The Greek referendum outcome and how it can affect international capital markets

It was just a week ago when the Greek PM Alexis Tsipras announced a referendum on Sunday the 5th of July. The question of the referendum is: 

“Should the plan of agreement be accepted, which was submitted by the European Commission, the European Central Bank and the International Monetary Fund in the Eurogroup of 25.06.2015 and comprises of two parts, which constitute their unified proposal?

The first document is entitled “Reforms for the completion of the current program and beyond” and the second “Preliminary Debt Sustainability analysis”. “

So the question is whether Greeks agree or not with the creditors’ proposal which the government characterises as strict austerity measures which will humper economic growth. Despite the fact that the Greek government has set the question with the intention of asking for approval or disapproval of the measures in the proposal, the question is unclear leaving the opposition parties, the European officials and the International leaders interpret the question differently. The majority suggests that the “real” question is whether the Greek people want Greece to stay in the Eurozone.

In addition, the “YES” opponents suggest that the creditors’ proposal is technically no longer on offer and a yes would mean that Greece will stay a member of the Eurozone and EU while a no will result in a Grexit.

Who will carve the new path to the Greek future?

In our point of view the uncertainty will remain even if Greeks vote for yes and we explain why each result contains risk and uncertainty as well as the scenarios in each case below. There will be pressure in the markets which can be moderated if creditors and institutions act fast.

The most important institution that draws the path of the future of Greece and influences the sentiment, at least in the short-run, is the ECB. The fact that the ECB can extent, cut off or just keep things as they stand with regards to ELA funding makes the institution the most important player in the “Greek Game”. It is obvious that currently, the failure to extent ELA for Greek banks next week will result in Greek deposits’ haircut or even Grexit. The ECB’s decision will be mainly be influenced by the sign of a willingness and ability of EC and the Greek government to reach a deal as soon as possible as well as the EFSF’s board decision of making the 145 million euros immediately  payable. The most important date the 20th of July when Greece has to pay 3.46 billion to a bond held by ECB, a failure of which will trigger the ECB funding cut. 

The IMF role in the Greek negotiations is also critical. The IMF has released the Debt Sustainability Report which illustrates that the Greek debt is unsustainable and a haircut and new funds will be necessary for Greece to get back on track. IMF also seem to require a haircut in order to continue its participation in the Greek program.

Last but not least, the European Commission, is the party that will need to find a solution through hard negotiations and decide on a new “memorandum”, investment programme and debt haircut for Greece.

No prevails

We believe that the European Commission and the Greek government will come back to talks to reach a deal. The new deal will have to be extremely generous for the Greek government to accept it and the parliament to vote in favour of the new proposal.

Scenario 1: ECB cuts off ELA funding

The ECB may act faster, depending on how it will interpret the “no” vote, by cutting off the liquidity it provides to the Greek banks. It could either keep ELA at current levels or deem ELA funds immediately payable which will probably lead to a bail-in (deposits haircut) as it happened in the case of Cyprus. This in turn may cause problems in the Greek financial and political stability and the fear may be diffused in the European markets as Greece will be close to a Graccident.

A Grexit will conceivably have significant effects on international capital markets. With uncertainty being present and investors fearing that another country may follow in the future, the government bond yields of the European periphery (Spain, Portugal, Italy and Ireland) will be under pressure and ECB will have to act fast in order to accommodate the effects by buying bonds.

We also expect a stock market plunge and volatility to rise sharply in international markets (but mainly in Europe) in the short run. A plunge in equity prices will primarily be driven not by the direct impact of the Greek default but the instantaneous increase in investors’ risk aversion and in turn the equity risk premium.

Given the size of the Greek economy, we do not foresee the operating results and profitability of the European companies to be affected and we would expect the markets to recover relatively fast as when the first corporate results are announced buyers will probably enter long-positions to take advantage of the overreaction.

Scenario 2: Deal

If the voting results in a “no”, the markets are expected to fall dramatically on Monday.

The ECB may be patient on Monday and wait until the meeting of the creditor with the Greek officials to be over to observe any positive signs of a possible agreement. A deal or agreement on the majority of the proposals on Monday’s Eurogroup would probably result in an extension of ELA funding. This will give positive signs and boost investor confidence leading to equity market indices take off. Nevertheless we do not consider this scenario plausible given the number of parties involved in the decision making process and the previous disagreements.

