Greece, Construction J&P Avax No catalyst in sight remains cheap April 8, 2010 Current price 2.03 Target price 6.50 From 6.40 Upside potential 220.2% Remains Outperform Key data Reuters code AVAr.AT Bloomberg code AVAX GA Mcap 157.6m Shares outstanding 77,654,850 Free float 33.3% Share price performance 1m 3m 12m Volume (k) 17.8 50.2 56.9 Absolute return 0% -31% 17% Relative to ATHEX GI 5% -21% -1% 52-week range ( ) High 4.03 Low 1.71 4Q09 operating performance was line with PBe, while the bottom line was weaker on lower than expected income from associates, mainly Attica Road. J&P Avax will distribute a FY09 DPS of 0.04, DY 2%. Given that there are limited new tenders coming, we assume a slower execution of the backlog, while we keep margins unchanged. All in, we cut the FY10 sales, EBITDA and net income estimates by 12.2%, 11.6% and 16.5% respectively to 934.1, 51.4m and 27.6m. Our target price remains almost unchanged at 6.50 per share despite the lower construction value, as concessions benefit from the roll over effect. Attica Road and Gefyra concessions remain the two most important assets of J&P Avax as their value is more than 80% of the total valuation exercise. The recent months average traffic in Attica Road indicates that the economic slowdown can affect businesses of this kind. In the event of a further drop, an increase of the toll fees will be an option to sustain the cash flows. Construction s performance is satisfactory and backlog is sufficient to support the next two years revenues. The debt level seems controlled, however it remains a risk as payment delays in Greece and abroad may lead to higher working capital needs this year. Overall, there is no visible catalyst for the stock in FY10, however we reiterate our Outperform rating solely on valuation grounds. 240 220 200 180 Key figures and valuation data 160 140 120 100 80 A M J J A S O N D J F M A J&P Avax Analyst Panos Panagiotou T +30 210 6970 685 p.panagiotou@proton.gr General Index 2008 2009 2010e 2011e 2012e Sales 991.1 945.7 934.1 903.4 866.7 EBITDA 40.1 56.4 51.4 51.1 47.0 EBIT 19.1 31.7 25.8 24.2 19.6 EBT 28.3 34.9 36.2 36.8 34.9 Net income 21.0 27.1 27.6 28.9 27.7 EPS 0.29 0.37 0.36 0.37 0.36 Net Debt 377.3 370.4 363.9 333.8 293.7 EV 534.9 528.0 521.5 491.4 451.3 EV/EBITDA 13.3 9.4 10.1 9.6 9.6 P/E 7.1 5.5 5.7 5.5 5.7 P/BV 0.6 0.6 0.6 0.5 0.5 ROCE 3.0% 3.5% 3.5% 3.7% 3.6%
J&P Avax April 8, 2010 4Q09 results review Sales reached 240.9m, in line with our forecast for 240m supported by good construction volume. Greece contributed 130.8m from 125.7m in 3Q09, while the foreign projects reached 110.1m from 119.3m the previous quarter. Note that the group's signed and to be signed projects stood at 2.6bn by the end of 2009. Figure 1: Backlog as of December 2009 ( bn) 3 2 2.0 0.6 0.3 0.3 2.6 1.2 0.9 1 1.1 1.4 0 Already signed To be signed Total Greece Abroad Source: Company data EBITDA settled at 15.9m, broadly in line with PBe for 16.8m, with the respective margin settling at 6.6% vs PBe for 7%. In 4Q09, Avax included a 1.5m loss provision after a settlement to dissolve the contract for the construction of a football stadium in Wroclaw, Poland. Recall that Avax had a 48.5% stake in the JV for the 142.9m project. Net income landed at 4m, well below our forecast for 9.2m. The wide divergence in the bottom line is attributed to a weak contribution of the income from associates line, 4.6m vs PBe for 9.1m, which is mainly related to Attica Road. Interest expenses also had a negative effect reaching 8.3m vs PBe for 7.2m. Table 1: 4Q09 results vs PBe ( m) 4Q08 4Q09 y-o-y PBe Act vs