In October last year, I submitted a write-up on Anemos, a Greek mid-cap Wind Farm operator that we thought was the cheapest listed wind farm operator in the world trading at a stupid valuation. Since then, a merger has been announced between that company and its parent company Ellaktor, a concession and construction conglomerate. Whilst this outcome has added a lot of compliexity (as shares in a pure play wind farm operator are now being swapped for shares into a far more complicated company), the liquidity of the company has improved a lot, and as the exchange ratio is broadly fair, so that the upside remains considerable (c. 200% upside) with a great number of very tangible catalysts over the coming months and years. I am therefore today as a follow up going to pitch Ellaktor.

Merger with Anemos

On Dec 28^th 2018, Ellaktor announced a share offer for Anemos, with a ratio of 1.27 new Ellaktor share per Anemos share. The transaction is expected to be completed in H1 2019, subject to regulatory approval and shareholder approval. These conditions are at this stage mere formalities so for all practical purposes, this is now a done deal.

The transaction has a triple rationale of

1)      simplifying the group structure

2)      providing Anemos shareholders with substantially increased liquidity coupled with more extensive sell and buy-side coverage

3)      important synergies in terms of tax and financing optimisation, and also to a lesser degree central costs which have been conservatively quantified at c. 45m EUR of net present value by the management.

Company overview

Ellaktor is the largest Greek construction company, as well as the largest concession operator in Greece (motorways). The company also owns the 2^nd largest wind turbine operator / developer in Greece, as well as the largest waste management business in Greece. They have also small non-core activities that are ear-marked for disposal (real estate, minority state in 2 CCGTs and shares in a gold mine in Northern Greece) engaged in a number of activities in Greece in the fields of construction and energy.

Listed on the Athens stock exchange, Ellaktor is one of the largest Greek “domestic” companies (as opposed to many large-cap stocks in Greece that are actually international or commodity linked businesses whose fortunes are ultimately not that much linked to the prospects of Greece). As such, they are likely to be one of the key targets for investors wanting to invest in a potential Greek recovery after years of stagnation and a very weak performance of the stock market.

This is an important point as a general election should be held in Greece at the latest in September, and most likely in May. In all likelihood, the current abysmal populist leftist government will be replaced by the centre right, currently headed by an extremely liberal and business-friendly leader. We expect this to increase the focus on Greece and on Greek domestics stocks and to help the country to at last grow nicely and recover after nearly 10 years of crisis.

Due to the various nature of the activities of Ellaktor, the most relevant valuation is to look at the sum of the parts of the group.

One difficulty with this company is obviously that it is very complex for its size, and in particular is burdened with a very large and in the recent past very disappointing construction business (that generated substantial losses / provisions recently). However, the vast majority of the value of the group is in its concession and wind far activities that are extremely high quality, cash generative and easy to value businesses, as well as to a lesser extent in the Waste management and Real estate activities that are very nice little businesses. Even assigning zero value to the construction business the upside remains considerable.

One issue with Ellaktor in the past is that it was jointly controlled by 3 very senior individuals (Bobolas, Koutras and Kallitsantsis) which were each running a part of the company like their own little fief with a complete lack of governance and central management. It seems many excesses happened during those years, resulting in a lot of provisions/ costs coming to bite now. There has also been a complete lack of thought given to capital allocation, financing and tax optimisation etc.. As a result, the company’s fortunes were poor and the share price has been heading south for years now.

Last summer, in a first in the Greek market, Kallitstantsis initiated a proxy fight. With the financial support of one of the leading and highest quality global value funds, he managed to acquire a controlling stake in the company, took control of the board and of the management and has since then been cleaning up the company (change4ellaktor campaign).

The plan revolves around a few key pillars which all make sense to us and on which Kallitstantsis has started to execute without delay:

1)      instauration of proper governance and management team – there have been a number of senior hires both at board and management level since last summer, and a number of best practices have been put in place transforming essentially Ellaktor overnight from one of the laggards to a posterchild of the Greek corporate sector

2)      simplification of the group – here it seems that the merger with Anemos was the first step, the second step is likely to be the merger with the small listed real estate subsidiary (REDS). This is also resulting in very solid financing / tax optimisation (until now, the company was a joke, there are solid net cash positions in some activities and a lot of debt in others, also there are activities that pay taxes whilst others have tax shields, this was all linked to the history of the group and is now being corrected)

3)      sale of non-ore activities. We understand that the aim is to sell real estate assets, the stake in CCGTs as well as the gold mines. Once they have reached a critical mass and current developments are finished, we wouldn’t be surprised if the wind farms were also put for sale (whist keeping maybe the development business). If that happened, they would be sold for more than the entire market cap of the company

4)      restructuring of the construction activity. This is a key aspect and revolves around first promoting the right management team and empowering them to clean up the company, putting in place the right systems and procedures, and finally shrinking the business quite substantially by exiting a few bad international markets and focusing on Greece, a very profitable even though greatly reduced and lumpy market where the group has a leadership  position.