Yes prevails

If “yes” prevails, the European partners have expressed their willingness to get back to talks. Nevertheless, the decision of the Greek PM to hold a referendum has undoubtedly resulted in a large impact on growth for this year, a greater need for bank recapitalisation and a larger gap in the government tax revenues which will inflate the deficit for this year.

Scenario 1: “National Unity” government and deal

The creditors will probably demand more austerity measures to be implemented to reduce the deficit and the Greek government may be left with a new, stricter proposal on the table.

The new proposal will need to be voted by the Greek parliament which will be extremely difficult at least for the current Syriza’s MPs. However the opposition parties have expressed their intention to keep Greece in Eurozone whatever the cost. A new “national Unity” government may be formed which will negotiate a third bailout package implement a part of the measures until next elections. Of course, if a new government which is determined to agree on the terms of the new package is formed and the new proposal get a majority vote from the Greek parliament, the markets are expected to react positively although the next elections may create uncertainty again.

Scenario 2: Elections

The Greek PM may resign and announce elections. In our view, this a very likely scenario if the result of the voting is “yes” as most of the government officials have already announced that they will resign if yes “wins”. The election will result in a greater uncertainty of both the election result as well as the ability and willingness of the new government to implement the required reforms.

The duration of this procedure may lead to a Graccident as it may take months to form a government and reach an agreement with the creditors. Once again, investors will face uncertainty and equity and bond markets will be extremely volatile during this period.

How will the proposals of Greek authorities, EC, ECB and IMF influence Greek firms?

In this article we are analysing how the proposal published by the European Commission on June 28th influences certain companies and industries within the Greek territory.

The following reforms are expected to directly and/or indirectly affect the Greek firms’ economics:

VAT reforms:

“Adopt legislation to reform the VAT system that will be effective as of July 1, 2015. The reform will target a net revenue gain of 1 percent of GDP on an annual basis from parametric changes. The new VAT system will: (i) unify the rates at a standard 23 percent rate, which will include restaurants and catering, and a reduced 13 percent rate for basic food, energy, hotels, and water (excluding sewage), and a super-reduced rate of 6 percent for pharmaceuticals, books, and theatre; (ii) streamline exemptions to broaden the base and raise the tax on insurance; and (iii) eliminate discounts, including on islands.”

A rise in VAT represents a measure of fiscal tightening and has the following effects on the macro-economy:

• Negative effects on GDP, consumer spending and employment.

1. Higher prices which leads to inflation, lower real income and finally reduced domestic demand and retail spending.
2. The overall effect of rises in VAT is highly correlated with increases in unemployment and reduced growth rates.

• Higher VAT through the elimination of the VAT discounts in islands will lead to a deterioration of the competitiveness of tourism, a major contributor in the Greek GDP. Thus leisure and hospitality sectors are expected to be prejudiced more than other sectors from this proposal.
• On the other hand, higher government revenues from increased VAT are expected to lower the fiscal deficit which in the long-term may be beneficial. But increases in VAT are linked to larger shadow economy and VAT evasion which may not bring about the desired outcomes. Also, in present value terms, the result to the economy is negative. 

The proposal does not provide any quantitative analysis with the expected result in absolute or relative terms.

Our view is that the proposed VAT reforms are anticipated to harm domestic demand and overshadow corporate profitability across all industries although the effect is not expected to be as material as that of other measures such as the increases in corporate tax rates (see below).

Fiscal structural measures

“In view of any revision of the zonal property values, adjust the property tax rates if necessary to safeguard the 2015 and 2016 property tax revenues at €2.65 billion and adjust the alternative minimum personal income taxation.”

“Eliminate the cross-border withholding tax introduced by the instalments act (law XXXX/2015) and reverse the recent amendments to the ITC in the public administration act (law XXXX/2015), including the special treatment of agricultural income.”

