Current trading

On January 3rd, XTPL announced its long-awaited first industrial implementation with a multi-billion USD partner from China. While the initial order for three printing heads is relatively small, the potential of the deal is significant (several dozen printing heads in 2025E alone, along with corresponding service revenues and substantial volumes of nanoink). More importantly, the first industrial implementation is likely to accelerate the three others that are very close to being signed. These include deals from the US and Taiwan, related to PCBs and semiconductors, which could generate higher revenues going forward than the Korean one, which is focused on the display industry.

In total, XTPL is in talks with 20 international partners regarding industrial implementation, with eight of these at an advanced stage of negotiations. Based on information from management, we estimate the total revenue potential of the 20 potential industrial projects at approximately PLN 890m per year, which is nearly three times XTPL’s current market capitalization. In terms of production capacity, XTPL plans to rely on third-party contract manufacturers.

In 9M/24, XTPL’s revenues (excluding grants) reached PLN 6.7m, which represents a 27.4% decline compared to last year. This decrease was mainly due to lower sales of Delta Printing Systems (-6.6% to PLN 5.7m). Additionally, in contrast to 9M/24 last year the company generated revenues from an R&D project with NASDAQ-listed Nano Dimension related to the development of a nanoink, which is why the segment “R&D services” only reported sales of PLN 421k (-84.4% y-o-y). The segment nanoinks increased its revenues by 40.4% y-o-y to PLN 584k.

As the number of staff almost doubled year-on-year to approximately 90 (including 2 highly qualified and experienced employees in the US and 1 in Asia), distribution, administration, and other expenses increased by 58.6% year-on-year to PLN 11.8m. Thus, these costs will likely significantly exceed our previous estimate of PLN 11.5m by the end of December 2024. Gross profit amounted to PLN -5.7m, compared to PLN 5m in 9M/23, primarily due to a 128.6% increase in R&D expenses year-on-year.

Nevertheless, we believe the heavy investments in staff, a sales and distribution center in Boston, and production capacity related to Delta Printing Systems (DPS)—which now allows XTPL to produce three times more DPS per year and deliver them in a few weeks instead of several months—should pay off in the long run. Furthermore, the company has developed an advanced version of the Delta Printing System, called DPS+, which enables more automated production of over 100,000 units per year with high flexibility and is supposed to be targeted at Tech corporations and producers of electronics.

In general, Delta Printing Systems are used by research and corporate clients for R&D on new application areas, which opens up more possibilities for XTPL regarding industrial implementations. By 2026E, management plans to open two more demonstration centers e.g. in South Korea and Taiwan.

At the beginning of December, XTPL completed an equity issue worth PLN 31m (300,000 shares at PLN 92 per share), which we believe was primarily subscribed by long-term institutional investors from Poland and Germany (as of 30/09/2024, cash reserves amounted to PLN 3.2m). With the first signed contract for industrial implementation, the company can now apply for debt financing from banks. Therefore, XTPL’s financing until cash break-even—expected in 2026E at the latest—is now secured.

Our revised forecasts

After 9M/24, we have lowered our assumption for the number of Delta Printing Systems in 2024 from 12 to 10. For 2025E, we are more conservative than management (20 devices sold vs. guidance of 30). In our new forecasts, we have also accounted for the new DPS+, of which XTPL should sell 2 devices in 2026E.

Although one industrial implementation will likely lead to orders of 10-several hundred printing heads, which cost EUR 75,000 each, and discussions with new potential partners are much faster than with previous ones, from today’s perspective we believe that XTPL will only reach the EBITDA break-even in 2026E. We now expect a negative gross margin of -15% in 2024E (previously: 56%) and higher operating expenses than before (PLN 19.2m/year compared to PLN 12m before).

Below are the updated estimates for 2024E-2026E. While XTPL’s stock remains highly promising in the long run, investors must be patient and prepared for significant volatility in the share price. In our view, the first industrial implementation has demonstrated that the global tech industry places a high value on XTPL’s technology and that the Polish company provides substantial added value to its commercial clients. As more industrial implementations are expected to be signed in 2025-26E – with management anticipating at least one additional implementation this year – we believe XTPL will ultimately be acquired by a major global player in the tech, display, or semiconductor sectors. It is also worth emphasizing that the company holds 40 granted international patents, with at least another 40 pending.

