Report
Andreas Souvleros, CFA ...
  • Marios Bourazanis
  • Natalia Svyriadi
  • Nikos Athanasoulias CFA
  • Stamatios Draziotis CFA

Greek Equity Strategy – Post Greece’s IG upgrade | Stay on board

Stay on board – Greek stocks have had a rather muted summer (ASE +4.7% in July, -1.6% in August), as the prospect for higher-for-longer rates fanned worries about the global economy, leading to widening equity risk premia amidst poorer liquidity conditions given the low seasonality. With Greek stocks already up 35% ytd (banks +55%), the short-term risk-reward looks symmetrical as the fragile international sentiment is balanced with the strong domestic fundamentals, attractive valuations and positive catalysts. Given the positive domestic medium-term outlook, we advocate that investors selectively add exposure during international-induced corrections. Our preferred list of picks is a mixture of quality names with high earnings visibility and cash returns (OPAP, Jumbo, Mytilineos) further supplemented by higher-beta stocks at low valuation, namely PPC & Piraeus Bank.

Valuations remain compelling, both on an absolute and relative basis… – The ASE is up 13% since the first elections (21st May) but just 0.5% since the second election round (23rd June), as the crystallization of the political landscape was partly priced-in in the period between the two rounds. That said, we note that strengthening fundamentals and strongly positive earnings revisions (both for banks and non-financials) have kept valuations at very compelling levels. Indicatively our non-financials universe is still trading at 20% discount vs EU peers. As for banks, the lower-priced cohort, namely Alpha and Piraeus, remains at 0.5-0.6x P/TBV, thus indicating plenty of scope to narrow the gap vis-à-vis foreign peers as conviction in Greek banks’ ability to generate sustainable 2-digit RoTE increases. Greece currently enjoys best-in-class earnings momentum in Europe, offers a cheap source of cyclicality, compelling starting valuations, low positioning, a healthy macro outlook (only partly wrinkled by the effects of the recent floods, which will likely cost >1% of GDP), solid profit growth profile for listed entities and technical catalysts (sovereign rating upgrade). As such, we expect the local market to outperform in the next 12 months, barring any significant risk-off swing.

IG upgrade: a catalyst that has not run its course – The upgrade of Greece’s sovereign rating has been well-telegraphed as a key catalyst that will help attract investor flows, thus improving market liquidity and leading to a narrowing of risk premia. Although Greece has indeed been upgraded to IG by Scope, and last Friday by DBRS (with the latter being among the agencies considered by the ECB), it is the other mainstream agencies that investors mostly focus on (S&P, Fitch, Moody’s), and, as such, this catalyst is still ahead of us, with positioning thus poised to be supportive in the coming months. Although some market participants have cautioned that the re-rating theme ahead of the sovereign upgrade may have already run its course, we argue that there is plenty of room to go, given the >6% ERP embedded in the price of non-financials (c9% COE). Indicatively, a 1ppt reduction in COE would translate into a c13% upside, ceteris paribus. As for banks, given the higher COE incorporated in prices (e.g. >17% for Alpha and Piraeus), the upside from the compression of equity premia is more material. We expect stocks included in the MSCI Standard index to benefit the most from the resulting fall in COE.
Underlyings
Greek Organisation of Football Prognostics SA

OPAP is engaged in the operating and management of numerical lottery and sports betting games as well as lottery games. Co. holds concession to operate and manage new sports betting games in Greece as well as a right of first refusal to operate and manage any new lottery games permitted by the Hellenic Republic. Co. operates six numerical lottery games, including Joker, Lotto, Proto, Extra 5, Super 3, and Kino; and three sports betting games consisting of Stihima, Propo, and Propo-goal. Co. is also engaged in designing new lottery games, including Bingo and Super 4. Co. distributes its games through an extensive on-line network of agents.

Jumbo S.A.

Jumbo is a trading company based in Greece. Co.'s main operation is retail sale of toys, baby items, seasonal items, decoration items, books and stationery. A part of its operations is wholesale of toys and similar items to third parties. Co. and its subsidiaries have four geographical segments: Greece, Cyprus, Bulgaria and Romania. At June 30 2015, Co. operated 72 stores in Greece, Cyprus, Bulgaria and in Romania and the on line store e-jumbo.

MYTILINEOS S.A.

Mytilineos Holdings is an industrial group engaged in the sectors of Metallurgy, EPC, Energy, and Defence. Co. and its subsidiaries are engaged in three main operating business segments: Metallurgy, Constructions and Energy. Co. and its subsidiaries monitor its performance on Metallurgy and Mining Sector through the subsidiaries Aluminium S.A. (Alumina-Aluminium) and Sometra S.A. (Zinc-Lead). Co., through its subsidiary, METKA S.A., is an EPC Constructor in Greece.

Piraeus Financial Holdings S.A.

Piraeus Bank is a banking institute. Co. and its subsidiaries provide services in the Southeastern Europe, Egypt, as well as Western European markets. Co. and its subsidiaries operate in four main business segments: Retail Banking, which includes the retail banking facilities; Corporate Banking, which includes facilities related to corporate banking; Investment Banking, which includes activities related to investment banking facilities of Co. and its subsidiaries, including investment and advisory services, underwriting services and public listings, and stock exchange services; and Asset Management and Treasury, which includes asset management facilities for clients.

Provider
Eurobank Equities
Eurobank Equities

Eurobank Equities is a Greek-based firm offering research, sales and trading services to institutional, corporate and private clients. The company is wholly owned by Eurobank, one of the 4 systemic banks in Greece.

Research is the backbone of Eurobank Equities' platform, with a team of 4 professionals committed to generating actionable investment ideas by providing timely research products. We are committed to offering value-added services to clients by filtering market noise and providing insights on the multiple sectors that we cover. Our universe includes 26 - large, medium and small cap - companies whose market capitalization amounts to 80-85% of the total market capitalization of the Athens Stock Exchange. Our research team also maintains the capacity to generate ad-hoc research for micro-cap listed companies.

Our team has consistently gained recognition among institutional investors for its quality research, having ranked No. 1 team in Greece at the Extel Surveys of 2013-2016 and 2018. We have also been named Leading Brokerage Firm in Greece over 2014-2016 and in 2018.

Analysts
Andreas Souvleros, CFA

Marios Bourazanis

Natalia Svyriadi

Nikos Athanasoulias CFA

Stamatios Draziotis CFA

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