AVAX — Building on strong foundations

AVAX is Greek-based construction company that has been listed on the Athens Stock Exchange since 1994. A critical inflection point in the company’s evolution came in 1999–2000 through a three-way merger with two medium-sized contractors, ETETH and J&P Hellas (the Greek subsidiary of Cypriot construction group, J&P). This was a result of legislation (Law 2940/2001) that required companies to collaborate to bid for larger public projects. The resultant company was named J&P-AVAX. In 2007, a smaller local contractor, Athena, was also acquired and eventually absorbed in 2018. In the same year, J&P-AVAX cut its ties with J&P Group. The company was renamed AVAX, with one of the two controlling families of J&P Group, the Joannou family, now in control of c 33.3% of AVAX’s shares.

AVAX boasts a relatively geographically diversified business model, with over 7,500 employees and realising more than 2,750 international projects since 1985. The company addresses multiple end-customer sectors in the construction market with varying sector drivers and project workflows; it has completed projects in a wide variety of construction areas such as marine projects, motorways, sports facilities and hospitals. AVAX tries to secure business through early engagement with project partners (eg end-clients, architects, main contractors) and adds value by drawing on the group's extensive experience in maturing project designs, identifying project risks (financial and other) and identifying appropriate resources (internal or outsourced) for every development. Each project is unique and brings different challenges such as site access/operating constraints or temporary work requirements; complex and typically scalable building projects are one of AVAX’s core strengths. Around 80% of the company’s projects are public infrastructure.

At the end of FY21, AVAX made the strategic decision to divest from energy sector operations after the sale of its portfolio of renewable energy source (RES) projects by 100% subsidiary Volterra, which generated €54.4m cash proceeds from the sale of its wind farms. It is exiting Volterra’s smaller 2–5% retail segment, which is recorded as a discontinued operation.

The company divides its continuing business activities into three main segments:

AVAX is well positioned in the sector, boasting a healthy, traditional construction division and valuable concessions portfolio with secured cashflows and the potential to win additional concessions with c 12–13% targeted internal rates of return (IRRs). The Greek economy has declined substantially in the past 10–15 years with few companies surviving the downturn, emphasising AVAX’s robustness. The last two quarters suggest Greek construction markets are on the road to recovery, with an expected surge in government expenditure over the next year, which should bolster the company’s growth momentum. Construction output in Greece rose c 30% y-o-y in Q422, accelerating from c 20% in the previous period, making it the highest quarterly growth in construction activity since Q316, as output advanced for building construction (24% vs 7% in Q3) and civil engineering (36% vs 30%). Construction output rose 24% in FY22 (FY21: 6.9%).

AVAX has three main competitors in the Greek construction sector, although GEK Terna Group (the leader in the sector) derives c 75% of its adjusted EBITDA from RES and thermal energy sales, so has limited overlap with AVAX. According to management, the company typically wins some 20–25% of projects bid for, with more success on the larger projects. The key is not just winning a contract through aggressive bidding but winning it at a reasonable price to make a profit. On average, over the last year or so, discounts offered in bidding for projects have narrowed from 20–30% to single digits, which will play a major role in future profitability of the company.

Concessions and PPPs form a fundamental part of AVAX’s long-term business model. Broadly speaking, these agreements involve a long-term partnership between the public and private sector for the development, delivery, operation and maintenance of public infrastructure (post construction); this enables the concessionaire to capitalise on the finished works. For example, a main contractor can be given a concession to apply tolls to a bridge for a long-term period (generally over 10 years) as full or part payment for having constructed the bridge. More recent projects have also included elements of ‘shadow tolls’, where the government pays a fee to the operator on a per-user basis as well as direct subsidies, reducing risk and improving returns for investors. Typically, as the concessionaire AVAX contributes c 20–25% of the total budget in equity, which is drip-fed during the construction process. The remaining budget is usually financed through bank debt or government grants. When the construction works are priced accurately, the profits generated from the construction phase are used to meet most of the equity input requirements.

On completion of the construction phase, the concession contract offers a projected stream of dividends, which may be sold to long-term financial investors seeking stable returns with an attractive IRR/risk profile, superior to other fixed-income securities. The cash proceeds from that sale can subsequently be used to fund the next project. As AVAX is both a contractor and concessions operator, striking the right balance between the returns from construction and operation is crucial. Construction yields short- to medium-term returns, while the operation generates long-term returns, so if the company limits aspirations for the construction period, it can opt for a higher return on the operation side. This allows for a lower NPV of the bid, even with the same amount of total revenue.