Pension Reforms

“Gradually phase out the solidarity grant (EKAS) for all pensioners by end-December 2019. This shall start immediately as regards the top 20% of beneficiaries with the modalities of the phase out to be agreed with the institutions;”

“Increase the health contributions for pensioners from 4% to 6% on average and extend it to supplementary pensions;”

Public Administration, Justice and Anti-Corruption

“Establish within the new MTFS ceilings for the wage bill and the level of public employment consistent with achieving the fiscal targets and ensuring a declining path of the wage bill relative to GDP until 2019;”

The reforms mentioned above relate to tax increases, wage decreases and pension reforms which have similar fiscal results:

• Reduced consumer spending and negative effects on GDP.
• Reduction in deficit.  

Fiscal structural measures, pension reforms and Public Administration, Justice and Anti-Corruption measures together are expected to influence profitability mainly though the consumer spending channel. We expect the reduced income available for spending to damage domestic demand which in turn will lower the economic growth of the country. Again, the effect on corporate sales and profitability is detrimental.

Fiscal Structural Measures

“Increase the rate of the tonnage tax and phase out special tax treatments of the shipping industry.”

Industries influenced directly: Shipping industry

Indirect effects: Probably higher freight costs – various industries

“Increase the corporate tax rate from 26% to 28%”

“Close possibilities for income tax avoidance (e.g., tighten the definition of farmers), take measures to increase the corporate income tax in 2015 and require 100 percent advance payments for corporate income as well as individual business income tax by end-2016; eliminate the preferential tax treatment of farmers in the income tax code; raise the solidarity surcharge;”

Direct effect

• ·         Both measures will negatively affect profitable companies with advance payments possibly resulting in further investments in working capital.
• ·         The higher tax rate will result in higher tax expense and lower net profitability.
• ·         So both measures deteriorate future cash flows and suggest immediate reductions in companies’ values.

Indirect effect

• ·         The indirect effect of the proposed measures (especially the advance payment of tax for individuals) is expected to result in a greater liquidity issue and very possibly in a reduction on consumer spending as households will have less available income for spending.
• ·         This is going to lead to lower or even negative sales growth.
• ·         The direct and indirect influences together are expected to result in significantly reduced bottom line figures.

Industries which will be affect the most:

Virtually every corporation in any industry but mainly:

• ·         Retailers
• ·         Shipping
• ·         Oil & Gas
• ·         Banks
• ·         Construction

**The information contained in this post as well as any information within this website is intended for informational purposes only. This is not a recommendation, offer or solicitation to purchase or sell any stock or other securities.

ASOS Q4 Trading statement

ASOS announced it's trading statement for the last quarter today. Sales have missed our estimates on all regions and the company failed to meet the 1 billion sales goal as expected. The stock is down 11% today.

UK revenues were up 35% (est. 37%), US revenues were up 19% (up 25% on CCY) for the year and 0% for the last quarter. EU sales rose 44% (45% in CCY) and RoW sales up only 5% for the FY (-5% in the 4th quarter). Exchange rates had a significant adverse effect on sales figures especially in the last quarter (Total retail sales up 15% while on constant exchange rate basis: up 21%).

The company also announced a large drop in gross margin for Q4 (-640bps), with a fire at the Barnsley distribution centre negatively contributing on this large drop of margin.

However other metrics as as active customers show impressive performance. ASOS had 8.8 million active customers at the end of August representing a rise of 25% year-on-year.

After revising our sales estimates the estimated value of ASOS stock is £29.51 based on a 14 year Discounted FCF model.  The reduction in the estimated value is mainly influenced by the lower sales estimates.


**The information contained in this post as well as any information within this website is intended for informational purposes only. This is not a recommendation, offer or solicitation to purchase or sell any stock or other securities.

A brief analysis on Jumbo SA (General Retailer)

Ticker:                   BELA:GA

Index:                     ASE General Index

HELMSI (Hellenic Mid&Small Cap)

GT30P

Price:                     €  11.57

52-week Low:      € 7.39

52-week High:      € 14.4

Mkt Cap:                € 136m

Performance (%)                1m          3m          12m

ASOS shares                         -1.95       +0.7        +46.2

Athens Index                        +1.41      1.69        +43.7     

Business Description

Sector: General Retailers

Jumbo SA is a Greece-based company that is engaged in the retail trade industry. The Company's main activity is the retail sale of toys, baby products, seasonal items, decoration items, books and stationery. Jumbo SA is also active in the wholesale trade of toys and similar products to third parties. The Company’s network consists of 67 stores situated in Greece, Cyprus, Bulgaria and Romania.

