population vs. Greece). Margins have remained resilient over the year and are expected to continue to be assisted by management’s ability to negotiate with suppliers and also to maintain the expense costs lower. 2017/18-20/21F EBITDA CAGR is forecasted at 6.4%, while EPS CAGR over the same period also at 6.1%. The company is expected to continue to distribute about 1/3 of its net profits as dividend. The company is trading at a 2019/19F P/E and EV/EBITDA of 12.6x and 7.1x respectively.
Exhibit 127. Jumbo share 12M performance Exhibit 128. Jumbo 12M FRW P/E (x)
17 25.00
16 20.00 15
14 15.00
13 10.00 12 5.00 11
10 0.00
9
13/11/2015 13/02/2014 13/05/2014 13/08/2014 13/11/2014 13/02/2015 13/05/2015 13/08/2015 13/02/2016 13/05/2016 13/08/2016 13/11/2016 13/02/2017 13/05/2017 13/08/2017 13/11/2017 13/02/2018 13/05/2018 13/08/2018 13/11/2018
05/03/2018 25/03/2018 14/04/2018 04/05/2018 24/05/2018 13/06/2018 03/07/2018 23/07/2018 12/08/2018 01/09/2018 21/09/2018 11/10/2018 31/10/2018 20/11/2018 10/12/2018 30/12/2018 19/01/2019 08/02/2019 13/02/2018 Forward P/E 5Y average
Source: Capital IQ, AXIA Research
Mytilineos (TP EUR 12.60/sh, 38.9% upside) – Mytilineos is a diversified industrial company with interest in the aluminium sector (amongst the biggest aluminium producers in Europe), EPC engineering (niche on energy related infrastructure in MENA) and energy (largest IPP in Greece). Mytilineos is expected to grow its EBITDA in 2019 by about 28% y-o-y driven by another solid performance of metallurgy division (amongst the lower cost producers globally) but also benefiting from the positioning in the energy market, while signed EPC projects abroad reach mature stage. The company trades at 2019-20F EV/EBITDA of 4.5x and 4.2x respectively compared to its 10-year average of 6.0x, and an EBITDA-weighted average of peers (aluminium-EPC-utilities) of 6.4x-5.4x for 2019-20.
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Exhibit 129. Mytilineos share 12M performance Exhibit 130. Mytilineos 12M FRW EV/EBITDA (x)
11.00 8.00 10.50 7.50 10.00 7.00 9.50 6.50 9.00 6.00 5.50 8.50 5.00 8.00 4.50 7.50 4.00 7.00 3.50 6.50 3.00
6.00
13/02/2014 13/05/2014 13/08/2014 13/11/2014 13/02/2015 13/05/2015 13/08/2015 13/11/2015 13/02/2016 13/05/2016 13/08/2016 13/11/2016 13/02/2017 13/05/2017 13/08/2017 13/11/2017 13/02/2018 13/05/2018 13/08/2018 13/11/2018
13/02/2018 25/03/2018 14/04/2018 04/05/2018 24/05/2018 13/06/2018 03/07/2018 23/07/2018 12/08/2018 01/09/2018 21/09/2018 11/10/2018 31/10/2018 20/11/2018 10/12/2018 30/12/2018 19/01/2019 08/02/2019 05/03/2018 Forward EV/EBITDA 5Y average
Source: Capital IQ, AXIA Research
Terna Energy (TP EUR 8.50/sh, 28.8% upside) – The company is one of the last independent pure wind energy plays in the EU market with an installed capacity of 986MW (9M18) and another ~300MW are currently under construction and a medium term target to reach 2.0GW by 2025. Terna Energy is the leader in the EUR 2.0bn domestic RES market that is expected to grow by 10% CAGR over the next decade, while also having 300MW installed in the US and 130MW in the Balkans. Stable cash flow derived from a mix of regulated Feed-in-Tariffs (FiTs) and Off-Take Agreements (PPAs) from a portfolio with 18.6 years of remaining contracted lifetime. Increasing cash distribution going forward due to critical size of portfolio with EUR 30m paid in January 2019 (+15% y-o-y). The company trades at 8.0x-7.3x on 2019- 20 EV/EBITDA and a dividend yield of 4.0% compared to EU sector trading at 8.7x yielding 3.0% and US Yield Cos trading at 11.1x yielding 6.4%. Note that relevant private market transaction point to 9.5x EV/EBITDA.
Exhibit 131. Terna Energy share 12M performance Exhibit 132. Terna Energy 12M FRW EV/EBITDA (x)
7.00 11.00 10.00 6.50 9.00 6.00 8.00 5.50 7.00
5.00 6.00
4.50 5.00 4.00 4.00 3.00
3.50
13/08/2016 13/02/2014 13/05/2014 13/08/2014 13/11/2014 13/02/2015 13/05/2015 13/08/2015 13/11/2015 13/02/2016 13/05/2016 13/11/2016 13/02/2017 13/05/2017 13/08/2017 13/11/2017 13/02/2018 13/05/2018 13/08/2018 13/11/2018
18/12/2018 07/01/2019 13/03/2018 02/04/2018 22/04/2018 12/05/2018 01/06/2018 21/06/2018 11/07/2018 31/07/2018 20/08/2018 09/09/2018 29/09/2018 19/10/2018 08/11/2018 28/11/2018 27/01/2019 16/02/2019 21/02/2018 Forward EV/EBITDA 5Y average
Source: Capital IQ, AXIA Research
Lamda Development (TP EUR 7.90/sh, 21.7% upside) – Lamda Development is the leading development and retail real estate company in Greece. In respect of the large-scale shopping malls in Greece the company controls about half of the total GLA of this segment, with an occupancy rate at its centres of above 98%. Characteristic of this market is the limited number of shopping centres in Greece, thus prospects remain positive as the economy expands. Key trigger for the stock is the completion of the agreement to acquire the shares of Hellinikon SA and the company to start developing one of the largest urban, mixed-use development projects in Europe (an area almost double the size of Central Park). The company currently trades at a EUR 6.49/sh, while our 2019E NAVPS stands at EUR 6.20/sh. The share price has yet to fully incorporate the potential for solid profitability growth and the expected yield compression of the existing shopping centres (currently at 7.9%) but also the Hellenikon deal prospects that on our estimates adds a bare minimum (the 3.0% management fee the company will receive on the cEUR7.0bn investment over a 15-year period) of another EUR 1.70/sh..
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AXIA Research
Exhibit 133. Lamda share 12M performance Exhibit 134. Lamda P/NAV (x)
8.00 1.3 1.4 7.50 1.3 1.3 1.1 1.1 7.00 0.9 0.9 6.50 0.8 0.7 0.6 0.6 6.00 0.5 0.4 0.4 5.50 0.3
5.00
04/05/2018 11/10/2018 13/02/2018 05/03/2018 25/03/2018 14/04/2018 24/05/2018 13/06/2018 03/07/2018 23/07/2018 12/08/2018 01/09/2018 21/09/2018 31/10/2018 20/11/2018 10/12/2018 30/12/2018 19/01/2019 08/02/2019
Source: Capital IQ, AXIA Research
Exhibit 135. Top picks trading data
Company Close Price MCap EV Free Float Total shares 1M ADV 12M ADV 52W high 52W low YTD 2018 000's 000's EUR/sh EUR m EUR m % m shares EUR/sh EUR/sh % change % change shares shares OPAP 9.00 2,860 3,358 50% 318 438 421 10.49 7.53 17.8% -27.7% Jumbo 14.80 2,014 1,727 67% 136 95 140 16.26 10.56 17.3% -14.6% Mytilineos 9.07 1,296 1,866 73% 143 172 234 10.76 6.59 24.4% -20.2% Terna Energy 6.60 741 1,271 76% 112 131 131 6.74 4.83 16.1% 27.0% Lamda Development 6.49 505 921 35% 78 50 58 7.5 5.56 13.9% -17.4% Source: Capital IQ, AXIA Research
Exhibit 136. Top picks valuation data Company Close Price Rating Target price Upside P/E EV/EBITDA Div. Yield FCF yield EUR/sh EUR/sh (%) 2019 2020 2019 2020 2019 2020 2019 2020 OPAP 9.00 Buy 11.20 24.4% 14.9 x 13.5 x 8.9 x 8.4 x 8.4% 9.5% 5.5% 9.3% Jumbo 14.80 Buy 18.50 25.0% 12.6 x 11.8 x 7.1 x 6.4 x 2.8% 3.0% 5.0% 6.2% Mytilineos 9.07 Buy 12.60 38.9% 7.0 x 7.2 x 4.5 x 4.2 x 3.9% 4.2% 3.8% 12.2% Terna Energy 6.60 Buy 8.50 28.8% 16.3 x 11.6 x 8.0 x 7.3 x 4.1% 6.0% -11.4% -7.4% P/NAV (x) FFO yield Lamda Development 6.49 Buy 7.90 21.7% 25.6 x 23.3 x 16.0 x 14.8 x 1.1 x 1.0 x 4.3% 4.7% Source: AXIA Research estimates
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AXIA Research
Outlook per sector
Greek Banks: stars getting aligned
The Greek banking sector has taken significant steps forward since its last recap in late 2015, assisted by a more accommodating regulatory framework (allowing banks to better address the NPE issue) and management initiatives, as agreed with the SSM, aiming to support capital levels and avoid capital dilutive actions. Still, despite the ongoing efforts, the level of NPEs remains high. At the same time the system’s net interest income level is under pressure by the on-going deleveraging and muted loan growth, which is not enough to offset the repayments and deleveraging. As a response, banks put effort in improving efficiency by reducing its cost base and investing in digital banking, in order to reduce the system’s cost/income ratio. But the pace of growth of the RoTEs of the bank is mainly related to the pace of decline of the cost of risk as banks address their mom performing exposures. The announcement of the Eurobank-Grivalia transaction is transformational for Eurobank as well as for the Greek market as it gives the bank a clear path when dealing with the stock of NPEs, sheds light on its capital levels going forward and improves the group’s profitability profile. At the same time, we believe it also increases the pressure on the other three systemic banks to act faster in disposing their NPEs vs. the current targets agreed with the SSM. The government-backed APS scheme (which is under negotiations with the EU Commission) and also the Bank of Greece’s NPE reduction plan (which apparently now starts to be considered by the Ministry of Finance) are key tools that should help banks accelerate the pace of NPE disposals, but how fast this will take place, will be a matter of management decisions and each bank’s capital position. In our view, both tools are welcome and we would expect the banks to make use of them, according to the proposed terms and conditions. We don’t believe that there is a “one size fits all” solution and that banks will find a different balance amongst the available solutions according to the characteristics of their specific books and strategy.
Exhibit 137. NPE ratio (3Q18) Exhibit 138. CET1 ratio (3Q18)
45% 35% 39.2% 40% 30% 35% 25% 30% 25% 20% 15.7% 14.7% 20% 15% 15% 10% 10% 3.0% 5% 5%
0% 0%
SI IS FI
IT IE
SI IS FI
LT
IE IT
PL
ES SE
EE
SK
LV
CZ
PT FR
BE
LU
NL AT
LT
DE
PL
SE ES
EU
DK
EE
SK
LV
HR
GR BG GB
FR CZ PT
CY
RO
BE
LU
NL AT
HU
DE
NO EU
DK
MT HR
BG GR GB
RO
HU
NO MT CY* Source: EBA Risk Dashboard and AXIA Research Note: Individual country data includes subsidiaries, which are excluded from EU aggregate. EBA Risk Dashboard summarises the main risks and vulnerabilities in the banking sector in the European Union (EU) by looking at the evolution of Risk Indicators (RI) among a sample of banks across the EU. *CY NPE ratio is as of 2Q18 as data is not disclosed by EBA because it was reported for less than three institutions.
Non-performing Exposures: is the pressure to accelerate the pace on? Since 2016, the Greek banks are following strict targets in order to reduce their NPEs to more “natural” levels of 20% and below in 2021. The reduction is expected to count on sales (>50% of the reduction), write-offs, collections, liquidations and the curing of exposures. Banks have so far delivered on NPE targets as set by the SSM, mainly with the help of NPE portfolio sales and negative NPE formation, however this remains a key challenge for the system going forward.
Below we show the quarterly reduction of NPLs and NPEs in the system up to 2Q18 for which Bank of Greece released the last report on operational targets on NPEs.
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Exhibit 139. Non-performing exposures GrossReported Fixed EUR Capital bn Formation2Q16 (y-o-y)3Q16 4Q16 1Q17 2Q17 3Q17 4Q17 1Q18 2Q18 NPLs 78.3 77.7 75.9 75.2 72.8 70.2 65.1 63.9 61.0 Ratio 37.0% 37.0% 36.2% 36.7% 36.1% 35.1% 33.5% 33.6% 32.8%
NPEs 106.9 106.0 104.8 103.9 101.8 99.1 94.4 92.4 88.6 Ratio 50.5% 51.0% 50.0% 50.6% 50.6% 50.1% 48.6% 48.5% 47.6%
NPLs (ahead)/behind - (0.4) (0.4) 0.5 0.4 (0.1) (0.8) - 0.3 % (ahead)/behind 0.0% -0.5% -0.5% 0.7% 0.6% -0.1% -1.2% 0.0% 0.5%
NPEs (ahead)/behind - (0.9) (1.0) (1.3) (1.6) (0.8) (1.5) (1.2) (1.6) % (ahead)/behind 0.0% -0.8% -0.9% -1.2% -1.5% -0.8% -1.6% -1.3% -1.8% Source: Bank of Greece and AXIA Research. Note: Green = ahead of target, Red = behind target
Based on the NPE plans presented, banks seem to be able to meet their objectives in a capital neutral manner, if given the time. We believe that this might not be the case for all of them, if they decide to, individually, accelerate the pace of reduction.
Exhibit 140. Non-performing exposures Gross Fixed Capital Formation (y-o-y) 120 60% 100 50% 80 40% 60 30% 40 20% 20 10%
0 0%
2013 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2014 2015 2016 2017
2021e 2018e 2019e 2020e
Consumer Residential Business NPE ratio (%)
Source: Bank of Greece, AXIA Research
Eurobank’s transaction with Grivalia will allow the group to reduce its NPE ratio to below 10% in 2021, which was not on the cards for any Greek bank when looking at the recently announced plans agreed with SSM (which were aiming for NPE ratios between 15% and 25% in 2021). In our view, once the level of NPE starts declining more aggressively, we should also start seeing a significant improvement in the banks’ RoTEs (as the cost of risk reduces) from the low single digits into mid-single digits by 2021 (on average) with Eurobank being at the high-end with an RoTE of 10.4% in 2021.
Old tools and new tools to deal with the NPE portfolio The pace of e-auctions (introduced in late 2017) is accelerating, while the interest in the secondary NPE market remains strong. Still the new NPE reduction schemes (the APS and BoG plan) are expected to lead the faster reduction of problematic loans.
Electronic auctions Electronic auctions began in Greece in November 2017 and are gradually increasing in volume, on track with targets set by the banks. E-auctions i) support to the reduction of the stock of NPEs, i) acts as a price-discovery tool for real estate while iii) sends an important message to strategic defaulters (i.e. which are linked to 25-30% of mortgage loans in arrears, according to our estimate) to restructure their loans in order to prevent their real estate assets being foreclosed by the banks.
For 2019, the number of auctions is expected to reach 25,000-30,000, and increase further to 35,000 and 40,000 in 2020 and 2021, respectively.
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AXIA Research
Exhibit 141. E-auctions
3,672 3,176 2,765 2,565 2,651 2,702 2,292 2,062
1,147 1,297
327 8 30 70 3 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 Aug-18 Sep-18 Oct-18 Nov-18 Dec-18 Jan-19 Total 8 30 70 327 1,147 1,297 2,565 2,062 2,651 3 2,702 3,176 2,765 3,672 2,292 Listed Canceled - - 11 20 10 10 24 39 52 - 8 45 51 44 47 Suspended - 10 11 78 201 258 462 423 652 1 552 793 610 887 646 Conducted 8 20 48 229 936 1,029 2,079 1,600 1,947 2 2,142 2,338 2,104 2,741 1,599
Source: eauction.gr, AXIA Research
The new NPE schemes: APS and BoG plan Asset Protection Scheme The government is moving forward to introduce an Asset Protection Scheme, which resembles to that of GACS in Italy. The aim is for banks to shrink their NPEs faster. According to reports, the plan is based to the transfer of cEUR15bn of NPEs to an asset protection scheme, while the State would need to guarantee a portion, gradually, as the NPEs are transferred. The rate that the banks will pay for the State guarantee remains to be decided. A low rate could prompt the DG Comp to consider this as a form of state aid. In addition, it is also unclear how this scheme will be funded and how the official guarantee would work. We believe that this support would not necessarily change the targets set by the banks with the approval from the supervisor. We do highlight that, so far, there was nothing officially published on the potential APS, which leaves room for speculation.
Exhibit 142. How GACS in Italy was structured
Source: EY and AXIA Research
Bank of Greece: Proposal on NPEs The Bank of Greece’s proposal is more ambitious as the proposal provides for the transfer of a significant part of NPEs along with part of the deferred tax credits (DTCs), which are booked on banks’ balance sheets, to a special purpose vehicle (SPV), aiming to achieve a single-digit NPE ratio within three years.
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AXIA Research
Loans will be transferred at a net book value and the amount of the deferred tax asset transferred will match additional loss, so that the valuations of these loans will approach market prices. A new legislation will be introduced which will enable the transformation of DTC into an irrevocable claim of the SPV on the Greek state with a predetermined repayment schedule based on the maturity of the transaction. In order to finance the transfer, the SPV will proceed with a securitization issue comprising of three classes of notes: (i) senior; (ii) mezzanine; and (iii) subordinated junior/equity. The lower class of notes (subordinated junior/equity), will subscribed by banks (each by no more than 20%) and the state; Private investors are expected to absorb part of the upper class of securities (senior) and a large portion of the intermediate part (mezzanine). The scheme will be managed exclusively by private investors (servicing companies for loans and credits) and there will be an asset class separation for each transaction and management operation (business, mortgage, consumer loans etc.).
On the other hand, the Bank of Greece’s plan could be more demanding on capital. The estimated reduction in the capital adequacy ratio CET1, according to the indicative example (here), is three percentage points on average. However, taking into account existing buffers above the minimum Pillar II requirements, potential capital shortfalls, if they materialize upon the completion of the transaction, would be significantly lower.
Sale of NPEs is in a positive momentum The secondary NPE market is accelerating with a number of transactions taking place within 2018 and planned for 2019. We note that the interest by investors and the banks, over the sale of NPEs, remain significant and this is could also be interpreted by the increased transaction prices of the recent deals.
Exhibit 143. NPE portfolio transactions
NPE Agreement Transaction Completion Project Type perimeter Buyer Additional info reached? price (expected) EUR bn 65% of consumer loans, 8% credit card debts and 27% percent of small corporate. Total of c.240k loans taken Venus Consumer / Unsecured 0.9 4.5% 1Q18 B2Holding out by c.156k debtors. RWA c.EUR100m. Total outstanding amount 3.7bn, principal amount 2bn.
Corporate loan portfolio covered with real estate assets Alpha Jupiter Secured / Commercial RE 0.8 4Q18 (estimated at 500 small businesses and 1,700 RE assets.)
A portfolio of non-performing unsecured consumer and Mercury Commercial unsecured 2.1 3.8% 4Q18 small business loans. Romania. Significant contribution in international assets Mars Corporate and retail 0.3 deleveraging. Positive financial impact and capital ratio accretive transaction for the Group.
Eclipse Consumer / Unsecured 0.6 3% 4Q17 Intrum
Consumer loans with gross book value of EUR1.1bn called “Zenith”. Specifically it includes more than 181,000 B2Holding consumer and credit card loans that are in arrears, on Eurobank Zenith Unsecured 2.0 6% 4Q18 and average, for more than 8 years. The interest parties are to Waterfall submit initial interest in early July and binding offers in early August, while the sale is expected to be concluded by October. Pillar Mortgage securitization 2.0 (1H19)
Consumer unsecured 0.1 16% Romania. Capital accretive (+18bps) and P&L positive. Unsecured CarVal/ consumer loans, credit cards, overdraft facilities and also NBG Earth Consumer / Unsecured 0.95 6% 2Q18 Intrum small, old vitages SME loans with no collateral. EUR 1.9bn face value, EUR 5.2bn incl. interest. Symbol Secured / commercial RE 1.0 1Q19 Granular portfolio of secured SBL and small SMEs. Unsecured retail 0.7 2Q19 Granular portfolio of credit cards, consumer loans & SBs.
Capital accretive (+23bps). €1.4bn gross book value / Amoeba Secured / commercial RE 2.0 30% 2Q18 Bain Capital Secured large SME and corporate loans / Sale agreed with Bain Capital Credit LP on 29 May 2018 for € 432m.
Capital accretive (+5bps). €0.4bn gross book value / Piraeus Arctos Consumer / Unsecured 2.2 5% 2Q18 APS Unsecured personal loans & credit cards / Sale agreed with APS Investments Capital s.r.o. on 29 June 2018 €0.4bn gross book value / Unsecured personal loans & Iris Unsecured 0.4 1H19 credit cards, small business loans, leasing exposures Nemo Secured 0.4 1H19 €0.4bn gross book value / Secured shipping loans Source: Greek banks data, AXIA Research AXIA Research Page 59
AXIA Research
New insolvency framework The Greek government (with the approval of the EU institutions) and the systemic banks have come to an agreement on the new Household Insolvency Law that will replace the current one (Katseli Law). Note that the Katseli law was due to expire on December 31, 2018, however, the Greek Government announced the extension of the law by two months (until end-February).
According to press, key proposed adjustments to the new primary-residency protection regulation are: i) mortgage NPEs up to December 31, 2018 ii) the maximum objective value of the property protected to reach EUR250k, iii) for a debtor to be eligible the mortgage balance to be less than EUR130k, iv) the law applies to debtors that are single with income up to EUR12.5k and to families with income up to EUR21k plus EUR5k per child, up to three children, and v) the debtor deposits to be less than 50% from the outstanding balance. There is the prospect of a haircut but only if the balance is more than 120% of the property value, while according to the agreement, the protection will be extended to primary residencies that act as collaterals to corporate loans. A specific pre-screening online platform will be created to petition the protection, and according to press, if debtors have petitioned already to courts under the current law, they will not have to file again to the new platform. Finally, if a debtor decides to seek protection without following the proposed settlement by the banks, he/she would need to pay 30% of the instalment until the court hears the case. Under the agreement, the State will subsidize the most vulnerable debtors providing up to 1/3 of the agreed installment, for a total cost to the State up to EUR200m. If the debtor following a settlement agreement with the banks, does not pay 3 instalments, then he/she forfeits the protection and the primary residency will be auctioned. The law will be active for one year from the date the pre-screening platform goes live, while under specific exemptions (unemployed, people with health issues) it will be active for longer. The agreement has been forwarded to EU institution for review. The final negotiations could last until the March 11 agreement. According to Kathimerini, about 170-180k debtors with a total amount of mortgages of cEUR10bn could take advantage of the new Household Solvency Law (to replace the Katseli Law) agreed between the Greek government and the systemic banks. This number represents c40% of primary residency mortgage-NPEs (total number of debtors estimated at c400k). Note that according to press by the end of 2018, 155k petitions under the Katseli Law are pending to the courts, while through the year c52.5k cases were judged by the courts. Irrespective any changes requested by the European authorities (towards an even more restrictive framework), the agreement is a positive development for the sector as i) puts restrictions that effectively discourage strategic defaulters ii) presents a way to review cases faster and therefore to quicker negotiate with the debtor iii) prompts debtors to proceed to a settlement. Note that NBG and Alpha Bank have the largest portfolios of mortgage NPEs.
Bank deposits are growing, with a virtual elimination of the ECB’s emergency line, while the deleveraging is continuing In terms of deposits, we expect a gradual increase in the deposit base of the Greek banking system, to the tune of c.5% per year, following years of deposit outflows given the financial crisis. Private sector deposits hit their peak in 2010, reaching more than EUR 235bn vs. EUR 134bn in December 2018. The support by ECB’s Emergency Liquidity Assistance (ELA) was crucial for the system at the peak of the crisis reaching EUR86.8bn in mid-2015. Now as conditions have normalized, the ELA ceiling managed to drop below EUR 2bn in January 2019 from EUR 4bn set the previous month. The development is in line with expectations and supports the deposit growth case. Note that NBG and Piraeus are completely out of the emergency line, with the other two being close to elimination.
As far as credit is concerned, growth is a function of demand and the aim of the banks to extend credit in specific sectors/industries (and very limited disbursement of consumer loans). Additionally, ongoing repayments, and the disposal of non-performing loans, tend to offset the banks’ new disbursements. Going forward, we expect banks to disburse cEUR 2.0bn-4.0bn of new loans per year, but still to face pressure from repayments and deleveraging, on top of lower lending rates. Over the medium-term, we believe that an increase in European rates will benefit the Greek banks as it will the cleanup of the books given a higher percentage of performing loans.
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AXIA Research
Exhibit 144. Bank Deposits (EUR bn) Exhibit 145. Bank Credit (EUR bn)
200 10% 250 4%
2% 150 0% 200 0% 150 100 -10% -2% 100 -4% 50 -20% 50 -6%
0 -30% 0 -8% 2014 2015 2016 2017 2018e 2019e 2020e 2021e 2014 2015 2016 2017 2018e 2019e 2020e 2021e Households Households NFCs NFCs System Deposits (HHs & NFCs) % y-o-y change System Credit (HHs & NFCs) % y-o-y change Source: ELSTAT, AXIA Research
Profitability to remain as a concern The deleveraging, and sale of NPE portfolios reduce the banks’ stock of outstanding loans with negative impact on the net interest income. At the same time, credit demand is limited while there are concerns in regards to the size of new loans granted as they might not be large enough to mitigate the lost net interest income.
In respect of the operating expenses, the sector continues to reduce expenses, although the pace of reduction is not sufficient to significantly impact the banks’ cost to income ratio which is still at high levels, putting pressure on profit margins. Going forward, we expect the benefits of the reduction in the branch network and staff, via the exit schemes, on top of improvements in the efficiency of the banks to reflect on the financial statements of the banks in the coming periods, albeit at a slower pace. Any significant improvement is the system’s cost/income ratio will be required to come from topline growth.
To this extent, we forecast pre-provision income to remain at similar levels, with progressive improvements over the medium-term for all Greek systemic banks, mainly due to revenues remaining somewhat flat (net interest income under pressure and growing fees and commission incomes), and the improvement on the expenses side.
Cost of Risk will still be linked to the banks’ efforts on reducing their high stock of NPEs but is expected to start declining over the coming years, as the banks keep addressing their stock of NPEs. Over the medium-term, we still expect the banks to post loan impairments over gross loans around 100bps, which is above management guidance, but it is due to the fact that impairments are likely to stay at that level if the banks’ NPE ratios remain around the 20% mark.
As a result, RoTE of Greek banks is projected to improve from now on, reaching an average of 5.5% in 2021, with Eurobank on the high end with a RoTE of 10.4% and Piraeus on the low with 2.5%.
Greek banks have their capital base above the minimum requirements as of 3Q18. At the same time, we do not expect the banks’ SREP for 2019 to be materially different from the 2018 requirement. We take into account the on- going phasing of regulatory buffers (such as the capital conservation buffer (CCB) and other systemically important institutions (O-SII)). Additionally, Piraeus has been communicating to the market that it expects the SSM to reduce its Pillar 2 Requirement from 3.75% to 3.25%, taking the group’s Overall Capital Requirements to 14% (vs. 13.75% for the rest of the systemic banks, according to our estimates).
Greek Banks’ market performance The market capitalization of the Greek systemic banks in 2018 dropped from EUR8.9bn to EUR4.3bn or by 52%. Interestingly, by July 1st, 2018 the drop was just c.3% but in H2:18 the decline accelerated with the banks dropping over the last 6 months by 51%.
We view that the contained decline during the first part of 2018 was related to positive developments both on the banking sector (positive performance in ECB’s stress tests, the acceleration of NPE disposals, e-auctions) but also on macroeconomic factors, as Greece during the first six months of the year proceeded to the implementation of reforms that allowed in June the Eurogroup to announce the successful completion of Greece’s economic adjustment program.
