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GREEK REFINERIES (HelleniQ Energy - Motor Oil) | Re(de)fining growth

Profitability holding up, valuations remain muted – Greek refineries have displayed noteworthy operational resilience through 2023, thanks to persistently strong refining margins (down just €0.8bn in 2024, when refining margins normalize to more sustainable levels. With the two stocks trading at c5x 2024e EV/EBITDA, at the low end of mid-cycle levels, we believe the current valuation does not capture the rising RES tilt in the profit mix (15-25% for HelleniQ and MOH respectively by 2025e). As such, we find the valuation of both stocks compelling, although we caveat that the path to our PTs is paved by an environment of no recession in Europe in 2024.

Lengthier journey towards mid-cycle refining margins… – Refining margins have undergone substantial fluctuations YTD, recovering to $15-20/bbl in Q3'23 from a low of 1GW of operating RES capacity – In recent years, both companies have made substantial progress in their RES portfolios. HelleniQ Energy significantly expanded its operating capacity to 356MW through the commercial operation of the landmark Kozani PV project (204MW) and several international and domestic M&A deals. With an ambitious pipeline of 4.1GW, ELPE has effectively secured its 1GW target by 2025, when we anticipate RES EBITDA to exceed €100mn (CAGR: 43%). Similarly, Motor Oil increased its operating capacity to 772MW following the completion of the Anemos acquisition, with its pipeline reaching 4.1GW after acquiring Unagi, a move which renders the group’s 2GW operational target by 2030 within reach. Overall, we estimate that Motor Oil’s RES EBITDA will gradually surpass €200mn by 2026, with management envisaging €300mn RES EBITDA by 2030.

Increase in estimates on higher refining margins and greater visibility on RES – Based on the better refining margin trends and the greater visibility on RES, we raise our 2023-2024e EBITDA for HelleniQ c20%, now anticipating FY'2023e EBITDA c€1.1bn, fading to c€0.8bn in 2024 assuming a c3$/bbl contraction in refining margins. In a similar vein, we raise our 2023-24e EBITDA for Motor Oil by 9%/5%, landing at €1.1bn in 2023e and €0.8bn in 2024e (inputting c$4.5/bbl margin compression). We have also consolidated Anemos in MOH financials.

Valuation – We have recalibrated our valuation for both companies, making modest upward adjustments to our PTs, less than the near-term earnings upgrades would suggest as our medium and long-term assumptions are little-changed. We have lifted our PT for HelleniQ Energy to €9.4 (from €9.2) and for Motor Oil to €27.5 (from €26.6), placing both stocks at c6x 2024e EV/EBITDA, at the high end of the long-term valuation of the EU refining sector, justified in our view by the rising RES mix. Given current price levels and barring a recession in Europe, we feel that risks skew constructively on balance and see scope for investors to selectively add exposure upon pull-backs.