AVAX is set up to handle nearly all of its projects on a fixed-price contract basis, consistent with the majority of them being issued by the Greek government; although this implies substantially more risk, the company reaps the benefits of surprises on the upside, which can offset the obvious downside risks. On a fixed-price contract, a single ‘lump sum’ is agreed before the project works begin; if the actual cost of the works exceeds the agreed price and absorbs integral contingencies, then the contractor must bear the additional expense or seek reparations. Although it is perceived as being higher risk than cost-plus contracts, usually a schedule of cost indexation is included in the contract, acting as a safety buffer with clauses for inflation or any substantial changes to the project required; this provides adequate protection for the company. In 2022 the Greek government passed Law 4398, which introduced some measures to alleviate the substantial cost pressures induced by the energy crisis for contractors on ongoing projects. These included compensation for synthetic materials (eg, PVC, asphalt) price surges on supply orders, applicable in H222, as well as regular quarterly adjustments of project budgets. In addition, contractors were given a choice between the following:

AVAX chose the second option for its large Athens Metro Line 4 project (budgeted at €1.8bn).

Overall, the government measures have provided some respite for ongoing projects. Bids in project tenders (either private, public or PPP) in the last year have already incorporated the increased input cost. Many private sector projects have been renegotiated with the clients, who are aware of the challenging macroenvironment with substantial increases in input costs and must protect their investment from stalling works or protracted battles with contractors’ compensation claims. A very limited number of AVAX’s smaller private contracts have been secured on a cost-plus basis. According to management, the company also has an effective risk-management process, thoroughly screening any potential projects before bidding.

In the past couple of years, AVAX has aggressively reduced debt through the strategic sale of mature concessions (in line with its long-term strategy) or non-core assets (eg Volterra and RES projects); in FY22 the company reported record low net debt of €220.4m, generating a healthier leverage ratio of 3.8x versus 7.3x in 2020. Looking forward, AVAX envisages using more project-based financing instead of leverage. AVAX used to have a lot of debt backed by concessions, which has decreased substantially; the company has recently proposed spinning off debt into its separate 100% subsidiary, AVAX Concessions, used to fund new concessions projects. The aim is for the construction division to eventually stand on a substantially reduced debt level of c €100m. So far, AVAX has transferred its 23.6% participation in the Aegean Motorway concessionaire and 19.1% in the concessionaire and operators of Olympia Motorway into AVAX Concessions.

Management

The company’s board of directors comprises 10 members, appointed at a general meeting and nominated by the main shareholders, who provide oversight and review of the performance of the Corporate Planning and Risk Management Committee (Executive Committee). Five of the board are executive members, all providing the company with a long history of experience in the construction sector: Christos Joannou (chairman), Konstantine Kouvaras (deputy chairman), Konstantine Mitzalis (managing director), Konstantine Lysaridis and Anthony Mitzalis. The Corporate Planning and Risk Management Committee comprises four of the executive members of the board of directors (Mr Kouvaras, Mr Joannou, Mr Mitzalis and Mr Lysaridis). Decisions by the Corporate Planning and Risk Management Committee are taken by absolute majority among its members, enabling them to be agile and flexible in the decision-making process.

Shareholder structure

The total share capital of AVAX is currently 144,321,516 shares with a long-term strategic family investment. Three executive members of the company collectively control 84,151,811 shares (58.3%); Christos Joannou (33.3%), Konstantine Mitzalis (17.2%) and Konstantine Kouvaras (7.8%). Stelios Christodoulou owns 12,263,889 shares (8.5%). The remaining 47,905,816 shares represent the free float of 33.2%.

We note that at the April 2021 AGM shareholders approved a bonus issue of 4m shares to staff and executives using company reserves. At the end of 2022 these shares remained unissued, not ranking for the FY22 dividend, but are expected to be issued in the future, with an element of dilution for existing shareholders.

Organisation: Subsidiaries

AVAX’s corporate structure is complex, with a wide range of 18 subsidiary companies, and we identify the main operating subsidiaries below (Exhibit 6). The subsidiaries enable AVAX to supply and support an international customer base.