The Success Story

The company started operating in 1986 as a toy store in Athens, Greece. It started to gradually expanding its product offering since then. Nowadays Jumbo offers both branded and non-branded products at low prices by maintaining high margins. Products include toys, baby care items, stationary, seasonal products, decoration and various home objects. A key element in company’s success is its marketing strategy and the strong brand recognition achieved through numerous successful (TV and radio) commercials. It’s worth mentioning that Jumbo is considered the place where someone can buy all kinds of products on the cheap.

Q3 2013/14 Results (Ending on March 2014)

Jumbo has recently announced its results for the third quarter (1/1/2014 – 31/3/2014). Sales were up 9% in this quarter while the 9M sales were up 7.6%.  For the 9-month period, sales grew 2.91% in Greece, 20.6% in Cyprus, 19.6% in Bulgaria while sales in Romania (stores in Romania started operating this fiscal year) were €6.5m. While management had expected sales for 2014 to grow 2-4%, after the strong results of 1st quarter, it has raised its target to +4-6%. However, it seems that sales will exceed even the revised projections and will grow at a rate of 7.9%.

Adjusted net profits (for the 9-month) fell by 3% yoy to €69.5m mainly due to the higher tax expense. Specifically jumbo announced 6.7% growth on Net Profits in Greece, 22.5% in Cyprus and 45% in Bulgaria.

Jumbo has also managed to reduce operating expenses (as % of sales) over the last 3 years by reducing the average number of employees per store by 11%. The company offers strong liquidity with cash and cash equivalents summing to €144m excluding blocked deposits.

Stock & Valuation

We cross check Jumbo’s valuation metrics against Developed and Emerging market peers in the following table. The recent MSCI reclassification demands that we consider emerging market names in the peer group even if Jumbo does not have similar growth profile. Unfortunately Jumbo does not have any direct peers and conclusions are vulnerable to many factors. Companies operating in the retail sector are chosen as peers. Furthermore, the Greek stock market has been reclassified from the MSCI as an emerging market. As a result we compare the performance of jumbo to both European as well as non-European retailers. We use an average value of developed and emerging markets as a benchmark because jumbo does offer neither the stability of (developed) European companies nor the high growth rates of (Emerging) non-European companies.

The valuation of Jumbo is performed based on the average of DCF, price and enterprise multiples-based fair values.

The 12 month estimated Value of jumbo is €12.61.

Valuation based on historical P/E

We use each year’s average price and recurring EPS to find the historical P/E value for each year from 2004-2013 (results can be found on the table below). The historic P/E of jumbo (average for the years 2004-2013) is 10.15. This makes the share to look quite expensive relative to past values. The current price represents a 43% premium to the “fair” value.

Valuation based on comparables

Jumbo trades at 9.71% discount to the average of the peer group as a result of the lower EPS growth rates (compared to peers).  The benchmark P/E is calculated as the average of the Eurostoxx Retail P/E and the Emerging Markets’ Retail P/E.

DCF Model

The estimated value of Jumbo stock is €12.41 based on a 14 year Discounted FCF model. In our point of view, sales growth rates in Greece will start recovering as the country returns to positive growth rates and unemployment falls. The stores’ network expansion in Romania will definitely contribute to the Jumbo’s sales growth in the region. Specifically, over the next 6 years we expect sales to grow at a CARG of 4% in the Greece, 6% in the Cyprus, 10.5% in Bulgaria and 56.5% in Romania.

Cyprus Operations

Because of its solid balance sheet, Jumbo has found it easy to absorb the impairment of its uninsured deposits in Cyprus which had a negative impact on 2013 profits equal to €24m. The company has managed to increase sales by 12% (in 2013) and 20.6% (for the 9month period) in the country although the economy and consumer spending are declining.

