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Citi Finds Greek Constructors Attractive

"We believe the shares of the Greek construction majors are attractively valued. They have not escaped the 2008 market sell-off, with the majors down 25% on average y-t-d vs. the Athens index now down c24%," says Citi in a report on Greek construction firms dated April 16.

Citi initiates coverage of Terna Energy (TENERG), chooses Hellenic Technodomiki (ELTEX) and J&P Avax (AVAX) as its top picks and ups GEK (GEK) and Terna (TERNA) to “Buy”.

In 2007, the Greek construction sector saw sales growth of 49% but EBIT growth of only 17% (EBIT margin 4.2%). The disconnect was due to increased bidding costs and delays in the execution of concession projects.

Record high order books and construction work on four toll-roads slated to start in 2Q-3Q08 should support sector EBIT growth of c45% in 2008E, says Citi and expect margins to be flat or slightly up this year and to recover in 2009 on greater execution of concession works.

Construction companies have seen their shares fall by an average of 23% y-t-d (-43% from mid-2007 highs) on general market weakness and construction-related concerns. Citi sees plenty of potential catalysts for 2008: improved earnings momentum, balance sheet

restructuring, buy-backs, and consolidation / simplification of holding structures.

Hellenic Technodomiki and J&P Avax are Citis top picks, both of them “Buy” rated. “For the complex HT, the construction business trades at a negative NPV; for the simpler J-P Avax, it comes almost free,” sayt Citi. Hellenic Technodomikis price target is upped to 12.3 euro from 11.5, while J&P Avax retains its 8.30 price target.

GEK and its subsidiary Terna are upgraded to Buy on valuation grounds and the IPO of Terna Energy. They retain their price targets of 11.5 euro for GEK and 12.5 euro for Terna.

Citi initiates coverage of Terna Energy, “one of Greeces leading wind-energy producers”, with a Hold/High Risk rating.New Coverage: Terna Energy – 2H (Hold/High Risk). Citis capacity forecasts are 40% below management guidance due to bureaucratic obstacles and a slow licensing process. The broker gives Terna Energy a target price of €7.1 is 35%.

Citi cuts Michanikis (MHXAK) price target to 5.8 euro (from 8.3 euro) and downgrades its rating to “Hold” based on a lower EPS forecast.

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