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PPC | Holistic transformation, more to come

We initiate coverage of PPC with a ‘Buy’ recommendation and a €10.0 PT, while adding the stock in our top picks list.

In our note, we deep dive into PPC, Greece’s largest energy utility and sole owner of the electricity distribution network operator (HEDNO). The group’s restructuring story has had few precedents both in the EU energy sector and in the Greek corporates’ space, with adj. EBITDA almost tripling yoy in 2020 by virtue of regulatory amendments, self-help actions and a favourable input cost environment.

Most importantly, a 2nd transformation phase is set to unfold with further portfolio restructuring and scaling-up of renewables (RES). As such, PPC’s adj. EBITDA capacity seems to have been rebased to >€0.9bn, a level we see as achievable in 2021e notwithstanding the higher input costs. With further cost savings kicking in and with the conventional generation unit about to turn the corner, we see adj. EBITDA being sustained at >€1bn in 2022-23, translating to c7% CAGR in the next 3-year period.

The potential monetization of HEDNO (sale of a 49% stake in the distribution operator is underway, €3bn RAB) is an additional short-term catalyst which could further crystallize value and lead to additional deleveraging, while providing balance sheet optionality (e.g. accelerated RES capacity roll-out).

On valuation, the stock trades at a >35% discount vs the broad peer group, still a good entry point in our view, notwithstanding the c68% rally year-to-date. This is especially the case as, on our reverse-engineering exercise, at the current price PPC’s Generation/Supply/RES segments are valued at just 3.5x 2021 EV/EBITDA, quite punitive in our view given the unfolding of PPC’s decarbonization strategy. Our PT is based on a SOTP, effectively valuing HEDNO at small premium to RAB and other segments at c4.8x 2021 EV/EBITDA.