EUR 508.94 For Business Accounts Only

Investing through reviews

Set up looks familiar, but program end is around the corner necessitating market access – Looking at where we stood last year vs. where we stand now brings up a series of similarities and one significant contrast. The similarities draw on the fact that we are closing off Q3 and heading into Q4 with another program review in sight, while having left loose ends with the previous review on the back of required actions. As the hype for the review progresses, much like last year, the anticipation of the timing of the conclusion of the aforementioned process shall weigh on the Greek investment case. The contrast though is that the economy is on a recovery trajectory and the government is aiming to lay the works for a “clean exit” with the end of the program in <1 yr.

A timely 3rd review completion… – …would catalyze the re-rating theme as the country further de-risks. We show that on our numbers the implied rf at current levels is 100bps above the Greek 10yr bond, suggesting an 18% upside from current levels on the back of the 10yr bond & equity valuation convergence. Should the process prove to not be a well-ordered one, we believe the market will focus on individual stories that have proven fundamental merits that transcend program review “noise”.

Restoring market access – Greece’s interest lies with an orderly completion of the 3rd review to increase its creditworthiness with the investor community and establish a more solid track record, which we show is one of the key attributes when seeking to restore market access. In 7 MOU years, Greece has completed 9 reviews, as many as Cyprus during its 3yr program, while Ireland and Portugal had completed 12 and 11 respectively. Other attributes showcased by the successful market return of Portugal, Ireland and Cyprus involve economic recovery and increased cash buffers. Both could be solidified by the completion of the review in a timely fashion as confidence (enhancing recovery momentum) and associated fund disbursements (build cash buffers) would allow for a phased-in market reentry and eventually seek an exit from the current MOU.

Past experience not supportive – Realistically, recent history has shown that reviews are never neat, there’s usual squabble between involved parties (mainly IMF) thus lengthening the process. At this juncture, we see two realistic options. Either seek an orderly review (3rd and remaining) completion so that market access can be restored (solely or with backstop facility) given the associated debt discussions accompanied by a cash buffer buildup or exhibit usual numbness and continued squabble that leads to lengthy process well into the new year, at which point a new medium term framework will need to be formulated proving that the 3rd one was not a charm.

Looking at EUR strength impact on Greek corporates, assessing potential winners and losers – There is only a limited number of companies generating USD or USD-related revenues (e.g. Intralot, FFG, Titan, refineries) and, by implication, are faced with a translational headwind. In some of these cases, revenue/cost matching (e.g. FFG, Titan, Intralot) or hedging (e.g. CCH, Aegean) limits the transactional impact on earnings. In other cases, the revenue and cost exposure mismatch suggests a positive impact from the EUR strength, given the significant USD-related cost base (e.g. retailers, Aegean Airlines etc.) Conversely, refineries enjoy USD-based revenues (matched with mostly USD-based COGS) but operating expenses are in EUR. By implication, the EUR strength would be a headwind for profits. That being said, mitigating the FX impact are the high refining margins

 Investing through “reviews” – We feel that the market has learned to live with the review tangled backdrop, increasingly focusing on individual names that have proven fundamental merits that transcend program review “noise”. To this respect we focus on our top pick names which are stocks exposed to the recovery theme (e.g. Jumbo) or are set to benefit from the increase of disposable income (e.g. OTE’s mobile and Pay TV business, OPAP’s gaming portfolio). In addition, on banks we remain positive, albeit one is required to stomach the volatility, as economic activity is picking up, while some significant milestones related to the NPL resolution framework have been completed recently aiming to make it more efficient,. From the sector we favour NBG on the back of its relatively more solid fundamental backdrop, given its higher NPE coverage, funding and capital position.