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The performance in the second half of the year was partially related to global market conditions (Italy, Turkey, Argentina) but to a great extend the drop was i) the result of idiosyncratic factors (banks communicated their intention to maintain a high cost of risk, leading to reduced expected RoE over the medium term, perceived slow growth on NPEs) and ii) uncertainties regarding the capital (especially in respect of Piraeus’ ability to raise EUR 500m in Tier 2 bonds and the implications for the bank and the system from not issuing it within 2018).
Exhibit 146. Valuation Multiples Mcap (€ Free P/TBV (x) RoE Price performance Price (€) mn) Float 2018e 2019e 2020e 2018e 2019e 2020e 1M 3M YTD Alpha Bank 1.12 1,723 89% 0.22 0.22 0.21 0.8% 2.1% 3.7% 22% 3% 3% Eurobank Ergasias 0.55 1,205 98% 0.25 0.45 0.41 3.5% 4.2% 9.6% 17% 26% 3% NBG 1.27 1,165 60% 0.24 0.23 0.22 1.3% 2.9% 2.2% 46% 33% 22% Piraeus Bank 0.79 345 64% 0.07 0.07 0.07 0.8% 0.3% 0.8% 32% -15% -3% Portugal 0.65 0.64 0.61 6.6% 8.8% 11.9% -5% -4% 1% Italy 0.67 0.65 0.62 6.2% 7.1% 7.5% 0% 1% 1% Cyprus 0.19 0.23 0.22 -0.3% 5.7% 4.6% -24% -42% -35% Spain 0.92 0.87 0.83 8.5% 8.9% 9.4% -5% -9% -1% EU Peers 0.81 0.85 0.82 6.9% 7.6% 8.1% n.a. n.a. n.a. EM Peers 0.98 1.00 0.94 8.5% 8.8% 8.0% n.a. n.a. n.a. Source: Capital IQ and AXIA Research. Note: BoC for Cyprus, Millennium BCP for Portugal and a sample of banks for the other countries.
What has created excitement is the announcement of the Eurobank-Grivalia deal in late November that allowed the bank to outperform its peers since then. The performance of the sector in the first month of 2019 did not materially changed with the banks recording a 13% decline in their capitalization over the first 4 weeks of the year. The trend sharply reversed in February with the sector during the first 3 weeks of the month managing to move higher vs. the levels seen at the end of December
We view that a number of reasons triggered this reaction including: i) the apparent agreement between the government and the banks on the new household insolvency law; ii) press reports indicating the decision of Alpha and NBG to consider accelerating their NPE reduction pace; iii) the Titlos announcement for NBG; iv) some improved confidence on Piraeus Bank management plans.
Moving forward, as noted earlier, we would expect the main catalyst for the sector to be the announcement of the general elections. Complementary to that we view that bank’s share prices to be supported by i) Greece’s effort to tap the markets and a potential subsequent reduction of yields ii) the approval by the EU Commission of the APS plan but also the efforts by the government to push forward BoG’s NPE plan iii) the implementation steps of the Eurobank- Grivalia deal iv) new NPE plans by the remaining banks (especially from Alpha Bank and Piraeus bank) and v) the prices achieved in the sale of the new NPE portfolios.
Exhibit 147. Greek bank stocks over the last 12M
140.0
120.0
100.0
80.0
60.0
40.0
20.0
0.0
ATHEX Composite Index (Rebased) ALPHA BANK A.E. EUROBANK ERGASIAS S.A. NATIONAL BANK OF GREECE S.A. PIRAEUS BANK S.A.
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AXIA Research
Energy: Everything is changing
Greece’s energy sector finds itself in a period that not only has to change, open up to competition and align with EU’s target model, but also handle at the same time the global trend of transition from fossil fuel to green energy. In this context EUR 32.7bn of energy related investments are scheduled for 2020-30 to facilitate the transition with EUR 17.3bn of those targeting to facilitate RES capacity expansion. In this context we recon two investment themes arising: i) the EUR 2.0bn RES market is seen more than doubling over the next decade and attracting interest from foreign capital, and ii) competitively positioned IPPs benefitting from the disposal of lignite fired capacity, flexibility and cost competitive of the CCGT units that are expected to ramp up. We believe Terna Energy and Mytilineos to be the best positioned names to offer leverage to these themes. PPC remains the elephant in the room that the new Greek government will eventually have to tackle.
Exhibit 148. Changing landscape of the Greek energy sector Recent developments in the Greek Energy market Required investments 2020-2030 (EUR bn) Formulation of a long-term national Energy plan for Greece RES for electricity generation 8.5 following consultation of Ministry of Energy and EU Commission Privatizations: i) Closing of DESFA (natural gas grid operator) 66% Electrical system (HV/SHV grids) 5.5 stake sold to consortium of Snam (60%), Enagás (20%) and Fluxys Distribution grids-digitalization 3.3 (20%): ii) ELPE (joint sale of 50.1% by State and Latsis family); iii) DEPA (public gas corporation, 65% State owned) Conventional PPs (new-upgrades) 1.9 Natural gas infrastructure: i) natural gas pipelines (TAP, East Med, Cross border NG pipelines 2.2 IGB); ii) LNG terminal in Alexandroupolis; iii) Underground storage facility in Kavala NG network and storage 2.2 Initial tender for 40% of PPC’s lignite capacity (Megalopoli and Meliti units, 930MW in total) failed, new tender to be launched. R&D 0.3 Establishment of Power Exchange (expected to start operations in Energy Efficiency 9.0 1H2019) End of PPC’s monopoly in lignite and hydro production through NOME auctions of capacity. General Total 32.9 New temporary flexibility remuneration mechanism (capacity Total RES related 17.3
payments) as of 2H18 (previous expired in May-17) New demand-response mechanism (interruptability) giving benefits to industrial customers for shifting consumption off peak Bundled electricity and gas supply services are being designed and offered by suppliers following liberalization of both markets Hydrocarbons: 2 international tenders for off-shore blocks on South- Western Greece. JV of Exxon-ELPE and Energean Oil are active LNG imports from the US started in 2018 Renewables: Auctions scheme for new wind and solar capacity. Source: Draft National Climate Plan 2030-Ministry of Environment and Energy, AXIA Research
Electricity market snapshot Focusing on the electricity market, demand in 2018 in the country declined by about 1.4%, affected primarily by milder winter conditions in the beginning of the year. In respect of generation, thermal units (lignite and natural gas) accounted for 64% of the total generation compared to 69% in 2017. This was driven by increased RES capacity and generation but also favorable hydrological conditions that pushed generation from large hydro to increase by 46% y- o-y and cover 11% of the interconnected system generation in 2018 vs. 7.5% the previous year.
Exhibit 149. Latest developments in electricity market Target Model market to be operational in 2Q19, through the power exchange. It will include the four markets (day-ahead, intraday, balancing and forward) and to be coupled thereafter with Bulgarian and Italian markets. Permanent flexibility/capacity remuneration mechanism to come into force in 2019 Supplier surcharge for RES account balancing reduced by 35% in 2018. After setting aside a safety cushion (cash), surcharge to be abolished in 2019. Provision for “Green certificates” framework Positive signs of improvement in arrears collection from PPC, including repayments from State owned entities and previous year’s PSO charges Interconnection of Cyclades inlands (Phase 1) to the main system as of 2018 to lead demand higher. Phase 2&3 expected to be completed in 2020. “Small” Crete underwater cable tender completed. To be commissioned in 2020 (~EUR 300m project). Second phase (~EUR 700m project) expected to be completed in 2020. This will lead to: i) lower PSO burden to consumers; ii) increase demand in the mainland; and iii) unlock RES capacity in the islands Strategic Business plan by PPC (advised by McKinsey) in order to restore profitability and financial health. Expansion in RES (add 600W by 2020), new markets (international, gas trading), tariff review, arrears collection with appointed agent (Qualco). New CCGT units announced by Mytilineos and Gek Terna (660MW each for ~EUR 300m, online in 2021-22) Source: AXIA Research
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AXIA Research
In respect of wholesale market, the increasing generation costs due to rising CO2 prices (primarily affecting lignite units), but also the higher natural gas prices pushed prices higher, especially during the second part of the year (1H18 SMP was affected by lower demand and high hydro reserves). SMP for 2018 averaged EUR 60.3/MWh, posting a 10.3% increase y-o-y (2H18 average SMP stood at EUR 67.8/MWH, +20.6% y-o-y).
On the supply side, PPC’s market share continued to decline to stand at 80.4% in Dec. 2018 compared to 85.2% in January. Yet it continues to remain above the targets agreement between the Greek government and EU authorities. This will result in increased volumes of lignite and hydro capacity being offered through NOME auctions in 2019.
Exhibit 150. Greek electricity market demand Exhibit 151. Wholesale price (EUR/MWh)
58,000 8.0% 80
6.0% 75 56,000 4.0% 70
54,000 2.0% 65
0.0% 60 52,000 -2.0% 55 50,000 -4.0% 50 -6.0% 48,000 45 -8.0% 40 46,000 -10.0% 35 Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec 2014 2015 2016 Electricity demand (GWh) GDP growth y-o-y 2017 2018
Source: ADMIE, Ameco, AXIA Research
Electricity prices In respect of electricity prices compared to EU, wholesale market price in 3Q18 was 12% higher vs. EU average according to EU Commission survey data. This is explained by the increased lignite and natural gas generation costs (due to CO2 prices and natural gas prices, respectively) but also due to the limited interconnections with continental Europe that keeps domestic market operating as a “load pocket”.
Looking on the end user level though, both household and industrial prices in 3Q18 were on average 10%-12% lower compared to EU despite the higher wholesale market prices. This is mainly attributed to the efforts to open up the retail market and induced competition amongst suppliers to secure market shares. In this context suppliers proceeded with significant discounts in order to attract clientele and essentially pushed PPC to follow up in order to avoid cherry picking on good clients offering up to 15% discount to clients paying on time and an additional ~5% for prepayments.
With wholesale prices seen remaining at elevated levels, price increases are gradually being introduced. Note that bulk of alternative suppliers have incorporated SMP clause in their tariff plans which are now starting to kick in. At the same time PPC that has lost a significant market share and revenues due to the lower market shares has found itself in a challenging position in respect of profitability. Constrained by political implications (PPC is 51% owned by the Greek State) the company has not proceeded with nay price increases over the last 10 years. Given though the challenging profitability conditions for the company we expect a round of indirect tariff increases in 2019 by the partial abolition of the discounts offered to clients and potentially the introduction of CO2 clause in the tariff plans.
Exhibit 152. Supply market shares for 2018 Exhibit 153. Electricity prices in 3Q18 (EUR/MWh)*
Wholesale 66.2 67.1 68.9 86.0% 6.00% 53.5 57.3 59.7 35.5 85.0% 5.00% 84.0%
83.0% Bulgaria Germany France EU Spain Greece Italy 4.00% Industrial 82.0% 140.2 150.5 98.3 102.8 116.4 117.1 81.0% 3.00% 82.6
80.0% 2.00% 79.0% Bulgaria France Greece Spain EU Italy Germany 78.0% 1.00% Household 254.9 296.1 77.0% 175.8 186.6 203.7 209.1 99.9 76.0% 0.00% Jan Feb Mar Apr May Jun Jul Aug Sept Oct Nov Dec PPC (lhs) Heron Mytilineos Elpedison Bulgaria France Greece Italy EU Spain Germany
*Industrial prices exclude VAT and returnable taxes, household prices include all taxes and levies, Source: EU Commission, ADMIE, AXIA Research AXIA Research Page 64
AXIA Research
Conventional capacity outlook In respect of thermal capacity the aging lignite fleet (newest lignite unit is more than 20 years old) and the transition to green energy is gradually leading lignite units to decommission. According to Ministry of Energy plan, about 1.8GW of lignite capacity will be put offline until 2022 (out of a total of 3.9GW in 2018), while by 2030 another 1.0GW of existing lignite capacity is estimated that could be decommissioned. At the same time the commissioning of PPC’s lignite new unit (Ptolemaida 5, 660MW) is expected in 2021. Based on that lignite generation would decline from 14.8GWh in 2016 (31% of total generation) to 12GWh in 2020 (24% of total) and reach 9.0GWh in 2030 (16% of total).
Also we have to note the ongoing process for the sale of PPC’s lignite units in Megalopoli and Meliti (930MW in total). The process follows the decision of the EU courts to allow lignite access to third parties (until now PPC was the only player with lignite units). Initial tender failed to attract compatible bids (two bids submitted) due to differences on “fairness opinion” assumptions and shareholders’ agreement framework between PPC and interested parties. Ministry of Energy is now looking to launch again the tender under different terms to attract new investors at more “reasonable” pricing.
On the other hand, natural gas units (average age <10 years) are expected to significantly benefit during this transitional phase of the market. Output from existing units is expected to increase by 20% in 2019-20 contributing ~35% of total generation (vs 27% in 2016). In respect of additions, Mytilineos has licensed an 650MW CCGT unit that is expected online by 2021, while following expansion of natural gas network capacity, PPC’s Megalopoli unit will operate at 800MW (vs. 500MW currently). In addition, Gek Terna announced its decision to go ahead with a new 660MW CCGT unit in Northern Greece (EUR 300m investment). It is worth noting that another two CCGT units (~1.2GW in total) are in the plans by other players (Copelouzos and Karantzis) but it is not clear if these will reach with implementation.
About 10% of Greece’s electricity consumption (c5.7TWh) comes from the non-interconnected islands and is covered by oiled fired units (80% of total) owned by PPC and some RES. In this context electricity generation cost in non- interconnected islands exceeds EUR 250/MWh. Oil fired generation is expected to gradually subside going forward (c50% drop estimated between 2017-25) primarily on the back of interconnection investments implemented by the grid operator IPTO (ADMIE). We note that this is expected to increase interconnected system demand going forward.
Exhibit 154. Average utilization rate of IPPs CCGT Exhibit 155. Expected additions/disposals of units conventional capacity
43%
37% 36%
22% 21%
2014 2015 2016 2017 2018
Source: ADMIE, AXIA Research
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AXIA Research
Renewables RES installed capacity in the country at the end of 2018 reached 6.0GW, increasing by 250MW (+4.5% y-o-y) mainly on the back of new wind park additions of 190MW. In respect of output, green energy generation (excluding large scale hydro) in January – November 2018 was up by 7.9% y-o-y driven by increased capacity and improved wind conditions.
Exhibit 156. Overview of the Greek RES market Exhibit 157. Wind and solar evolution (MW) 6.0GW of installed RES capacity in Greece (ex-large hydro), providing ~18% Wind Capacity of electricity demand (12TWh) in 2018. 3,000
Greece is below EU targets framework for RES penetration, with total RES 2,500
capacity target for 2020 at 10.6GW. State support scheme with off-take 2,000 PPAs and FiTs 1,500 Despite a pick-up in installation in 2008-10 (especially solar), market lost 1,000 momentum due to crisis with only some major local players adding capacity. New expansion round commenced in 2016-17 following market 500
framework restructuring. -
2015 1989 1990 1991 1992 1993 1994 1995 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2016 2017 2018 Greece aims to tender 2.6GW of new RES capacity (wind and solar) by 1987 2020. Scheme offers 20year PPA with FiT set through competitive auction. Limited number of transaction in RES assets in the past. Bid-ask spread Solar Capacity 3,000 wide due to macro volatility and RES account liquidity issues, while invested players did not face pressure from banks. Available bank finance 2,500 for RES projects allowed developers to implement greenfield and enjoy 2,000 higher IRRs 1,500
Fragmented market with many “small” players (especially for solar) 1,000 Balancing of RES account following legislation in 3Q16 and improved macro 500 conditions increased investors interest over Greek RES assets. Also - competitive auction scheme for greenfield development leads IRRs lower. 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 First public transactions in 2018 with wind 186MW of assets sold at 9.5x EV/EBITDA or 1.5x EV/MW (Fortress acquiring Euroenergy wind portfolio) Significant new capacity to be “unlocked” following interconnection of Cyclades and Crete to mainland. Source: AXIA Research
In respect of RES market framework, following restructuring framework adopted in late 2016 and a series of initiatives by Ministry of Energy liquidity has been fully restored and payment times to RES producers has returned to normalized levels. According to the latest estimates by market operator, RES account is expected to close 2018 with a surplus of EUR 218m. This allowed regulator to proceed with the abolishment of the supplier’s surcharge and lignite fee as of January 2019. For 2019 a surplus of EUR 152.9m is forecasted for the RES account
Exhibit 158. RES account (deficit)/surplus (EUR m) Exhibit 159. RES account dynamics 2016-19E
300 200 100 2,015 Other 1,848 194 1,871 0 1,807 227 225 152 CO2 -100 289 -200 328 190 411 0 -300 89 RES fee 32 242 -400 870 -500 ETMEAR 889 659 -600 950
-700 Market pool
Dec
June June June June June
March March March March March 708 486 584 Total RES
366
December December December December December
September September September September September compensation
2013 2014 2015 2016 2017 2018 2016 2017 2018E 2019E
Source: LAGIE, AXIA Research
Greece has set out an ambitious target for RES capacity expansion in order to comply with EU’s “green” policy targets. In this context, the plan call for installed wind and solar capacity to more than double up to 2030 so as RES penetration in electricity generation expands from 24% to 43%. According to Ministry of Energy estimates this will mobilize total investments related to RES of EUR 17.6bn over the next 10 years.
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AXIA Research
Exhibit 160. RES penetration outlook Exhibit 161. RES producers revenues (EUR m, 2017)
1227.6
509.1
51.6 37.1 38.5
Wind Solar Small Hydro Biomass Cogen
Source: Ministry of Energy, LAGIE, AXIA Research
In 2018 Greece launched its auction scheme for RES capacity, with any new installation securing its 20-year PPA through a competitive bid tender. The scheme provides for 2.6GW of RES capacity to be auctioned in 2018-20. Two tenders took place in 2018 (July and December). Increased competition during the tenders has driven PPA prices about 30%-40% lower compared to initial starting price. On the other hand lower investment costs (solar panels and wind turbines prices have dropped by ~30% over the last five years) and competitive financing terms by local banks have supported the financials of the projects, maintaining equity return levels in mid-teens area.
On the downside market participants continue to highlight the lengthy lead times in securing necessary approvals until projects mature as well as associated costs. Also another issue under discussion if the tender process framework and especially the applied 75% coverage ratio (to award 100MW, total offers must reach 175MW) that is creating delays in implementation of mature projects.
Another point worth noting is the return of international investors in the Greek RES market in 2018. Foreign capital has been absent from the market during the crisis period affected by volatile macro and weak banking environment. During the first two auctions round in 2018 sector majors Iberdrola (present in Greece since 2007) and EDPR (first timer) secured wind projects, while continental EU based companies participated in the solar auctions.
Exhibit 162. Greek wind market top 5 players installed capacity (MW) 2012 2013 2014 2015 2016 2017 2018 2012-18 CAGR Terna Energy 242 277 360 397 460 530 536 14.2% El.Tech.Anemos 147 163 163 199 239 257 286 11.8% Iberdrola 251 251 251 251 251 251 251 0.0% EDF* 299 323 323 358 238 238 238 -3.7% ENEL GP 201 201 201 201 201 201 200 0.0% Mytilineos 36 36 36 63 88 106 154 27.6% Market Total Wind 1,751 1,866 1,977 2,136 2,370 2,651 2,828 8.3% *EDF in 2016 sold part of its wind portfolio Source: ELETAEN, AXIA Research
The elephant in the room or what is going on with PPC? Given the turmoil in the domestic macro, PPC, the incumbent electricity producer and supplier of the country has found itself in a very challenging position. The company’s close ties with the political landscape and the massive footprint on the domestic economy have not allowed PPC to respond to the impact of the crisis on the company and the restructuring that is taking place in the domestic electricity market.
Currently PPC has reached a crucial point where significant decisions and decisive actions need to be taken in order for the company to remain afloat and competitive. To this end, we also need to consider the footprint and significance of PPC for the Greek banks but overall for the Greek economy. The refinancing agreement with the Greek banks and the supporting actions by the government has bought PPC time to structurally reshuffle its business and cure its balance sheet, but time and execution is of the essence.
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AXIA Research
With the estimated replacement cost of PPC’s asset base exceeding EUR 10bn, the key is the sustainable improvement of the company’s profitability. Apart from the focused execution of the business plan, we recon as a major catalyst the sale of the State’s 17% stake that is sitting on Greece’s privatization fund books. According to the agreement with the international creditors the sale of the 17% stake (potentially to a strategic investor) is to take place in 2019. This would loosen the close ties with the State (stake would go to 34%) and eventually enhance the corporate culture of the company and potentially proceed to a management reshuffling. Note though that 2019 will be an election year for Greece so difficulties may arise in the further privatization of the company.
Exhibit 163. PPC’s MCap (EUR bn) Exhibit 164. PPC’s Business plan targets (EUR m)
3,500 4,500 10.0 x 9.0 x 4,000 9.0 x 3,000 3,500 8.0 x 2,500 7.0 x 3,000 6.0 x 2,000 2,500 5.0 x 2,000 1,500 3.0 x 4.0 x 1,500 3.0 x 1,000 1,000 2.0 x
500 500 1.0 x 445 4,017 1,050 3,150 0 0.0 x 0 2017 2022E 06/02/2014 06/02/2015 06/02/2016 06/02/2017 06/02/2018 EBITDA Net Debt Net Debt/EBITDA
Source: PPC, Capital IQ, AXIA Research
Developments in the natural gas market
Natural gas is becoming an increasingly important fuel in Greece, rising to a share of about 15% in the total primary energy supply (vs. EU-28 average of ~25%) and 33% in electricity generation in 2018. The bulk of the consumption is done by electricity generation (~70%), while heavy industry and retail supply cover about 10% and 20% respectively. Over the last five years, natural gas consumption has been growing by almost 3.5% CAGR (+4.5% CAGR since 2000) driven primarily by increasing usage in electricity production. In respect of supply Greece imports all of its quantities through two pipeline entry points in Greece’s Northern borders (with Bulgaria and Turkey) and one LNG terminal close to Athens coastline (Revythousa).
Exhibit 165. Natural gas consumption in Greece (m Exhibit 166.. Greece’s natural gas supply by entry Nm3) point for 2017
5,000 Turkey, 12.40% 4,500 4,000 LNG, 28.90% 3,500 3,000 2,500 2,000 1,500 1,000 500 Bulgaria, 58.70% -
Source: DESFA, AXIA Research
Demand for natural gas is expected to accelerate going forward according to the system regulator estimates with consumption growing by 4.0% CAGR for 2018-2028. Growth will be driven by electricity production needs but also by the expansion of the retail network. Note that currently only part of the country has access to natural gas infrastructure (we estimate <50% of population and <30% of geographical area have access).
In this context, a major restructuring effort of the natural gas market in currently taking place, aiming to open up the market to competition and align with EU frameworks. The restructuring of the market is also one of the key reforms included in the country’s agreement with its international creditors.
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AXIA Research
Exhibit 167. Natural gas countrywide expansion Exhibit 168. Natural gas prices (EURc/kWh)
Household 7.13 7.28 7.57 6.03 6.03 6.19 6.57 4.83 3.98
Bulgaria UK Germany EU Greece Spain France Italy Portugal
Industrial
3.03 2.73 2.44 2.48 2.54 2.55 2.12 2.18 2.37
Bulgaria UK Portugal Spain Italy EU Germany Greece France
*industrial prices exclude VAT and recoverable taxes Source: DEPA, EU Commission, AXIA Research
One of the major steps already taken in this front is the privatization of transmission system operator. The company formerly owned by the Greek State (through the natural gas supply company, DEPA) and Hellenic Petroleum, was privatized in 2017 (transaction closed in late 2018, with 66% being sold for EUR 535m) to a consortium led by the Italian gas distribution system operator, Snam and the participation of Enagas (Spain) and Fluxys (Belgium).
Currently the Ministry of Energy is working on a framework to restructure DEPA. DEPA is the owner of the distribution networks, is active in retail and wholesale supply and owns the commercial agreements for the import of natural gas supply with Gazprom, Botas and Sonatrach (LNG). According to the plan, distribution networks will be unbundled and spin-off to a new entity (DEPA Infrastructure), while all of the commercial activities (wholesale and retail) as well as supply agreement with the main suppliers will be under a different entity (DEPA Commercial ops). At a final stage, a minority stake (~14%) of the DEPA infrastructure will be sold to a private investor, while a majority stake (51%) of DEPA Commercial will also be privatized. The draft framework is due to be reviewed by EU authorities and thereafter tabled to the parliament. Yet given the election period in the country as well as euroelections, delays should be expected.
At the same time, private sector is getting more active. On the supply side, supported by the completion in 2018 of extended capacity of the LNG terminal in Revythousa, major electricity producers are increasingly becoming active in the LNG market taking advantage of opportunities. Also as natural gas penetration to households increases, electricity supply players are entering the natural gas retail market offering bundle services to consumers.
In respect of infrastructure a major project due to be completed in 2019 is TAP pipeline that travels along Greece’s Northern borders transferring Azeri gas to Europe (Southern gas corridor). Moreover, a new project is being developed in Northern Greece that includes the construction of a FLNG terminal and regasification unit by Gastrade as well as a new vertical pipeline (IGB) extending connection from the terminal to Bulgaria’s distribution system. Future projects include: i) licensing of a new LNG terminal by Motor Oil in Korinthos area; ii) privatization of underground storage facility in northern Greece (Kavala), and iii) Posidon Med promoting LNG use in marine bunkering.
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AXIA Research
Real Estate: Yields that attract attention
2018 was a stabilization year for the Greek real estate market, although some segments have already been in the rebound. Overall, the prospects of the real estate sector overall are positive as the economy is growing. Tourism and the golden visa should continue to be the drivers for housing, while for other markets categories (office space, retail, logistics) the yields that remain considerably higher vs. other EU markets continue to attract both domestic (especially since the number of domestic REIC is increasing) and international interest. We highlight the case of Lamda Development, as the privatization process of Hellenikon is entering its final stages and also that of NBG Pangaea REIC that once it moves to increase its free float, it could become one of the most interesting investment propositions in Greece.
Housing – assisted by tourism and the golden visa scheme Focusing on the housing market, data suggest stabilization and signs of improvement. According to the Bank of Greece, residential property prices have fallen by 42.8% from 2008 since the lows in 1H17 with the latest data by the BoG (3Q18) suggesting prices growing by 2.5% y-o-y (+1.0% q-o-q).
Exhibit 169. Residential Price Index Exhibit 170. Residential Loans
300 15% 72 60%
250 10% 70 55%
68 50% 200 5%
66 45% 150 0% 64 40% 100 -5% 62 35% 50 -10% 60 30%
0 -15% 58 25% Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017*2018* 2013 2014 2015 2016 2017 2018
Residential Price Index y-o-y EUR bn NLP ratio (%)
Source: Bank of Greece, AXIA Research
The main drivers for housing demand have been tourism and the golden visa scheme. Specifically, because of tourism i) prices have recovered in the Athens city center due to demand for short rentals (Airbnb-type of accommodation), while at the same time ii) property prices in popular islands are on the rise. The golden visa program has been also supportive to the demand (mainly) in Athens, with the latest estimates calling for about EUR 1.0bn of foreign capital being invested through the golden visa scheme since its inauguration in 2013.
In this context, according to various market sources, residential yields in Athens range from 3.5% to 4.15% and in detached houses from 4.4% to 4.50%, while in the luxury tourist destinations of Greece, the yields of holiday homes available for rent, with a surface of more than 200sqm and a swimming pool are in Mykonos 8.5%, in Santorini 6.5% and in Rhodes 5.5%.
The rebound is not uniformed though. Demand for residential properties in Athens with inferior characteristics and/or properties located in less desirable areas has been low. It is worth noting that for some regions the drop vs. 2008 highs exceeds 60%-70%. Apartments of 30 or 40 years old in some areas in the center of Athens are sold for EUR 10k-20k. The same is true for the demand in most areas outside the capital.
Finally, thus far the impact from the acceleration of the auctions of residential properties held by the banks has been small but the number of properties auctioned is expected to increase substantially in the coming months. This prospect is impacting expectations and could curb the potential of significant price appreciation over the medium term.