Greece and Romania

Greek economy is still depressed but this does not seem to impede jumbo from experiencing higher sales and profitability in the region. The slow and stable network expansion along with the low price policy constitute a good strategy of the management. Also, Greek economy is expected to turn to positive growth rates and lower unemployment in 2014. The strong profitability and cash flow generation from Greece will be adequate to facilitate penetration in Romania. Romania in turn, is expected contribute a lot to the group’s revenues and profits by the end of the decade as (approximately) 18 stores are expected to open till 2020.

Network outlook

Jumbo has 67 stores, 53 in Greece, 4 in Cyprus, 8 in Bulgaria and 2 in Romania while it has signed franchise agreement for 2 stores in Albania and 2 in FYROM. The 2 stores in Romania, 1 in Cyprus and 2 in Greece started their operation during the first quarter. The network is expected to reach 60-62 stores in Greece& Cyprus and 18 stores in Romania.  In 2013 the group has also launched its online store “e-jumbo”.

Geographical Sales Split (Current and Expected)

Jumbo sales are concentrated in mainly in one country: Greece. As of the end of 2013 fiscal year, Greek sales constitutes 82% while sales in Greece and Cyprus combined represent the 93% of the group’s total sales. However the scene seems to be changing as the company expands in Europe. By 2020 Greek sales are expected to represent only a 64% while sales in Romania will approach 16% of total sales. Revenue in Bulgaria also seem to grow at faster rates and we expect the Bulgaria to have a 9% share in total sales. 

*Word and Excel files are available on request. 

**The information contained in this post as well as any information within this website is intended for informational purposes only. This is not a recommendation, offer or solicitation to purchase or sell any stock or other securities.

Q3 2014 Review ASOS Plc

ASOS plc

International Demand Pressures

Ticker:                   ASC:LN

Index:                     FTSE AIM All-Share

FTSE AIM 100

FTSE AIM UK 50

FTSE AIM All-Share - Retail

Price:                     £ 28.32

52-week Low:      £ 29.59

52-week High:      £ 71.95

Mkt Cap:                £ 2,354m

Free Float (%):    63%

Performance (%)                1m          3m          12m

ASOS shares                         -32          -43          -27

FTSE AIM 100                      -1            +2.8        +11

Q3 2013/14 Results (Ending on May 2013)

ASOS recently announced its Q3 results with total retail sales up 25% y-o-y. International sales were lower than expected (£151.1m) while UK sales rose an impressive 43%.

ASOS has seen its retail sales rising 25% y-o-y to £243m, with international retail sales up 17% consisting 62% of total retail sales. In addition, capital expenditures are expected to be £68m for the current financial year (in line with previous guidance). Although sales and margins were well pressured this quarter, all customer metric in each territory were positive (with Australia being the only exception). ASOS managed to increase active customers by 32% to 8.6m at the end of May 2014, the items per basket and the frequency of purchases.

Gross margin was down 370bps on prior year mainly because of the shift from international to UK sales (with the later offering lower gross margins), promotions and clearance activity.

The slower growth in sales along with a rise in inventory (+30%) clearly indicates that the demands has been much lower. We expect that this will influence the profitability in the short term. However, the Sterling continuous strengthening had a huge impact on the international sales growth and margins. Thus, as zonal pricing is implemented, we expect that benefits will start flowing back, resulting in higher future margins.

Stock & Valuation

Q3 trading statement released on 5^th June drove ASOS stock price down to £31.2 due to lower  than estimated EBIT margin, sales growth (especially non-UK), losses in China and currency movements.

The estimated value of ASOS stock is £40.8 based on a 14 year Discounted FCF model.  The reduction in the estimated value is mainly influenced by the lower international sales estimates and higher CAPEX.

In our point of view, sales growth rates in UK will start declining from next year but we are very optimistic for sales growth in the rest territories for the following years, when zonal pricing is launched. Specifically, over the next 6 years we expect sales to grow at a CARG of 15% in the UK, 25% in the EU and 23% in US. The Rest of the World segment sales are expected to grow at a CARG of 21%.

*Word and Excel files are available on request. 

**The information contained in this post as well as any information within this website is intended for informational purposes only. This is not a recommendation, offer or solicitation to purchase or sell any stock or other securities.