EUR 150.00 For Business Accounts Only

PPC | Buying opportunity on overdone negativity

In the spotlight amid rising commodity costs – PPC has remained in the spotlight, amid rising commodity costs, given that the company is long on customers and is exposed to rising electricity prices. Despite this, we believe PPC is well positioned to meet its €0.8-0.9bn EBITDA guidance in 2021, and sustain a similar level of profitability in 2022, owing to continuous Govt support (this enables PPC to make full use of the pass-through mechanism) as well as active hedging efforts (hedging helps mitigate price volatility in the commodity markets).

Govt support enables PPC to make full use of pass-through mechanism – The Govt is subsidising household electricity bills (adjusted on a monthly basis, taking into account trends during the previous month), along with support on non-household bills (industrial, commercial, farming). The initiative is financed through the Energy Transition Fund, which utilizes CO2 emission proceeds, among others. As per our understanding, the sharp increase in CO2 prices (peaking at 96.5 €/Ton in February) indicates that there is more than enough room for increased injections from the special RES account to the Energy Transition Fund. Recent press reports citing comments of the Regulatory Authority’s head, implied that the ETF could receive as much as €1bn from CO2 auction proceeds alone. As such, PPC is likely to continue to make full-use of the updated pass-through mechanism with reduced risk of collection trends deterioration, as the impact for the end consumer is mitigated. Even under a worst-case scenario though, PPC has ample liquidity to cope with potentially worsening collection trends, until prices normalise.

Increased use of water reserves helps mitigate impact from rising gas prices – In the meantime, PPC is mitigating the impact from rising gas prices with increased hydro generation. The company is making full use of water reserves and has increased hydro generation to > 5 TWh in 2021 from an average of 3-4 TWh in previous years. Weather conditions remain supportive (snowfalls earlier in the year), indicating full water reserves and increased hydro operation in the current year also.

Set to come out from the energy crisis with minimal risk to operating profitability – As such, recent share price weakness is unwarranted, in our view, indicating a buying opportunity for investors willing to gain exposure on the Energy Transition theme in Greece. PPC remains significantly undervalued, trading on < 7x 2023e EV/EBITDA multiples, which indicates a c20% discount to European utilities. At current price levels, PPC’s conventional generation (gas/hydro) and supply business are valued at < 2x 2022e EV/EBITDA, quite punitive in our view. We expect the stock to move higher in the valuation spectrum to reflect: (a) the sale of HEDNO, which helps deleverage and expand in RES; (b) a generation/supply value closed to that normally applied to EU peers’s such activities (i.e. 4-5x EV/EBITDA historically); and (c) secular growth as PPC delivers on its de-lignitisation targets and expands in RES. We reiterate PPC as one of our Top Picks (Buy; PT €14.50).