Office space – Strengthening of demand but lack of prime space In terms of office space, the sector has stabilized with demand picking up and leading to a gradual contraction of yields, which nevertheless remain high vs. other EU markets. Prime yields for 2018 are seen between 7.5%-9.0% and are estimated to have contracted by about 1.0%-1.5% since the highs of 2015-16. We have to note though that in certain assets increased competition has driven yields even lower (~6.0%-6.5%). AXIA Research Page 70
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High quality office space attracts the bulk of the demand with the available stock being very low, whilst a number of occupiers are in the market looking for A grade space. In this context note that the construction activity of new office space in Greece over the past 10 years has been limited. Pricing has also been supported by increased demand from local REICs for office space, with the number of transactions of these vehicles over the past couple of years increasing substantially.
Exhibit 171. Office price index Exhibit 172. Office rent index
100 20% 100 20% 95 15% 95 15% 90 90 10% 10% 85 85 80 5% 80 5% 75 0% 75 0% 70 -5% 70 -5% 65 65 -10% -10% 60 60 55 -15% 55 -15% 50 -20% 50 -20% H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2* H1* H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2* H1* 2011 2012 2013 2014 2015 2016 2017 2018 2011 2012 2013 2014 2015 2016 2017 2018
Office price index (lhs) y-o-y (rhs) Office rent index (lhs) y-o-y (rhs)
Source: Bank of Greece, AXIA Research
Since expectations are that the economy will continue to grow in the foreseeable future, the outlook in respect of the office market is positive. The shortage of suitable available offices to satisfy corporate demand along with the very limited development activity should continue to drive pricing, while at the same time space renovation/upgrades to remain key characteristic of the segment, underlining the positive trends. Finally, we highlight the expected interest from investors for office space related to portfolios of NPEs coming to the market.
2019 started with two sizable transactions in the office space, with local REICs Trastor (listed) acquiring the portfolio of a foreign investor for a reported value of EUR 30m, while Orilina REIC (an affiliate of Brevan Howard) acquired Ellaktor’s HQ office building for EUR 25.5m in a sale and leaseback agreement. In addition, reports indicate that in the tender run by Alpha Bank for the sale of a portfolio of 5 office buildings (belonged to the developer Babis Vovos - total area >30,000 sqm) the interest had been significant, leading to expectations the tender to fetch a higher price than initially estimated (from EUR 80m initially expected to EUR 90m).
Exhibit 173. EU main cities net office prime yield (1Q18)
9.00% 8.00% 8.00%
7.00%
6.00%
5.00% 4.32%
4.00%
3.00%
2.00%
1.00%
0.00%
Source: BNP Paribas Real Estate 1Q18, AXIA Research
Retail – Increasing interest from investors Following a long and sharp decline in demand, the retail property market started showing signs of recovery in 2017 driven by demand for prime retail space. Demand is driven by increased interest of Greek and multinational commercial companies looking to position in central locations. Occupancy in high street locations offering exposure to tourism (i.e. Central Athens) has increased significantly with yields ranging at 6.0% to 6.75%, while in other prime locations yields range between 7.0%-7.5%.
In respect of malls, occupancy is high, especially for well-located and managed assets that exceeds 97%-98%. The increased interest is driven by competitive rents vs. high street but also the increasing visitor numbers as Greece
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remains one of the lowest countries in terms of mall space per inhabitant. Shopping center yields are around 7.5%- 8.5%.
Exhibit 174. Retail price index Exhibit 175. Retail Rent Index
100 20% 100 20% 95 15% 95 15% 90 90 10% 10% 85 85 80 5% 80 5% 75 0% 75 0% 70 -5% 70 -5% 65 65 -10% -10% 60 60 55 -15% 55 -15% 50 -20% 50 -20% H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2* H1* H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2 H1 H2* H1* 2011 2012 2013 2014 2015 2016 2017 2018 2011 2012 2013 2014 2015 2016 2017 2018
Retail Price Index (lhs) y-o-y (rhs) Retail Rent Index (lhs) y-o-y (rhs)
Source: Bank of Greece, AXIA Research
On the other hand, the relatively slow pace of economic growth (including difficult access to financing) as well as the strong growth of E-commerce remain two key factors that will continue to impact the segment.
Regarding the development of new spaces, for now, this mainly concerns the renovation or expansion of existing shopping centers. The main significant development going forward is that of the investment by Lamda Development in Hellenikon (expectations are that Lamda Development will complete the acquisition agreement with the State within 2019). Still, we note the creation of a shopping mall in Hellenikon should take few years to be completed. The development of another mall in the Northern suburbs of Athens was recently approved but the timetable for the completion of this investment is unclear. Interest from M&A activity in the sector has been reported in the press, while some initial actions have been made.
Apart from the economic developments, similarly to office space, the performance of the retail space to be impacted by the acceleration of the sale of NPE portfolios by the banks and this includes both retail stores and smaller shopping centers.
Logistics – Privatized infrastructure turn Greece into a transportation hub Reflecting the expectations of a turnaround in economy, demand for logistics real estate has increased over the last couple of years. This, together with the limited supply of offered space is driving prices higher. In this context yields are currently estimated at 9.5% (1H18) having contracted by c150bps compared to 11.0% about one year ago (over EU logistics have also contracted by 50bps in the same period). Demand is expected to be maintained as both the Greek economy is picking up speed and as Greece becomes a transportation hub. To this end there is increased prospect for logistic facilities in Thriassion Region at the outskirts of Athens, related also to the activity of the Piraeus Post, while at the same time Thessaloniki Port to increase its activity as it is becoming a transport hub connecting freight traffic with the markets in Eastern Europe and also in Russia.
Overall the market is characterized as a good activity with some new leasing deals occurring. The take up of logistics space, that showed a positive trend, the lack of added supply, but also parameters like the increase of E-Commerce business and the privatization of the two major Greek Port Authorities, are leading to a conformity, that also in this asset class the rental values will probably increase, especially for the high quality product.
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Exhibit 176. EU logistics market net prime yields (warehouses over 5,000 sqm)
12.00% 11.00%
9.50% 10.00%
8.00% 6.76% 6.16% 6.00%
4.00%
2.00%
0.00%
1H18 1H17
Source: BNP Real Estate European Property Report August 2018, AXIA Research
The RE players in the market The main listed players in the RE market in Greece are Pangaea REIC, Grivalia REIC (due to be merged with Eurobank in 1H19) and Lamda Development. Recall that Grivalia is expected to be absorbed by Eurobank within this year. In addition, there are a number of smaller RE companies and REICs listed in the ASE (with relatively small free float and trading volumes).
In respect of market performance the listed REIC universe (excluding Lamda Development) currently trades at c0.8- 0.9x on P/NAV. To this extent, we have to note the very small free float and trading activity of smaller names (ICI, Trastor, BriQ) and the practically zero free float of the largest REIC, Pangaea.
Exhibit 177. Listed REICs P/BV(x) Exhibit 178. adj. EBITDA yields
1.2 8.2% 7.9% 7.6% 1.1 6.9%7.1% 6.4% 6.4%6.3% 6.1% 1.0 6.1% 5.8% 5.6% 5.5%5.4% 0.9 4.9%4.8% 0.8 0.7 0.6 0.5 0.4 Grivalia Lamda Retail portfolio
Grivalia Trastor ICI 2011 2012 2013 2014 2015 2016 2017 2018*
*2018 figures for Lamda are 9M18 annualized Source: Companies Financials, Capital IQ, AXIA Research
We have to note that within the next 18-24 months, REICS with total assets in the tune of EUR 0.6-0.8bn could be introduced to Athex. The bunch could include real estate arms of listed entities (Viohalco, Fourlis Group) as well as family-office setups (Orilina, Blue Cedar). Further capital markets action could come from a potential listing of Lamda’s mall subsidiary as well as potential SCI in Pangaea.
Exhibit 179. Greek listed Real estate names key figures Company Focus sector Close Price MCap GNAV* NAV* P/NAV Gross LTV EUR/sh EUR m EUR m EUR m (x) (%) Pangaea Office, Retail 4.86 1241.7 1656.0 1251.0 1.0 28.60% Grivalia Office, Retail 8.58 827.1 1008.0 907.0 0.9 22.00% Lamda Development Malls 6.49 505.3 890.0 434.0 1.2 47.90% Trastor Office, Retail 0.85 68.6 96.0 79.0 0.9 19.60% ICI Office, Retail, Resi 5.80 60.5 95.0 69.0 0.9 30.20% REDs Malls 0.97 55.4 113.0 92.0 0.6 21.80% BRIQ Properties Office, Retail 2.18 26.0 29.0 29.0 0.9 0.00% *latest published Source: Companies Financials, Capital IQ, AXIA Research
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Construction: Ready for the next cycle
Greece’s construction sector is looking set for a new growth cycle. With infrastructure investment being a key driver of sustainable economic growth, a pro-investment and market friendly political agenda could eventually lead to a new growth cycle for Greek contractors. At the same time, the sector is gradually reaching a mature phase, preparing to adapt to the new market environment and capitalize on the opportunity with the total market value of the major names being 75% lower vs. historical high.
The upside momentum for the Greek construction sector generated in 2012-13 with the re-start of major public sector projects (mainly motorways) was rather short-lived affected by continuing challenging macro and shifting political priorities. Greece’s construction activity during 2014-17 contributed about EUR 3.5bn per year to the country’s GDP (~2.0%). This compares to an average contribution of to the tune of EUR 9.0bn in 2000-10 (6.2% of GDP) to the Greek economy and to an average of 5.0% of GDP for the European countries during the last decade. This has resulted in Greece’s infrastructure quality lagging significantly amongst EU.
Exhibit 180. Construction sector GVA vs. GDP (%) Exhibit 181. Infrastructure quality index
9.0% Finland 8.0% Austria Germany 7.0% Sweden 6.0% Spain 5.0% Belgium
4.0% Lithuania Cyprus 3.0% Czech Republic 2.0% Hungary 1.0% Latvia
0.0% Greece Poland Romania EU-15 GR EU-15 average GR average 0 1 2 3 4 5 6 7
Source: EU Commission, IMF, AXIA Research
Despite the available pool of projects, the period for a project to reach tender and thereafter implementation remains very long in Greece. The slow pace is dictated mostly by lack of political consensus and traction in the scheduling of the public investment program. Also in many cases a tender process is challenged at various stages by third parties (other contractors, local communities etc), with the relevant judicial authorities taking time to process a final decision.
Currently according to our estimates and industry sources, infrastructure related project backlog in Greece for the next five years is seen at about EUR 20bn-25bn (incl. projects under execution/tendered as well as mature projects expected to be tendered in the near term). Bulk of these projects relate to transportation (railway, motorways, airports etc.) and energy related infrastructure (oil and gas, RES, conventional electricity).
More specifically we expect a series of infrastructure projects to move ahead in the near term. Amongst other we note; i) Athens underground extension with EUR 1.5bn value; ii) North Crete motorway (EUR 1.5bn); iii) Hellinikon development (EUR 6.0bn); iv) Salamina subsea interconnection (EUR 0.4bn); v) Moreas motorway extensions (>EUR 0.2bn); vi) Attiki Odos extensions (EUR 0.3-0.6bn); vii) Kasteli Airport (EUR 0.5bn); viii) Central Greece motorway extensions (EUR 0.8bn).
In respect of financing, despite the limited capacity of the Greek State, new funding tools have become available. These include EU structural funds (ESPA), Public-Private-Partnership (PPPs) schemes, and long-term concessions with the participation of private capital (domestic and foreign). Greek banks, despite the challenging environment have shown increased appetite to support infrastructure projects offering very attractive rates. Finally we have to highlight the increasing footprint of supranational credit agencies (EIB, EBRD) in financing projects in Greece.
In this context the ability of contractors to secure the available financing to participate in the concession of the project will be crucial and will essentially act as a tool to replenish backlog by adding profitable and secure projects. Also, contractors with existing stakes in concessions (i.e. motorways) are expected to be better positioned to secure extension related projects.
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Exhibit 183. Funding mix of infrastructure projects in Exhibit 182. Public Investments program (EUR bn) Greece
9.5 9.6 9.6 8.8 8.4 8.2 8.5 7.8 7.4 7.5 7 2.6 2.5 6.9 6.8 6.8 Commercial Banks and 6.6 6.6 6.4 6.3 Public, 40% 4.7 2.7 2.2 Supranationals, 50% 2.7 5.3 2.1 2.6 3.9 2.6 1.4 0.8 0.7 1.0 1.0 0.7 0.8 3.2 1.2 7.0 7.1 6.3 5.5 6.1 5.5 5.8 5.9 5.7 5.5 5.8 5.8 5.3 5.2 4.8 5.0 3.9 4.5 4.1
Private, 10%
EU- funds Greece
Source: Ministry of Finance, AXIA Research
We have to note that over the last decade Greek construction sector has undergone a significant consolidation as many companies under financial difficulties exited the market and M&A took place to strengthen companies’ balance sheet. At the same time, since the burst of the crisis and the decline in available projects foreign players have distanced themselves from taking a leading role in projects and participating (if at all) in JVs with local players.
Focusing on the four listed major contractors that remain active in the market (Ellaktor, Gek Terna, J&P Avax and Intrakat) signed backlog at currently stands at ~EUR 5.3bn (9M18) about 50% lower vs. the previous peak at end-2013 affected by the slow tendering process of new domestic projects (about 50% of backlog is international). At the same time, combined construction revenues peaked at EUR 3.1bn in 2016-17 and is expected to be 5%-10% lower in 2018. The performance during the past five years related primarily to the restructuring and re-start of major public projects (mainly motorways) in 2013 achieved by the New Democracy led government at the time, and thereafter the accelerated pace to complete the projects by the end of 2017.
Exhibit 185. Greek listed contractors revenues (EUR Exhibit 184. Greek listed contractors backlog (EUR m) m)
10,686 3,152 3,154
280 147.1 141.1 8,671 2,598 2,576 2,200 497.1 604.2 139.7 300 7,147 7,378 123.9 6,603 463.7 1,900 173 1,867 494.3 276 955 5,294 900 3,900 1,600 1,700 476 94.0 1,230 388.8 793 827 3,300 550 2,500 1,100 2,800 1,800 491
2,000 1,553 1,510 4,306 1,171 1,161 3,171 3,097 2,471 3,005 893 1,644
2013 2014 2015 2016 2017 9M18 2013 2014 2015 2016 2017 Ellaktor Gek Terna J&P Avax* Intrakat* Ellaktor Gek Terna J&P Avax Intrakat
*J&P Avax and Intrakat 9M18 backlog refers to 1H18 Source: Companies Financials, AXIA Research
Yet things haven’t been rosy for the sector as the strong top line performance has not been translated in profitability (at least not for all the players). Delays in the pace of execution and payments in domestic projects affected by the volatile political domestic environment, as well as subdued profitability of international projects established a volatile environment for contractor’s profitability. This has also created issues in the liquidity of the companies that had to deal with increased WC needs but also liabilities settlement to stop loss making projects.
The earnings volatility has also been depicted in the market performance of the stocks, with combined MCap of the four companies being currently at EUR 800m, 75% below the historical high of almost EUR 3.0bn in 2007.
2018 was also a year with significant changes in shareholding of the domestic construction companies. Starting with Ellaktor, a shareholder proxy fight resulted in a new BoD and management team that took the task to restructure the company and restore construction division. In a ripple effect, the former Chairman and shareholder of Ellaktor sold its stake and acquired a 20% in the smaller but upcoming rival, Intrakat. J&P Avax in 2018 initiated the process for a capital increase that will lead to one of the major shareholders taking control of the company. Finally, in Gek Terna one of the founding shareholders sold its stake to a Dutch family office (Reggeborgh Invest).
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Exhibit 186. Greek contractors* revenues (EUR m) Exhibit 187. Greek contractors MCap (EUR m) and EBIT margin evolution vs. construction sector GVA (EUR bn)
4,000 14.0% 3,500 20.0 12.5% 18.0 3,500 11.0% 3,000 9.5% 16.0 3,000 8.0% 2,500 14.0 2,500 6.5% 12.0 5.0% 2,000 2,000 3.5% 10.0 2.0% 1,500 8.0 1,500 0.5% -1.0% 6.0 1,000 1,000 -2.5% 4.0 500 -4.0% 500 -5.5% 2.0 0 -7.0% - 0.0
Total revenues EBIT margin (rhs) Construction GVA (lhs) Market Cap
*Aktor, Terna, J&P Avax, Intrakat, Source: Company Financials, ELSTAT, AXIA Research
Looking forward, we believe that the sector could essentially be the major beneficiary of the economic growth in the country. Given the availability of both projects and financing solutions, the focus is on traction of government policy to spearhead tendering process and implementation of the much needed infrastructure investments that have a magnifying effect on the economy*.
*According to IMF study for every EUR 1.0 spend on infrastructure, GDP increases by an additional EUR 0.8
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Retail Sector: operating leverage to kick in
The Greek retail sector has felt tremendous pressure by the prolonged economic crisis with the general retail index posting 40% drop since the highs of 2008. Over the past couple of years the market has seen some improvement, while expectations are that this rebound will continue and could pick up pace, as unemployment drops, disposable income increases and consumer confidence improve. Regarding the listed companies in the sector, the positive backdrop should increasingly reflect on the valuations since the combination of expected higher revenues and operating leverage should lead to stronger profitability and cash flows. At the same time, investment plans now in the backburner, could provide new excitement for the sector.
The fiscal measures taken by the Greek governments over the past 8 years and the increasing unemployment have led to a sharp decline of the retail spending and thus on the revenues and the profitability of the sector. As a result, the Greek retail sector was forced to go through a wide restructuring with key characteristics i) weaker players closing shop, ii) some consolidation taking place, and iii) substantial cost adjustment in the expense structure.
Exhibit 188. Retail sales vs. GDP growth Exhibit 189. Retail sales volume index 2018 vs. 2008
15%
10% 5.6% 10.6% 3.2% -27% -24.31% 5% 2.1% -30.07% 0.8% 1.5% -33.43% -32.31% 5.9% -0.3% -0.5% -0.3% -40.39% 0% -3.2% -44.58% 2.3% -4.3% 1.9% -50.06% -5.4% 0.9% -1.0% -0.8% -0.5% -5% -7.3% -59.73% -9.2% -4.6% -10% -6.9% -8.0% -8.6%
-15% -11.4% 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018* Retail sales (y-o-y) GDP growth
Source: ELSTAT, AXIA Research
Yet since 2016 some confidence has gradually start to build up in the consumers, with consumption showing the first positive trends. This has been supported by improvements in households disposable income driven by i) curbing (albeit from high levels) of unemployment; ii) socially supportive measures by the government, and iii) tourism-driven consumption (arrivals have been increasing by 10% CAGR since 2013).
Exhibit 190. Consumer confidence index Exhibit 191. Retail sales volume index Nov’18 vs. Nov’17 0.0 7.28% 5% 5.25% -10.0 3.27% 3.33% 1.18% 2.00% -20.0
-30.0 -0.56%
-40.0
-50.0 -10.37% -60.0
-70.0
-80.0
-90.0
Source: ELSTAT, AXIA Research
In this backdrop, stronger players proceeded to claim a bigger portion of a smaller pie that along with continuing effort to optimize their expense base, managed to weather the local adverse market conditions. In parallel, some retailers expanded (or continued to expand) abroad in an effort to geographically diversify.
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Focusing on the revenues of the main Greek listed retail companies Jumbo, Sarantis, Fourlis and Plaisio, they have grown over the 7-year period (since the lows of 2011) by a CAGR of 3.5% (including foreign operations) while the EBITDA margin has grown by ~350bps from 13.2% to 16.7%.
Exhibit 192. Listed retailers sales (EUR m) and EBITDA Exhibit 193. Listed retailers net income margin margin
12.0% 2,000 18.0%
1,800 17.0% 10.0% 1,600 16.0% 1,400 8.0% 15.0% 1,200
1,000 14.0% 6.0%
800 13.0% 4.0% 600 12.0% 400 2.0% 11.0% 200
0 10.0% 0.0% FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 IQ_LTM FY2010 FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 FY2017 IQ_LTM Total sales (lhs) EBITDA margin
Source: Companies financials, AXIA Research
Going forward as the economy enters into a sustainable growth path and the disposable income increases we expect revenues grew, while margins should continue to improve at a faster pace despite increased cost pressures. Note that private consumption (that comprises about 70% of the Greek GDP) is expected to grow by 1.5% annually in the medium term. This pace should accelerate if the Greek administration proceeds towards lowering the overall personal income tax rate. Overall we are optimistic about the prospects of the retail sector stocks in our universe over the medium term, assisted by the rebounding economy and supported by robust business plans, healthy financial position, and increasing geographical diversification.
Our universe of retail companies trading in the ASE consists of Jumbo, Fourlis and Sarantis. Although all three companies have substantial activity abroad (Jumbo: c.35% of revenues from abroad, Fourlis: c38% of revenues from abroad, Sarantis: c65% of revenues from abroad) the Greek market represents a large part of their business offering exposure on the sector dynamics.
Exhibit 194. Listed retailers 12M share performance Exhibit 195. Listed retailers P/E (x)* vs. ATHEX
160 150 34.1 P/E (x) 140 130 120 110 100 90 16.6 14.5 15.5 80 12.8 13.1 13.4 13.5 12.3 11.2 12.1 70 10.4 60
Jumbo Fourlis Sarantis
5Y average CY2018 CY2019 CY2020 Jumbo Fourlis Sarantis ATHEX Composite Index
*consensus figures Source: Capital IQ, AXIA Research
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Telecoms: NGN and disposable income to drive top line
The economic crisis accelerated the transformation of the telecom sector in Greece with the pie now divided mainly by three players (OTE, Vodafone Hellas and Wind Hellas), since the listed Forthnet is in negotiations to be absorbed by Vodafone Hellas and Wind Hellas. The prospects of the sector are mainly related to the evolution of the disposable income and the ability of the players to push for higher value services in the market allows a period of hefty investment in NGN. OTE is positioned to grow faster than the sector (has lower broadband penetration vs competitors), albeit the overall profitability of the company to be impacted by the performance of its Romanian subsidiary.
Following increased M&A activity but also the shutdown of operations of a number of smaller players (especially in the beginning of the crisis), Greece now has three telecom companies (OTE, Vodafone Hellas and Wind Hellas) that offer both fixed and mobile telephony. The smaller Forthnet (fixed-telephony and pay-TV) is essentially under the control of Greece’s systemic banks, with Vodafone Hellas and Wind Hellas in a JV, negotiating to buy a stake from them, following an international tender.
The severe economic downturn coupled with the significant decline in the disposable income, the increased levies on the sector and the regulatory changes (i.e. roaming) implemented have led to a decline in the number of active fixed lines (from 5.2m in 2009 to 4.75m in 2017) to slower pace of broadband penetration and to lower revenues. This and the competitive pricing (in the early years on the crisis) reflected on telecom top line
Revenues for the telecom sector reached EUR5.0bn in 2015 from EUR7.9bn in 2009 and they remained at this level for 2016 and 2017. The top line contraction is despite the increased broadband penetration and sharply higher demand for pay-TV (consumers turned to pay-TV as a cheaper form of entertainment).
Exhibit 196. Telecom sector revenue (EUR bn) Exhibit 197. Fixed-Line Market Evolution (million)
7.9 8 10% 5.25 7.1 5.2 6.6 7 6.2 5% 5.08 6 5.5 5.3 5.0 5.0 5 0% 4.91 4 4.80 3 -5% 4.77 4.74 4.75 4.76 2 -10% 1
0 -15% 2009 2010 2011 2012 2013 2014 2015 2016
Turnover (lhs) y-o-y (rhs) 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: EETT, AXIA Research
The sector following a long period of underinvestment (to a lesser extent by OTE), during the period 2016-18 has proceeded to a significant capex to introduce new generation networks (vectoring).
Market trends In respect of fixed telephony, OTE is the incumbent operator representing 55.5% of fixed lines (2017), while in terms of revenues it gathered c61% for the year. For the sector, total revenues from fixed and broadband revenues in 2017 settled at cEUR1.4bn, flattish vs. the previous year. The key characteristics of the fixed telephony performance include the steady decline in voice revenue and the increase of the broadband revenue. Fixed broadband penetration as % of the population settled at c34% in 2017. The faster pace of growth (vs. the EU) over the last few years brought Greece to the EU average in terms of broadband penetration. At end-2017 OTE market share to the total broad lines was at 46%.
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Exhibit 198. Fixed-Line Market Evolution (million) Exhibit 199. Broadband Market Evolution (million)
3.8 3.6 4.80 3.4 3.2 2.9
4.77
4.76 4.75 4.74
2013 2014 2015 2016 2017 2013 2014 2015 2016 2017
Source: EETT, AXIA Research
Pay-TV, following substantial growth between 2012 and 2015, now shows signs of stabilization. The number of subscribers in 2017 reached 1.02m, up 1.3% y-o-y, with satellite-TV representing c90% of the subscriber base. The sharp increase between 2012 and 2015 was driven by the introduction of OTE’s pay-TV (currently c50% market share), allowing the company to improve its churn rate on narrower pricing gap against rivals and to offer value-added services. This strategy is now followed by its two main competitors with the potential of increasing their share of this market segment, especially if they manage to acquire Forthnet (c45% market share), while still at c25% pay-TV penetration in Greece remains small.
Exhibit 200. Broadband penetration progress in Exhibit 201. Progress of VDSL lines Greece vs. EU
33.9% 500 14.0% 31.6%32.8% 12.1% 29.8%31.0% 27.7%28.7% 450 24.8%26.4% 12.0% 22.6% 400 9.7% 20.0% 32.7%33.7% 16.2% 30.8% 350 10.0% 28.9% 7.5% 12.1% 26.5% 24.3% 300 6.5% 8.2% 22.2% 8.0% 20.3% 250 4.9% 17.1% 5.1% 6.0% 13.5% 200 4.0% 9.1% 3.2% 150 2.5% 4.0% 4.4% 1.7% 1.4% 100 0.1% 0.5% 2.0% 50 0 0.0% Dec'13 Jun'14 Dec'14 Jun'15 Dec'15 Jun'16 Dec'16 Jun'17 Dec'17
Greece EU VDSL lines % of total broadband lines
Source: EETT, AXIA Research
In terms of mobile telephony, pre-paid and post-paid contracts in the market in 2017 reached 16.2m (penetration at 150% of the population, up 1.5% y-o-y), with c26% representing post-paid contracts. Total revenue of mobile companies in 2017 reached EUR1.6bn, flattish y-o-y. OTE controlled 46.3% of the mobile market in 2017 in terms of contracts, with Vodafone claiming 30.9% of the market and Wind reaching 22.4%. Characteristic of the mobile telephony is the sharp increase of data posting a 108% y-o-y increase in terms of the MB used, while voice increased by 2% y-o-y and SMS posted a 20.6% y-o-y decline. Still, in terms of mobile broadband, penetration Greece is at c59%, amongst the lowest in the EU.
Exhibit 202. Telecom sector investments Exhibit 203. Progress of Pay TV users (000s)
1,600 25.0%
1,400 20.0% 1,200
1,000 15.0% 800
600 10.0% 902 904 910 730 400 5.0% 493 88 87 105 113
200 67 371 77
942 729 783 922 668 998
1,294 1,371 1,347 1,070 1,131 0 0.0% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2012 2013 2014 2015 2016 2017
Investments (EUR m) Investments (% of turnover) IPTV Satellite Total
Source: EETT, AXIA Research
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Exhibit 204. Progress of mobile telephony Exhibit 205. Mobile broadband penetration in Greece connections and the EU
25 90.2% 83.8% 75.8% 72.0% 20 63.7% 4.6 54.3% 15 46.6% 4.3 4.2 4.2 4.3 4.5 4.4 4.2 4.4 59.1% 10 25.9% 49.8% 23.9% 45.9% 15.7 42.0% 44.1% 11.7 37.1% 36.5% 5 10.3 10.2 10.8 11.4 11.3 11.1 11.9 25.0%
0 12.2% 2009 2010 2011 2012 2013 2014 2015 2016 2017 Dec'09 Dec'10 Dec'11 Dec'12 Dec'13 Dec'14 Jun'15 Jun'16 Jun'17
Pre-paid registered Post-paid Greece EU
Source: EETT, AXIA Research
Going forward Telecom revenues are highly correlated with the disposable income. That said, expectations for improved economic conditions in the market (higher disposable income lower unemployment and also creation of new businesses) should drive telecom revenues (both because of broadband and mobile) higher for the foreseeable future, albeit at steady pace. On top of that, the significant investments in NGN give the opportunity to telecom companies to offer higher value services in broadband, thus leading to higher ARPU. Another point is that the considerable investments made and the need for returns substantially reduce, in our view, the prospect of any price wars. We have seen no effort by the three main operators to alter their pricing strategies over the past few years (actually there were small adjustments higher in respect of some mobile offerings). As revenues are seen to move higher, we would expect margins to continue to improve with companies paying close attention on the expense side. Particularly in respect of OTE, the increase should be higher as the company continue with its large voluntary retirement schemes and the hiring of new personnel at a lower cost.