AVAX has a secure revenue stream from its concessions portfolio, which yields favourable margins. However, the company’s primary focus over the next decade will be on expanding into value-adding areas within the construction division that are less cyclical and have the potential to generate higher margins, along with a steady stream of cashflows. In the short term, the company envisages increasing its local operations in Greece, taking advantage of the recovering economy and increased government spending on construction projects. Currently, the majority (90–95%) of new projects are concentrated in Greece, a significant increase from the previous fiscal year (c 50% in FY21). Nonetheless, AVAX’s long-term vision includes establishing a substantial international presence, which is an integral part of its corporate DNA.

AVAX avoids aggressive bidding for projects that could jeopardise its profitability, opting for a more conservative approach to ensure a stable cash inflow. The company now bids for the majority of larger projects in the market, competing with its three main peers. As mentioned before, management estimates that it typically wins c 20–25% of the projects it bids for.

AVAX is also undergoing significant restructuring in which its holdings in concessions and PPPs are gradually being transferred to a subsidiary, AVAX Concessions, along with associated debt. This will provide a clearer view of the value of the remainder of AVAX and reveal the true value of the concessions portfolio; management hopes this will enhance financing flexibility for the company.

The Greek construction market declined sharply in the decade after the debt crisis that hit Greece and other Southern European countries from late 2009, with austerity measures severely hampering government ability to invest in new infrastructure projects. As conditions stabilised later in the decade and green shoots started to appear, the effects of the global COVID-19 pandemic severely constrained economic and construction activity in 2020.

According to the IMF, Greek GDP fell by 9.0% in 2020 to its lowest level this century of €167.3bn before recovering in 2021, with an 8.4% rise to €181.3bn, just 1.3% below the pre-pandemic level in 2019 (€183.8bn). The recovery continued last year with GDP growing 5.9% to €192.0bn. A variety of sources forecast Greece’s GDP growth rate to moderate to c 1.2% in 2023 and then around 1.5% to 2026.

The Greek Construction market is around €7.5bn and can be split into two distinct sectors, housebuilding (c 30%) and civil engineering (c 70% non-residential construction, including commercial and infrastructure projects), including both private and public works. During the COVID-19 lockdowns, construction sites remained open and thus the industry performed relatively well, registering growth in 2020, which continued in 2021 and 2022. According to data from ELSTAT (the Hellenic Statistical Authority) overall average construction activity fell by just 9.5% in 2020, before increasing 7% in 2021 and 24.4% in 2022, the highest level since 2017 in absolute terms.

In terms of the prospects for the non-residential construction market, the civil engineering segment declined by 11.7% in 2020 before recovering 1.8% in 2021. There was a very strong performance in 2022 with growth of 29.6% again recovering to the highest level since 2017. However, we note this is still around a third of the level of activity seen before the financial crisis in 2009, which has led to a substantial contraction in the number of enterprises involved in construction and employment. Following the recent purchase of Aktor by Intrakat, the big four construction companies AVAX, Ellaktor, GEK Terna and Intrakat) account for more than 50% of the civil engineering segment revenues and are involved in the bulk of major Greek construction projects.

In terms of prospects, growth in the civil engineering segment in 2022 appears to be driven at least in part by the unplugging of the infrastructure pipeline in Greece stimulated by the Greece 2.0, the country’s National Recovery and Resilience Plan that was initiated in mid-2021 and was supported by the EU with over €30bn of Recovery and Resilience Facility grants and loans. The stimulus package is expected to add around 2–3% to GDP by 2026. While the reforms and initiatives are primarily aimed at green and digital progression, including renewable energy, they should also aid other infrastructure programmes as well as attracting additional sources of private finance.

According to PWC, in October 2020 Greece had an infrastructure project pipeline of 118 projects (in progress or prepared, but not funded), worth €43.4bn. The backlog has increased as the country seeks to improve the quality and expand capacity of its public works after periods of underinvestment since the financial crisis. As well as energy, which accounts for almost 60% of the total, priority areas are transportation 90 (c 35%), including road, rail, port and airport projects, and waste management. Given the scale of these opportunities we expect to see the civil engineering sector continue to expand over the next few years. For comparison in the five years to 2019, 40 infrastructure projects were completed with a total value of €8.9bn. We believe Greece 2.0 will add to the backlog, notably increasing projects in connectivity, tourism and the environment.