PBe Sales 311.3 240.9-22.6% 240.0 0.4% COGS 296.3 215.7-27.2% 214.7 0.5% Gross profit 15.0 25.2 67.8% 25.3-0.3% Gross margin 4.8% 10.5% 5.6pp 10.5% -0.1pp EBITDA 2.8 15.9 >100% 16.8-5.3% EBITDA margin 0.9% 6.6% 5.7pp 7.0% -0.4pp Net income 3.8 4.0 5.5% 9.2-56.8% NI margin 1.2% 1.7% 0.4pp 3.8% -2.2pp Source: Company data, Proton Bank estimates On an FY09 basis, sales reached 945.7m, down 4.6% y-o-y, 55% of which came from projects in Greece, while the remaining came from projects abroad. EBITDA settled at 56.4m (+40.7% y-o-y) supported by Greece, while the foreign projects had a negative contribution of 1.4m mostly due to write downs. Net income stood at 27.1m (+28.8% y-o-y). Net debt came in at 370m vs our forecast for 417m and almost unchanged vs last year. The company declared an FY09 DPS of 0.04 yielding 2%, vs our estimate for 0.08 and 0.05 a year ago. 2 Greece, Construction
April 8, 2010 J&P Avax Table 2: FY09 results vs PBe ( m) FY08 FY09 y-o-y PBe Act vs PBe Sales 991.1 945.7-4.6% 944.7 0.1% COGS 911.8 845.9-7.2% 844.9 0.1% Gross profit 79.3 99.7 25.7% 99.8-0.1% Gross margin 8.0% 10.5% 2.5pp 10.6% 0.0pp EBITDA 40.1 56.4 40.7% 57.3-1.6% EBITDA margin 4.0% 6.0% 1.9pp 6.1% -0.1pp Net income 21.0 27.1 28.8% 32.3-16.2% NI margin 2.1% 2.9% 0.7pp 3.4% -0.6pp Source: Company data, Proton Bank estimates Greece, Construction 3
J&P Avax April 8, 2010 Revision of forecasts We lower our FY10 sales estimate by 12.2% to 934.1m. Although the backlog is sufficient for the next two years, we expect somewhat less new tenders and as such a slower execution of projects. Note that the backlog incorporates about 750m of concessions projects in the domestic market. We also cut our EBITDA estimate by 11.6% to 51.4m. The decline is mainly attributed to the lower top line forecasts, as we keep the respective margin expectation unchanged at 5.5%. We also cut the net income forecast to 27.6m from 33m before. Note that we slightly lower our income from associates forecast to 34m, while we now expect an effective tax rate of 21% from 17% before. We expect the FY10 end net debt at 362m, little changed vs FY09 but lower than our previous forecast. 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 1063.9 934.1-12.2% 991.2 903.4-8.9% 971.4 866.7-10.8% COGS 956.8 842.5-11.9% 888.6 810.7-8.8% 873.2 775.5-11.2% Gross profit 107.1 91.6-14.5% 102.6 92.7-9.7% 98.2 91.2-7.1% Gross margin 10.1% 9.8% -0.3pp 10.3% 10.3% -0.1pp 10.1% 10.5% 0.4pp EBITDA 58.2 51.4-11.6% 52.0 51.1-1.8% 47.7 47.0-1.4% EBITDA margin 5.5% 5.5% 0.0pp 5.2% 5.7% 0.4pp 4.9% 5.4% 0.5pp Net income 33.0 27.6-16.5% 28.9 28.9 0.0% 27.4 27.7 1.2% NI margin 3.1% 3.0% -0.2pp 2.9% 3.2% 0.3pp 2.8% 3.2% 0.4pp Source: Proton Bank estimates 4 Greece, Construction
April 8, 2010 J&P Avax Risks The recent financial turmoil has caused difficulties in the funding of new projects. Some projects tenders may delay and other may be canceled, while 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 at stretched levels. 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 some uncertainty. 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 an increase in working capital needs on delays in the collection of receivables. Also in the quest for liquidity the government may increase taxes even more. For example the new tax law that imposes higher taxation on the profits to be distributed may 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. Greece, Construction 5
