Greece, Construction J&P Avax Hefty upside, but no catalysts June 4, 2010 Current price 1.45 Target price 5.40 From 6.50 Upside potential 272.4% Remains Outperform Key data Reuters code AVAr.AT Bloomberg code AVAX GA Mcap 112.6m Shares outstanding 77,654,850 Free float 33.3% Share price performance 1m 3m 12m Volume (k) 17.6 19.0 42.9 Absolute return -22% -30% -51% Relative to ATHEX GI -8% -10% -25% 52-week range ( ) High 4.03 Low 1.44 J&P Avax reported a good set of 1Q10 results despite the lower than expected construction volumes. The foreign projects were mainly behind the performance. We cut the FY10 sales estimate by 9.1% assuming a slightly slower pace in the execution of the backlog, while we increase the respective EBITDA estimate by 13.8%. On the other hand, we cut the net income forecast by 11.1% on the additional taxation. Our new target price is set at 5.40 per share from 6.50 before. New projects tenders in the domestic market are now limited, however J&P Avax has a satisfactory order book and is well placed in some countries so as to have good chances to participate successfully in various tenders. In any case, a further decline in the backlog should not be ruled out. What is of concern though, is the sustainably high level of debt. Note that J&P Avax has recently announced a 265m bond issue that secures most of its forthcoming financing needs. Attica Road and Gefyra remain the most valuable assets of the group even after our revised valuation estimate. Those two assets account for more than 80% of the total valuation exercise and stand three times higher than the current market cap. We cannot identify any major catalyst in the short to mid term for the stock, and hence our Outperform rating is solely supported by the hefty upside. 140 120 100 Key figures and valuation data 80 60 40 J J A S O N D J F M A M J J&P Avax Analyst Panos Panagiotou T +30 210 6970 685 p.panagiotou@proton.gr General Index 2008 2009 2010e 2011e 2012e Sales 991.1 945.7 849.1 863.4 832.1 EBITDA 40.1 56.4 58.5 54.1 49.7 EBIT 19.1 31.7 33.0 27.3 22.4 EBT 28.3 34.9 38.2 34.0 31.3 Net income 21.0 27.1 24.5 21.8 20.3 EPS 0.27 0.35 0.32 0.28 0.26 Net Debt 377.3 370.4 376.7 358.5 318.2 EV 489.9 483.0 489.3 471.1 430.8 EV/EBITDA 12.2 8.6 8.4 8.7 8.7 P/E 5.4 4.2 4.6 5.2 5.5 P/BV 0.5 0.4 0.4 0.4 0.4 ROCE 3.0% 3.5% 3.1% 2.7% 2.6%
J&P Avax June 4, 2010 1Q10 results review Sales reached 189m, 17.7% lower y-o-y and below our forecast for 226.5m. Greece contributed 125.7m, while the foreign projects contribution fell to 63.3m, which accounts for 33.5% of total sales vs our forecast for c40%. Note that the group's signed and to be signed projects stood at 2.45bn by the end of March 2010 from 2.6bn a quarter ago. Table 1: Greece & Abroad sales and EBITDA breakdown ( m) Greece 1Q09 1Q10 y-o-y PBe Act vs PBe Sales 120.1 125.7 4.7% 113.7 10.6% EBITDA 5.1 4.2-16.6% 4.6-8.1% EBITDA margin 4.2% 3.4% -0.9pp 4.1% 0.7pp Abroad Sales 109.5 63.3-42.2% 89.7-29.4% EBITDA 12.3 14.1 15.2% 7.1 99.0% EBITDA margin 11.2% 22.3% 11.1pp 7.9% -14.4pp Source: Company data, Proton Bank estimates EBITDA settled at 18.4m, above PBe for 12.9m, with the respective margin settling at 9.7% vs PBe for 5.7%. Note that this strong performance is mainly attributed to the foreign projects that account for 77% of the total EBITDA. The 1Q10 EBITDA margin from abroad stood at an impressive 22.3%. Net income came in at 8.9m, well above our forecast for 5.5m benefitted by a slightly higher than expected income from associates (mainly Attica Road) of 6.9m vs PBe for 6.5m and lower than expected interest expenses of 5.7m vs PBe for 6.1m. Net debt reached 426.6m at end March, from 370.4m the previous quarter mainly on higher working capital needs. Table 2: 1Q10 results vs PBe ( m) 1Q09 1Q10 y-o-y PBe Act vs PBe Sales 229.5 189.0-17.7% 226.5-16.6% COGS 205.0 157.1-23.4% 204.5-23.2% Gross profit 24.5 31.9 29.9% 22.0 44.6% Gross margin 10.7% 16.9% 6.2pp 9.7% 7.1pp EBITDA 17.3 18.4 5.8% 12.9 42.0% EBITDA margin 7.6% 9.7% 2.2pp 5.7% 4.0pp Net income 9.5 8.9-6.2% 5.5 61.7% NI margin 4.1% 4.7% 0.6pp 2.4% 2.3pp Source: Company data, Proton Bank estimates 2 Greece, Construction