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Gaming: Betting on VLTs, online and the economy
As of 2017 the Greek gaming market has entered a growth phase driven by the introduction by OPAP of the VLTs and the Virtual Games. The trend is expected to continue as the roll out of VLTs continues, and as the new framework for online gaming (not voted yet) facilitates companies to increase market penetration. The market is dominated by OPAP, a company that is expected to increase its position further as the rollout of the VLTs continues and as OPAP focuses to online. The economy along with the pace of growth of the disposable income are the other catalysts for the sector. For Intralot, a company listed in Greece, the catalysts are more idiosyncratic, while the exposure in terms of revenues in the country, is small.
The regulated Greek gaming market has experienced a sharp drop since the pick in 2008 driven by Greece’s economic stagnation. In parallel, the increased online activity that remain semi-regulated (so no reliable data on the performance) and the illegal gaming from VLTs/AWPs, also reflect on the decline of the market’s regulated revenue. Gaming market (excluding on line) Gross Gaming Revenue (GGR) from EUR2.75bn in 2018 settled to EUR1.63bn in 2017.
Exhibit 206. GGR vs GDP growth (y-o-y) Exhibit 207. GGR vs Disposable income (y-o-y)
10% 10%
5% 5%
0% 0%
-5% -5%
-10% -10%
-15% -15%
-20% -20% 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
GGR (y-o-y) GDP (y-o-y) GGR (y-o-y) Disposable Income (y-o-y)
Source: Hellenic Gaming Commission (HGC), Eurostat, AXIA Research
Key characteristics of the market over the past few years were i) the consolidation that took place with OPAP acquiring Hellenic Lotteries and Horse Races, ii) the efforts by OPAP to slow down the revenue decline through actions to rejuvenate its games and to introduce new ones, and iii) the sharp drop of the GGR of casinos. In respect of the online market, according to the latest data by the regulator (as presented by some market participants on a voluntary basis) the GGR reached EUR280.6m in 2017 from EUR116.2m in 2015 (the sharp increase most likely relates to a larger number of companies deciding to provide data ahead of the regulation of the market). In respect of casinos, the segment experienced a strong pressure on GGR due the recession as the number of visitors and the average spending declined, leading almost all of the casinos of the country in dire position.
Exhibit 208. GGR breakdown - 2010 Exhibit 209. GGR breakdown - 2017
Total GGR: EUR 2.3bn Total GGR: EUR 1.6bn 5.7% 1.7%
15.52% 22.7%
69.9% 84.49%
OPAP Casinos Hellenic Lotteries Horse Races SA OPAP Casinos
Source: Hellenic Gaming Commission (HGC), Eurostat, AXIA Research
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Market trends OPAP controls c85% of the regulated gaming market with the remaining controlled by the casinos. Going forward the main drivers of the market are i) the roll out by OPAP a total of 25k Video Lotto Terminals (VLTs), and ii) the decision by the State to regulate the online market.
Exhibit 210. OPAP Revenue (EUR bn) Exhibit 211. OPAP GGR (EUR bn)
5.3 1.8 5.2 1.7 4.9 1.6 4.2 4.0 1.3 3.8 3.8 3.6 1.2 1.2 1.2 3.5 3.5 1.1 1.2 1.2
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: Hellenic Gaming Commission (HGC), AXIA Research
In terms of VLTs, OPAP is expected to have installed all machines by end 2019 from an estimated 17.5k in end 2018 and we forecast that by 2020 VLTs could generate c20% of the company’s GGR. Key to the success of the game will be the efforts (by the State) to curb illegal betting (according to some estimates the size of the illegal gaming market could be up to 30%-40% of the legal one). In any case, the expansion of VLTs should adversely impact OPAP’s other games namely Kino, the scratch and the Virtuals.
In respect to online, the consultation period for a new online gaming law has been concluded but it is uncertain when the relevant legislation will reach the Parliament to be voted on. A new regulatory framework (for sports betting and casino type of games since for RGN OPAP has the exclusivity) is expected to support demand and to attract interest from existing players but also new ones.
Finally, casinos continue to experience a slide of their GGR, albeit at a slower pace vs the previous years. We note that since the peak in 2007, the GGR of the sector has dropped by c68%, the result of the economic crisis in the country. The slower rate of decline over the past few years is partially credited to tourism. The weak performance of the sector has put pressure on all players, leading shareholders and banks to reconsider their position.
Exhibit 212. Online GGR (EUR m) 213. Casinos GGR (EUR m)
744.5 355.9
626.1 295.7 280.7 513.4
215.1 419.7
330.2 298.7 275.3 123.1 264.9 262.7 253.5
2015 2016 2017 11M:17 11M:18 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Source: Hellenic Gaming Commission (HGC), Kathimerini, AXIA Research
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Going forward Demand for gaming should be supported by the gradual increase of the disposable income, although the GGR of the sector is expected to grow at a much stronger pace, due to VLTs and online attracting different demographic groups than OPAP’s legacy games. At the same time margins to contract as the payout of VLTs and online are significantly higher than most of the market’s legacy games.
Casinos are in an evolving environment: the new legislation implemented should assist profitability through a lower GGR tax as of January 1, 2019 (from 22%-35% to 20% flat), while the Casino of Parnitha is expected to move closer to the center of Athens and a new casino in the area of Hellenikon is expected to be created. Both the casino in Hellinikon and the new Parnitha Casino should be operating over the next 3-4 years. At the same time OPAP’s “Play” stores should continue to claim market share from casinos from the VLTs segment. In any case the catalyst for the sector is the pace of the economy.
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AXIA Universe
Alpha Bank Eurobank NBG Piraeus Bank ADMIE Holding Aegean Airlines Autohellas Cenergy Holdings Ellaktor ElvalHalcor ELPE EXAE Fourlis Gek Terna Intralot Jumbo – Top pick! Lamda Development – Top pick! Motor Oil Mytilineos – Top pick! OPAP – Top pick! OTE PPC Sarantis Terna Energy – Top pick! Titan Cement Viohalco
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Banks Alpha Bank
Alpha Bank holds a unique position in the Greek banking sector, as it presents the highest CET capital ratio (phased-in) of 18.3%, as of 3Q18. This translates into a capital buffer of EUR 2.6bn Rating Buy over the capital requirements set by the SSM. Target Price 2.25 The bank has to deal with its high stock of non-performing exposures, and in particular, with its Price (EUR/sh) 1.12 retail book, for which a transformation plan was introduced as of July 2018, aiming to accelerate MCap (EUR m) 1,723 its restructuring efficiency. As of 3Q18, Alpha had the second largest stock of NPEs (EUR 26.6bn, 89% NPE ratio: 50%, NPE cash coverage ratio: 47%). Free float (%) 3m ADV 4,353 Under the current NPE plan, the bank targets for an NPE ratio of c. 20% and EUR 8bn of NPEs in 2021. In 2019, when the bank plans to reduce the stock by EUR 5bn, the majority of the reduction Price high (12M) 2.252 expected to come from sales and liquidations (56%), write downs (32%) and net outflows (12%). Price low (12M) 0.841
We would expect a similar mix on the road into 2021. On the positive side, the fact that the bank is well-capitalized, provides Alpha with the ability to address its problematic loans more aggressively than the other three systemic banks. To this extent, newly elected CEO, Vassilios Psaltis (effective from 2 January 2019), is expected to present a new business plan for the group, which could potentially include a more ambitious reduction in the stock of NPEs over the medium-term. Going forward…
We expect Alpha’s future profitability to be driven by a reduction in the group’s cost of risk
(albeit at higher level than the other Greek banks), while we estimate a RoTE of 6% in 2021. Alpha Major shareholders currently targets a cost of risk of 220-240bps on gross loans, which we expect to decrease to HFSF 10.96% 130bps in 2021 (even though we have increased the cost of risk estimates in 2019 and 2020 by c.20bps and c.50bps, respectively), supporting a return on tangible equity of 6.1%, from 1% in Blackrock 3.96% 2018. The Vanguard Group 3.19%
Overall, we are not projecting Alpha’s main income statement lines to change materially over the next years as the pressure on NII could be counterbalanced by a better mix of credit and the Company description Alpha Bank, together with its subsidiaries, provides lower cost of funding (including Eurosystem). corporate and retail banking, financial services, investment banking and brokerage services, On fees, we expect a stable growth to the tune of c.5% per year driven by increased activity, but insurance services, real estate management and hotel not much improvement on the cost side, with the cost/income ratio at c.44%. services to individuals, professionals, and companies in Greece and internationally. Alpha Bank was founded in 1879 and is headquartered in Athens, Greece. The bank’s shares are listed in the Athens Stock Exchange since 1925 and are included among the companies with the higher market capitalization.
EUR m 2017 2018E 2019F 2020F 2021F Net interest income 1,943 1,759 1,754 1,804 1,819
Fees and commissions 323 336 356 373 392 Other income 197 516 360 243 201
Total income 2,464 2,610 2,470 2,420 2,412 Total expenses 1,293 1,120 1,096 1,074 1,054
Pre-provision income 1,210 1,040 1,114 1,206 1,263 Provisions (1,005) (1,233) (1,145) (922) (662)
Net profit 194 72 172 318 522 Net loans 43,318 40,325 40,677 39,187 39,812
Gross loans 56,612 52,540 52,165 50,911 51,543 Customer deposits 34,890 39,252 41,607 43,687 45,543
Total assets 60,813 58,637 58,985 59,837 63,067
NPEs 29,272 25,634 21,888 15,202 8,808
NPE ratio 51.7% 48.8% 42.0% 29.9% 17.1% Analysts
NPE coverage ratio 45.4% 47.3% 47.3% 48.0% 49.0% Jonas Floriani – Director of Research Cost-to-income ratio 52.5% 42.9% 44.4% 44.4% 43.7% [email protected] +30 210 741 4460 RoTE 2.2% 0.9% 2.2% 3.9% 6.1%
CET1 ratio (phased-in) 18.3% 18.6% 19.1% 19.3% 20.2% Celia Hjioannou – Analyst Source: AXIA Research estimates, The Company [email protected] +357 22 742 013
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Banks Eurobank Ergasias
In November 2018, Eurobank announced the upcoming merger with Grivalia, which we consider Rating Restricted to be a landmark transaction for the Greek market. In particular, following the increase in capital (EUR 0.9bn) given the merger with Grivalia, Target Price N.R. Eurobank will engage in a new securitization, through which it will transfer EUR 7bn of denounced Price (EUR/sh) 0.55 NPEs into an SPV, driving the NPE ratio to c. 16% in 2019, which is very close to the ratio that the MCap (EUR m) 1,205 bank was planning to reach in 2021 (i.e. 15%) when announced the new NPE targets alongside 3Q18 results. Free float (%) 98% 3m ADV 9,336 We highlight that the sale of a majority stake in Eurobank FPS (NPL servicer wholly owned by the group) is also part of Eurobank’s plan. The size of the stake Eurobank is planning to sell is still not Price high (12M) 1.058 defined, but it will be greater than 51%. In our view, Eurobank will aim to get c.EUR 200-400m Price low (12M) 0.44
from the sale of Eurobank FPS, which will in turn strengthen the group’s capital ratios.
Going forward… Incorporating the Grivalia deal into our numbers, we expect the bank’s profitability to be mainly driven by a significantly reduced cost of risk of 106bps on net loans in 2021 (or EUR 356m) from 200bps in 2017 (or EUR 750m), with the RoTE reaching 10% in 2020, which is still considered to be conservative when compared to management’s guidance. Despite the dilution of Eurobank’s shareholders, we expect that the improvement in profitability, alongside the distribution of SPV tranche to shareholders to act as mitigate factors.
We do not expect meaningful changes at the NII level as the bank will still face headwinds from deleveraging and repayments, which will be partially counterbalanced by the new disbursements. Major shareholders Eurobank already presents a competitive cost/income ratio of 46% (3Q18), which is expected to Hamblin Watsa Inv. Council 16.89% decline further to 44% in 2021, according to our estimates. Given the bank’s recent efforts to Capital Research and 8.35% improve efficiency and the future expenses on IT platforms, we see limited room for significant Management cost cutting. PIMCO 3.32%
In the short-term, we expect the bank to achieve c.EUR 11bn reduction in the stock of NPEs Company description between now and the end of 2019 supported by (i) the new EUR 7bn securitization, (ii) the Eurobank Ergasias and its subsidiaries are active in previously announced EUR 2bn mortgage securitization; and (iii) around EUR 2bn of organic retail, corporate and private banking, asset reduction via collections, liquidations, write-offs, etc. management, treasury, capital markets and other services. Eurobank was founded in 1990 and is incorporated in Greece. The bank’s shares are listed on the Athens Stock Exchange. The Group operates mainly in Greece and in Central and Southeastern Europe. In November 2018, Eurobank announced the merger with Grivalia Properties REIC, by absorption of the latter by the bank. The completion of the merger EUR m 2017 2018E 2019F 2020F 2021F is expected in mid-April 2019.
Net interest income 1,463 1,419 1,419 1,425 1,436 Fees and commissions 268 292 371 382 393
Other income 151 126 88 174 174 Total income 1,882 1,837 1,877 1,981 2,004
Total expenses 894 874 880 880 880 Pre-provision income 987 963 998 1,101 1,124
Provisions (750) (684) (620) (427) (356) Net profit 186 212 210 485 553
Net loans 37,108 36,802 32,628 33,181 34,005
Gross loans 47,242 46,158 35,578 35,578 35,578
Customer deposits 33,843 37,057 40,595 42,625 44,756
Total assets 60,029 57,724 58,565 61,187 64,268 NPEs 20,100 17,447 5,689 4,864 3,407 Analysts NPE ratio 42.5% 37.8% 16.0% 13.7% 9.6% NPE coverage ratio 50.4% 53.6% 51.8% 49.3% 46.2% Jonas Floriani – Director of Research [email protected] Cost-to-income ratio 47.5% 47.6% 46.9% 44.4% 43.9% +30 210 741 4460 RoTE 3.2% 3.9% 4.4% 10.0% 10.4% Celia Hjioannou – Analyst CET1 ratio (phased-in) 17.9% 14.4% 17.9% 19.3% 21.0% [email protected] 2019E-2021E incorporate the Grivalia deal. Source: AXIA Research estimates, The Company +357 22 742 013
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Banks National Bank of Greece
National Bank of Greece presents a solid capital ratio of 16.3% (on a phased-in basis and 13.0% Rating Buy fully loaded) which is expected to remain above minimum requirements in 2019. Target Price 2.59 NBG holds the lowest stock of NPEs of EUR 16.8bn amongst Greek systemic banks as of 3Q18, translating into an NPE ratio of 42%, whereas its cash coverage ratio is relatively high standing at Price (EUR/sh) 1.27 59.8%. Under the current NPE reduction plan, the group aims to reach an NPE stock of c. EUR 6bn MCap (EUR m) 1,165 in 2021 (from the current level (SSM perimeter) of EUR 15.9bn), which translates into an NPE ratio Free float (%) 60% of <20%. 3m ADV 3,812 In 1Q19, the new CEO, Paul Mylonas (appointed in July 2018), is expected to present to the Price high (12M) 3.5 market a transformational business plan for higher profitability addressing the group’s high cost/income ratio of 72% in 3Q18 and 61% in 2021, according to our estimates. Moreover, we Price low (12M) 0.9
expect the group’s new business plan to present possible actions for an acceleration in the
reduction of NPEs. Going forward… We expect the bank to reach a net profit of EUR 152m in 2021, and delivering a RoTE of 3.3%. We do take into account the potential savings from recent exit schemes which could reach EUR 25m in 2019 and forecast total operating expenses to reach EUR 912m-913m in the three years of 2019, 2020 and 2021. Additionally, we expect new guidance on the group’s cost cutting measures and cost/income ratio to come in the new business plan. For the time being we forecast NBG to present a cost/income ratio of 61% in 2021. Major shareholders We highlight that NGB is also in the process of finding a solution for the disposal of its insurance HFSF 40.39% business, Ethniki Insurance. The sale of the insurance business at book value is expected to add c.130bps to the group’s capital ratios. The Vanguard Group 2.06% We expect NBG to sustain a comfortable level of capital going forward and estimate a CET1 ratio Norges Bank Inv. Management 1.97%
(phased) of 12.5% in 2021. This estimate includes the sale of a 75% stake on Ethniki Insurance, the Company description group’s insurance business. We assume that the sale will be around 0.6x the book value of EUR National Bank of Greece was established in 1841 and 850m. We also deduct the related risk-weighted assets of EUR 750m (75% of EUR 1bn). Note that along with its subsidiaries, it provides a wide range of NBG is still waiting for binding offers for the Romanian business, which means that the capital hit financial services including retail and commercial banking, asset management, brokerage, investment already taken could be reversed. banking, insurance and real estate. The Group has In February, NBG announced that the Hellenic Republic and NBG agreed to cancel the interest rate presence in Southeast Europe and Eastern Mediterranean, with the bank’s headquarters located swap Titlos. NBG will benefit by earning annual interest income of EUR110m, while eliminating in Athens, Greece. NBG’s shares are listed on the the need to hedge the IRS (together with the substantial associated cost). The impact is not Athens Exchange since 1880 and on the New York incorporated in our number yet, we calculate that this agreement could add 150bps to 2019e Stock Exchange since 1999.
ROTE to 4.9% and c.30bps to CET1, to 14.4%.
EUR m 2017 2018E 2019F 2020F 2021F
Net interest income 1,386 1,118 1,130 1,125 1,131 Fees and commissions 240 245 254 307 334
Other income (8) 22 20 22 22 Total income 1,617 1,386 1,404 1,454 1,487
Total expenses 943 951 913 913 912 Pre-provision income 674 434 490 542 575
Provisions (788) (328) (354) (349) (333) Net profit (443) 105 151 116 152
Net loans 30,969 30,723 32,338 34,940 37,089
Gross loans 42,103 39,985 39,771 40,195 40,622 Customer deposits 40,265 42,087 43,991 46,100 48,311
Total assets 61,404 63,917 65,722 68,539 70,904 NPEs 18,397 15,739 13,099 9,268 6,340 Analysts NPE ratio 43.7% 39.4% 32.9% 23.1% 15.6% NPE coverage ratio 61.2% 59.0% 55.8% 53.0% 50.0% Jonas Floriani – Director of Research [email protected] Cost-to-income ratio 58% 69% 65% 63% 61% +30 210 741 4460 RoTE -7.0% 2.8% 3.4% 2.7% 3.3% Celia Hjioannou – Analyst CET1 ratio (phased-in) 17.0% 16.2% 14.1% 14.4% 12.5% [email protected] 2019E-2021E do not include the recent Titlos transaction. Source: AXIA Research estimates, The Company +357 22 742 013
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Banks Piraeus Bank
Piraeus Bank presents the most challenging position of the four systemic banks, as it battles Rating Neutral against the highest stock of NPEs amongst the Greek systemic banks (EUR 28.5bn, as of 3Q18), an NPE ratio of 54% with cash coverage of 49%, which is below the average and median in Greece. Target Price 2.51 Price (EUR/sh) 0.79 Under the group’s current NPE plan, the target is to reach an NPE ratio of c. 25% in 2021, reducing the stock of NPEs to EUR 13.3bn. MCap (EUR m) 345 Free float (%) 64% We highlight that Piraeus presents the lowest CET1 ratio of 14.2% amongst the Greek banks (pro- forma phased). At the same time, the bank has undergone the European stress test and, in line 3m ADV 2,253 with the guidance provided by the bank, the SSM is expected to reduce Piraeus' minimum capital Price high (12M) 3.7 requirement for the Pillar II component from 3.75% to 3.25% taking the bank’s Overall Capital Price low (12M) 0.552
Requirements to 14% (vs. 13.75% for the rest of the systemic banks). This is seen as a positive
signal by the SSM as the SREP ratio is one way the supervisor has to ask the banks to hold more
capital against their risk-weighted assets. Going forward… We view that Piraeus’ profitability will remain under pressure given future credit impairments. We project the bank to keep posting a cost of risk of c.155bps on gross loans in the coming years, which averages EUR 821m per year over 2019-2021. Considering the management’s guidance on operating expenses (reach EUR 0.9bn in 2021 from
EUR 1.1bn in 2017), we expect a RoTE of 2.5% in 2021 (vs. management’s guidance for 10%).
At this point, we note that Piraeus is looking into options in regards to Tier 2 bond issuance, Major shareholders aiming to reduce any overhand concerns on its ability to do so over the short term. The SSM seems HFSH 26.42% to have granted Piraeus an extension to secure the extra Tier 2 capital, while the bank is requested Paulson & Co. 9.13% to meet the capital requirements set until September 2019. Reportedly, the extension was driven
by the bank’s decision not to pay the coupon on the CoCos that led to savings of EUR 160m or Company description 36bps on capital. Piraeus Bank was founded in 1916, and it is headquartered in Athens, Greece. Together with its To this extent, it is reported that Piraeus runs a tender for the sale of EUR 2.5bn unsecured NPEs subsidiaries, Piraeus provides services such as retail and also for the management of the bank’s entire portfolio of NPEs that currently amounts to EUR and corporate banking, fixed income, foreign 27.5bn. The preferred bidder through a private placement could also cover (almost to the entirety) exchange and treasury activities, in the Southeastern the EUR 500m Tier 2 issuance. and Western Europe. Piraeus’ shares are listed in the Athens Stock Exchange since 1918.
EUR m 2017 2018E 2019F 2020F 2021F
Net interest income 1,631 1,388 1,404 1,428 1,434
Fees and commissions 351 363 351 368 387
Other income 119 113 100 100 100
Total income 2,101 1,866 1,855 1,897 1,921 Total expenses 1,119 1,156 1,050 997 947
Pre-provision income 983 710 806 900 974 Provisions (2,171) (625) (780) (822) (808)
Net profit 13 69 23 63 128 Net loans 44,720 39,210 41,609 44,053 44,330
Gross loans 60,260 53,051 50,902 50,832 49,751 Customer deposits 42,715 42,721 43,148 45,305 47,571
Total assets 67,417 59,657 62,032 64,42 67,144 NPEs 32,856 27,336 22,093 16,700 13,300 Analysts NPE ratio 56.0% 52.0% 44.5% 34.0% 27.7% NPE coverage ratio 52.1% 49.0% 49.0% 51.0% 51.0% Jonas Floriani – Director of Research [email protected] Cost-to-income ratio 53.2% 61.9% 56.6% 52.6% 49.3% +30 210 741 4460 RoTE -0.2% 1.1% 0.5% 1.2% 2.5% Celia Hjioannou – Analyst CET1 ratio (phased-in) 15.7% 13.7% 13.5% 13.4% 13.8% [email protected] Source: AXIA Research estimates, The Company +357 22 742 013
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Utilities ADMIE Holding
ADMIE Holding is the owner of a 51% stake in Greece’s electricity transmission system operator Rating N.R. (IPTO S.A.) that was curved-out of PPC and listed in ATHEX in 2017. IPTO is a monopoly owning and operating under a regulated return framework Greece’s high voltage grid, 24% is owned by State Target Price N.R. Grid Corp. of China (world’s largest electricity utility). The investment theme gravitates towards Price (EUR/sh) 1.66 the scheduled investment program to improve and expand Greece’s electricity grids that are MCap (EUR m) 385 expected to increase IPTO’s RAB by 10% CAGR in 2018-21. Underleveraged asset and financing capacity of major shareholder are expected to drive dividend distribution going forward, with DPS Free float (%) 52.1 CAGR of 5.0% in 2018-21 on our estimates, yielding ~5.0%. Developments around Crete-Attica 3mADV(k-shares) 89 linkup to improve growth visibility. Price high (12M) 2.49
Key investment themes Price low (12M) 1.46
ADMIE Holding is a “pass-though” entity with >90% of IPTO dividend distributed to
shareholders (51% Greek state, 49% free float). IPTO’s shareholder agreement for minimum 50% payout. Asset base is set to expand significantly in the coming years as Greece upgrades and improves its domestic grid but also its international linkups in order to converge with regional electricity markets. Major projects for the 10-year plan include connection of Crete Interconnection (phase I&II with capex of ~EUR 1.3bn), Aegean islands connection to the mainland (EUR 550m) and expansion and upgrade of mainland system (EUR 650m).
IPTO runs under a regulated operating model, securing stable and long term cash flows.
Average allowed return for regulatory period 2018-21 of 6.5% (vs. 7.8% in 2015-17). Incentive
of 150-200bps for projects of major importance. RAB at EUR 1.4bn, with scheduled investments of EUR 1.0bn in 2018-21 to drive RAB growth Major shareholders of 12.4% CAGR in 2018-21. Total investments of EUR 2.3bn in the 10-year plan. Hellenic Republic 51.1%
Allowed remuneration growth of 9.7% CAGR in 2018-21 driven by investments. Top-line also
supported by auxiliary services (cable rentals) Company description Expanding asset base to drive profitability higher (EBITDA to grow c7.5% CAGR in 2017-21) and ADMIE Holding (the listed entity) controls 51% of boost shareholder returns (DPS growth of c10% CAGR in 2017-21) ADMIE (IPTO SA – the operating entity). Hellenic Republic and State Grid control the remaining State Grid Corp. of China (world’s largest electricity utility), holder of 24% IPTO stake with stake (25% stake and 24% respectively). IPTO SA execution input (acquisition price of EUR 2.85/sh on a comparable to ADMIE Holding basis). is the county’s high voltage electricity grid owner Crete-Attica linkup SPV set up with IPTO injecting EUR 200m (20% of total capex), while in and operator (former subsidiary of PPC)
discussion with other EU TSO’s to participate in the SPV’s equity with minority stake. IPTO Holding trades inline with direct peers at about 5.0% dividend yield for 2018-21 and 10.4- 9.3x EV/EBITDA for 2019-20. Yet IPTO is under-levered (2.2x net debt/EBITDA vs. 5.0x of peers
for 2018).
