Sharing key investor debates and pushback following initiation of coverage
We initiated coverage of GEK TERNA last week with a Buy rating and €55/sh price target [link]. We see the company as a core infrastructure holding, offering long-duration, concession-led earnings growth and a market-leading construction franchise at an undemanding valuation relative to peers. Feedback from 10+ investor meetings over the past week has been constructive. Investors generally agreed that the earnings potential of Attiki Odos and Egnatia Odos remains underappreciated, while debate centred on the sustainability of construction leadership, execution and political risks, as well as the potential for further upside following strong share-price performance YTD. We host the CFO and IR team at our annual conference 9-10 September [sign up here] and, in this note, we address pushback as well as outline the catalysts ahead.
Investors positive on Attiki/Egnatia asset potential ; questions on Construction leadership /catalysts
Agreement: Under-appreciation of i) Attiki Odos price inelasticity of demand, with debate centred around the speed and extent to which the company could look to implement dynamic pricing; ii) traffic/digitisation opportunity of Egnatia Odos, with opex tailwinds from a catch-up in e-ticket penetration and traffic growth potential following significant capex revamp offering growth prospects beyond the tariff rebase.
Pushback: i) scope for further re-rating. Despite strong share-price performance YTD, we note GEK TERNA continues to trade at a significant discount to infrastructure peers based on its growth profile, whilst our implied valuations for Attiki Odos and Egnatia Odos assets screen as undemanding vs other toll road assets given duration and pricing power characteristics (Figure 1-3); ii) growing competition, with some investors concerned about the risk of a major international contractor acquiring a domestic player. Whilst it cannot be ruled out, the possibility has existed for several years, yet international groups continue to partner with established local contractors, highlighting the importance of local expertise and stakeholder relationships (Figure 4); iii) Construction risk – whilst we acknowledge the complexity/scale of upcoming projects, we take comfort in recent declines in W/C intensity, reducing balance sheet risk associated with execution (Figure 5); and iv) political risk, where elections could delay individual tenders but, the risk of a coalition government, in our view, is unlikely to alter the direction of Greece’s infrastructure investment pipeline.
Valuation: Buy, PT €55/sh
We value GEK TERNA using a SoTP combining asset-level concession DCFs and a multiple-based approach for Contracting. Key catalysts: upcoming concession/PPP awards in the next 6-12m and 1H results (September), which could allow investors to further de-risk strategy execution on Attiki/Egnatia Odos.
Addressing investor pushback
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