On November 5, the scenario many Western European politicians had feared became a reality: Donald Trump won the U.S. presidential election by a significant margin, securing 312 electoral votes to Kamala Harris’s 226.

If Trump follows through on the promises he made during his campaign — and based on his actions during his first four years in office, we believe he will — times could become difficult for Europe. Two of his main objectives are the widespread use of tariffs on both Chinese and European goods to support American industry, and the immediate end of the Russia-Ukraine war, where the U.S. has so far been Ukraine’s largest supporter.

Trump’s economic policy — e.g. there are discussions about a min. 10% tariff on European and a 60% tariff on Chinese products https://www.reuters.com/world/europe-will-pay-big-price-trump-warns-tariffs-2024-10-30/ — would make European goods significantly more expensive for US consumers and thus reduce Europe’s competitiveness. It’s worth noting that the U.S. is currently among the top three trading partners for many EU member states, including Germany and France (Source: destatis, World Bank, Google search) and the largest partner for the whole EU https://ec.europa.eu/eurostat/statistics-explained/index.php?title=File:Principal_partners_for_EU_exports_of_goods,_2023.png  Furthermore, Trump could pressure the EU to choose between aligning with the US in its policy against China or maintaining its current business relationship with the Asian country, which is the bloc’s 3^rd largest trading partner. This would be a particularly bad scenario for German car manufacturers, which generate between 16.1% (BMW) and 23.3% (Porsche) of their yearly revenues in China.

In terms of geopolitics, Trump aims to keep the U.S. out of foreign conflicts that cost American taxpayers billions. He also insists that all NATO countries spend at least 2% of their annual GDP on defence. During his first term as president, he even threatened that the US — by far the bloc’s largest financial contributor — could withdraw from NATO.

Trump’s plans could have severe economic and political consequences for the EU. His tariffs would likely hit Germany — the largest European economy and home to a car & machine building industry that support c. 800,000 and c. 955,000 jobs respectively — particularly hard. For most EU countries, including those in Central and Eastern Europe, Germany is by far the largest trading partner. For example, it currently accounts for approximately 27% of Poland’s exports, 33% of Czechia’s, 26% of Hungary’s, and 21% of Romania’s. Unless Europe quickly reduces its dependence on the US and China, the likely outcome could be a deep, Europe-wide recession, deindustrialization, and significant long-term destruction of wealth.

In terms of defense policy, a forced peace deal in Ukraine — under which Russia would likely retain the territories it has already seized, likely resulting in even more Ukrainian refugees in Western Europe — would have mixed implications. While Europe might participate in the rebuilding of Ukraine, the negatives would likely outweigh the positives. Reports suggest that members of Trump’s inner circle want Europe to bear the cost of securing a planned demilitarised zone between Ukraine and Russia’s occupied territories such as Donbas. Additionally, the EU would need to significantly increase its defense spending to deter further aggression from Russia.

In our view, sectors in Europe that could benefit from this new reality include defense, construction (particularly companies with prior experience in the CIS region), building materials, mining (e.g. producers of coke coal that is critical for steel production), and steel. Moreover, if a peace treaty is signed, the following Ukrainian companies — most of which are listed in Warsaw — could see significant recovery: Astarta, Ferrexpo, IMC, and Ovostar Union. However, we must emphasise that investing in Ukrainian equities carries significant risks, as these companies often lack adherence to Western corporate governance standards, and minority shareholder rights are frequently disregarded.

Investment case

Zabka Group was founded in 1998 and is the largest chain of convenience stores in CEE (small local stores, often 24/7, where you can buy food, newspapers, send a package or withdraw cash) with currently 10,880 stores in Poland and 26 in Romania. The store locations, which are often in apartment buildings, are being selected by Zabka with an AI-based tool, which analyses millions of addresses and takes into account hundreds of KPIs. 