In terms of government funding of projects, Greece ranks number two globally for its procurement of infrastructure projects using PPP finance as a percentage of GDP. At the Greek PPP Pipeline Roadshow in November 2022 hosted by the EBRD, the Ministry of Development and Investment of the Hellenic Republic indicated there were 57 PPP projects in the investment portfolio with a total development cost of €7.2bn. A total of 14 projects worth €0.8bn were already signed and 43 worth €6.4bn were approved and in a tender process. Of the projects, 83% involved a concession and the average project life was 27–30 years including the construction phase. Seven projects with a €1.5bn value were in the transport segment. An additional €1.7bn of projects across all segments were also being considered. This indicates the potential value in the Greek construction market, in which AVAX is a predominant leader.

As one of the dominant players in the Greek construction market, AVAX has contributed to some of the largest local projects. These have ranged from the design, construction, financing, operation and maintenance of new motorways (eg, Attiki Odos motorway) to the design of one of the world’s longest multi-span, cable-stayed bridges (Rion-Antirrion Bridge).

One interesting project that AVAX is participating in, alongside a JV with Ghella and Alstom, is the construction of a new Metro Line 4 in Athens. The same consortium completed the 7.6km extension of Metro Line 3 from Haidari Forest to the Dimotiko Theatro in October 2022 (Exhibits 10 and 11). This contract was valued at €344m and involved the construction of three new stations to relieve traffic congestion in Greece’s largest port (with an expected reduction of 23,000 cars daily) and to connect Athens International Airport with Piraeus in less than an hour. AVAX was the lead contractor on both projects (the extension of Line 3 and the new Line 4).

In 2020 the AVAX-Ghella-Alstom consortium won the public procurement tender for the construction of the first Section A of Athens Metro Line 4 (expected length of 38.2km), a U-shaped line running from Alsos Veikou to Goudi. Phase A of construction was initiated in H221 and the line is scheduled to be complete in 2029/30. The JV’s tender was the lowest bidder at €1.3bn and the contract includes the construction of 12.8km of twin tube tunnel and at least 15 underground stations; the consortium’s competitive bid demonstrates their expertise and commitment to delivering this transformative project. The foreseen project budget, VAT excluded, amounts to €1.51bn (including contingencies, revision and works on a cost-plus basis) with an envisaged construction duration of eight years. This project marks a major milestone for AVAX, underscoring the company’s leadership and expertise in the construction industry, as it is the largest infrastructure project planned in the EU and will radically change commuting in the Athens metropolitan area.

The operation of the Attica Motorway is a pioneering project, constructed on concession basis and recognised as one of the largest co-financed road projects in Europe. This 70km dual-carriageway (three-lane) road was constructed in the 1990s, connecting 28 municipalities with the Athens International Airport and two national motorways, whilst by-passing the city centre. The primary aim of this ring road is to alleviate traffic congestion in the main arteries of Athens and provide a direct link between the Western and Eastern areas of Attica, enhancing regional connectivity and accessibility. The total cost of construction was €1.6bn with an investment total of €2bn (34% participation from AVAX).

Although the construction involved a large number of companies (planned at a central government level by the Ministry of Development, Competitiveness, Infrastructure and Transport Network), the operation of the motorway is managed solely by AVAX and Ellaktor under a PPP model on a 50/50 basis. The concession period spans from 1996 to 2024 with the toll under the contract €2.8 per vehicle; however, this is set to be reduced to €2.5 in a renewed concession agreement (post 2024) as part of efforts to alleviate the pressure on drivers facing high costs of living. This project underscores AVAX’s commitment to providing sustainable solutions.

AVAX made good strategic progress in FY22, notably by divesting its Volterra subsidiary, which operates in the wholesale and retail energy market. In June 2022 it sold a 112MW capacity portfolio of Volterra’s RES to PPC Group, generating a capital gain of €39.1m. The remaining activities of Volterra are now treated as discontinued, with €22.6m of net assets held for sale at the year end. In addition, the group disposed of its participation in the Rio Bridge concession to the remaining shareholders for €60m after collecting a €4.2m dividend payment.