Risks Finalization of Crete phase 2 interconnection framework and scheme / Funding structure of
Crete 2 phase project / Conceptually affected by lower yields / Complex holding structure / State maintains a 51% stake
EURm 2015 2016 2017 2018E 2019F 2020F Total Revenues 264.6 248.6 256.5 232.6 249.8 279.8 Regulated 239.7 225.5 236.9 196.2 212.8 242.8 Other 24.9 23.1 19.6 36.4 37.0 37.0 EBITDA 154.8 152.0 172.0 176.4 166.9 196.3 EBITDA margin 58.5% 61.1% 67.0% 75.8% 66.8% 70.1%
EBT 61.9 54.1 83.0 112.2 85.7 92.5 Net Income 35.5 -2.7 61.7 79.7 60.8 65.7 DPS (for ADMIE Holding) 0.00 0.00 0.07 0.09 0.07 0.08 Capex (138.6) (142.1) (70.1) (300.0) (465.0) (184.0) RAB 1,373 1,517 1,430 1,431 1,646 1,922 Net Debt 301.7 204.0 234.4 381.5 768.0 843.3
Net Deb/EBITDA 1.9 1.3 1.4 2.2 4.6 4.3
P/E NA NA 19.9 12.2 16.0 14.9 Analyst EV/EBITDA NA NA 5.7 7.7 10.4 9.3 EV/RAB 8.9 10.0 8.3 8.1 9.9 9.8 Argyrios Gkonis RAB/EBITDA 8.9 10.0 8.3 8.1 9.9 9.8 [email protected] Dividend yield (ADMIE Holding) 0.0% 0.0% 3.4% 5.7% 4.4% 4.8% +30 210 741 4462 Figures refer to 100% IPTO SA. Source: AXIA Research A XIA Research Page 90
AXIA Research
Airlines Aegean Airlines
Aegean is a full service airline, attending exclusively one of EU’s fastest growing aviation markets, Rating Buy Greece. Aegean is the leader (27% share) in a market that grows by 9.5% CAGR the last years and is expected to continue growing at high rates driven by tourism demand and improving macro. Aegean Target Price 10.0 is positioned in the mid-range of legacy and low cost (LCC) space, allowing the company to effectively Price (EUR/sh) 8.05 compete, while continuing streamlining efforts are helping it deliver solid financials. In order to meet MCap (EUR m) 575 growing demand and enhance competitiveness, Aegean placed earlier this year a re-fleeting order for up to 42 new generation aircrafts that will offer significant fuel and maintenance savings amid higher Free float (%) 38% seat capacity and lower ownership costs, with deliveries expected to start by 2020. On our view the 3m ADV 34 current environment provides a positive backdrop for Aegean to register solid profitability growth and Price high (12M) 9.59 maintain its hefty dividend distribution policy (55% payout for 2018-20). Price low (12M) 6.52
Key investment themes
EU aviation market environment not expected to change drastically as restructuring is primarily a politically sensitive issue. We expect airlines with streamlined cost structure and focused 10.0 management to continue to enjoy high growth rates and superior returns. Aegean’s operating 9.0 model with a cost base competitive to low cost names, but offering quality experience (8 times 8.0 ranked best EU’s regional airline) should allow the company to continue to benefit. 7.0 International arrivals in Greece reached 33m in 2018 growing by 10% y-o-y and by 11.0% during 6.0 5.0 2012-18 CAGR. 2019 is expected to be a stabilization year for the market in respect of offered Feb Mar Apr May Jun Jul 18 Aug Sep Oct Nov Dec Jan capacity, following extensive growth over the previous years. Note that air arrivals account for more 18 18 18 18 18 18 18 18 18 18 19 Aegean Airlines S.A. than 76% of the total international arrivals in Greece. Demand is expected to be sustained as the ATHEX Composite Index (Rebased)
Greek tourism industry continues investing in new infrastructure (hotels, airports, highways, entertainment) to offer an augmented experience to visitors and tap new markets. Major shareholders In order to meet growing demand and enhance competitiveness, Aegean placed earlier this year a Vasilakis Eftichios 36.6% re-fleeting order for up to 42 new generation aircrafts that will offer significant fuel and SIANA Enterprises Co. Ltd 9.48% maintenance savings amid higher seat capacity and lower ownership costs, with deliveries expected ALNESCO Enterprises Co. Ltd 9.48% to start by 2020. Bulk of re-fleeting order backed by sale and leaseback agreements, while new Constantakopoulos Achileas 6.39%
acquisitions funded by new credit lines and cash at hand. For 2019 Aegean announced a 5.5% increase in offered capacity (700k seats) mainly targeting international destinations (North Africa, Continental Europe) out of Athens. Management is Company description targeting to capture the positive trends on the “shoulders” of the summer season (recall that Aegean Airlines S.A., an airline company, Aegean international traffic in 1Q18 increased by 15.6% and in November 2018 grew by 18% y-o- provides public aviation transportation services in Greece and internationally. The company y), while also taking advantage of competition exiting the market (defaulted Germania had 380k operates through two segments, Scheduled seats to Greece in 2018) or reducing capacity (Ryanair). Flights and Charter Flights. It offers We forecast Aegean’s international passenger traffic to grow by 6.5% CAGR for 2017-20 and total transportation of passengers and commodities through scheduled and unscheduled flights. The passenger growth of 3.9% CAGR for the same period. With fares levered from international routes company also provides services of aviation and gradual growth of ancillary revenue, we model total revenues to grow by 4.7% CAGR for 2017- applications, technical support, and on ground 20. Profitability in the period is expected to be driven by top line performance as strict cost handling aircraft services. management and continued efficiencies should mitigate the impact of higher fuel prices and cost
inflation. We model for EBIT growth of 1.9% CAGR for 2017-20. Aegean currently trades at 8.3x-8.0x on 2019-20 P/E which is inline with sector names, but its hefty payout drives dividend yield at 6.6%-6.9% compared to sector yielding 4.5%.
Risks
Competition from low cost companies and especially in the domestic market / Rising fuel costs / Exposed to FX (USD short) / Domestic macro environment remains subdued with significant seasonality effect
EUR m 2015 2016 2017 2018E 2019F 2020F Total passengers (k) 11,650 12,463 13,217 13,933 14,472 14,834
Domestic 5,624 5,725 5,903 5,963 5,977 6,008 International 6,027 6,738 7,314 7,970 8,495 8,826 Yield 8.71 8.03 8.14 8.03 7.95 7.86 Revenues 982.9 1,020.4 1,127.7 1,194.8 1,251.9 1,293.3 EBITDAR 217.2 206.9 257.3 255.4 259.0 271.6 EBT 100.2 51.6 85.8 93.1 97.2 100.2 Net Income 68.3 32.2 60.4 66.1 69.0 71.2
DPS 0.70 0.40 0.55 0.51 0.53 0.55 adj. Net Debt/EBITDAR 5.0 5.4 4.9 4.7 4.6 4.7 P/E 7.1 x 14.0 x 9.8 x 7.8 x 8.3 x 8.0 x Analyst adj. EV/EBITDAR 5.0 x 5.4 x 4.9 x 4.7 x 4.6 x 4.7 x FCF yield 8.5% 26.4% 17.6% 8.1% 13.8% 2.9% Argyrios Gkonis Dividend yield 10.2% 6.3% 6.7% 7.1% 6.6% 6.9% [email protected] Source: AXIA Research, the Company +30 210 741 4462 A XIA Research Page 91
AXIA Research
Leisure-Tourism/Car rentals Autohellas
Autohellas is the largest Hertz International subsidiary globally, and amongst the very few companies in the Target Price N.R. Athens Exchange that directly relates to both Greece’s economic growth and the dynamic tourism industry of the country. These drivers are expected to continue to fuel the company’s top line, while volume growth to be feeding Rating N.R. the company’s hybrid operational model, supporting profitability. About 20% of the group’s operating profitability Price (EUR/sh) 22.20 derives from international operations, while the company is expected to benefit by its decision to enter the auto trading business in Greece at the trough of the cycle. Autohellas continues to trade at a significant discount to its MCap (EUR m) 270 peers, which is even bigger if we account for the company’s 11.6% stake in Aegean. A key issue for the stock is Free float (%) 35% liquidity, which although has improved, it remains very low. 3m ADV 5 Key investment themes Price high (12M) 26 Autohellas is well placed to gain by the growth of tourism and of the economy both in Greece and Price low (12M) 20.4
in the other markets it operates:
Rent-A-Car in Greece mainly relates to leisure (c85% of total demand) and therefore the segment’s revenue and profitability is expected to continue to grow at a healthy pace as tourism remain strong and as it expands in the shoulder months of the peak season. Autohellas is the largest provider of RAC in the country (c18% market share). Autohellas is the second largest player in car leasing in Greece. This is a growing segment as the economy rebounds, while the company has a competitive advantage on leasing to SMEs. International operations to continue to expand as local economies grow and Autohellas invests
in car fleet and creates a size to apply its operational model.
Well placed to gain from the demand for cars having three exclusive local distribution agreements (SEAT, Hyundai and KIA) and an established car-trading subsidiary. The company entered the
market, at the trough of the cycle and is expected to benefit by i) higher demand as the economy Major shareholders rebounds and ii) higher operating leverage (consolidation of new activities and size since by now its car trading activities represent car 12 brands). Vasilakis 60.06% We forecast top line to jump 28.6% y-o-y in 2018, reflecting growth in RAC/Leasing but mainly the Fidelity Investments 5.02%
sharp increase of auto trading revenue (addition of Hyundai and KIA distribution). 2017-20F, top line CAGR estimated at 13.5%. EBITDA in 2018 is forecasted at EUR135m or 13.0% higher y-o-y with the respective margin declining 500bps as the low-margin auto trading business generates a Company description Autohellas is the leading Car Rental player in larger part of revenues. 2017-20F EBITDA CAGR is seen at 8.9%. EPS y-o-y growth in 2018 is south-eastern Europe offering both short-term forecasted at 19.9% with a 2017-20F CAGR at 14.3%. car rental and long-term leasing services. The The group has been on an expansion mode over the past few years. Still, net debt/EBITDA settled group is the largest global subsidiary of Hertz International. Greece is the group’s main market at 2.8x in 2017, at the low end of the sector, as peers operate at c7.1x net debt/EBITDA. but over the last 10 years it has expanded its FCF generation is expected to improve in the coming years driven by operating profitability but international footprint operating in other seven also the normalization of the investment cycle. The 11.6% stake in Aegean Airlines provides markets: Cyprus, Bulgaria, Serbia, Montenegro, Autohellas with substantial dividend and also beneficial commercial agreements. Croatia, Romania and Ukraine. Since late 2015 the company entered in the auto trading market The company trades at a sharp discount to its direct peers (55.5% discount in terms of P/E and in Greece operating both as a wholesaler and as 68.0% in terms of EV/EBITDA, for 2019) although we highlight that these peers are active in larger retailer of cars. markets with different operating models and revenue mix. On the other hand, we note the low
liquidity of the stock.
Risks High exposure to Greece / Sensitivity of tourism on pricing, trends and geopolitical risks / Aggressive competition in Greece (other rent-a-car & leasing companies as well a car sharing services) / Interest rate-refinancing risk
EUR m 2015 2016 2017 2018E 2019F 2020F 2021F Revenues 182.9 264.8 340.6 450.7 492.0 524.6 547.4
Greece 143.9 140.6 165.1 185.6 199.2 210.3 219.3 International 39.0 49.1 57.0 59.0 61.1 64.5 66.8
Car trading - 75.1 118.5 206.1 231.7 249.8 261.3
Gross Profit 104.6 126.9 144.7 175.2 190.0 199.4 207.7 OPEX 18.3 26.8 31.2 51.0 54.7 57.1 58.9 EBITDA 88.1 104.3 119.3 135.0 146.8 154.0 160.4 EBIT 33.5 41.8 54.1 64.9 70.6 75.4 78.2 Net Financials (9.0) (13.4) (14.6) (17.4) (15.3) (13.9) (12.7) EBT 27.6 30.3 41.4 52.3 58.8 65.2 69.4 Net Income 18.6 22.7 31.6 37.9 42.6 47.3 50.3
EPS 1.5 1.9 2.6 3.2 3.5 3.9 4.1 DPS 0.8 0.9 1.1 1.3 1.4 1.6 1.7 Capex 107.7 147.4 158.8 102.3 84.5 86.9 85.2 Net Debt 215.2 261.0 337.0 362.5 356.2 347.4 333.4 Analyst P/E 6.0 x 6.1 x 9.1 x 6.8 x 6.3 x 5.7 x 5.3 x EV/EBITDA 3.7 x 3.8 x 5.2 x 4.7 x 4.2 x 4.0 x 3.7 x Constantinos Zouzoulas [email protected] Div. yield 9.3% 7.5% 4.6% 5.8% 6.3% 7.0% 7.5% +30 210 741 4460 Source: AXIA Research estimates, The Company
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AXIA Research
Industrials Cenergy Holdings
Cenergy is a holding company offering exposure in the global demand for energy transportation and Rating N.R. distribution infrastructure through its steel pipes (Corinth Pipeworks) and cables (Hellenic Cables) 100% owned subsidiaries. The company operates manufacturing facilities primarily in Greece but Target Price N.R. has a global reach with >65% of its sales booked abroad, being strategically positioned in the US, Price (EUR/sh) 1.29 South Med and Northern sea/Baltic markets. Following an extensive investment cycle and solid underlying demand, Cenergy is increasing its footprint in niche market segments, while targeting MCap (EUR m) 240 higher value-adding projects. The increasing backlog and positive trends in profitability that are Free float (%) 18% expected to be realised as of 2019, should support the company’s high leverage accumulated during 3m ADV 71 its investment cycle. Price high (12M) 1.6 Key investment themes Price low (12M) 0.972
The key competitive advantage of both subsidiaries is the state of the art facilities, knowhow and
patents they hold on their respective markets that have been accumulated over the years. Profitability depends to a large extend on the project contracts and pricing the subsidiaries can achieve. Both names are approved suppliers of all major E&P and utility companies globally which allows them to participate in a significant pool of project tenders. Steel pipes: Corinth Pipeworks (CPW) engages in the production of steel pipes for the transportation of natural gas, oil and water networks, as well as steel hollow sections which are used in construction projects. Amongst others, CPW constructs the largest length
underwater steel pipes worldwide, while recently introduced a concrete weight coating
facility, which provides a competitive advantage in the offshore pipeline market.
Cables: Hellenic Cables constitute one of the largest cable producers in Europe, manufacturing power, telecommunication and submarine cables, as well as enamelled wires Major shareholders and compounds. The company can product and deploy the largest submarine cable length Viohalco 81.93%
worldwide without joints, reducing drastically the cost, execution time and risk on these
applications. 2019 is expected to be an inflection year for the profitability of Cenergy. This will be primarily Company description driven by the execution of a significant backlog of projects booked by Hellenic Cables, utilizing the Cenergy Holdings is the steel pipes and cables significant investments undertaken over the previous years and the dynamic market penetration. arm of Viohalco. The entity was listed in 2016 (primary listing in Euronext Brussels) following At the same time steel pipes business will maintain the utilization of production at high levels the merger of two long standing companies, continue under the current sales/project mix. Corinth Pipeworks and Hellenic Cables. Corinth Very limited impact from US import tariffs as the company’s high quality products (mainly steel Pipeworks (CPW), is a world leader in steel pipe manufacturing for the oil and gas sector and pipes used in oil and gas transportation) are not available or easily replicated by other producers. major producer of hollow sections for the Potential for upside from further escalation of sanctions towards Asian producers. construction sector. Cablel (Hellenic Cables) is Leverage is high due to extended investment cycle in order to target higher value-adding one of the largest cable producers in Europe, manufacturing power and telecom cables for markets, but also increasing WC needs. Management is working to re-profiling of debt, taking various sectors, including oil and gas, advantage of the Brussels, based listing and the BS of parent Viohalco. renewables, energy transmission and distribution, construction and Risks telecommunications.
Inflationary pressures from labour and energy costs / Further escalation of trade sanctions by the US / Competition from larger players especially in cables segment / Interest rate-refinancing risk given the elevated debt.
EUR m 2015 2016 2017 y-o-y 1H17 1H18 y-o-y Revenues 774.8 691.8 758.3 9.6% 385.4 451.0 17.0% Steel pipes 296.2 320.2 335.8 4.9% 180.3 223.6 24.0% Cables 478.6 389.6 422.4 8.4% 205.1 227.5 10.9%
adj. EBITDA* 73.2 59.7 57.4 -3.8% 25.0 28.7 14.7% Steel pipes 30.8 28.2 25.5 -9.8% 13.8 14.7 6.9% Cables 42.2 32.0 33.2 3.8% 11.2 13.9 24.2% adj. EBITDA margin 9.4% 8.6% 7.6% 6.5% 6.4% EBIT 44.8 33.8 22.3 15.0 14.1
EBT 15.5 2.8 -10.6 -1.2 -2.4 Net Income 7.7 -3.7 -4.8 -0.9 -1.1
Equity 209.1 206.5 200.2 195.1 Net WC 181.7 205.3 198.0 261.7 Net Debt 340.6 375.9 385.4 452.9 Net Debt/EBITDA (x) 4.7 6.3 6.7 NM
EV/Sales (x) 0.6 0.7 0.8 EV/EBITDA (x) 6.3 8.3 10.8 Analyst
P/E (x) 15.7 NM NM Argyrios Gkonis P/BV (x) 0.6 0.6 1.2 [email protected] Source: AXIA Research estimates, The Company +30 210 741 4462
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AXIA Research
Construction Ellaktor
Ellaktor has booked in 2013-18 cumulative bottom line losses of ~EUR 500m affected by the thin (or Rating Buy negative in some projects) profitability of its driving and most traditional activity, construction, while liquidity is very tight. This has triggered an intense shareholder proxy that ended in summer 2018 Target Price 2.20 with Kallitsantsis family assuming management in an effort to turnaround the group and unlock Price (EUR/sh) 1.55 shareholder value. New management is focusing to clear any legacy issues (mainly on the international portfolio), restore profitability and utilize the group’s asset base in order to improve MCap (EUR m) 267 liquidity and strengthen balance sheet. In this context management has already launched the process Free float (%) 53% to absorb its wind park subsidiary, executed a sale and lease back agreement for its HQ office 3m ADV 382 building, with 2019 expected to be the first year with positive bottom line since 2012. Focused Price high (12M) 2.155 execution is of the essence to improve market sentiment over the name and drive stock rerating. Price low (12M) 1.104
Key investment themes
Greece’s largest construction company, having executed significant projects over the years having also a regional presence. The company is expected to claim a significant share of upcoming infrastructure investments in the country. Loss making international projects, thin profitability and slow tendering of new projects are pressuring the group’s key division, construction. Operations to focus in domestic construction and selective international and gradually post some profitability. Management guides for no
additional impairment form legacy backlog after 2018.
Backlog at 9M18 of EUR 1.65bn (55% international)
Holder of a 65% stake in one of Greece’s most lucrative assets, Attika Ring Road. Estimated cumulative dividends of ~EUR 600m to be received by 2027 from the project. Minority stakes in Major shareholders other motorways that were given to circulation in end-2017 with cash distribution though starting Kallitsantsis family 27.3% in 2027. Leonida Bobolas 15.0% Strong brand name in waste management construction and operation projects with significant international exposure. Cash positive division with contracted cash flows form facility Amber Capital 5.6%
management. Second largest player in domestic wind park market, with 296MW installed and a target of Company description 492MW by end 2020. Initiated process for the merger by absorption of the remaining 35% of wind Ellaktor is a diversified construction and park arm, El.Tech.Anemos in an all-share transaction expected to be completed in 1H19. concession conglomerate. The group is active in Other non-core assets/participation (real estate, thermal energy) could be divested. In February Greece and also has regional presence. Its executed a sale and lease back of HQ office building for EUR 25.5m. Additional ~EUR 50m could be construction arm, Aktor is one of the two largest construction companies in Greece and is also raised from non-core asset sales. active in the Balkans and the Middle East. Significant upside on a blue sky scenario, downside cushioned by hard asset exposure (Attiki Concession portfolio of operating motorways Odos, Anemos). Ex-construction, all debt is adequately covered by assets not pressuring balance includes Greece’s most lucrative concession, Attiki Odos. Group is also active in wind energy sheet. (2nd largest player in Greece), real estate Ellaktor trades at 5.4x-5.2x on 2019-20 EV/EBITDA vs. domestic peer Gek Terna trading at 5.4x- development and management and thermal 5.0x and EU construction/concession peers trading at 6.6x-6.2x energy.
Risks Uncertainty over legacy issues in construction / Slow tendering process for new construction projects in Greece and increased competition abroad / Limited profitability and stretched liquidity
on the construction division / Traffic volume risk in concession portfolio / Regulatory risk for wind park business
EUR m 2015 2016 2017 2018E 2019F 2020F Group Revenues 1,533.1 1,942.4 1,865.8 1,832.2 1,436.5 1,205.5 Construction 1,161.3 1,552.7 1,509.5 1,445.0 1,045.0 795.0 Real Estate 7.2 7.0 6.8 7.0 7.2 7.4 Concessions 206.0 230.3 222.9 240.8 229.7 222.5
Wind 40.1 45.2 49.7 57.3 72.6 97.8 Waste mgm 118.2 106.9 76.5 82.0 82.0 82.9 Group EBIT 28.8 31.1 101.6 0.3 130.2 146.1 Construction (39.9) (66.9) 5.1 (123.9) 17.7 13.6 Real Estate 3.7 0.6 (1.3) 1.1 1.2 1.2 Concessions 58.7 83.7 103.7 80.3 71.2 74.8 Wind-Anemos 19.6 21.7 21.9 31.6 36.9 53.4
Waste mgm 18.2 5.0 -0.4 18.3 10.2 10.1 Group Net Income (106.2) (121.9) (41.2) (121.3) 20.2 32.1 Corporate net debt 551.1 527.1 514.7 681.9 679.5 685.8 Analyst P/E nm nm nm nm 16.5 10.4 EV/EBITDA 7.0 x 6.3 x 5.0 x 10.9 x 5.4 x 5.2 x Argyrios Gkonis P/BV 0.3 x 0.3 x 0.4 x 0.4 x 0.6 x 0.6 x [email protected] Source: AXIA Research estimates, The Company +30 210 741 4462
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AXIA Research
Refining ELPE - Hellenic Petroleum
Ongoing privatization has turned the spotlight on ELPE (binding bids deadline set for mid-March) at a time that the group is best positioned to benefit from the IMO 2020 framework and has significantly Rating Buy de-levered its balance sheet. Following a soft 2019 (includes maintenance), 2020 is set to be a Target Price 10.20 historical high for ELPE’s profitability while there is scope for operational improvement going forward Price (EUR/sh) 7.90 to further leverage profitability. MCap (EUR m) 2,414 Key investment themes Free float (%) 20% Privatization process update. Following the obligation of the Greek State to reduce its participation in ELPE, a joint sale of a 50.1% stake has been agreed along the State and majority 3m ADV 77 private shareholder, Paneuropean Oil (Latsis family). Stake is selling 20% and POIH is offering Price high (12M) 8.68 another 30%. Two consortiums have advanced to the binding bids stage i) Glencore-Carlye and ii) Price low (12M) 6.6
Vittol-Sonatrach. We note the politically sensitive timing of the transaction (ahead of the Greek
elections) noting though that the State has already cleared all the tricky points. The focus is now on the price offered and weather it would be accepted by the government and the private seller. ELPE is one of the best positioned refineries to capitalize on the IMO 2020 regulation. The recently concluded investment in a new coker (2013) has benefited the group with a middle distillate yield of 50% and fuel oil of just 10%. At the same time ELPE’s system allows to refine heavier crudes (>60% heavy feed), while sourcing is benefited by the proximity of the refineries to various producers and captive markets. Following an expected weakness in 1H19, refining performance is expected to ramp up starting in
3Q19. Based on their crude diet and product yield we expect ELPE’s margin to gain $2.5/bbl in
2020 and drive refining EBITDA to an all-time high of EUR 693m (vs. 2015-18 average o EUR 566m). Major shareholders Group is exposed to the Greek macro upside. ELPE sell to the domestic market c45% of their POIH (Latsis 45.47% production volumes control about 60%-65% of the domestic wholesale market that offers higher family) margins vs. international sales. On the retail side through own marketing network ELPE command Greek State 35.47% a 30% market share. Greek market demand is down c20% since 2010.
Through strong FCF generation in 2015-18, ELPE have re-risked their balance sheet, settling past
due liabilities and allow the group to engage a rich payout policy (2018 dividend yield >10%). Company description Recent DESFA sale to further reduce leverage (70% of proceeds to be used to reduce debt). Also Hellenic Petroleum is an independent refiner this allowed to aggressively reduce interest expenses by 40% (EUR 50m) since 2015, while further operating three refineries in Greece with a total reduction is expected going forward. production capacity of 240kbpl/d (65% of the Greek market capacity). Exports account for 60% Group is set for a record year in 2020, with EBITDA reaching EUR 898m (+18% vs. 2015-18 average) of the total sales targeting East Med markets. and net income of EUR 440m (+47% vs. 2015-18 average). Holds >30% of the domestic retail supply market With ELPE’s running cost above sector average, there is scope for further efficiencies to improve through gas stations (operator of BP brand in Greece). The company has also presence in profitability and tackle cost base that could boost EBIDTA by at least EUR 50-80m, while sale of Balkans. The group holds a 35% participation in DEPA stake to offer additional cash. No major investment needs ahead. natural gas supply company DEPA that is be On our estimates ELPE trade at 6.3x-4.4x EV/EBITDA for 2019-20, with dividend yield of 6.3%- privatized allowing for additional deleverage. Early stage E&P initiatives in Greece in JVs with 8.9%. This compares to ELPE’s 5y average EV/EBIDTA of 6.0x and EU peers median trading at Edison and Calfrac. 5.8x-4.9x and yielding 3.3%-3.5% respectively. Note that if we adjust for ELPE’s stake DEPA (that could be disposed similarly to DESFA) 2019-20 EV/EBITDA slides to 5.7x-3.9x.
Risks
Global economy slowdown and trade tensions to affect product demand / levered vs. sector balance sheet / volatility of oil prices / domestic macro environment deterioration.
