ECONOMY

ATHEX needs M&A

What a difference a year can make. This time last year, the Athens Exchange (ATHEX) had just started coming out of its most severe correction since the current rally started back in the spring of 2003. This year, the Athens bourse is up about 9,6 percent but shows signs of fatigue. The key as to its future direction is in the hands of the investors who have kept pumping money into ATHEX for the last few years. Yet many of them have not seen what they would like to have seen. If one just looks at the figures and compares the performance of the MSCI (Morgan Stanley Capital International) Greece equity index with the Pan-European broader MSCI-Europe stock index so far this year, one can easily see that their year-to-June 22 returns are similar. The Greek MSCI Stock Index gained 9.61 percent compared with Europe’s 9.41 percent. A closer look at their last three-month performance shows Greece has underperformed with a 7.18 percent rise versus 9.35 percent for the MSCI Europe Index. Is it just a coincidence, an outlier which will go away in coming months, or is something else going on that merits closer attention? According to analysts, fund managers and others, most of the major Greek companies – which traditionally have the most populous following among foreign investors – are not more expensive at this point based on their consolidated 12-month earnings than they were last year, relative to their European peers. So, the underperformance of the Athens bourse in the last three months has little to do with comparative valuations. For example, the forward 12-month P/E (price-to-earnings per share) ratio of the large Greek banks is at a premium compared to large European banks but more in line with Southern and Central European mid-cap banks. This year, like last year, analysts and others forecast a double-digit increase in the after-tax earnings of large banks, telecoms and other companies for 2007, along with either double-digit or high single-digit growth in 2008. This is why the majority of analysts recommend target prices for the Greek stocks they cover which are higher than the present market prices. At the same time, as local blue chips struggle to outperform their peers, their mid- and small-cap counterparts are doing much better. Greece’s MSCI Small-Cap Index is up almost 20 percent year-to-June 22 while the pan-European Small Cap MSCI Europe Stock Index gained 11.5 percent. The Greek small-cap index has also outperformed in the last three months. To a number of analysts, commentators and others, this is not surprising and partly reflects an international trend. Non-resident institutional portfolios have plenty of cash to invest and are moving down to smaller-capitalization stocks, offering high growth prospects, as the current stock market rally enters its mature phase. In other words, they have scanned the bigger companies and run out of options there so a number of them pursue the so-called «new ideas,» that is, stocks offering a superb earnings profile for the next two years at least. In the process, they lower their sights to accommodate smaller listed companies. Of course, not all foreign funds can do so. Some are prohibited from doing so by their own charter. It is no secret that foreign portfolios have been attracted to the story of a Greek construction firm, Michaniki, which is active in the real estate markets of Ukraine and Russia. Michaniki is a well known construction company in Greece but few paid attention to its real estate dealings abroad before large investment banks started making noises about it and their clients responded, lifting its shares. Unfortunately, not so many «new ideas» have been discovered in Greece so far. Another construction company, Kloukinas-Lappas, which until recently was unknown even to Greek investors, is also considered a new idea. The company’s share has posted impressive gains in the last few months after it became widely known that one of its subsidiaries had the exclusive rights for a Mothercare brand for Greece and the Balkans. The company has taken advantage of it, opening new stores while like-for-like sales growth in older stores is very strong, above 30 percent year-on-year. Of course, foreign funds know that «new ideas» may promise higher growth but at the same time they also entail higher risk. This does not bother the locals who have helped the shares of some struggling small-caps make impressive gains on rumors they will be the next candidates on the short list of foreign funds, which is obviously not the case. So, small- and medium-caps may thrive for now on scenarios that they will be taken up or found on the «new idea» list of foreign investors but this is not enough to help the Greek stock market outperform its European peers. In addition to confirming or even surpassing market expectations, the big Greek companies will have to be given an extra jolt and by all accounts this is called M&A (mergers and acquisitions) Just a look at what was happening on that front this time last year is revealing. The part-flotation of a 25 percent stake of Postal Savings Banks (TT) took place and the market knew the government was planning to sell up to 10 percent of ATEBank and had in mind to reduce the state’s equity participation in incumbent OTE telecom. Also, CosmOTE, OTE’s mobile subsidiary, had agreed to buy Germanos and National Bank of Greece was going ahead with a rights issue to raise more than -3 billion to acquire Turkey’s Finansbank. In other words, there was plenty of M&A activity which is not the case today. So, if one listens to the various Fund managers and others and tries to identify why the Athens bourse has underperformed Europe in the last three months, they will have the answer. With the exception of shipping, it looks as if M&A activity has stalled for now in Greece and this may relate to the belief that early elections will be held in the country, which speaks volumes about the influence of the state and the public sector on the economy. At any rate, the bourse needs some extra push from M&A activity, in addition to confirming the high earnings growth of its major companies and the positive impact of the «new ideas,» if it is to outperform Europe.

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