The continuing operations saw revenues decline largely due to delays on starting new projects awarded during the year, mostly outside Greece. Construction revenues in Greece increased sharply by 59% to €267.6m in FY22 (FY21: €135.1m), almost recovering to pre-pandemic FY19 levels of €290.0m. International revenues fell 68% from €423.8m to €135.1m. When investing in contractors, it is important for investors to understand how revenue is recognised against long term contracts. As mentioned in the appendix, AVAX’s revenue derived from construction contracts are recognized in accordance with IFRS 15 using the input method.

The overall gross margin in FY22 declined slightly to 5.2% (FY21 5.3%) although this again masked a substantial mix shift between domestic and international activity. Domestic activities generated a gross profit of €64.6m compared to a loss of €8.5m in FY21 while international delivered a FY22 loss of €43.7m more than reversing a profit of €40.7m in the prior year.

In terms of EBITDA calculation, AVAX includes the contribution from the concession operations, although many of these are associates and reported in the group accounts at a pre-tax level. A few concessions are fully consolidated and generate a few million euros of revenue. The presentation thus inflates the group EBITDA margin but, as we show in the table below, the construction segment has generated an improved mid-single digit margin of 4.7% despite the international losses.

We note that the company also reported an adjusted EBITDA figure of €82.3m that primarily reflects the addition of the €39.1m capital gain on the RES disposal. We would not normally include such gains in EBITDA, as it is by nature non-recurring.

The pre-tax contribution from associates (which reflects the concessions activity) increased 52% to €47.4m (FY21 €31.2m)

At the operating level FY22 financial results were depressed by write-off of doubtful receivables and other provisions of €6.5m compared to €15.7m in FY21. Before this, operating profit including associates increased 21% to €45.9m (FY21 €38.0m).

The net finance charge fell 7% to €20.7m (FY21 €22.3m), primarily reflecting the lower debt burden. As a result, reported PBT improved to €18.5m from break even in FY21. EPS for the continuing business also increased significantly to €0.088/share from €0.013/share in FY21. Adding back the write-offs, EPS rose by 9% to €0.133/share (FY21 €0.122/share).

Cashflow for the group remained positive, with net debt reduced by €117.9m to €220.4m in line with the management priority to lower bank debt. The reduction was largely in performance bond loans, which fell €108.5m or 28% to €276.4m, reflecting the lower activity levels. Over the last three years management has significantly reduced its bank debt burden and expects to continue to do so despite the resumption of dividend payments. The sale of non-core assets and the increasing income from concessions dividend streams have been key factors in the debt reduction. Lease liabilities increased to €75.8m in FY22 from €53.2m in FY21. The bank debt-related financial metrics are shown below.

At the end of 2022 AVAX had work in hand worth €1.86bn, significantly higher than recent periods, with much of it due to a resurgence of activity in its domestic construction market in Greece. Since the start of the year, the company has signed a further €274m of new contracts with €43m awaiting signature. The backlog at the year-end represents several years work at recent turnover levels. At the investor briefing on 11 May, management also indicated it was close to securing two major projects (one in Greece and one international) that would increase the work in hand to close to €3bn before deducting invoiced work year to date.

The level of booked activity and the burgeoning Greek construction project pipeline underpins management’s expectation that the financial performance of the group should strengthen this year. We also expect these factors to drive a significant shift towards domestic activity although international market opportunities are likely to be pursued where appropriate, especially in specialised energy projects.

Management believes it is beginning a period where it can sustainably deliver improved profitability, which should allow for enhanced shareholder returns. The announcement of a €0.07 gross dividend per share for FY22 is the first for many years and indicates improved management confidence.

As a construction company involved in large project contracting and concessions in Greece and abroad, AVAX is exposed to the usual operational risk management issues, including those associated with fixed-price contracting, which management addresses on a constant basis. The concessions portfolio provides a more stable and long-term cash-generative underpinning of the group activities, although volumes can fluctuate as was experienced during lockdown (road tolls etc). However, the other sensitivities include:

Geopolitical, political and economic risk: the spike in energy costs and inflation that arose from the invasion of Ukraine has tempered the post-COVID-19 pandemic economic recovery in Greece and elsewhere. It has also necessitated a higher interest rate environment globally. In addition, an election is due in Greece, which could affect the infrastructure project awards, although we think that is unlikely given the positive economic attributes of the policies. Outside Europe, the group seeks to operate in territories with reduced geopolitical and has no direct exposure to Ukraine or Russia.