EUR m 2016 2017 2018E 2019F 2020F 2021F Refining sales volumes (k MT) 15,602 16,056 15,997 16,006 16,151 15,851
Refining gross margin ($/bbl) 9.5 10.5 10.5 9.7 12.2 11.5 Refining 536.6 632.0 536.2 456.5 693.2 628.2 Marketing 96.0 107.0 99.8 109.1 111.4 112.5 Petchems 100.1 84.6 99.7 100.6 100.1 99.6 Group adj. EBITDA 731.0 823.5 725.7 659.3 897.7 833.3 Net financials (200.8) (165.1) (144.7) (126.1) (114.5) (114.1) Adj. Net Income 265.0 372.0 290.1 258.0 440.4 398.1
DPS 0.20 0.40 0.80 0.50 0.71 0.65 Capex (125.7) (208.7) (140.0) (225.0) (165.0) (145.0) FCF (651.3) 97.3 262.6 173.0 393.0 426.6 Net Debt 1,141.8 1,122.6 1,760.9 1,801.5 1,672.4 1,740.2 Net Debt/EBITDA (adj.) 2.4 2.2 2.3 2.6 1.7 1.5 P/E (x) 5.1 6.3 7.7 9.4 5.5 6.1 Analyst EV/EBITDA (x) 4.3 5.0 5.4 6.3 4.4 4.4 FCF yield -48.2% 4.2% 11.8% 7.2% 16.3% 17.7% Argyrios Gkonis Dividend yield 4.5% 5.3% 10.8% 6.3% 8.9% 8.2% [email protected] Source: AXIA Research, The Company +30 210 741 4462
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AXIA Research
Industrials/Metals ElvalHalcor
ElvalHalcor (“ELHA”) is a global aluminium and copper products manufacturer with production Rating Buy facilities in Greece and Bulgaria, while 90% of its output is directed to the international markets. The company was launched in Dec’17 following the merger of two established and with long history Target Price 2.30 companies, Elval (a leading aluminium products fabricator) and Halcor (the biggest copper tubes Price (EUR/sh) 1.48 producer in EMEA). The shares of the new entity begun trading in Athex in early Feb’18. ELHA holds no interest in primary metal production, while its business model makes it immune to metal price MCap (EUR m) 555 fluctuations. The company, that holds significant market shares in various products classes in the EU, Free float (%) 9% is now focusing on further penetrating niche markets and increasing capacity and utilization by taking 3m ADV 67 advantage of its size. Growth of both volumes and realized margins is seen driving profitability sharply Price high (12M) 1.925 higher (2017-20 adj. EBITDA CAGR of 12.4% vs. sector at c6.5%). Price low (12M) 1.1
Key investment themes
90% of output is directed to international markets (>10% of sales to the US) “Pass through” Operating model with no exposure on commodity price fluctuations The aluminium segment (Elval) in 2017 booked shipments of 292kMT generating EUR 82m of adj. EBITDA (67% of ELHA total). Elval serves a 5.0mMT market that is expected to grow by 3.0-4.0% p.a. over the coming years and is holding amongst other significant market shares in niche product ranges. Elval is looking to capitalize on demand trends by increasing its installed capacity as of 2020-
21. The investment that comes at a cost of EUR 150m, is expected to add 15.5% to the output
leading adj. EBITDA 34% higher. Additionally, Elval is looking to benefit from further penetrating
niche markets and opportunities to improve sales mix. In total we forecast Elval adj. EBITDA to reach
EUR 93.8m in 2018 and EUR 103.4m in 2019 and grow by 10.4% CAGR in 2017-21. Shareholding The copper segment (Halcor) in 2017 contributed 50% of group comparable revenues and 33% of adj. EBITDA. EU copper manufacturing industry has been facing the headwinds of modest demand Viohalco 91.45%
growth and shifting trends, with the capacity utilization at just 80%. Halcor, the owner of the biggest copper tubes plant in the EMEA has managed to shift its production to industrial application Company description products (c70% of 2017 sales) that have more stable demand trends and better margins. Also with ElvalHalcor Hellenic Copper and Aluminium the transfer of knowhow from Elval, the copper rolling and extrusion subsidiary Sofia Med is not industry S.A. (ElvalHalcor, “ELHA”) is a leading only ramping up production but also expected to realize higher commercial margins by targeting global manufacturer of aluminium and copper products. The Company was formed in December higher value products amid a less competitive environment. Overall we expect copper segment 2017 via the merger of Elval, a leading European sales volumes to grow by 3.0% CGR in 2017-22, with adj. EBITDA growing by 12.4% CAGR for the aluminium rolling company, and Halcor, the same period. largest copper tubes producer in Europe. In 2017 We estimate that ELHA’s gross operating FCF will reach EUR 115.1m in 2018 (+4.0% y-o-y) and EUR the company sold 192kMT of aluminium products and 156kMT of copper and alloy products. As a 127.7m in 2019 (+11.0% y-o-y). This should allow the company to serve the EUR 214m of required combined entity ElvalHalcor capitalises on capex for growth and maintenance over the period 2018-19, while keeping leverage on a declining natural synergies in innovation and technology, trend. Specifically, we expect net debt/adj. EBITDA from 4.1x in 2017 to decline to 3.0x in 2019. R&D, procurement, marketing, infrastructure and environment to produce value added, high With FCF generation of above EUR 90m p.a. after 2020 (c15% FCF yield) we believe the company quality solutions for its global client base. The can start dividend distribution as soon as 2021. company is subsidiary of Viohalco. Significant M&A in the sector in 2Q18 (direct peers), pointing to “fair” valuation multiples of about
11.0x-12.0x on trailing EV/EBITDA of ~7.3x on fully utilized capacity. ELHA currently trades at 6.3x-5.2x on 2019-20 EV/EBITDA vs. weighted average of aluminium and coper sector peers at 6.1x-5.7x (vs. sector 10y historical of 7.2x)
Risks Exposure to global trade tensions / Competition in the EU / Substitution trends / Leverage for
copper segment / Limited free float
EUR m FY2016 FY2017 FY2018E FY2019F FY2020F FY2021F Aluminium sales volume (kMT) 283 292 297 303 310 317 Copper sales volume (kMT) 135 156 161 167 173 181
Total Revenues 1,534.1 1,863.3 1,967.6 2,034.7 2,101.8 2,177.6
Total adj. EBITDA 119.5 129.2 147.8 165.6 183.5 203.0 Aluminium segment adj.EBITDA 87.5 87.1 93.8 103.9 115.1 129.1 Copper segment adj. EBITDA 32.3 42.2 54.1 61.6 68.4 73.9 Net Income 23.5 60.7 45.0 55.9 58.0 74.7 DPS 0.00 0.00 0.00 0.00 0.00 0.09 Capex -36.4 -133.7 -86.0 -126.0 -34.0 -39.0
FCF 15.8 -23.1 29.1 1.7 95.8 103.8 adj. FCF NA NA 88.8 101.7 95.8 103.8 Net Debt 524.4 526.8 497.7 496.0 400.2 296.4 P/E NA 12.4 12.3 9.9 9.5 7.4 Analyst EV/EBITDA NA 9.9 7.1 6.3 5.2 4.2 adj. FCF yield NA -3.1% 5.3% 0.3% 17.4% 18.8% Argyrios Gkonis Source: AXIA Research estimates, The Company [email protected] +30 210 741 4462 AXIA Research Page 96
AXIA Research
Financial Services/Exchanges EXAE
Over the past few years, domestic political and economic worries along with the weakness in the Rating N. R. banking sector significantly curtailed interest for trading in the Greek market. The feeble performance Target Price N. R. continued in 2018 since despite a number of positive news for the market (Greece exiting its economic Price (EUR/sh) 3.82 adjustment program, Greece tapping the markets, banks pass stress tests), the turmoil in Italy as well as in some emerging markets (Turkey, Argentina) led investors to a risk-off mode. We view that the MCap (EUR m) 231 general elections will drive interest in Greek equities, leading Athex revenues up and along with high Free float (%) 95% operating leverage (opex base to marginally increase on significantly higher volumes) profitability will 3m ADV 63 substantially improve. The stock is trading at demanding multiples, partially we view because of the anticipation of stronger trading volumes going forward. Athex to maintain its hefty dividend policy. Price high (12M) 5.28
Price low (12M) 3.51
Key investment themes
Hellenic Exchanges profitability has remained weak over the past few years, the result of the low trading activity in the cash market that represents the majority of the group’s revenues. The ADV in 2018 averaged at EUR56m. To compere, note that for the period 2015 to date has averaged cEUR65m, while for the period 2010-14 ADV it has averaged at EUR98m and at the peak (between 2006 and 2009) it had reached EUR337m. The two main triggers that could prompt trading volumes to move higher are i) the upcoming
general elections and ii) the strengthening of the economy (started reflecting on the profitability of
the companies).
The opex base of the Exchanges' is to a large extent fixed (following also rounds of cost cutting over the last few years) and thus the increase in turnover is expected to flow to the bottom line. Major shareholders For 2018 we forecast revenue 2.7% lower y-o-y on the back of lower ADV. For the period 2017-20F we account for a top lime CAGR of 10.9% as from ADV of 58.8m in 2017 we gradually pencil in ADV Franklin Templeton 5.2% The London and of 98m in 2020 (levels seen back in 2013 when the market was in a growth mode). EBITDA in 2018 11% Amsterdam Trust is seen at EUR7.2m (-9.7% y-o-y) with a 2017-20F CAGR at 27.2%. Net income in 2018 is estimated
at EUR2.9m and a 2017-20F CAGR at 46.3%.
The balance sheet remains healthy but extra distribution of cash (that was the case in previous Company description years) should not be expected. The company’s net cash position has fallen from more than EUR Hellenic Exchanges is a vertically Integrated 137m at the end of 2015 to cEUR 90m currently on the back of dividend payments, capital returns group controlling the trading, clearing, and buybacks. Most of the remaining cash pile to be used as regulatory capital. The company is settlement and registry systems of the Greek cash, derivative and bonds markets expected to keep distributing its entire FCF going forward. Athens Stock Exchange is trading at a large premium vs. its peers on current multiples, and its valuation looks reasonable only if we assume volumes closer to mid-cycle, i.e., more than 50%
higher than current levels.
Risks
Political & macro conditions in Greece / High market concentration / Potential downward pressure on fees towards the levels of other EU exchanges / Potential new round of de-listings
EUR m 2015 2016 2017 2018E 2019F 2020F 2021F Revenue 35.0 27.0 27.4 26.7 31.2 37.4 41.6
ADV 85.7 60.5 58.8 55.9 72.6 98.0 117.6
Opex 16.3 15.3 16.3 22.0 23.0 23.4 24.0 EBITDA 15.0 8.0 8.0 7.2 11.0 16.4 19.9 EBT 13.5 3.4 5.1 4.2 7.7 13.2 16.7
Net Income 9.0 1.4 3.1 2.9 5.6 9.6 12.3 EPS 0.14 0.02 0.05 0.05 0.09 0.16 0.20 DPS 0.33 0.32 0.20 0.06 0.11 0.19 0.27
Net Debt (Cash) -137.2 -100.0 -85.9 -88.1 -90.6 -92.5 -92.8 P/E 38.3x 223.7x 103.6x 80.7x 41.6x 24.1x 18.8x
EV/EBITDA 14.0x 27.4x 29.2x 19.9x 12.8x 8.5x 7.0x Analyst s Div. yield 6.3% 6.6% 3.8% 1.5% 2.9% 5.0% 7.0% Constantinos Zouzoulas Source: AXIA Research estimates, The Company [email protected] +30 210 741 4460
AXIA Research Page 97
AXIA Research
Retailers Fourlis
The investment case of Fourlis is mainly related to the expected growth momentum over the medium Rating N. R. driven by i) economic growth in Greece and in the other countries it operates ii) opportunities for organic growth in the existing geographies and products and iii) potential expansion to new markets Target Price N. R. and product categories. The establishment of a REIC subsidiary (real estate owned by the group and Price (EUR/sh) 4.58 used for the IKEA operations) should improve tax structure but mainly take to advantage of the MCap (EUR m) 237 opportunities in the real estate market (the company eventually to acquire real estate assets from Free float (%) 86% the market and potentially proceed to a listing). Operating leverage from the existing operations should help drive profitability higher, leading to a stronger FCF generation (albeit higher capex is 3m ADV 74 expected in 2019). The company’s debt profile is manageable (FY19e net debt/EBITDA at 2.1x), while Price high (12M) 6.26 we expect Fourlis to maintain its dividend policy. The company trades 6.1x its 2019e EV/EBITDA or Price low (12M) 3.775
33.8% below European retailers.
Key investment themes Fourlis is clearly a Greek-economic recovery play. With significant exposure on Greece and in two segments (home products: IKEA and sporting goods: Intersport) expectations are that the improved economic conditions in the country will lead to higher demand and this should reflect on profitability through high operating leverage. Fourlis’ retail home-furnishings subsidiary, IKEA, is a dominant player in the Greek furniture market boasting a market share of above 25% (vs. c12% in 2008). Spending on the Greek furniture market is
estimated at c0.5% of GDP (more than 50% lower than that in other European countries including
countries with lower GDP per capital than Greece). Growth of IKEA in Cyprus and in Bulgaria to continue
strong, assisted (apart from economic growth) by e-commerce and the expansion/introduction of pick up points. Major shareholders
The gross margin of IKEA to remain above 40%. Fourlis D 20.6% The expansion of the Intersport and Athletes Foot brand names to continue. Romania, Bulgaria as well as Turkey (despite the deterioration of the local economic environment) are key markets for growth. Horizon Growth 5%
The company aims to increase its sporting goods POS by more than 40% in the coming years. We expect revenues to increase by 3.3% y-o-y in 2018, while we estimate a top line 2017-20FCAGR of 4.9%. 2018 EBITDA growth is forecasted at 0.6% with 2017-20F EBITDA CAGR at 8.9%. EPS to increase Company description Fourlis is a leading retailer in the home furniture 40% y-o-y in 2018 with 2017-20F EPS CAGR at 32.2%. sector through the IKEA brand name and is the The group’s balance sheet remains healthy with net debt/EBITDA forecasted at 1.6x in 2020 vs. 2.3x in exclusive marketer of IKEA-branded products in 2018. Greece, Cyprus and Bulgaria through the current FCF generation should continue to improve allowing the distribution of dividend. seven stores (five in Greece, one in Cyprus and one in Bulgaria). The Company also operates 126 A strategic decision by Fourlis management is the creation of a REIC that will initially include properties outlets for athletic products under the Intersport owned by the group and used for IKEA operations (in Greece and in Bulgaria), as well as other non-core and Athlete’s Foot brand names in Greece, properties. New properties could be added. The creation of a REIC should lead to tax benefits for the Cyprus, Romania Turkey and Bulgaria. Recently group, but clearly the aim is for the group to take advantage of the interest for real estate assets. management announced the creation of a REIC According to the legislation it should be listed within 24 months after receive its operating licence that eventually is expected to be listed.
(expected in Q2:19) The stock is trading at 2019F and 2020F EV/EBITDA of 6.1x and 5.0x respectively. At current levels the company trades c35.0% below its 5-yr EV/EBITDA of average of 9.3x.
Risks Slow top line growth as durable goods investments are delayed / Economic concerns in Turkey could impact Intersport operations in the country / Potential of competition in Greece (furniture/home
appliances) from international players
EUR m 2015 2016 2017 2018E 2019F 2020F 2021F
Revenues 414.4 428.1 434.1 460.3 492.9 525.8 561.5 IKEA 279.5 291.3 291.3 302.9 316.6 330.5 343.9
INTERSPORT 129.2 136.5 142.7 157.3 176.3 195.3 217.6
EBITDA 32.6 38.4 41.8 46.1 54.5 62.9 70.7 Net financials -16.8 -16.7 -13.4 -10.8 -9.2 -6.6 -6.2 EBT 2.5 7.7 14.5 21.8 31.6 42.1 50.4
Net Income 0.3 6.0 10.0 15.9 23.1 30.8 36.8 EPS 0.005 0.12 0.19 0.31 0.45 0.60 0.71 Analysts DPS - - 0.10 0.11 0.16 0.21 0.25
Capex 9.8 10.6 11.7 17.0 18.0 14.0 14.0 Constantinos Zouzoulas Net debt 124.8 114.5 107.8 106.2 97.5 78.9 56.2 [email protected] Adjusted FCF 17.2 9.3 10.4 14.4 22.7 33.2 39.0 +30 210 741 4460
P/E 528.1 x 37.0 x 30.9 x 14.8 x 10.2 x 7.7 x 6.4 x Vasileios Karachalios EV/EBITDA 7.9 x 8.8 x 10.0 x 7.4 x 6.1 x 5.0 x 4.1 x [email protected] Div.yield - - 1.7% 2.4% 3.4% 4.6% 5.4% +30 210 741 4465 Source: AXIA Research estimates, The Company A XIA Research Page 98
AXIA Research
Construction Gek Terna
Gek Terna has evolved over the years to become the leading construction and infrastructure holding Target Price 6.70 group in the country. Utilizing the profitability of the construction division, the group has invested Rating Buy significantly over the years in concessions and RES projects that offer long term and stable cash flow profiles. The completion of motorway projects (end-2017) and critical mass of 1.0GW in RES Price (EUR/sh) 4.97 (achieved in end-2018) signals the start of a c20-year cash collection period. At the same time the MCap (EUR m) 485 group’s construction division is best positioned to go after new construction projects as Greece tries Free float (%) 49% to “built” its way out of the prolonged recession. 3m ADV 88 Key investment themes Price high (12M) 5.59 Construction backlog in 9M18 stood at EUR 1.2bn. During the last months Gek Terna i) has signed Price low (12M) 3.97 ~EUR 600m of new projects (50% abroad); ii) is about to sign another EUR 480m project that has
been awarded to the company (Kasteli airport); iii) EUR 500m motorway project in Greece is awarded and pending financial closure. Also Gek Terna participates with international partners in a series of tenders that are expected in the near term including major projects like Athens Underground extension (EUR 1.4bn), North Crete motorway (EUR 1.5bn). Construction division after taking a “breather” in 2018 (EBITDA to drop by ~60% y-o-y), is expected to accelerate again driven by new projects. Profitability to revert at normalized levels (EBIT margin 5.0-6.0%) vs. hikes in 2016-17. This will also support group’s bottom line growth.
With more than 1.15GW installed as of 1Q19, Gek’s wind park subsidiary Terna Energy (Gek
owns 37.9%) is the leader in the domestic RES market (561MW installed) and present also in the
US (450MW in 1Q19) and East EU (132MW). Another ~250MW of wind in Greece are in various Major shareholders development stages expected online by 2021, while keeping an eye for opportunistic moves in York Global Finance 17.35% other jurisdictions. As TE is now exceeding the critical mass of 1.0GW that allows to both fund new Peristeris Giorgos 14.1% investment and reward shareholders, we estimate cash available for distribution (CAFD) to grow Reggeborgh Invest 13.0% Kampas Nikolaos 6.0% by 11.7% CAGR in 2017-22.
Gek Terna has invested ~EUR 260m to own 100% in two recently constructed motorways in
Greece that were given into circulation in late 2017. The projects now enter a 20-year cash Company description distribution mode, with estimated payout of ~EUR 30m p.a. Also Gek Terna is leading the GEK TERNA is the parent company of the group concession consortium for the construction of a new airport in Greece’s largest island and key that is active in construction, renewable energy, tourist destination, Crete. Gek will invest EUR 120m of equity to the EUR 480m project receive a thermal energy, real estate and concessions. The Renewable energy activity falls under Terna ~10% IRR on our estimates. Project is expected to be completed in 2022. Energy (38%). The thermal energy division Other activities: In the begging of the year, Gek completed the sale of a real estate asset it includes 50% and 25% ownership in the plants developed in Bulgaria (office building) for a price of EUR 78.6m, with cash used to repay the bulk HERON I and HERON II. The group holds one of the leading positions in their area of activities in of real estate division debt. Group is also in early stages of developing a mining asset (magnesite) Greece and also has established a strong position in Greece. in key markets in South East Europe in Energy, Net debt at 9M18 of EUR 1.25bn including EUR 570m of concession and EUR 590m of RES related real estate and construction debt, with the bulk being project finance, non-recourse to parent. Construction division sits of a
net cash position of EUR 140m, that could be further enhanced from new projects down payments. We estimate adj. FCF to reach EUR 80m in 2019. On our estimates Gek Terna trades at 5.4x-5.0x in 2019-20 EV/EBIDTA yielding 17%-19% of FCF
compared to 6.6x-6.2x and 8.5%-12.0% of relevant construction/concession peers.
Risks
Slowdown in new construction projects tendering / competition to affect margins / exposure to various regulatory environments / Capital intensive business model / Motorway traffic sensitive to domestic macro
EUR m 2016 2017 2018E 2019F 2020F 2021F Group Revenues 1,163.5 1,185.5 1,342.5 1,226.2 1,258.2 1,138.2 Group EBITDA 252.8 279.9 287.3 314.6 341.2 343.0
Construction 149.8 124.1 50.8 57.0 61.7 43.5 RES 109.1 128.9 156.9 175.7 193.4 207.5 Concessions (0.4) 12.1 86.0 83.5 85.7 90.4 Net income 34.6 69.8 24.5 37.7 45.4 49.4 Net debt 403.2 1,084.1 1,199.4 1,205.9 1,225.1 1,141.8 Net debt/EBITDA 1.6 3.9 4.2 3.8 3.6 3.3 Analyst
adj. FCF na na -81.9 82.4 94.2 86.3 Argyrios Gkonis P/E 6.5 x 6.2 x 17.5 x 12.9 x 10.7 x 9.9 x [email protected] EV/EBITDA 2.6 x 5.5 x 5.7 x 5.4 x 5.0 x 4.8 x +30 210 741 4462 adj. FCF yield NA NA -19.1% 16.9% 19.3% 17.7% Source: The Company, AXIA Research estimates
AXIA Research Page 99
AXIA Research
Intralot Gaming
Driven by the strategy of the new management team, over the past few years, Intralot has made Rating N. R. significant progress towards streamlining operations, increasing transparency, refocusing towards more predictable cash flows from developed markets and reducing the group’s financing costs. Nevertheless, Target Price N. R. burdened by high net debt levels, the main catalyst for the group will be management’s decision to Price (EUR/sh) 0.52 crystalize the value of its most valuable asset: the US subsidiary (management has talked about the possibility of an IPO). Beyond that, 2018 has been an inflection year (high capex requirements to operate MCap (EUR m) 77 the Illinois contract and also the completion of the lucrative OPAP contract in Greece). The high Free float (%) 54% probability of not renewing the lucrative contract in Turkey (one of the two contracts in the country) is 3m ADV 316 negative for the group. Still, new (but smaller in size) signed contracts along with the long duration of most of the remaining contracts and expectations for lower capex should lead to improved FCF. Price high (12M) 1.412
Price low (12M) 0.376
Key investment themes
Efforts to crystalize value of the US subsidiary either through an IPO or other corporate action is the main catalyst for Intralot. The underlining drivers of this prospect are i) strong recurring operating profitability of the existing contracts (avg. contract duration at 7.1 years) and ii) the opportunity from opening the sports betting in the US (est. GGR of more than EUR10bn of GGR). Intralot has the expertise and is well placed the US (operates 14 contracts in 12 States) and is expected to be generate EBITDA cEUR53m (2019) assisted by the new Illinois contract. There is visibility and steady growth potential in a number of key markets (Bulgaria, Malta, Argentina
and Australia / New Zealand).
The potential loss of the Turkish contract (managing the country’s sports betting company) will be a
considerable setback. Still note that in Turkey the company also operates Bilyoner (Intralot 50.01%, Turkcell 49.99%), the leading online distributor of sports betting games in Turkey and is not directly Major shareholders affected by the company that manages sports betting. Kokkalis 20% The completion of the profitable OPAP contract in mid-2018 impacts profitability for 2018 and 2019, partially counterbalanced by a new (smaller) OPAP contract and the launch of the Illinois lottery Mittleman Brothers 10.2% contract (in Feb. 2019). C. Dimitriadis 8.9% We expect reported EBITDA at EUR156m (-9% y-o-y) in 2018, reflecting the completion of the OPAP Intesa Sanpaolo 5.0%
contract and adverse currency movements (Turkish Lira, Argentinian Peso). Assuming that the Turkish contract is not renewed, for 2019 reported EBITDA is seen at EUR128.2m (-18.8% y-o-y), impacted by Company description i) the OPAP contract ii) the sale of the Azerbaijani contract and iii) the small delay in the launch of the Intralot is a leading gaming solutions supplier and operator offering gaming solutions and retail Illinois contract. We expect negative net income for the coming periods. operational expertise to lottery and gaming The group’s net debt position from EUR508m in 2017 is expected to grow to cEUR610m in 2018 due organizations globally. The company is active in to high capex requirements (mainly related to the Illinois contract). Although on a reported basis net 52 regulated jurisdictions. Key markets for the debt/EBITDA is estimated at 3.9x in 2018, on a proportional basis (“own” EBITDA + participations and group is the US, Oceania, Bulgaria and Turkey. In “own” cash) net debt/EBITDA is seen at 5.3x. EUR250m mature in 2021 and EUR500m in 2024. 2017 the company handled EUR24bn of wagers with the bulk of reported revenues coming sports Adj. FCF is expected closer at breakeven levels for 2019 and expected to broadly remain at these levels betting and lottery games. taking a conservative view of capex above EUR50m per year. We estimate that the group could fetch more than EUR85m from the sale of non-core assets, a big part of which is the 20% stake in the listed Italian company Gamenet.
Risks Contract renewal risk / Competition in fully liberalized markets / Regulatory, political, economic and tax risks / Currency risks / Choppy capex
EUR m 2016 2017 2018E 2019F 2020F 2021F
991.5 1,104.2 1,082.3 932.1 939.5 958.6 Revenues Technoloby & Management 326.6 346.1 314.2 327.0 320.0 327.4 Licensed Operations 662.9 754.6 764.6 601.6 616.0 627.6
Other gaming Rev 2.1 3.5 3.5 3.5 3.5 3.5 EBITDA 162.5 171.5 156.0 128.2 120.6 121.7 EBITDA (proportional own) 104.4 107.4 97.9 91.3 96.2 97.7 Net financials (75.9) (62.9) (45.8) (46.3) (47.3) (46.2)
(7.5) 10.3 56.4 21.4 18.7 23.4 EBT EAT 0.9 (53.4) (13.8) (24.5) (18.4) (15.4) EPS 0.01 (0.3) (0.1) (0.2) (0.1) (0.1)
65.4 74.3 125.0 40.0 50.0 60.0 Capex Adjusted FCF* (34.2) 0.8 (103.4) 6.8 (1.2) (18.6) Net Debt 492.8 507.9 610.3 603.5 604.7 623.3 Analyst
Net Debt/EBITDA 3.0 x 3.0 x 3.9 x 4.7 x 5.0 x 5.1 x Constantinos Zouzoulas EV/EBITDA 3.8 x 3.7 x 4.4 x 5.3 x 5.7 x 5.8 x [email protected] EV/EBITDA proportionate 5.9 x 5.9 x 7.1 x 7.5 x 7.1 x 7.2 x +30 210 741 4460 *ex-dividends paid to minorities, Source: AXIA Research estimates, The Company
AXIA Research Page 100
AXIA Research
Jumbo Retailers
With net cash position of cEUR287m, and an extensive and expanding network, Jumbo is well Rating Buy positioned to benefit by the economic rebound in Greece as well as the continuing strong economic growth in Romania, Bulgaria and Cyprus. As c70% of the company’s network is in Greece, the focus Target Price 18.50 remains on this market with Jumbo continuing to expand taking advantage of its strong balance Price (EUR/sh) 14.80 sheet and the weak competition. In Romania the company continues with its business strategy for organic growth. We expect the group to be adding 2-3 new stores each years for the foreseeable MCap (EUR m) 2,014 future in this market. History has proved management’s ability to maintain high gross margins and Free float (%) 77% to contain SG&A increases. Organic growth along with high cash flow generation, a strong balance 3m ADV 151 sheet and a set dividend policy are the investment themes for Jumbo. The company trades at a Price high (12M) 16.26 35% and 37% 2019F P/E and EV/EBITDA discount to international peers. Price low (12M) 10.56
Key investment themes
Jumbo is a growth story driven by higher demand and network expansion. It operates a business model difficult/expensive to replicate based on: large stores, wide product mix, low prices and a very efficient distribution centre. The risk from online buying (mainly from European companies) is mitigated by the average low selling price of its products (average selling price of EUR4.99) along with the associated shipping costs. The company’s retail network currently stands at 77 stores, that is expected to grow by 11% by 2020 (to 83 stores) and by 21% in 2022 (to 91 stores).
The company is well positioned in the Greek retail market with a strong brand name and a balanced
product mix that should allow the company to benefit by the upturn of the economy, while
competition (especially in respect of toys/baby products) remains weak and fragmented. Greece remains the group’s key market with 51 stores /c60% of sales and EBIIT. Major shareholders Romania has by now become the group’s second largest market (entered in 2014), expected to Vakakis A. 23.22% generate revenues of cEUR135m in FY2018/19. From 10 stores by mid-2018 and 12 stores currently, we expect at least 22 stores to be operational by 2022. The size of Romanian market equals that of FMR 13.2% the group’s 3 other markets, combined (Greece, Bulgaria, Cyprus). Capital Group 5%
The group has commented for further expansion in neighbouring countries in due time.
Margins should remain strong assisted by the group’s product mix, purchasing strategy, increasing negotiating power towards manufactures (as its size increases), distribution efficiency and control of Company description expenses. The inverse relationship of USD (sourcing in China using USD) and oil (freight costs) should Jumbo is a leading retailer of toys, baby products, also continue to support margins. stationery, seasonal, haberdashery and home products in Greece. The company operates an We expect revenues to increase by 8.3% y-o-y in FY2018/19, while we estimate a top line 2017/18- extensive retail network of 77 stores (51 in 20/21F CAGR of 8.65%. 2018/19 EBITDA growth is forecasted at 6.4% (pressured by FX and some Greece, 5 in Cyprus, 9 in Bulgaria, 12 in Romania), increases in operational costs) with 2017/18-20/21F EBITDA CAGR at 7.1%. EPS to increase 5.9% y-o- 1 e-shop and signed franchise agreements for 11 y in 2018/19 with 2017/18-20/21F EPS CAGR at 6.1%. stores to 5 non-EU countries (e.g. 3 in FYROM, 2 in Albania, 3 in Kosovo, 2 in Serbia and 1 in The group’s balance sheet remains healthy with net debt/EBITDA forecasted at -1.4x in 18/19 as net Bosnia). The company positions its self as an cash is estimated at cEUR333m. Note that Jumbo owns 70% of its stores affordable toys/seasonal products store (a The company is expected to maintain its healthy dividend strategy, distributing 1/3 of its profitability. EUR5.0 store). Dividend yield for FY18/19 is estimated at 2.8%
The company currently trading at a 2018/19F P/E and EV/EBITDA of 12.6x and 7.1x respectively compared with a group of international retailers that trade at a 2019 P/E and EV/EBITDA of 19.5x and 10.9x, respectively.