J&P Avax April 8, 2010 Valuation & rating We cut our value estimate on the construction business to 0.69 from 1.06. Note that we now use in our 2-stage DCF model a WACC of 10.2% instead of 9.4% before, while we maintain the perpetuity growth rate at 0%. The value estimate of the Attica Road and Gefyra concessions is slightly increased due to the roll over of our DDM model to 330.4m from 307.3m and to 64m from 60.4m respectively. We also add the value of Attikes Diadromes ( 26.9m), while car parks contribute another 23.3m. Similarly, we value the new BOTs (ie Corinth-Patra-Pyrgos and Maliakos-Kledi) at 57.7m from 51.6m, excluding the value that belongs to Athena s minorities (c20%). Finally, we add the market value of the group s real estate portfolio discounted by 50%, and we exclude the approximately 66m of the debt related to the acquisition of Athena. Our target price remains broadly unchanged at 6.50 per share, which is about three times the current price. Table 4: Valuation in m per share Construction DCF 53.4 0.69 Attica Road DDM 330.4 4.25 Attikes Diadromes DDM 26.9 0.35 Gefyra (Rio-Antirio Brigde) DDM 64.0 0.82 Car Parks DDM 23.3 0.30 New BOTs 57.7 0.74 Real estate Mkt value (x0.5) 12.5 0.16 Minus debt related to Athena acquisition 66.2 0.85 Total J&P Avax 502.1 6.50 Upside/downside 220.2% 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% 7.1 7.3 7.5 7.8 8.1 9.2% 6.6 6.8 6.9 7.2 7.4 WACC 10.2% 6.2 6.3 6.5 6.6 6.8 11.2% 5.8 6.0 6.1 6.2 6.3 12.2% 5.6 5.7 5.7 5.9 6.0 Source: Proton Bank estimates Overall, the results were broadly in line with forecasts apart from the bottom line that was burdened by lower income from associates mainly due to one offs. The construction s performance was satisfactory, while the weakness in the margins of foreign projects is mainly related to one offs like the Wroclaw football stadium and other things being equal, it should not be repeated. The profitability coming form the domestic market seems pleasing. 6 Greece, Construction
April 8, 2010 J&P Avax Once again, we highlight that the participations in Attica Road and Gefyra exceed 80% of our total value estimate for the group. Although 2010 is expected to be the first year with a decline in the average traffic in those two concessions, we believe that given the significant headroom for toll fee increases, the expected dividends will not materially change. A higher toll fee may be also required if the government decides to impose a higher tax on the concession s dividends. Construction remains the core revenue stream for J&P Avax, however we calculate only a very small value for it. The debt seems to be controlled, nevertheless we believe that the weak public finances may cause delays in payments, while the projects in the Middle East also bear a similar risk. The stock has no visible catalyst going forward, however, given the huge upside to our target price, we reiterate our Outperfom rating. Greece, Construction 7
J&P Avax financial statements 2009 2010e 2011e 2012e 2009 2010e 2011e 2012e Profit & Loss (in m) Cash Flow Statement (in m) Sales 945.7 934.1 903.4 866.7 y-o-y % (1.2%) (3.3%) (4.1%) EBIT 31.7 25.8 24.2 19.6 Cost of Goods Sold 845.9 842.5 810.7 775.5 Non cash items 24.7 25.6 26.9 27.4 Gross Profit 99.7 91.6 92.7 91.2 Gross Cash Flow 56.4 51.4 51.1 47.0 Gross margin 10.5% 9.8% 10.3% 10.5% SGAs 41.6 41.1 43.4 45.9 Working Capital (6.2) 9.6 17.3 13.1 Other Income (1.7) 0.9 1.8 1.7 Tax 4.8 8.1 8.1 8.8 EBITDA 56.4 51.4 51.1 47.0 Cash Flow from Operations 57.8 33.7 25.7 25.1 y-o-y % (8.8%) (0.6%) (8.0%) EBITDA margin 6.0% 5.5% 5.7% 5.4% CAPEX (30.0) (34.1) (25.7) (15.0) Depreciation 24.7 25.6 26.9 27.4 Investments (31.9) 0.0 0.0 0.0 EBIT 31.7 25.8 24.2 19.6 Cash Flow from Investments (61.9) (34.1) (25.7) (15.0) y-o-y % (18.5%) (6.1%) (19.0%) Financials net (26.5) (23.6) (22.6) (20.9) Change in ST debt (6.5) (6.9) (30.3) (40.4) Income from associates 29.7 33.9 35.2 36.1 Change in LT debt (8.5) 0.0 0.0 0.0 EBT 34.9 36.2 36.8 34.9 Dividends (3.3) (4.1) (4.3) (4.2) y-o-y % 3.7% 1.6% (5.2%) Interest & Investment Income 3.2 10.4 12.5 15.3 EBT margin 3.7% 3.9% 4.1% 4.0% Capital Increase 0.0 0.0 0.0 0.0 Taxes 7.8 7.6 7.4 6.6 Subsidies and other items 11.1 0.7 21.9 18.9 EAT 27.1 28.6 29.4 28.2 Cash Flow from Financing (4.0) (0.0) (0.3) (10.4) y-o-y % 5.4% 2.9% (4.0%) Minorities 0.0 1.0 0.5 0.5 Change in Cash and Equivalents (8.2) (0.4) (0.2) (0.3) Net Income 27.1 27.6 28.9 27.7 y-o-y % 1.8% 4.8% (4.1%) Per Share Data (in ) Net margin 2.9% 3.0% 3.2% 3.2% EPS 0.37 0.36 0.37 0.36 CEPS 0.70 0.70 0.72 0.72 Balance Sheet DPS 0.040 0.053 0.06 0.05 Net Fixed Assets 241.2 249.7 248.5 236.1 BVPS 3.54 3.68 3.99 4.30 Investments & other 243.1 242.5 241.3 239.9 No Of Shares (Yr-end, m) 77.65 77.65 77.65 77.65 Total Fixed Assets 484.2 492.2 489.8 475.9 Adj. No Of Shares (m) 73.94 77.65 77.65 77.65 Inventories 30.5 30.0 28.9 27.6 Account Receivables 542.6 550.2 544.5 534.3 Valuation Data Cash & Equivalents 139.3 138.8 138.6 138.4 P/E (x) 5.5 5.7 5.5 5.7 Other Current Assets 181.5 179.3 153.6 130.0 P/CF (x) 2.9 2.9 2.8 2.8 Total Current Assets 893.9 898.4 865.6 830.3 P/BV (x) 0.6 0.6 0.5 0.5 Total Assets 1,378.2 1,390.6 1,355.4 1,306.2 Div. Yield (%) 2.0% 2.6% 2.8% 2.6% EV / Sales (x) 0.6 0.6 0.5 0.5 Accounts Payable 348.8 346.2 322.1 297.4 EV / EBITDA (x) 9.4 10.1 9.6 9.6 Short Term Debt 299.0 292.0 261.7 221.3 Dividends Payable 0.0 0.0 0.0 0.0 Ratios Taxes Payable 23.0 22.5 21.8 19.6 Tax Rate 22.2% 21.0% 20.0% 19.0% Other 157.1 155.1 150.0 143.9 ROE (avg) 10.7% 10.1% 9.7% 8.6% Total Current Liabilities 827.8 815.8 755.5 682.2 ROCE-average 3.5% 3.5% 3.7% 3.6% Long Term Debt 210.7 210.7 210.7 210.7 Net Debt / Equity 1.4 1.3 1.1 0.9 Minorities 12.8 13.8 14.3 14.8 Interest Coverage 1.2 1.1 1.1 0.9 Other LT Liabil. & Prov. 65.0 65.0 65.0 65.0 Inventory days 13 13 13 13 Total Liabilities 1,116.2 1,105.2 1,045.4 972.7 Accounts receivable days 209 215 220 225 Total Equity 261.9 285.4 310.0 333.6 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 07/04/2009 Outperform 6.00 26/05/2009 Outperform 6.00 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 Companies mentioned Company Rating Price Date/Time Disclosures J&P Avax Outperform 2.03 Closing of 7 April 7, 8 Athena N/R 0.72 Closing of 7 April - 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
PROTON BANK S.A. Eslin & 20 Amaliados St., 115 23 Athens, Greece T +30 210 69 70000 Bloomberg Page PRTB <GO> Research Vassilis Kararizos Panos Panagiotou John Stamatakos Vassilis Raptis Vassilis Gouzios George Kaknis v.kararizos@proton.gr p.panagiotou@proton.gr j.stamatakos@proton.gr v.raptis@proton.gr v.gouzios@proton.gr g.kaknis@proton.gr +30 210 6970 690 +30 210 6970 685 +30 210 6970 687 +30 210 6970 688 +30 210 6970 689 +30 210 6970 686 Equities Sales Sophia Kyprianidou Andonis Petropoulos Spyros Valatas s.kyprianidou@proton.gr a.petropoulos@proton.gr s.valatas@proton.gr +30 211 1081 586 +30 211 1081 589 +30 211 1081 556 Equities Trading Marilena Fella Helen Hatzidrosou Maria Mavrantonaki m.fella@proton.gr e.hatzidrosou@proton.gr m.mavrantonaki@proton.gr +30 211 1081 546 +30 211 1081 542 +30 211 1081 540 Derivatives Sales Vassilis Kallipolitis Andonis Yiannopoulos v.kallipolitis@proton.gr a.yiannopoulos@proton.gr +30 211 1081 285 +30 211 1081 583 Bonds - Swaps Structured products Marina Giannarou m.giannarou@proton.gr +30 211 1081 643