Construction

Aktor is the leading contractor in Greece with strong credentials, such as motorways (Attiki Odos), airports (Athens airports), tunnels, metro lines, bridges… Half of Aktor operations are located in Greece, while the other half is located abroad (mostly in Eastern Europe most notably Romania and Middle East).

The new management team has been working actively at shrinking and improving the profitability of this business, with the sale of the ISF project and a focus on profitability rather than volume in the new orders.

In 2017, Construction had revenues of 1.5bn EUR, EBITDA of 27m EUR and EBIT of 5m EUR. As of September 2018, net debt excluding ISF was 23m EUR. As of June 2018, backlog was standing at 1.9bn EUR with 211m EUR of contracts about to be signed. The company had to take 100m EUR of provisions in the 9M of 2018 due to its overseas operations. We understand this represents a complete clean-up of all the skeletons in the cupboard.

Going forward, the group expects lower revenues with enhanced profitability which will stabilise the earnings.

·         Due to the limited visibility on the business, we use a “normalised” EBITDA of 30m EUR (3% margin on c. EUR 1bn of sales) and a 5x multiple, translating into an EV of 150m EUR for Aktor. Subtracting the net debt and the ISF liability, the value attributable to Ellaktor is c.70m EUR, or 0.33 EUR / share. There is a lot of uncertainty on these numbers, and I could be convinced this business is worth much more if the turn-around is very successful, although it could also be practically worthless if it is not.  

Concessions

Ellaktor operates a number of highly cash generative motorway concessions which represent the bulk of Ellaktor’s value.

Attiki Odos is the Athens ring road. Until late 2018, Ellaktor had a 59.2% stake in Attiki Odos. Piraeus Bank, which held a 6.5% stake was a forced seller of its stake, which Ellaktor bought for 37.5m EUR, representing an equity value of 577m EUR (for 100%). Press suggested that Davidson Kempner offered that amount when the stake was sold, even though Ellaktor had a pre-emption right (which they exercised). The fact they were offering this for a small minority stake in our view validates the value we are giving to the asset. Management is also strongly of the view they acquired the small stake for a very attractive price. Attiki Odos’ concession expires in September 2024 and had a net cash position of 233m EUR as of September 2018, from 129m EUR as of end 2015. This means that Attiki Odos has generated 103m of cash flows over 2.75 years, which is 37.5m / year on average of excess cash flows. Over that period, the concession paid dividends of c. 70m / year. Given the strong financial position, the dividends can now be expected to increase to over 100m EUR / year. One further likely upside of Attiki Odos is that the government is currently looking at extending the duration of the concession by a few years in exchange for further extensions of the road / capex. The NPV calculation if this happens would be extremely positive to Ellaktor. We are not valuing this upside risk.

·         Actualising the dividends at a 9% rate (which is arguably too conservative given the net cash position of the concession) translates into an equity value of 635m EUR, which values Ellaktor’s stake at 417m EUR, or 1.95 EUR / share.

The other concessions are smaller compared to Attiki Odos, but have a longer duration, and consist of:

·         Ellaktor has lent 68m EUR of junior debt to Moreas, which gets eliminated with the consolidation. Using a conservative 50% of the book value for the equity, we value Ellaktor’s total interest in Moreas to 90m EUR, or 0.42 EUR / share

·         For the non consolidated concessions, we use the book value of equity as of end 2017 : 63m EUR for Aegean motorway, 124m EUR for Gefyra and 206m EUR for Olympia Odos (all for 100%). In aggregate, and using 1.2x book value of Olympia Odos given its strong performance, Ellaktor’s equity stake is estimated at 82m EUR, or 0.38 EUR / share

·         Among non-current receivables, Ellaktor has 75m of “Receivables from associates”, which is junior debt that they extended to these assets, worth 0.35 EUR / share

·         The concession division has debt of (135)m EUR, and adding the purchase price of Piraeus’ stake in Attiki Odos, the adjustment is (172)m EUR, or 0.80 EUR / share

·         In aggregate the net interests in Concessions at the Ellaktor level are estimated to 492m EUR, or 2.29 EUR / share

Anemos

Post merger, Ellaktor will own 100% of Anemos. Our recent valuation of Anemos on a standalone basis remains unchanged and is detailed in the October write-up.