Risks Adverse macro-economic conditions / Adverse FX fluctuations / Online competition / Increases in freight costs
EUR m 2014/15 2015/16 2016/17 2017/18 2018/19E 2019/20F 2020/21F
Revenues 582.5 637.6 681.4 753.3 815.9 885.4 966.3 Greece 437.9 458.9 470.5 489.0 501.6 516.8 533.4 International 144.7 178.7 210.9 264.3 314.4 368.6 432.9 Gross margin 53.2% 53.0% 52.2% 52.5% 51.9% 51.2% 50.3% EBITDA 159.2 183.7 194.9 221.3 235.5 251.3 265.6 Net Financials 1.7 1.9 1.8 1.3 2.8 2.8 2.8 EBT 137.0 165.1 173.5 197.9 211.2 225.6 238.3
Net Income 104.8 121.3 131.0 151.1 160.1 171.0 180.7 Analysts EPS 0.8 0.9 1.0 1.1 1.2 1.3 1.3 DPS 0.27 0.36 0.36 0.39 0.41 0.44 0.46 Constantinos Zouzoulas Capex 59.1 34.7 38.0 42.2 55.0 60.0 60.0 [email protected] Net Debt (Cash) -152.1 -250.4 -206.8 -287.3 -332.8 -397.8 -455.5 +30 210 741 4460 P/E 9.6 x 13.2 x 15.8 x 12.7 x 12.6 x 11.8 x 11.1 x EV/EBITDA 5.4 x 7.4 x 9.6 x 7.4 x 7.1 x 6.4 x 5.9 x Vasileios Karachalios FCF yield 7.5% 5.3% 3.9% 6.8% 5.0% 6.2% 6.0% [email protected] +30 210 741 4465 Div. yield 3.6% 3.1% 2.4% 2.8% 2.8% 3.0% 3.1% Source: AXIA Research estimates, The Company AXIA Research Page 101
AXIA Research
Real Estate Lamda Development
Lamda Development, is Greece’s market leader in the large-scale shopping malls, and is expected to continue to benefit as the economy improves and demand for high quality retail space Rating Buy increases. This should continue to reflect positively on the value of the assets through a further contraction of the yields (net yield of the 3 malls of the company at 7.9% - Q3:18). Still, the key Target Price 7.90 trigger for the group is the launch the Hellenikon project. This is a EUR7.0bn project with Lamda Price (EUR/sh) 6.49 is set to gain i) as a project developer (anticipating a fee of 3% of all investments in the project) MCap (EUR m) 505 and ii) as an developer and operator of assets (developing, all or part, of the project’s retail areas that will include Greece’s largest mall with c85,000 GLA and other lucrative retail space). The Free float (%) 35% completion of the privatization of Hellenikon has delayed although we would expect it to 3m ADV 65 materialize in the coming months either by the current administration or the new one, given the Price high (12M) 7.5 impact of this investment in the local economy. Price low (12M) 5.56
Key investment themes Lamda controls more than 50% of the total GLA of large-scale malls in Greece with its shopping centres commanding a catchment area of c4.5m people (40% of population), occupied by well-known tenants. Offered mall space per capita in Greece (GLA/1,000 population) is 60sq.m. vs. the EU average of c300sq.m. Since i) no sizeable GLA additions in the coming 3-4 years are expected, ii) there is limited availability of attractive land and red-tape and iii) demand remains high, Lamda that enjoys occupancy rates of above 98% will continue to have dominant bargaining
power over shopkeepers seeking increases in the base-rent (including CPI pass through) and
parking fees and higher third-party revenues.
Lamda is in the process of developing the unused space of its Golden Hall mall adding 11,500 sq.m. of GLA, adding to the current GLA of 41,000 sq.m. investing EUR 25m Major shareholders Lamda’s EBITDA from retail sector (3 malls – excl. revaluation impact) settled at EUR 59.5m Consolidated Lamda Holdings 51.9% in FY17, and is up by 3.5% y-o-y in 9M18, while is expected to surpass EUR 65m in the next 3 Voxcove Holdings 12.8%
years driven by increases (already initiated) in rents and corporate actions. The 3 malls
current yield is at 7.9%. The group’s new subsidiary in Lamda Malls, includes the 2 smaller malls of Lamda and the Company description aim is to grow the subsidiary’s asset base through acquisitions and new commercial LAMDA Development S.A. engages in the investment, development and sale of real estate developments. Opportunity to consolidate the market. Värde Partners has invested EUR projects in Greece, Romania, Bulgaria, Serbia, 61.3m to acquire a 31.7% stake in Lamda Malls. and Montenegro. The company’s development The development of the site of the former Athens International Airport (Hellenikon) will portfolio includes three commercial and leisure be the largest investment in Greece (project size at cEUR8.0bn). Lamda to acquire the asset centres comprising The Mall Athens, Golden Hall, and Mediterranean Cosmos; hotels and with financing backed by an SPV controlled by Al Maabar, Fosun and Latsis Group. Lamda is residential complexes; office buildings; and acting as a development manager and will collect a fee on all amounts invested in the Flisvos Marina in Faliro. The company is in the project, while it will develop revenue generating assets in the property, including a large new final stages to acquire Hellenikon, a large undeveloped property in the coastline of Attica mall. region, minutes from the centre of Athens. Lamda’s current NAV (Q3:18) at EUR 434m or EUR 5.57/sh, while for end-2019 we calculate the NAV at EUR 481m or EUR 6.20/sh (contraction of yields, addition of the new part of the
Golden Hall). To this we add the estimated present value of the prospective management fees from Hellinikon (EUR 1.70/sh).
Risks Macro risk: More than 90% of Lamda’s reported direct and indirect income derives from its shopping centres / Hellenikon project: Legal-political issues could delay the transfer of shares iii) Legal and permitting/political issues could delay or even cancel investments that management could consider
EUR m 2015 2016 2017 2018E 2019E 2020E Revenues 44.0 49.2 87.2 79.1 82.0 85.2 Reported EBIDTA 8.5 19.7 -2.4 108.2 76.4 101.0 Reported Net Income -22.1 -3.2 -48.3 40.6 27.8 40.1 Reported EPS -0.28 -0.04 -0.61 0.51 0.35 0.50
Recurring EBITDA 18.6 23.8 58.1 50.7 52.0 54.6 FFO 2.3 0.1 27.7 20.9 23.4 25.6 Net Debt 158.8 164.7 327.5 301.8 280.4 256.9 GNAV 551.4 551.4 809.7 885.4 909.9 956.4 Retail portfolio EBITDA yield 7.6% 8.3% 8.7% 8.1% 8.1% 8.0% Net LTV 28.8% 29.9% 40.4% 34.1% 30.8% 26.9% NAV 408.1 403.7 395.1 447.9 481.5 532.0 Analysts NAVPS 5.23 5.22 5.08 5.80 6.20 6.83 P/NAV(x) 0.8 0.9 1.4 1.0 1.1 1.0 Constantinos Zouzoulas P/E(x)-Recurring nm 69.2 24.7 29.1 25.6 23.3 [email protected] EV/EBITDA(x)-Recurring 25.5 22.5 15.1 16.8 16.0 14.8 +30 210 741 4460 Source: AXIA Research, The Company A XIA Research Page 102
AXIA Research
Motor Oil Refining
Motor Oil over the years has proved its capacity to capture and capitalize on market trends, taking advantage of its well invested, sophisticated asset base and focused management. The company has Rating Buy consistently captured high gross refining margins and amid a low cost base has managed to deliver Target Price 23.60 best in class net profitability. This allows the company to maintain a hefty payout while pushing Price (EUR/sh) 21.15 leverage to historical low levels. MCap (EUR m) 2,343 Key investment themes Free float (%) 53% MOH’s refining business in 2015-18 has delivered an average EBIDTA of >EUR 500m p.a., +50% 3m ADV 172 vs. 2010-15 taking advantage apart from the $2.0/bbl improvement in refining margin environment, a continued increase in volumes (+25% since 2012) and a decline on unit opex (down Price high (12M) 23.9 20% vs. 2012). Note that traditionally 80% of sales is directed to international markets. Price low (12M) 16.88
Addressing the IMO 2020 effect in 3 steps to capture additional margin: With middle distillate market expected to turn to deficit in 2020 on the back of switching marine demand, middle distillate cracks are set to improve considerably. MOH has an average middle distillate yield of 45%. Motor Oil runs the last couple of years with an average fuel oil yield of 23% (about half of it though is related to topping capacity used to increase sales volumes). With global FO demand expected to subside in 2020, the company’s access to captive markets in need of
the products is expected to provide significant support to its strategy.
Driven by the expected increase for lighter crudes (that have higher middle distillate yield),
sweet/sour differentials seen widening in 2020 benefiting refiners that can process and access heavier crudes. MOH’s feed is traditionally levered to heavier crudes (c80% heavy Major shareholders crudes). Growing footprint in the retail market. Despite that decline in domestic fuels market during the Motor Oil Holdings 41.5% crisis (down c20% since 2010), MOH’s retail network (current agreement with Shell runs up to 2023 Doson 8.1%
while runs also own brand AVIN) market share has increased by almost 10% since 2010, while
continued profitability enhancing initiatives are having a major operating leverage effect. In early 2019 Motor Oil is expected to reach FID for a 3-year investment of EUR 300m adding to Company description Motor Oil (MOH) is an independent oil refining its refinery system a Naphtha processing unit that will allow to further increase gasoline output. and marketing company. It owns and operates Investing in Greece. Motor Oil in the last couple years has invested over EUR 100m in various one of the most advanced refineries in the strategic small projects, complementary to the refining business that allowed sales volumes to industry that generates c85% of the group’s EBITDA with c80% of the refinery sale coming further increase. Also in 2018 company announced the participation with minority stakes in a TV from the international markets. MOH has also station and a challenger bank taking advantage of the depressed asset prices seeking to extract strong presence in the domestic retail fuel further synergies. market, covering c35% of the total volumes Motor Oil on our estimates trades at 2019-20 EV/EBITDA of EUR 4.7x-3.7x and has a dividend through its proprietary network of gas stations that include the retail operations of Shell Hellas. yield 7.7%. This compares to direct peers median (Saras, ELPE, Tupras) trading at 6.3x-4.4x and yielding 6.3%-8.9% respectively.
Risks Global economy slowdown and trade tensions to affect product demand / sluggish demand for fuel oil leading to crippling prices / volatility of oil prices / domestic macro environment deterioration to affect marketing sales.
EUR m 2015 2016 2017 2018F 2019F 2020F 2021F Refinery volumes(000's MT) 11,647 11,449 12,915 12,836 12,745 12,688 12,688 Refining margin ($/bbl) 9.4 8.0 9.3 8.3 7.7 9.4 7.8 -Benchmark 6.3 4.5 5.5 4.3 4.4 5.7 4.5 -Additional 3.1 3.5 3.7 4.0 3.3 3.7 3.3 Refining adjusted EBITDA 546 462 560 487 448 581 446 Marketing EBITDA 52 74 66 92 96 99 101
Group adjusted EBITDA 612 543 633 579 544 680 547 Finance costs and other (adj) -89 -76 -65 -37 -35 -34 -33 adjusted net 290 255 333 305 282 375 277 FCF 240 381 204 176 149 302 218 DPS (total) 0.7 0.9 1.3 1.4 1.4 1.6 1.6 Net Debt (group) 681 384 280 264 275 153 115
Capex (group) -43 -87 -106 -123 -253 -183 -183 Analyst Net debt/EBITDA 1.1 0.7 0.4 0.5 0.5 0.2 0.2 P/E 3.8 5.7 6.3 7.3 8.3 6.3 8.5 Argyrios Gkonis EV/EBITDA 2.9 3.4 3.7 4.3 4.8 3.7 4.5 [email protected] Dividend yield 6.5% 6.9% 6.9% 7.2% 6.8% 7.7% 7.7% +30 210 741 4462 FCF yield 21.7% 26.2% 9.8% 7.7% 6.4% 12.9% 9.3% Source: AXIA Research, The Company
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AXIA Research
Diversified industrials Mytilineos
Mytilineos presents on our view one of the most attractive investment cases in the Greek market, providing for i) solid fundamentals; ii) growth prospects; and iii) attractive valuation levels. Through Rating Buy focused execution over the last decade, the group is now reaching a phase that its 2019-20 forecasted Target Price 12.60 EBITDA will be ~60% higher vs. its 2010-18 average, while management’s vision is to double the size Price (EUR/sh) 9.07 of the group by 2022. MCap (EUR m) 1,296 Key investment themes Free float (%) 73% Global aluminium sector is going through a volatile period affected by the ongoing trade war and 3m ADV 189 demand slowdown concerns (2019 demand outlook revised in 2H18 to ~3.0% vs. ~4.0%). LME prices Price high (12M) 10.76 in 2018 peaked above $2,400/MT (Apr’18) to close the year at $1,800/MT (2018 average at $2,100/MT). YTD though prices have recovered, currently hovering close to $1,900/MT. At these Price low (12M) 6.59
prices about 50% of out of China and 60% of China capacity is loss making, while market ex-China ended the year in deficit. Regional aluminium premiums also reverted to more normalized levels ($150-200/MT). In respect of alumina, supply disruptions that skyrocketed prices in 2Q18 (>$600/MT) have eased, with prices returning to more normalized levels (~350-400/MT), yet amid tight market conditions. Mytilineos runs an 220kMT aluminium (AL) and 850kMT alumina (AX) plant that through continued investment sit at the 1st percentile of the global cost curve (all in cost AL $1,600/MT, AX
$230/MT). With AL sales for 2019 hedged at 1H18 prices, the group’s metallurgy division is set for
another strong year, with 2019E EBITDA at EUR 195m vs. 2018E of EUR 189.
EPC division is set for a rebound in profitability in 2019 with EBITDA increasing by 53% y-o-y. Following a strong expansion in solar EPC sector in 2H18, total de-risked backlog stands at cEUR Major shareholders 1.3bn (out of which traditional EPC is cEUR 0.9bn), while solar backlog could increase further in the Mytilineos Family 26.5%
near term. Launch of EPC project in Libya and Ghana will drive 2019 profitability with hefty margins
(16%-17%), while we model in for revenues of ~EUR 350m from the execution of solar projects albeit at lower margin (<10%). Solar is expected to remains a major contributor going forward. Company description Mytilineos is a leading diversified industrial Energy division is best positioned to capture the trends of the domestic electricity market company in Greece with 3 distinct activities: (i) restructuring. Production levels from the CCGT units are expected to substantially increase in 2019 Metals & Mining (including Aluminium of Greece as wholesale market price is moving higher driven by decommissioning of lignite capacity, high CO2 - one of the largest aluminium and alumina prices, increased RES penetration and rising demand. Also regulated revenues streams (RES and producers in Europe); (ii) EPC, a leading regional player in ME-Africa and Balkans); and (iii) energy CCGT capacity payments) are supporting profitability. Taking the above into account Energy (largest IPP in Greece). division’s EBITDA is seen growing by 86% y-o-y in 2019, while further improvement is expected going forward as domestic market matures.
New investments: Mytilineos is moving ahead with a new 660MW CCGT unit to come online in 2021, while in respect of the new alumina refinery (1.0mMT capacity), management said that is currently completing a comprehensive technical study before being able to make a final decision (expected in 3Q19). Note that on our estimates the CCGT unit could generate ~EUR 50m of EBITDA
annually, while the alumina plant would add another EUR 100-150m. Currently we do not account for these two projects in our estimates. Finally the company is following closely development in the Greek energy market.
Strong financials of the group support our valuation (TP set at EUR 12.60/sh) despite the recent rerating of aluminium peers. Currently Mytilineos trades at 4.3x on 2019 EV/EBITDA and P/E vs. an EBITDA weighted EV/EBITDA average of aluminium/EPC/energy peers of 6.4x.
Risks Cyclicality of commodity business / backlog replenishment for EPC / energy sector sensitive to regulatory decisions
2015 2016 2017 2018E 2019F 2020F Revenues 1,382.9 1,246.0 1,526.7 1,489.4 2,145.2 2,220.4 EBITDA 234.1 222.4 306.0 295.1 377.3 374.0 Metallurgy 98.0 84.0 141.5 189.9 195.1 187.5 Energy & Power 22.0 65.0 74.7 53.2 99.3 109.9
EPC 123.0 82.0 88.8 54.0 82.6 76.0
Net Income 47.5 34.2 154.8 155.3 185.3 179.6 FCF (138.0) (48.8) 97.0 208.0 48.9 158.1 Capex 75.7 74.3 134.2 75.0 200.0 105.0 Net Debt 526.7 617.8 568.1 385.7 377.8 263.8 Net Debt/EBITDA 2.2 x 2.8 1.9 1.3 1.0 0.7 Analyst
P/E 9.0 x 21.0 8.4 6.7 6.7 6.9 Argyrios Gkonis EV/EBITDA 4.1 x 6.0 6.1 4.9 4.3 4.0 [email protected] FCF yield -32.2% -6.8% 7.4% 20.0% 4.0% 12.8% +30 210 741 4462 Dividend yield 0.0% 0.0% 3.5% 4.8% 4.1% 4.4% Source: AXIA Research estimates, The Company
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AXIA Research
OPAP Gaming
OPAP is proceeding with its efforts to roll out and operate 25k Video Lotto Terminals (VLTs) by end- 2019, while at the same time it has become the leading player in the Greek on line market by i) Rating Buy acquiring a controlling stake in Greece/Cyprus leading online gaming company, while at the same Target Price 11.20 time ii) is relaunching its own on sports betting offering and is planning to introduce its most Price (EUR/sh) 9.00 popular games (Kino, Joker, Lotto) online some cannibalization and fatigue in traditional offerings the company is expected to deliver 2017-20F EBITDA CAGR of 10.5% and EPS CAGR over the same MCap (EUR m) 2,860 period of 17.2%. At the same time is expected to continue to distribute all its FCF (and above, given Free float (%) 67% it has already prepaid for all its licences) to shareholders leading us to calculate dividend yield for 3m ADV 437 2019F at 8.4% and for 2020 at 9.5%. Price high (12M) 10.49 Key investment themes Price low (12M) 7.525
Although at a slower pace than initially expected, revenue growth of the VLTs increases, driven by the
expanding and maturing network. VLTs GGR from EUR57.5m in 2017 is expected to settle at EUR341.6m in 2020, the first full year of operations for the 25k machines. On the other hand, legacy games continue to be impacted by i) online (evident in the sports betting game Stihima) ii) cannibalization from the VLTs (in respect of Kino and the scratch although at a lower rate that initially expected) and iii) normalization of demand vs. the initial hype for the Virtuals. On a positive note i) Greece’s economic growth and the increase of the disposable income, plus ii) management efforts to rejuvenate these games, should be supportive of the performance of these
games going forward.
Significant trigger for OPAP is online. Although the market segment is still waiting for the new
legislation that sets the framework for the market, OPAP i) relaunched its own sports-betting offering ii) is expected to launch online its popular games (Kino, Stihima and Lotto) in the coming period, while Major shareholders iii) it acquired a controlling stake to Greece’s (and Cyprus’) largest online gaming company, Stoiximan. We expect 5.6% y-o-y GGR growth in 2018, while 2017-20F GGR CGR is seen at 5.1%. EBITDA growth EMMA Delta 33%
is estimated at 13.4% y-o-y in 2018 with 2017-20F EBITDA CAGR forecasted at 10.5% (reaching
EUR413.7m in 2020) supported also by a slow opex increase. EPS CAGR over the period 2017-20F in estimated at 17.2%. Company description The FCF to be strong as profitability increases and as the capex expansion cycle comes to an end (adj. OPAP is a lottery and betting company with exclusive rights to all numerical and sports FCF forecasted from EUR127m in 2018 to reach EUR265.5m in 2020). Actually more than 100% of this betting games in Greece until 2030. It also holds FCF is expected to be distributed to shareholders, as the company has already prepaid its exclusivity the exclusive right for the operation of 25k video licences. DPS for 2019 in estimated at EUR0.75/share and to EUR0.85/share in 2020 translating to a lottery terminals until 2035, as well as the 12- dividend yield of 8.4% and 9.5% for 2019 and 2020, respectively. At the same time net debt/EBITDA year exclusive right on the operation of Hellenic stands at 1.6x (2019F) while the company has said that it aims at a net debt/EBITDA of 2.0x-2.5x. State Lotteries (until 2026) in partnership with Intralot and Scientific Games. OPAP was also At 2019F numbers the company trades broadly at par with peers in terms of P/E and EV/EBITDA at granted the 20-year horse betting concession. 13.5x and 8.4x respectively vs. 15.0x and 8.4x for the peers respectively. On the other hand in terms OPAP is amongst the most liquid stocks in the of dividend yield for 2019F OPAP is trading at 8.4% vs. peers at 4.4%. We understand that valuations ASE. of the sector globally have been impacted by idiosyncratic reasons but OPAP presents a unique case:
with long-term exclusivity agreements the company controls c.85.0% of the local gaming market, the market is expanding (mainly with the introduction of new products targeting new demographics), the profitability of the company is expected to grow at a strong pace over the coming years and the dividend distribution policy to remain very attractive.
Risks
Performance of VLTs weaker than expected / Slower economic/disposable income growth / changes in the tax regime / Unsuccessful efforts by the authorities to curb the offering of online and VLT/AWP gaming from illegal operators
EUR m 2015 2016 2017 2018E 2019F 2020F 2021F
Revenues 4,257.3 4,230.0 4,422.9 6,028.2 6,743.1 7,387.7 7,533.3 GGR 1,399.7 1,397.6 1,455.5 1,537.6 1,604.8 1,688.0 1,713.9 Gross Profit (NGR) 625.3 573.0 603.0 660.6 705.5 743.5 755.4 OPEX & others -248.2 -265.5 -296.6 -312.9 -318.1 -329.9 -335.2 EBITDA 377.1 307.5 306.5 347.6 387.3 413.7 420.1 Net financials -3.2 -12.3 -21.3 -25.5 -20.8 -20.4 -19.2 Net Income 210.7 170.2 126.2 157.1 189.3 208.5 215.1
EPS 0.66 0.54 0.41 0.51 0.61 0.67 0.70 DPS 0.40 1.29 1.10 0.70 0.70 0.84 0.87 Capex 39.6 42.9 96.3 115.0 115.0 25.0 25.0 Net Debt -153.6 108.2 436.2 530.2 589.3 579.8 569.1 Net Debt/EBITDA -0.4 x 0.4 x 1.4 x 1.5 x 1.6 x 1.5 x 1.4 x P/E 12.3 x 15.5 x 25.4 x 17.8 x 14.9 x 13.5 x 12.9 x Analyst
EV/EBITDA 6.4 x 9.1 x 12.3 x 9.8 x 8.9 x 8.4 x 8.2 x Constantinos Zouzoulas FCF yield 6.2% 1.6% 3.6% 4.5% 5.5% 9.3% 9.7% [email protected] Div. yield 4.9% 15.4% 10.5% 7.8% 8.4% 9.5% 9.6% +30 210 741 4460 Source: AXIA Research estimates, The Company
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AXIA Research
OTE Telecoms
The structurally solid Greek telecom market is returning to growth driven by the improving Target Price N.R. fundamentals. For OTE, the market’s expected gradual growth along with the cost optimization efforts and a declining capex should allow for improving FCF. Still, in the Romanian operations (the last foreign Rating N.R. subsidiary since in Albania the company is in the process of divesting) albeit the ongoing effort to Price (EUR/sh) 10.70 improve profitability, the operational trends remain challenging, while regulatory decisions could weight further. In any case, OTE’s strong balance sheet, appealing shareholder distribution policy MCap (EUR m) 5,135 (100% of the FCF), attractive multiples (2019F EV/EBITDA at 4.5x vs 6.1x for its EU peers) and top class Free float (%) 49% corporate governance (Deutsche Telecom controls a 46% stake) make OTE’s case an attractive one. 3m ADV 432
Key investment themes Price high (12M) 12.22 OTE is Greece’s incumbent telecom operator (and the market leader) with the company’s investment Price low (12M) 9.39
case driven by the prospects of organic growth in this market, both in respect of fixed line and mobile, as the local economic rebounds and there is a gradual increase in the disposable income. In Greece the competitive landscape is set (both for fixed as well as mobile), while the price environment remains stable. In terms of Greek fixed, OTE to benefit by i) increased demand for broadband demand as penetration (currently at 72% penetration to its fixed-line base vs. 83% for the market) ii) dominant position in terms of FTTC (controls c17k commercially viable cabinets out of a total of c25k) iii) the low penetration of high speed fibre that stands at c25% of the retail broadband base. Supportive to the efforts to reduce churn is
OTE’s leading position in pay-TV.
Greek mobile market has started growing driven by demand and some small increases in the headline
tariffs as market participants are increasingly focused on value creation. OTE enjoys c46% market share, assisted by a superior mobile network. Major shareholders The performance in Romania (both in terms of fixed and mobile) remains weak as competition is strong Deutsche Telekom 46% and OTE’s market share remains low. Expectations are for stabilization of the performance at low levels albeit there are concerns regarding the actions of the local regulator: i) greed tax (aims to increase the Greek State 5%
regulatory tax from 0.4% of revenues to 3% - if the tax is upheld most likely the market will pass it to the consumer) ii) cost of spectrum (3G renewal & 5G auction). For 2019 we expect revenues to grow 0.7% y-o-y with a 2017-20F CAGR of 0.6%. Reported EBITDA in 2019 Company description OTE is the largest telecom company in Greece is seen up 5.0% y-o-y, with a 2017-20F EBITDA CAGR of 2.1%, assisted also by the expectation of the group both in terms of fixed and mobile telephony. OTE continuing with its VRS schemes. Net income growth 2019 is estimated at EUR291.8m vs. EUR175m in has also a 54% stake in the Romanian fixed line 2018, assisted by significantly lower depreciation & amortization charges and sharply lower net financial incumbent operator Romtelecom. The company expenses. For the period 2017-20F CAGR is seen at 60.5%. is in the process of selling its mobile subsidiary in FCF over the past few years has been impacted by the investments in new generation networks but going Albania. Deutshe Deutsche Telecom controls a 45% stake that increases, as the company is forward, capex requirements ease somehow (we incorporate capex at cEUR650m over the medium term). pursuing a share buyback & share cancelation Increased profitability and lower capex should lead reported FCF from EUR267m in 2018 to EUR354m in program. 2019. Net debt / EBITDA at 0.6x in 2018 with the management have stated that would be comfortable OTE is amongst the most liquid stocks in the ASE. high a higher ratio.
Attractive shareholder distribution policy with the group distributing 100% of its FCF to dividends and to share buybacks. Prospect of extraordinary return following the completion of the Albania sale (to receive cEUR50m) OTE trades at a 2019E and 2020E EV/EBITDA at 4.5x and 4.4x, or a discount vs. its EU peers of 26% and
24x%, respectively, or in line with its trailing three-year discount.
Risks Weaker economy / Regulatory hurdles in Greece (fixed-line) / Potential competitive pressures that could impact profitability / slow recovery progress in Romania
EUR m 2015 2016 2017 2018 2019F 2020F 2021F
Revenue 3,902.9 3,908.1 3,796.9 3,798.7 3,826.6 3,869.5 3,902.6
EBITDA 1,220.5 1,267.1 1,236.6 1,250.9 1,311.7 1,316.6 1,361.5 EBITDA adjusted 1,343.0 1,320.9 1,295.1 1,316.8 1,351.7 1,373.2 1,394.2 EBIT 391.1 385.7 396.7 495.2 518.2 495.3 528.5 Net interest expense 155.0 149.4 139.1 86.1 75.4 75.4 75.4 EBT 246.5 252.5 272.7 413.4 444.7 421.8 455.0 EAT 151.9 140.1 67.2 175.0 291.8 278.1 298.0
EPS 0.31 0.29 0.14 0.36 0.60 0.57 0.61
DPS 0.10 0.16 0.35 0.53 0.60 0.60 0.61 Adjusted FCF 284.8 372.2 -119.3 267.4 353.8 410.3 433.3 Net Debt 866.6 539.5 743.0 743.9 703.7 589.0 456.1 Net Debt/EBITDA 0.7 x 0.4 x 0.6 x 0.6 x 0.5 x 0.4 x 0.3 x P/E 29.7 x 31.2 x 83.7 x 29.7x 17.9 x 18.7 x 17.5 x Analyst EV/EBITDA 4.4 x 3.9 x 5.1 x 4.8 x 4.5 x 4.4 x 4.2 x Constantinos Zouzoulas FCF yield 6.3% 8.5% -2.1% 5.3% 7.0% 8.1% 8.6% [email protected] Dividend yield 1.1% 1.8% 3.1% 4.9% 5.6% 5.6% 5.7% +30 210 741 4460 Source: AXIA Research estimates, The Company
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AXIA Research
Utilities PPC
Given the turmoil in the domestic macro, PPC, the incumbent electricity producer and supplier of the Rating Neutral country has found itself in a very challenging position. The company’s close ties with the political landscape and the massive footprint on the domestic economy have not allowed PPC to respond to Target Price 1.80 the impact of the crisis on the company and the restructuring that is taking place in the domestic Price (EUR/sh) 1.33 electricity market. Currently PPC has reached a crucial point where significant decisions and decisive MCap (EUR m) 309 actions need to be taken in order for the company to remain afloat and competitive. The refinancing Free float (%) agreement with the Greek Banks and the supporting actions by the government has bought PPC time 49% to structurally reshuffle its business and cure its balance sheet, but time and execution is of the 3m ADV 221 essence. Price high (12M) 2.948 Price low (12M) 1.11
Key investment themes
The incumbent electricity producer and supplier of the country has found itself in challenging times due to the restructuring of the domestic electricity market. State controlled management (State owns 51%) has not allowed the company to effectively tackle challenges. The group is forced to dispose 40% of its lignite fired capacity and at the same time reduce its supply market share form c90% to 50% by end 2019. Also disposed in 2017 its network operator subsidiary (IPTO). Receivables from unpaid bills have accumulated to EUR 2.3bn during the crisis, significantly
affecting the company’s liquidity. Appointment of special advisor (collection agent) starts bearing
fruits Limited exposure to renewable energy generation sources. Significant carbon footprint with about Major shareholders 40 million tons of CO2 emissions annually Greek State 35% Tender for the sale of lignite units failed to attract bids compatible with fair valuation levels and HRADF 17% proposed framework. Government is pushing for a new round with revised assumptions and shareholders agreement to attract improved bids and avoid any discussion for the sale of valuable Silchester 11%
hydro units. New 5-year strategic business plan presented in 2Q18 that provides for EBITDA to grow by 18.5% Company description CAGR in 2017-22 and reach EUR 1.0-1.1bn, while leverage should subside to the 3.0x range (vs. 9.0x PPC is Greece’s ex-incumbent electricity in FY17). This is supported by a EUR 3.9bn capex. company. The company generates electricity Refinancing agreement with Greek banks agreed in 2Q18 provides time window to undertake through a fleet of lignite, large hydro, natural gas and oil fired units covering c55% of total restructuring. country’s needs. Also has small footprint in RES. Ministry of energy working on a pricing package that could after long delays allow PPC to realize PPC controls also about 80% of the domestic higher prices. electricity supply market. Available credit line and cash to be utilized for the EUR 350m Eurobond repayment in April.
