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Summary This series seeks to find extremely cheap stocks and determine whether they are deep value opportunities or deep value traps. Public Power Corporation is one of the cheapest stocks on the already depressed Athens Stock Exchange. If Greece can turn a corner, it could be a surprising winner, subject to major political risks. But how long until Greece turns a corner? Greece’s financial markets have had a rough ride but for those willing to put some capital on the line some very cheap equities are available. Here I’ll be looking at Public Power Corporation of Greece (OTC: PUPOF ) (ATHENS: PPC.AT) to see whether its deep value position is actually worth investing in. Background Public Power Corporation of Greece, hereafter referred to as PPC, is often talked about as Greece’s power monopoly. And there’s good reason for that. PPC supplied 97.9% of Greece’s electricity in 2014 and is vertically integrated owning mines, generation facilities, and transmission lines. Traditionally, a major utility company would be seen as one of the safest investments but PPC experienced troubles over the past few years since many customers lacked the ability to pay due to the economic depression in Greece. PPC is also majority state-owned although this could change as EU regulators push for greater privatization. Valuation Compared to the high valuations paid for the “safety” of U.S. utilities, PPC trades at an extremely low valuation. 2014 est. 2015 est. 2016 est. 2017 Price to Earnings 10.7x 3.9x 4.6x 4.2x These numbers equate to a roughly 25% forward earnings yield which is clearly pricing in a large amount of risk and skepticism. PPC also trades far below its end of 2014 book value of 26.4 euros per share giving a price to book value of 0.16x. While this may seem like a steal, it doesn’t mean much on its own since PPC is unlikely to break up to maximize asset values given that it’s a government controlled power company. Dividends For 2015, PPC paid an annual dividend of 0.05 euros per share for a yield of 1.2%. Even compared to the low yield U.S. markets, this is a small yield, especially for an utility. Although the dividend was a high as 0.90 euros per share in 2004, it was gradually reduced falling to only 0.10 euros per share prior to the financial crisis. Because of this dividend record, I do not see PPC as a near-term dividend play since there would have to be significant changes in capital allocation to produce a sizeable yield. However, if PPC were to show signs of dividend growth, I may be willing to reconsider this point. Catalysts to realize value Buying undervalued stocks is no good unless the market eventually realizes the value and drives up the stock price or dividend. Like many deep value stocks, PPC does have some potential catalysts but investors may need to be willing to wait. Privatization Reducing the government’s stake in PPC could help drive its value higher by lessening political risk and there are some powerful groups trying to push this forward. EU regulators have been pushing Greece to open up its electricity market for years yet PPC has remained a government monopoly. It turns out that powerful groups in Greece are also opposed to privatizing more of PPC. When the previous Greek government proposed selling off some of its PPC shares, workers protested by shutting off power to certain areas. To some extent, it’s easy to understand why these workers are protesting. Since the government reduced its PPC stake about a decade ago PPC worker wages have fallen about 60%. For its own part, SYRIZA has also opposed further privatizing PPC throwing up another roadblock. If PPC is further privatized, I see it as a long-term event and not a near term catalyst for value recognition. Economic recovery PPC shares also suffer from a low valuation caused by the clouds of uncertainty hanging over Greece in conjunction with the depressed economy. While Greece’s economy is actually starting to slowly grow again, an unemployment rate over 25% signals that a turnaround is far from complete. On top of that, the recent bailout package really did not solve Greece’s debt problem so issues relating to the sovereign debt are likely to continue cropping up. As long as these issues stick around, investors will be reluctant to take Greece out of the financial penalty box thus preventing PPC’s valuation from rising in the near-term. Public Power takeaway If you’re looking for a long-term recovery pick for Greece, PPC shares may be worth an investment, however, a lack of near-term catalysts reduces their appeal as a deep value turnaround investment. I will continue to follow the latest on PPC and may be willing to acquire shares if the dividend is significantly raised, major progress is made toward restructuring Greece’s debt, or privatization plans actually gain significant traction. Note: Trading in PUPOF is extremely illiquid and the best liquidity is found on the Athens Stock Exchange. For those without access to the Athens exchange, shares trade with reasonable volume on the Frankfurt exchange. Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks. Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Additional disclosure: The author does not guarantee the performance of any investments and potential investors should always do their own due diligence before making any investment decisions. Although the author believes that the information presented here is correct to the best of his knowledge, no warranties are made and potential investors should always conduct their own independent research before making any investment decisions. Investing carries risk of loss and is not suitable for all individuals. Scalper1 News
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