June 4, 2010 J&P Avax Revision of forecasts We cut our FY10 sales estimate by 9.1% to 849.1m, assuming a slower pace in the execution of projects, especially abroad. The tight economic conditions domestically lead into less new tenders during the year and result to a decline in the construction volumes. On the contrary, we increase our EBITDA estimate by 13.8% for FY10. The increase reflects the expectation for higher margins from foreign projects. Overall, we expect the FY10 EBITDA margin to settle at 6.9% from 5.5% before. We cut our net income estimate by 11.1% to 24.5m due to the extra taxation on 2009 s gains and the 40% tax rate imposed on the distributed profits. All in, the effective tax rate for FY10 should be c30%. Table 3: Change in forecasts ( m) FY10 old FY10 new new vs old FY11 old FY11 new new vs old FY12 old FY12 new new vs old Sales 934.1 849.1-9.1% 903.4 863.4-4.4% 866.7 832.1-4.0% EBITDA 51.4 58.5 13.8% 51.1 54.1 5.9% 47.0 49.7 5.6% EBITDA margin 5.5% 6.9% 1.4pp 5.7% 6.3% 0.6pp 5.4% 6.0% 0.5pp Net income 27.6 24.5-11.1% 28.9 21.8-24.6% 27.7 20.3-26.8% NI margin 3.0% 2.9% -0.1pp 3.2% 2.5% -0.7pp 3.2% 2.4% -0.8pp Source: Proton Bank estimates Greece, Construction 3
J&P Avax June 4, 2010 Risks The recent economic turmoil has caused difficulties in the funding of new projects. Some projects tenders may delay and other may be canceled, while the profitability margins may become thinner. Hence, J&P Avax may find it difficult to renew its backlog, at least in favorable terms, as the current conditions are not helping much. The net debt position still remains high. J&P Avax is a typical construction company and faces all risks related to the cyclicality of the sector. The Greek State is a key client for J&P Avax and hence any pause in tendering projects or payment delays has a direct effect on the group s performance. The new government may amend the current allocation method. The latter may cause some delay in new public project tenders, as well as lack of visibility. Long delays may be caused from objections submitted by the companies that have unsuccessfully participated in tenders. There is a risk that J&P Avax may witness further increase in the working capital needs on delays in the collection of receivables. In the new tax law the government imposes higher taxation on the profits to be distributed, which may also have a direct effect on concessions. The group participates in tenders for sizeable projects abroad that can easily boost the backlog size and hence the value of the core business. The concessions portfolio may prove to be undervalued as the bulk of the dividend payments approaches. The assumptions for the new concessions may be conservative as well. 4 Greece, Construction