Short term upside catalysts: approval of tariff increases, rebate part of RES suppliers fee On our view if the company sticks strictly to business plan implementation there are valid chances its can boost profitability and improve liquidity going forward.
Sale of State’s 17% stake (MoU) to lower State’s influence on the company, support restructuring efforts and act as a long term catalyst for the company.
Risks Heavy exposure on CO2 prices / very thigh liquidity positions creates uncertainty and limits growth initiatives / very low presence on RES market compared to sector / State controlled management
EUR m 2014 2015 2016 2017 2018E 2019F 2020F
Generation volumes (GWh) 35,338 34,089 30,255 32,584 30,338 29,256 25,659 Sales volumes (GWh) 49,434 49,177 46,307 43,821 41,327 37,692 33,938 Revenue 5,863.7 5,735.7 5,130.0 4,943.9 4,749.8 4,534.7 4,314.5 Cash Opex 4,410.4 3,956.8 3,878.0 4,062.3 4,409.0 3,920.1 3,594.4 EBITDA 1,022.1 828.5 811.3 804.7 390.8 564.6 670.1 EBITDA margin 17.4% 14.4% 15.8% 16.3% 8.2% 12.4% 15.5%
Net financials -189.7 -172.0 -114.4 7.8 -95.0 -87.3 -93.8 EBT 137.6 -106.5 125.4 60.0 -326.0 -126.7 -9.2 Net Income 91.3 -102.4 170.2 88.7 -231.5 -90.0 -6.5 Capex -670.4 -623.7 -727.5 -427.5 -796.0 -690.0 -690.0 FCF -423.0 312.1 247.4 659.8 -44.3 -67.9 3.7 Net Debt 5,095.5 4,880.3 4,405.0 4,017.4 3,924.8 3,992.6 3,988.9
Net Debt/EBITDA (x) 5.0 5.9 5.4 5.0 10.0 7.1 6.0 Analyst P/E (x) 13.7 n.m. 4.0 5.1 n.m. n.m. n.m. EV/EBITDA (x) 6.2 7.0 6.3 5.6 10.8 7.6 6.4 Argyrios Gkonis P/BV(x) 0.20 0.16 0.11 0.08 0.06 0.06 0.07 [email protected] Source: AXIA Research estimates, The Company +30 210 741 4462
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Retail Sarantis
Sarantis is a well-positioned, regional player in the production and distribution of mass market Target Price N.R. cosmetics, household products, health&care products and luxury cosmetics. In addition, the 49% JV Rating N.R. with Estee Lauder (Greece, Cyprus, Bulgaria and Romania) represents c22% of the group’s EBIT. The company has leading market shares in its segments in Greece, Poland, Romania and in other Eastern Price (EUR/sh) 7.10 European countries, while Greece along is accounting for c35.5% of group sales. Sarantis has MCap (EUR m) 477 delivered substantial growth over the past 6 years through healthy organic growth (above market Free float (%) 47% performance that is expected to be maintained over the medium term) and targeted acquisitions. 3m ADV 38 Key driver for the company over the coming years is the recent acquisition in Ukraine that allows the company to enter into a new, large, market that potentially could be used to introduce the firm to Price high (12M) 8.275 the Russian market. Predictable cash flows, strong balance sheet and recurring dividend are key Price low (12M) 6.5
attributes of the case.
Key investment themes The company is expected to maintain its growth momentum in Greece assisted by the economic rebound in the country, market share gains and its ongoing efforts to leverage on its distribution capacity through negotiating the representation of additional brands We expect the strong performance of the international operations also to be maintained driven by i) increased market share ii) introduction of new products and iii) entry to subcategories of
products that had no presence at all
The most exciting prospect for the group comes from the recent acquisition of Ergopack, in
Ukraine, a company that exports half of its production and with significant potential to grow both exiting operations (underinvested) and to add new ones (based on what Sarantis produce in other Major shareholders counties). In turn, this could allow the group to expand into new markets, namely Russia. GGR Sarantis 52% We expect sales to grow by 10% in 2018 assisted by both organic growth and the recent FMR 10.67% acquisitions (Ergopack & Indulona). Top line CAGR over the period 2017-20F is seen at 7.9%. EBITDA is seen up 11.5% in 2018, with a 2017-20F EBITDA CAGR of 11.3%, partially as profitability KAS Depository Trust 5.0%
of the recent acquisitions increases. Net income in 2018 is forecasted to increase by 8.2% y-o-y slightly impacted by higher net financial expenses (acquisition of Ergopack), while 2017-20F EPS Company description CAGR is estimated at 11%. Sarantis is a leading consumer-products Sarantis free cash flow to be improving growing assisted by increasing operating profitability and company in Greece, offering well recognized relatively low capex requirements. The healthy free cash flow generation plus its underleveraged brand names in the categories of Fragrances & balance sheet allows the company to proceed with both dividend (2019F dividend yield at 2.4%) Cosmetics, Personal Care, Household Products and Health & Care Products. The group operates and expansion, if there is an opportunity. in Europe, via 10 subsidiaries in Poland, Romania, The stock trades at attractive multiples, with an 2019F EV/EBITDA of 9.6x and a P/E of 13.7x, a Bulgaria, Serbia, Czech Republic, F.Y.R.O.M., sharp discount vs. the peer group (18% and 31% respectively) that is only partially explained by its Hungary, Bosnia & Herzegovina, Portugal and Ukraine, while at it maintains a distribution size and lower-margin model operations. network in more than 35 countries via direct exports. Foreign countries activity constitutes Risks approximately 64.5% of the total group turnover. Macroeconomic environment in Greece and in in Eastern Europe / Growing demand for less
expensive own label products vs. branded ones impacts sales growth / FX fluctuations
EUR m 2015 2016 2017 2018E 2019F 2020F 2021F Revenues* 243.3 287.3 299.7 329.9 356.9 376.7 395.8
EBITDA 27.9 32.2 39.7 44.2 50.3 54.6 58.6
EBIT 24.8 29.1 34.5 38.2 43.5 47.7 51.3 EBT 22.9 23.6 34.7 37.3 43.0 47.2 51.1
Net Income 18.5 19.4 29.0 31.4 36.1 39.7 43.0
EPS 0.53 0.55 0.41 0.45 0.52 0.57 0.61 DPS 0.16 0.18 0.14 0.15 0.17 0.19 0.20 Analyst 10.2 5.5 24.7 -0.4 25.6 31.6 36.2 FCF Constantinos Zouzoulas Capex 6.0 8.4 9.3 25.0 9.0 9.0 9.0 [email protected] Net debt 0.72 -0.17 -13.22 -1.53 -14.51 -32.56 -54.49 +30 210 741 4460 P/E 14.5 19.9 30.5 15.8 13.7 12.5 11.5 Vasileios Karachalios EV/EBITDA 9.6 12.0 22.0 11.2 9.6 8.5 7.5 [email protected] Div. yield 2.1% 1.6% 1.1% 2.1% 2.4% 2.6% 2.9% +30 210 741 4465 *IFRS adjusted, Source: AXIA Research estimates, The Company
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Terna Energy Utilities/Renewable Energy
Greek RES market is gradually evolving to one of the most attractive areas of the domestic economy, with wind park sector as the crown jewel. Stabilization of market framework on the back of policies Target Price 8.50 adopted over the last couple of years, global green energy demand trends and an underinvested Rating Buy domestic sector are set to drive the ~EUR 2.0bn Greek RES market to double within the next decade. Price (EUR/sh) 6.60 This has already attracted the interest of foreign capital that has been absent during the crisis, allowing though domestic players to grow. MCap (EUR m) 741 Terna Energy is the leader in the Greek wind sector (20% share) having also presence in the US and Free float (%) 30% the Balkans with a total installed capacity of 986MW (9M18) and a target to reach 1.4GW by 2022. 3m ADV 143 The company’s critical mass allows to both continue expanding but also ramp up cash distribution to shareholders with EUR 30m (EUR 0.27/sh) paid in 2019 and a medium term target of ~EUR 50m (EUR Price high (12M) 6.74 0.44/sh). Terna Energy, one of the few independent pure wind producers in the EU, trades at 2019- Price low (12M) 4.85
20 EV/EBITDA of 7.6x-7.3x vs. EU&US peers median of 9.7x-9.1x.
Key investment themes New RES account legislation in Greece as of Oct’16 tackled efficiently the delays in payments (A/R dropped from 6 to 3 months) and removes government policy concerns. RES capacity auctions scheme launched in 2018 targeting to auction 2.6GW of wind and solar capacity. Competition is driving prices lower increasing sector’s long term sustainability. In the US Terna Energy focuses on opportunistic moves in “below the radar” opportunities.
TE in 9M18 had 986MW installed out of which 561MW in Greece (including 18MW of pump storage hydro and 8.0MW of PV), 293MW in the US and 132MW in Poland and Bulgaria. Major shareholders It is expected that by the end of 2020 following the completion of the under development parks Gek Terna 37.9% (Fluvana II in the US, Evoia and Servouni in Greece) installed capacity will reach 1.263GW. Additionally we now account for another ~200MW to be added by the end of 2022 under the Peristeris Georgios 22.4% Greek auctions scheme. In parallel the company is continuing the development of two waste York Global Finance 9.0%
management projects that will add another cEUR 11.0m of EBITDA upon full ramp up (2022). The
capacity expansion plan is backed by a total capex of EUR 734m in 2018-22 funded by i) available Company description subsidy/tax equity (in the US); ii) project finance and iii) own cash. Terna Energy S.A. is active in the production of Solid operating asset base with long term contracted PPAs for the entire portfolio. Weighted energy from renewable energy sources (RES). average PPA lifetime 18.6 years with our estimates calling for cumulative EBITDA generation of More specifically Terna Energy constructs and operates wind parks, small hydroelectric plants, EUR 4.5bn over the portfolio lifetime. photovoltaic parks and recently has been Following a strong cash generation in 2017-18, supported also by receivables collection, the involved in the waste disposal facilities area. Its company raised by 15% y-o-y its cash distributions for 2019. As TE is now exceeding the critical construction division undertakes mainly electromechanical projects both in house and mass of 1.0GW that allows to both fund new investment and reward shareholders, we estimate third party developments. cash available for distribution (CAFD) to grow by 11.7% CAGR in 2017-22, with the company’s cash distributions growing by 18.6% CAGR during the same period.
Risks Exposure to various regulatory environments / Capital intensive business model / Sector sensitive to global environmental policy decisions
EUR m 2016 2017 2018E 2019F 2020F 2021F Installed capacity (YE MW) 764.5 985.9 1,004.9 1,162.9 1,262.9 1,358.9 Total Revenues 225.6 276.8 283.5 291.1 312.9 336.7
…o/w RES sales 151.1 173.4 209.5 232.6 253.9 271.7 EBITDA 115.8 143.9 166.1 179.3 198.0 215.6 Net Income 20.2 37.4 43.2 48.5 60.4 71.6
Dividend payout 9.5 26.0 28.7 33.9 45.3 53.7 FCF -107.0 -139.4 -83.3 23.1 33.1 88.4
CAFD NA 61.4 92.0 59.2 75.7 91.4
Net Debt 503 581 585 666 744 772 Net Debt/EBITDA (x) 4.3 4.0 3.5 3.7 3.8 3.6
P/E (x) 14.7 12.3 14.7 14.5 11.6 9.8 EV/EBITDA (x) 6.9 7.2 7.3 7.6 7.3 6.8 Dividend yield 3.2% 5.6% 4.5% 4.8% 6.4% 7.6% Analyst
CAFD yield NA NA 14.5% 8.4% 10.8% 13.0% [email protected] Source: AXIA Research estimates, The Company +30 210 741 4462
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Industrials Titan Cement
Titan is one of the oldest Greek corporates that has evolved to an international player with presence in 4 continents and 14 countries where its holds significant market shares. Titan’s momentum going Target Price N.R. forward is expected to be driven by the continued growth of the US market (albeit at lower rates), at a time though that the remaining 3 markets (Greece, East Med and Balkans) after a long period of Rating N.R. decline are seen registering small, but positive, growth trends. Sector re-rating at lower levels since Price (EUR/sh) 19.36 4Q18 is currently capping Titan’s upside. MCap (EUR m) 1,533
Key investment themes Free float (%) 89% US is Titan’s driving force contributing ~65% of EBITDA. Titan is strategically positioned in the East 3m ADV 53 Coast and specifically in Florida, Virgina and North Carolina, were cement consumption is ~40% Price high 23.4 below peak (vs. 24% on a nationwide level) with demand growth estimates of 1.5%-2.0% CAGR for (12M) 2018-23. With underlying demand expected to surpass available capacity in the next 2-3 years, Price low (12M) 18.22 prices are increasing in high single digit figures over the last 3-4 years. Titan has invested EUR 240m
in this period to strengthen position and profitability with sales in 2012-17 growing by 18.7% and EBITDA reaching EUR 185m in 2017 vs 5.8m in 2012. We estimate 2017-20 CAGR sales and EBITDA growth of 6.0% and 9.0% respectively The Greek crisis had a detrimental impact on cement consumption that is now ~90% below its peak and at levels last seen in the 1960s. Despite some green shots coming mainly from tourism related construction and some public works, we fail to see a material upside in local demand in the medium term. Titan has managed to maintain plant utilization taking advantage of exports
(almost exclusively to the US), but with a hit in profitability. It is worth noting that at its peak
(2007), Greek market generated >EUR 180m of EBITDA vs. 2011-18 average of EUR 30m. Balkans (Bugaria, Serbia, Albania, Kosovo, FYROM, Montenegro) present high growth potential as urbanization rises and political environment stabilizes. Titan that leads many of these markets has Major shareholders invested to improve competitiveness and profitability. The cluster has shown remarkable stability Kanellopoulos A. 12.8% during volatile periods (2012-17 sales -1.3% CAGR) is currently contributing EUR 55-60m of EBITDA EBYDEM 11.2% (20% of total) with our estimates calling for EBITDA growth of 2.1% CAGR in 2017-20. Kanellopoulos P&A 9.8% Kanellopoulos L. 5.7% East Med (Egypt) presents a volatile market environment affected by macro. The 50% Titan Cement 5.0%
devaluation of the EGP in 2016 resulted in spiking inflation and price volatility, while higher energy
costs and levies are burdening profitability. Despite the underlying demand, new capacity coming into market (State-owned mega plant) increases uncertainty over price increases capacity which Company description is the key factor for the recovery of the performance. Titan Cement S.A engages in the production, trade, and distribution of a range of construction Titan as a long term investor took the opportunity to invest in the downturn of the Brazilian materials worldwide. The company is present in market acquiring in 2016 a 50% stake in Cemento Apodi for EUR 106m with early market Greece, US (Atlantic), South East Europe, Egypt, stabilization signs in 2018. Also in 3Q18 agreed to acquire an additional 25% stake in its JV in Turkey and Brazil. Titan Cement Company S.A. Turkey (Adocim) to reach 75% in amid a deteriorating macro environment. Turkey assets of cEUR was founded in 1902 and is headquartered in Athens, Greece. 70m and turnover of EUR 70m in 2017 to be fully consolidated under East Med as of Oct’18. On our estimates Titan trades at 7.4x-6.7x EV/EBITDA for 2019-20, with a dividend yield of 3.1%- 3.4%. This compares to Titan’s major peers (LafargeHolcim, Heidelberg, CEMEX, Buzzi) trading
at 6.8x-6.5x and yielding 4.0%-4.5%. Note that in 4Q18 global cement names affected by macro concerns took a hit, with sector multiples declining to current levels vs. ~8.0x before.
Risks Significant dependence on US market / Macro volatility in Egypt and Turkey / Very slow recovery of demand in Greece / Rise of energy costs and fuel prices / FX volatility
EUR m 2014 2015 2016 2017 2018E 2019F 2020F Group Revenues 1,158.1 1,396.2 1,509.4 1,505.2 1,477.6 1,610.2 1,691.6 US 468.8 678.9 794.8 870.9 854.8 981.7 1035.3 Greece 284.9 268.7 261.2 230.0 230.1 230.4 246.3 Balkans-SEE 207.5 208.3 204.5 210.8 230.7 235.3 242.4 Egypt 196.9 240.6 249.2 185.4 161.9 162.8 167.6 Group EBITDA 181.6 216.4 278.6 273.5 262.8 313.3 335.2
US 46.5 100.8 145.2 185.1 173.5 220.9 238.1 Greece 37.1 44.8 36.4 18.3 14.7 17.3 19.7 Balkans-SEE 67.2 55.8 56.2 56.9 58.4 58.8 60.6 Egypt 30.9 15.0 40.8 13.2 16.2 16.3 16.8 Net Income 30.9 33.8 127.4 42.7 56.2 94.5 114.6 DPS 0.30 0.31 1.10 0.55 0.45 0.60 0.65
Capex (82.9) (173.0) (244.0) (169.7) (120.0) (120.0) (120.0)
Net Debt 540.7 621.3 654.9 723.0 757.4 737.6 695.6 Net Debt/EBIDTA(x) 3.0 2.9 2.4 2.6 2.9 2.4 2.1 Analyst P/E (x) 46.5 40.6 14.3 43.3 27.5 16.6 13.7 EV/EBITDA (x) 10.9 9.2 8.9 9.4 8.8 7.4 6.8 Argyrios Gkonis FCF yield 1.2% -1.1% 1.1% -1.1% 1.0% 3.6% 5.6% [email protected] Dividend yield 1.7% 1.9% 4.9% 2.4% 2.4% 3.1% 3.4% +30 210 741 4462 2018-20 figures do not include Adocim consolidation Source: The Company, AXIA Research estimates
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Industrials Viohalco
Viohalco is a Belgium based holding company of leading metal processing companies across Europe. The company through its subsidiaries is active in the manufacturing of aluminium, copper, steel, steel Target Price N.R. pipes, and cables while developing a sizable real estate portfolio. Viohalco is one of the oldest Rating N.R. industrial groups in Greece with its sales accounting for ~7.0% of total Greek exports. In 2017 Viohalco Price (EUR/sh) 2.99 posted net profits of EUR 73.68m, signalling the end of a 10-year period of negative bottom line as the operations were affected by both affected by both challenges in the global markets but also the Greek MCap (EUR m) 791 crisis. This turnaround was driven by the management’s strategic focus to an extrovert profile Free float (%) 25% (currently 85% of sales are abroad) and was achieved on the back of continued investments. Viohalco 3m ADV 127 over the last 10 years has invested almost EUR 2.0bn to improve product mix and quality and offer innovative solutions to clients that made Viohalco companies competitive on a global scale. Price high (12M) 3.845
Key investment themes Price low (12M) 2.44
Aluminium (~35% of EBITDA). With solid underlying demand trends global market is growing by 5- 6% per year. Viohalco is global leader in niche markets and already operates on full capacity. Currently is further investing to keep up with demand and increase profitability. Significant M&A in the sector involving major peers. Copper (~15% of EBITDA). Following a difficult period for the copper market, Halcor (largest copper tubes producer in EMEA) through continued and focused investments has turned around the business and is swiftly increasing plant utilization and profitability. Significant M&A in the sector
involving major peers.
Steel (~25% of EBITDA). Steel sector has been heavily affected by the Greek crisis. Viohalco through
strategic investments and an extrovert orientation is restoring profitability and utilization leading EBITDA to more than double since 2015. Sustainably higher utilization and operational excellence Major shareholders Stasinopoulos family 75.1% is the target. Associated leverage remains high though (EUR 550m net debt).
Steel pipes (~10% of EBITDA). Established players on a global scale with ~90% of sales abroad.
Investments to technologically advanced products will support penetration in new markets, while Company description remaining a traditional partner of major E&P players. Well positioned in the US market. Turnaround Viohalco S.A. is a Belgium-based holding of the steel business will be a major catalyst for Viohalco. company of leading metal processing companies across Europe. With production facilities in Cables (~10% of EBITDA). One of the largest cable producers in EU for industrial use. 2019 is shaping Greece, Bulgaria, Romania, Russia, FYROM, to an inflection year driven by the execution of a significant backlog of projects booked in 2017-18, Turkey and the United Kingdom, Viohalco utilizing the significant investments undertaken over the previous years and the dynamic market subsidiaries focus on technological advancement penetration. and specialise in the manufacture of aluminium, copper, cables, steel and steel pipes products, Real Estate. Viohalco is developing to utilize its real estate asset portfolio comprising of 41 generating annual revenue of EUR 3.7 billion. properties including office buildings, malls, hotels and industrial buildings with a GNAV of EUR 244m. The company has filed for a REIC license, aiming to list the entity after development and
refurbishment of assets has been completed. We view this as a key catalyst for the stock.
Risks Global demand growth slowdown / trade wars / currency fluctuations / substitution trends / cost inflation
EUR m 2015 2016 2017 y-o-y 1H17 1H18 y-o-y Revenues 3,280.4 3,119.2 3,721.3 19.3% 2,185.8 1,835.6 -16.0%
adj.EBITDA 239.9 249.5 284.2 13.9% 142.7 143.6 0.6%
Aluminium 98.4 104.3 102.4 -1.8% 52.7 56.4 7.1% Copper 30.9 31.9 46.6 45.9% 24.7 25.0 1.1% Steel 34.1 48.7 75.2 54.2% 38.1 34.0 -10.6% Steel pipes 30.1 27.5 20.6 -24.9% 12.2 14.1 15.3% Cables 42.0 32.3 33.2 3.1% 11.7 12.9 10.9% Real Estate 1.7 1.5 5.6 NM 1.7 2.2 30.9%
Recycling 2.7 4.3 6.7 55.6% 3.8 2.0 -47.2% Other 0.1 -1.0 -6.1 NM -2.1 -3.1 NM EBIT 73.4 110.1 167.5 52.2% 102.8 110.8 7.8% EBT -36.8 6.8 56.8 NM 46.6 45.9 -1.3% Net Income -60.0 -6.4 73.7 NM 24.1 37.7 56.6% Total Equity 928.5 1,057.7 1,106.6 1,143.1
WC 905.2 926.8 971.2 1,058.1 Net Debt 1,498.7 1,527.4 1,527.5 1,599.0 Analyst Net Deb/adj.EBITDA (x) 6.2 6.1 5.4 5.6 EV/Sales (x) 0.6 0.6 0.6 Argyrios Gkonis EV/EBITDA (x) 8.0 7.4 8.3 [email protected] P/E (x) NM NM 11.3 +30 210 741 4462
P/BV (x) 0.4 0.3 0.7 Source: AXIA Research estimates, The Company
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Disclosures
General information This research report was prepared by AXIA Ventures Group Limited, a company incorporated under the laws of Cyprus (referred to herein, together with its subsidiary companies and affiliates, collectively, as “AXIA”) which is authorized and regulated by the Cyprus Securities and Exchange Commission (authorization number 086/07). AXIA is authorized to provide investment services in the United Kingdom, Cyprus, Greece and Portugal pursuant to its permissions under the Markets in Financial Instruments Directive and may also provide similar services in other countries, inside or outside of the European Union, subject to the applicable provisions. AXIA Ventures Group Limited is not a registered broker-dealer in the United States (U.S.), and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. In the U.S., this research report is intended solely for persons who meet the definition of “major U.S. institutional investors” in Rule 15a-6 under the U.S. Securities and Exchange Act, as amended, or persons listed under Rule 15a-6(4)) and is meant to be disseminated only through “AXIA Capital Markets LLC”, a wholly owned subsidiary of AXIA Ventures Group Limited and associated US registered broker-dealer in accordance with Rule 15a-6 of the US Securities and Exchange Act.
Content of the report The persons in charge of the preparation of this report, the names of whom are disclosed below, certify that the views and opinions expressed on the subject security, issuer, companies or businesses covered by this research report (each a “Subject Company” and, collectively, the “Subject Companies”) are their personal opinions and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendations or views contained in this research report.
Whilst all substantial sources of information for the research are indicated in this report, including, without limitation, bases of valuation applied to any security or derivative security, such information has not been disclosed to the Subject Companies for their comments and no such information is hereby certified.
All information contained herein is subject to change at any time without notice. No member of AXIA has an obligation to update, modify or amend this research report or to otherwise notify a reader thereof in the event that any matter stated herein, or any opinion, projection, forecast or estimate set forth herein, changes or subsequently becomes inaccurate, or if research on the Subject Company is withdrawn. Further, past performance is not indicative of future results.
Persons responsible for this report: (Head of Research) Constantinos Zouzoulas, (Director) Jonas Floriani, (Analyst) Argyrios Gkonis and (Analyst) Celia Hjioannou of AXIA Ventures Group Ltd which is authorized and regulated by the Cyprus Securities and Exchange Commission (CySEC) under CySEC license No 086/07.
Key Definitions AXIA Research 12-month rating* Buy The stock to generate total return** of and above 10% within the next 12-months Neutral The stock to generate total return**between -10% and 10% within the next 12-months Sell The stock to generate total return** of and below -10% within the next 12 months Under Review Stock’s target price or rating is subject to possible change Applicable Laws / Regulation and AXIA Ventures Group Limited policies might restrict certain types Restricted of communication and investment recommendations Not Rated There is no rating for the company by AXIA Ventures Group Limited * Exceptions to the bands may be granted by the Investment Review Committee of AXIA taking into account specific characteristics of the Subject Company **Total return: % price appreciation equals percentage change in share price from current price to projected target price plus projected dividend yield.
AXIA Ventures Group Limited Rating Distribution as of today Of which Investment Coverage Universe Count Percent Count Percent Banking Relationships Buy 16 70% 3 3 14% Neutral 3 13% Sell Restricted 1 4% Not Rated Under Review 3 13%
Independence and objectivity conflicts of interest management None of the analysts in charge of this report nor any other personnel involved in the preparation and dissemination of this report are involved in activities within AXIA where such involvement is inconsistent with the maintenance of that analyst’s independence or objectivity. None of the aforementioned persons has received or purchased shares in any Subject Company prior to any private or public offering of those shares. However, the analysts responsible for the preparation of this report may interact with trading desks or sales personnel for the purpose of gathering and interpreting market information with regard to the Subject Companies. As an investment services provider engaging in a wide range of businesses, AXIA is active in the field of activities which may include the provision of investment services to issuers of securities, such as brokerage services, services related to underwriting or placing of financial instruments or to advice on capital structure, industrial strategy and related matters (“investment banking services”), or services related to the provision of research reports. The nature of such activities, in conjunction with the activity of production and issuance of research reports, may be considered as leading to situations of conflict of interests when the research reports cover an issuer with whom AXIA has an ongoing or has recently had a business relationship for the provision of investment services.
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AXIA Research
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AXIA Research Page 113
AXIA Research
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Constantinos Zouzoulas [email protected] +30 210 7414460 Jonas Floriani [email protected] + 44 20 8068 3516 Argyrios Gkonis [email protected] +30 210 7414462 Celia Hjioannou [email protected] +357 22 742013 Vasileios Karachalios [email protected] +30 210 7414465
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