·         Using our target price of 5.62 EUR for the standalone Anemos share, we value Anemos’ equity value at 465m EUR, or 2.17 EUR / Ellaktor share (pro forma)

Waste Management

Ellaktor owns 94% of Helector, a company specialised in waste management. The company is a European leader in the development and operations of waste management facilities. Among its past projects, Helector has built the biological treatment plant in Europe in Bulgaria, with a capacity of 410 kt / year) and has participated in major projects in Greece and Germany, among others.

In its domestic market, Helector has significant business opportunities. Greece is lagging all other European countries in the conversion of landfills to Waste-to-Energy plants and is undergoing regulatory pressures to transition to better waste management techniques. This provides Helector with a healthy pipeline.

Over the 12 months period ending September 2018, Helector had revenues of 80m EUR and EBITDA of 24m EUR. Excluding non recurring profits, EBITDA was 14m EUR. Helector had a net cash position of 27m EUR as of September 2018. Minority stakes in Helector subsidiaries represent c. 15% of Helector’s P&L

·         Using a conservative 5x EBITDA multiple, Ellaktor’s stake in Helector is valued at 86m EUR, or 0.40 EUR / share (management would laugh at our assumptions here we think but we prefer to take a low multiple given the lumpiness and complexity of this business even though it is certainly high quality)

Gas-fired Electricity Generators

Ellaktor owns a 23% stake in Elpedison. Elpedison owns 2 CCGTs in Thessaloniki (400MW) and Thisvi (410MW). The sector is regaining a lot of interest as Ellaktor’s close peer, Gek Terna, just announced that they plan to develop a new CCGT plant, and other companies seem to have similar plants. Given the high CO2 prices, the decommissioning of Lignite plants is accelerating, and given the increase in renewable energy production, CCGT will be paramount to offset the volatility of the renewables. In addition, lower price of LNG is supporting the sector.

·         Given the leverage of Elpedison, we conservatively value Ellaktor’s stake at 0. However, it represents one of the many value upsides to our valuation. Management believe they can sell this stake for a few 10m this year.

Real Estate

Ellaktor owns 55% of REDS, a small cap real estate company listed on the Athens stock exchange, with a market cap of 52m EUR. REDS owns a successful retail centre near Athens called smart park as well as a prime large tract of land next to the metro that they will develop. REDS is expanding smart park which will create significant value.

·          Given the expansion plans of REDS, we value the company at 100m EUR equity value (we believe they can sell it for substantially more in the next couple of years having spoken with companies that invest in Greek Real Estate). This translates into Ellaktor’s stake value of 55m EUR, or 0.26 EUR / share

Other

Ellaktor owns 1% in Eldorado Gold, a Canadian mining company, as well as 5% of Hellas Gold (owned by Eldorado Gold), a gold mine in Greece. The current Greek government has forced Hellas Gold to close the mine. However, given the weak position legal position of that decision, it is highly likely that Hellas Gold will be able to operate normally once the next Greek government takes over the current one.

·         We value the Eldorado Gold stake at spot price, which is worth c. 10m EUR, or 0.05 EUR / share. There is upside to our valuation in the stake in Hellas Gold which we value at 0.

Group

·         On top of the different group activities, there are recurring overhead costs of c. (6)m EUR / year, which, valued at 7x are worth (42)m EUR, or (0.20) EUR / share

·         At the parent company level, the net debt as of September 2018 is 202m EUR, or (0.94) EUR / share

·         We don’t include the management’s expectation of 45m EUR NPV of synergies which represent 0.21 EUR / share

·         The sum of the parts valuation reveals an underlying value of 4.35 EUR / Ellaktor share pro forma, which represents 200% upside over the current share price of 1.45 EUR

·         Based on the Ellaktor valuation, we update our valuation of Anemos to 5.52 EUR / share using the offer ratio.

·         Given the conglomerate nature of the group, consolidated valuation metrics are harder to use. On various assumptions of FCFE though, we are getting to normalised FCFY that are close to 50% in a couple of years time based on normalised earnings in particular from construction and from windfarms once the development capex has been spent. This in our opinion confirms the notion that the current valuation is stupid and that the upside is considerable. Put differently, given the quality and the cash generation of the bulk of the assets, the margin of safety in this investment is huge