June 4, 2010 J&P Avax Valuation & rating The value estimate of the construction business is little changed at 0.67 per share as the effect from the higher taxation is offset by the higher margin estimates. Note that our WACC estimate stands at 10.2%, while we maintain the perpetuity growth rate at 0%. We value Attica Road and Gefyra concessions lower at 3.48 and 0.77 per share from 4.25 and 0.82 before. Note that we have now set the discount factors at 9% for Attica Road and Gefyra from 7.5% and 8.5% before. We also transfer some of the Attica Road s dividend payments to later years. We lower the value of Attikes Diadromes at 0.27 from 0.35 per share due to taxation. We value the new BOTs (ie Corinth-Patra-Pyrgos and Maliakos-Kledi) at 56.9m, excluding the value that belongs to Athena's minorities (c20%). We cut our Car Parks DDM valuation to 0.27 per share from 0.30. Finally, we add the market value of the group s real estate portfolio discounted by 50%, and we exclude the approximately 76m of the debt related to the acquisition of Athena and other assets. All the above result into a c18% cut in our target price, to 5.40 per share. Table 4: Valuation in m per share Construction DCF 51.8 0.67 Attica Road DDM 269.9 3.48 Attikes Diadromes DDM 20.7 0.27 Gefyra (Rio-Antirio Brigde) DDM 59.8 0.77 Car Parks DDM 20.7 0.27 New BOTs 56.9 0.73 Real estate Mkt value (x0.5) 12.5 0.16 Minus debt related to Athena acquisition and other debt 76.2 0.98 Total J&P Avax 416.1 5.40 Upside/downside 272.4% Source: Proton Bank estimates We also apply a sensitivity analysis to our target price vs the WACC over the construction DCF and the long term growth. Table 5: Sensitivity analysis ( ) Long term growth -1.0% -0.5% 0.0% 0.5% 1.0% 8.2% 5.9 6.1 6.4 6.6 6.9 9.2% 5.5 5.6 5.8 6.0 6.2 WACC 10.2% 5.1 5.2 5.4 5.5 5.7 11.2% 4.8 4.9 5.0 5.1 5.2 12.2% 4.5 4.6 4.7 4.8 4.9 Source: Proton Bank estimates The results were good with construction s operating performance being outstanding despite the thinner than expected volumes. The performance of the foreign operations was exceptional and, other things being equal, it should not be repeated in the coming quarters, yet it has created a strong base for the annual performance. The company s order book of almost 2.5bn is sufficient to support the construction activity for the next 2-3 years. However, new tenders are limited given the current economic conditions and a further decline in the backlog should not be ruled out. Greece, Construction 5
J&P Avax June 4, 2010 We lower the value estimate on Attica Road and Gefyra concessions, as the declining traffic and the extra taxes are set to affect the distribution of dividends. Nonetheless, these two assets are valued three times higher than J&P Avax s current market cap. The group s net debt remains at high levels and is mostly related to construction. The company has now finalized the issue of a 265m corporate bond with a 8.5-year duration, securing most of its forthcoming needs. Overall, we do not see any major catalyst for the stock at least in 2010; however, the robust upside heavily supports our Outperform rating. 6 Greece, Construction
J&P Avax financial statements 2009 2010e 2011e 2012e 2009 2010e 2011e 2012e Profit & Loss (in m) Cash Flow Statement (in m) Sales 945.7 849.1 863.4 832.1 y-o-y % (10.2%) 1.7% (3.6%) EBIT 31.7 33.0 27.3 22.4 Cost of Goods Sold 845.9 754.0 769.6 739.9 Non cash items 24.7 25.5 26.8 27.3 Gross Profit 99.7 95.0 93.8 92.1 Gross Cash Flow 56.4 58.5 54.1 49.7 Gross margin 10.5% 11.2% 10.9% 11.1% SGAs 41.6 37.4 41.4 44.1 Working Capital (6.2) 39.3 18.7 5.1 Other Income (1.7) 0.8 1.7 1.7 Tax 4.8 0.7 13.2 12.4 EBITDA 56.4 58.5 54.1 49.7 Cash Flow from Operations 57.8 18.6 22.3 32.3 y-o-y % 3.8% (7.5%) (8.2%) EBITDA margin 6.0% 6.9% 6.3% 6.0% CAPEX (30.0) (33.3) (25.2) (15.0) Depreciation 24.7 25.5 26.8 27.3 Investments (31.9) 0.0 0.0 0.0 EBIT 31.7 33.0 27.3 22.4 Cash Flow from Investments (61.9) (33.3) (25.2) (15.0) y-o-y % 4.2% (17.1%) (18.2%) Financials net (26.5) (23.9) (23.5) (22.1) Change in ST debt (6.5) 5.2 (18.0) (40.6) Income from associates 29.7 29.1 30.2 31.0 Change in LT debt (8.5) 0.0 0.0 0.0 EBT 34.9 38.2 34.0 31.3 Dividends (3.3) (3.0) (3.6) (3.8) y-o-y % 9.5% (11.1%) (7.9%) Interest & Investment Income 3.2 5.2 6.6 8.9 EBT margin 3.7% 4.5% 3.9% 3.8% Capital Increase 0.0 0.0 0.0 0.0 Taxes 7.8 11.4 10.5 9.5 Subsidies and other items 11.1 6.2 18.1 18.0 EAT 27.1 26.8 23.5 21.8 Cash Flow from Financing (4.0) 13.7 3.1 (17.5) y-o-y % (1.1%) (12.3%) (7.2%) Minorities 0.0 2.3 1.7 1.5 Change in Cash and Equivalents (8.2) (1.0) 0.1 (0.2) Net Income 27.1 24.5 21.8 20.3 y-o-y % (9.5%) (11.0%) (6.9%) Per Share Data (in ) Net margin 2.9% 2.9% 2.5% 2.4% EPS 0.35 0.32 0.28 0.26 CEPS 0.67 0.67 0.65 0.63 Balance Sheet DPS 0.040 0.039 0.05 0.05 Net Fixed Assets 241.2 248.9 247.4 235.0 BVPS 3.37 3.65 3.88 4.10 Investments & other 243.1 239.2 239.8 238.5 No Of Shares (Yr-end, m) 77.65 77.65 77.65 77.65 Total Fixed Assets 484.2 488.1 487.1 473.6 Adj. No Of Shares (m) 77.65 77.65 77.65 77.65 Inventories 30.5 26.9 27.4 26.4 Account Receivables 542.6 546.7 560.6 544.8 Valuation Data Cash & Equivalents 139.3 138.2 138.3 138.1 P/E (x) 4.2 4.6 5.2 5.5 Other Current Assets 181.5 163.0 146.8 124.8 P/CF (x) 2.2 2.2 2.2 2.3 Total Current Assets 893.9 874.8 873.1 834.1 P/BV (x) 0.4 0.4 0.4 0.4 Total Assets 1,378.2 1,362.9 1,360.3 1,307.7 Div. Yield (%) 2.8% 2.7% 3.2% 3.4% EV / Sales (x) 0.5 0.6 0.5 0.5 Accounts Payable 348.8 309.9 305.7 283.8 EV / EBITDA (x) 8.6 8.4 8.7 8.7 Short Term Debt 299.0 304.2 286.2 245.6 Dividends Payable 0.0 0.0 0.0 0.0 Ratios Taxes Payable 23.0 33.7 30.9 28.1 Tax Rate 22.2% 29.8% 30.8% 30.3% Other 157.1 140.9 143.3 138.1 ROE (avg) 10.7% 9.0% 7.5% 6.6% Total Current Liabilities 827.8 788.7 766.2 695.6 ROCE-average 3.5% 3.1% 2.7% 2.6% Long Term Debt 210.7 210.7 210.7 210.7 Net Debt / Equity 1.4 1.3 1.2 1.0 Minorities 12.8 15.1 16.8 18.3 Interest Coverage 1.2 1.4 1.2 1.0 Other LT Liabil. & Prov. 65.0 65.0 65.0 65.0 Inventory days 13 13 13 13 Total Liabilities 1,116.2 1,079.4 1,058.6 989.5 Accounts receivable days 209 235 237 239 Total Equity 261.9 283.4 301.7 318.2 Accounts payable days 150 150 145 140 Source: Company data, Proton Bank estimates
Required Disclosures Proton Bank Equity Allocations Rating Coverage IB Services (over 1Q10) Count % of total Count % of total % of rating category Outperform 12 50.0% 0 0.0% 0.0% Neutral 10 41.7% 0 0.0% 0.0% Underperform 0 0.0% 0 0.0% n.m. Under Review 2 8.3% 0 0.0% 0.0% Total 24 0 Proton Bank s Equity ratings definitions Outperform: Expected outperformance above 7% Neutral: Expected relative performance +/- 7% Underperform: Expected underperformance above 7% Benchmark Index: ASE General Index Time Horizon: Twelve (12) months, unless otherwise stated General Disclosures Sources of information: Reports prepared by Proton Bank analysts are based on public information. Analysts are required to use information only from credible sources. Analysts' compensation: Based on individual analyst performance considering also the success of their recommendations. No compensation is received based on investment banking fees generated from transactions with the covered companies. Internal procedures: Chinese Walls rules ensure that there is no exchange of price sensitive information between the Research and Investment Banking departments. Regulation: Proton Bank is a member of the Athens Exchange SA and regulated by the Hellenic Capital Market Commission. Frequency of reports: No pre-determined frequency. Ratings History Date Rating Target Price 05/06/2009 Outperform 6.10 25/08/2009 Outperform 6.10 04/09/2009 Outperform 6.60 23/11/2009 Outperform 6.60 03/12/2009 Outperform 6.40 17/03/2010 Outperform 6.40 08/04/2010 Outperform 6.50 19/05/2010 Outperform 6.50 04/06/2010 Outperform 5.40 Companies mentioned Company Rating Price Date/Time Disclosures J&P Avax Outperform 1.45 Closing of June 3 7,8 Company Specific Disclosures 1. Proton Bank and its affiliated companies own 5% or more of the total share capital of the company. 