The Zabka Group consists of two business units: Zabka Polska (focuses on operational and commercial aspects of the Group’s domestic business) and Zabka International (supervises the implementation of the foreign expansion strategy, especially in Romania, where Zabka cooperates with DRIM Daniel Distributie, one of the largest FMCG distributors there). The fully consolidated, 62%-owned subsidiary MasterlifeSolutions sp. z o.o. operates 1. Maczfit.pl – a diet catering that serves customers in Warsaw and almost 3,000 other locations in Poland with 418.8k monthly total visits according to Similarweb.com – and 2. Dietly.pl – a search and comparison engine for more than 300 diet catering and box diet companies in >1,000 Polish cities with 785.5k monthly total visits. The 100%-owned Lite ecommerce Sp. z.o.o is an Ecommerce startup that develops rapid grocery delivery services (Zabka Jush app, 100k-500k users according to sensortower.com) and e-commerce (delio app, 10k-50k users), including a dark stores network serving exclusively online orders.

Zabka, which currently has c. 2,000 employees & c. 9,000 franchisees, listed on the Warsaw Stock Exchange on October 17, 2024. During the IPO, which was valued at EUR 1.5bn/PLN 6.45bn and was the 4th largest in Polish history, the company’s owners, UK-based private equity fund CVC Capital Partners (76.89% stake before the IPO, now 40.82%), Australian Partners Group (18.02%, now 12.64%) and the European Bank for Reconstruction and Development, as well as members of the company’s board of directors sold in total 300m shares. 

Zabka’s guidance for 2023-28E looks as follows: 

1. 1,000+ new stores per year

2. c. 14,500 stores in Poland by 2028E

3. Mid-to-high single digit annualized LFL growth (7.5%-9% in 2024E)

4. 2x increase of the sales to end customers by 2028E vs. 2023

In terms of risks for Zabka’s business model, we believe that the main ones are 1. Changes in consumer trends 2. Increasing franchisee turnover (2023: 16%), and 3. Changes to the current Sunday trading bank law in Poland, which benefits Zabka.

Financial results

The available financial data for Zabka shows a significant double-digit growth on top-line and high profitability. In 2021-23, the company’s revenues grew at a CAGR of 25.9%, gross and EBIT margin reached 17.8-19% and 7-7.7% respectively and average ROCE equalled 12.4%. However, as the table below shows, this was weaker than the two largest players in the Polish food retail sector, Dino Polska S.A. and Portuguese Jeronimo Martins (Biedronka chain). 

For 9M/24, Zabka reported revenues of PLN 17.7bn (+20% y-o-y), a gross margin of 17.9% (9M/23: 16.9%), EBIT of PLN 1.2bn (+28.7%, 7% margin) and a net income of PLN 377m (+154.7%). In January-September 2024, the company reached a LFL sales growth of 8.6% (Q3/24: +6%) and opened 892 new shops (366). While small format stores and hypermarkets lost market share in Poland, Zabka’s went up by 1.2% to 18.6%.

In 9M/24, Zabka reported an operating cash flow of PLN 3.4bn (+71.9% y-o-y) and a Free Cash Flow of PLN 1.4bn (9M/23: PLN 823m). At the end of September 2024, its interest-bearing debt equalled PLN 10.1bn (incl. PLN 4.7bn of leasing liabilities), thereof 11.3% was short term. However, negative was the fact that Zabka’s goodwill (PLN 3.4bn) was higher than ist equity (PLN 1.1bn).

Summary & conclusion

Although Zabka is a solid company with a strong brand, we believe that its current valuation, implying a P/E ratio of 33x-22x for 2024-25E (compared to a P/E ratio of 19.4x-17.1x for Jeronimo Martins and 26.8x-20.8x for Dino Polska, both of which generate a higher ROCE), can only be justified by the growth potential in the Romanian market (19.1m people, GDP growth >3% per year, real wage growth of approximately 7% year-on-year). While Poland remains attractive due to significant single-digit real wage growth and improving consumer sentiment, the growth potential for Zabka in its domestic market appears to be largely exhausted, with Zabka stores now located on nearly every corner.

Given the above, we advise investors to remain on the sidelines at the current price level. Another risk to consider is the likely further share sales by CVC Capital Partners and Partners Group in the coming quarters, which, in our view, will weigh on Zabka’s share price.

In our opinion, Zabka would be a BUY at a share price below PLN 16 (current price: PLN 20.91 per share).