Counterparty risk: the group is involved in a large number of projects in Greece and abroad, with select clients with a proven record of reliability and credit worthiness. New clients are carefully assessed to ensure credit worthiness. In terms of public projects, the group’s policy is to participate only in tenders where project financing is secured with EU funds. Historically, the Greek state has been the largest client, as the private sector is a small player in AVAX’s specialities of building facilities and infrastructure projects.

Input price volatility: AVAX has exposure to movements in global prices for raw materials and other supplies (eg, cement, steel rebar and fuel), which is addressed via a centralised procurement approach. It purchases supplies for all its businesses to secure economies of scale and can pre-order large quantities of stock to lock in pricing. The company also has to manage wage inflation, which can vary through a contract life but normally have indexation clauses in contracts.

Foreign exchange risk: the group receives revenues from international markets, with a significant proportion coming from outside the eurozone. In these, it seeks to match its receivables in foreign currency with payables in the same currency, creating a natural hedge and hedges remaining exposures through bank agreements.

Financial considerations: AVAX has significant financial liabilities including long-term bond loans, working capital and performance bonds from banks to participate in project tenders and guarantee their proper execution to clients. The interest rates and fees are determined by liquidity conditions beyond the control of management, despite strong banking relationships. Management’s prioritisation of debt reduction started before the current increase in global interest rates. It has helped reduce the sensitivity of financial results and shareholder funds of a ±100 basis point interest rate variation to ±€2.51m in FY22, down from ±€3.81m in the previous year.

Founding family interests: these account for c 67% of the outstanding equity. We understand that this has been a relatively stable position for a number of years and have no reason to believe this is likely to change significantly. However, investors should recognise it is a minority free float.

The group increased net asset value by 40% to €154.9m or €1.07 per share in FY22, which was almost double the level at the end of FY19 (€78.3m). Management believes this understates the value of the group as the concessions are valued at the book value of the equity participation. During FY22, the book value of concessions fell to €295.5m (FY21 €340.4m) primarily due to the €60m Rio Bridge participation disposals. Third-party independent fair valuations of the company’s remaining concessions portfolio suggest a value gap of €130.2m or €0.90/share. In the context of a share price of just €0.93/share, these net asset values appear to suggest significant value potential.

The recent acquisition of Aktor (the construction arm of Ellaktor Group, previously the fifth large player in the Greek construction market) by Intrakat indicates there is value for construction businesses in Greece. The €214m deal (€100m upfront + €114m to be gradually paid within 19 months, regarding Aktor’s debt obligations) represented an EV/sales multiple of 0.4x for a business that traded just below break even at the EBITDA level in 2022. With the AVAX construction arm consistently generating a positive EBITDA, we would expect the business to attract at least that transaction multiple on a debt-free basis. Adding the independent concessions valuation and subtracting net debt would suggest a significant equity potential, which may become more achievable if the Greek economics picture continues to improve.

Exhibit 17 shows a selected list of AVAX’s peers, with the other three in bold being its largest Greek competitors. AVAX currently trades at a price/book ratio of 0.87x and EV/sales of 1.08x, both of which represent significant discounts to the average of the domestic peers. We have also included some larger European peers for comparison.

AVAX’s revenue from construction contracts are recognised in accordance with IFRS 15 using the input method, meaning it is driven by the percentage of completion based on the budgeted expenses and any revisions in projections are booked in the current reporting period. It is calculated on the basis of the ratio of the realised costs incurred to management’s total estimated costs until the project is complete. This is consistent with the revenue recognition methodology used by its peers. This standard establishes a five-step model for determining revenue from customer contracts:

IFRS 15 stipulates that any variable consideration such as claims for delay/acceleration costs, reward bonuses or additional work should only be recognised as revenue if it is highly probable that there will not be a significant reversal in the amount of the cumulative revenue recognised in the future. Management must assess this likelihood by considering experiences adjusted for the circumstances of the existing contracts. Furthermore, additional claims and variation orders should be included in contract revenue only when it is probable that they will be approved by the customer and the amount of revenue can be reliably measured.