2. The company and its affiliated companies own 5% or more of the total share capital of Proton Bank and/or its affiliated companies. 3. Proton Bank acts as a market maker for the securities of the company. 4. Proton Bank has acted as manager or co-manager in the underwriting or placement of the company s shares during the past 12 months. 5. Proton Bank has received compensation from the company for investment banking services during the past 12 months. 6. Proton Bank has received compensation from the company for the preparation of the research report. 7. Proton Bank has sent the research report prior to publication for factual verification. 8. If 7 applies, Proton Bank has made the following changes to the initially sent report: no changes. 9. The research analyst(s) who prepared this report has financial interest in the company. 10. The research analyst(s) who prepared this report holds a board member position in the company. General disclaimer The above material was produced by PROTON Bank and is for the use of intended recipients only. The above material should not be reproduced or redistributed, in whole, or in part, for any purpose, without PROTON Bank explicit prior consent. The material contained herein is based on public information believed to be reliable and is presented in good faith, however, PROTON Bank cannot guarantee in any way its correctness, accuracy, or completeness. All information, opinions, estimates, forecasts and valuations contained herein, are those of PROTON Bank at the date of this material and are subject to change without notice. This material is published for information purposes only and does not represent an offer to sell or a solicitation to buy an asset, security or financial instrument. Changes in interest rates or foreign exchange rates may affect the value and price of, or the income from securities or investment positions discussed herein. The assets, securities and financial instruments discussed herein, may not be suitable for all investors, depending on individual needs, objectives and financial conditions. Investors therefore should seek professional advice and exercise their independent judgment and make their own decisions. PROTON Bank accepts no liability whatsoever for any direct or indirect loss arising from any use of this material. PROTON Bank including its officers, personnel and related associates may have or had, for their own account, investment positions related to the material discussed herein, before, during or after the above material reaches customers of PROTON Bank. PROTON Bank including its officers, personnel and related associates may provide or have provided investment banking, commercial banking, or other financial services to the issuer of the securities, derivatives or other financial instruments mentioned herein. Consequently, PROTON Bank including its officers, personnel and related associates, may possess information which is not presented herein. For any additional information, concerning the use of the present document and material, please contact PROTON Bank.
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