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).

Business Description

Founded in 1990, Comp is currently the No. 1 provider of fiscal devices and IT security solutions in Poland. The company, which generates c. 7% of its total revenues abroad, operates two business units:

1. Retail Segment

-> Production and distribution of proprietary cash registers (including online and virtual versions), payment terminals, and add-on services such as M/Platform (an online big data platform for smaller shops for managing promotions, e-payments and e-invoices in cooperation with Eurocash, a leading wholesaler/retailer in Poland). Approximately 900,000 (thereof: c. 550k online ones that can be equipped with add-on services) of the total 1.8m (c. 1.1m) cash registers in Poland were produced by Comp.

-> Contributed 35% of total revenues in 2023

-> EBITDA margin of 12.9% in 2023

2. IT Segment

-> Provides IT security software and equipment for large enterprises and public administration. Comp holds all necessary certifications to conduct business with the Polish Ministry of Defence and the Armed Forces, which are difficult to obtain. Over the last 30 years, the company has built strong relationships with both public and private clients, as well as with international IT security solution providers such as Cisco Systems, Check Point Software, HP, IBM, Juniper, McAfee, and Symantec.

-> Contributed 65.1% of total revenues in 2023

-> EBITDA margin of 13.9% in 2023

Historically, Comp has been heavily dependent on third-party providers of IT security software and equipment, as well as on investment cycles related to cash registers and budgets for IT security projects. However, in our view the company now already generates over PLN 40m in monthly recurring revenues from proprietary add-on services for cash registers and from its own products (e.g. encryptors, identification tools). We believe that these high-margin categories are growing at >25% year-over-year and are expected to help Comp 1) reduce the seasonality of its business, which has historically been skewed towards H2, and 2) increase its EBITDA margin to 15-20% in the near future.

Comp’s shareholder structure is stable and long-term oriented. Polish pension funds own over 43% of the shares, the US-based fund Perea Capital Partners owns 6.7%, and CEO Robert Tomaszewski holds 6.3%. Since 2021, Comp has distributed PLN >70m to shareholders through dividends and share buybacks.

Latest Results

Over the past five years, Comp has increased its revenues and EBITDA at a CAGR of 8% and 9%, respectively. ROCE has historically ranged between 3% and 7%, but improved significantly to 9.9% in 2023, with further growth expected due to a focus on service revenues. For Q1/24, the company reported revenues of PLN 153.1 million (-28.8% y-o-y), including PLN 83.7m (-2.2%) from the Retail segment and PLN 69.6m (-46.4%) from the IT segment. In Q1/23, sales were positively impacted by several large but low-margin IT projects such as E-Health in the Pomorskie province and the Electronic Surveillance System. At the Group level, the EBITDA margin in Q1/24 increased to 18.4%, up from 11.6% in the previous year. In the Retail segment, the margin was 18.9% (Q1/23: 13.3%), and in IT, it equalled 24.9% (Q1/23: 14.3%). Between January and March 2024, Comp’s net income amounted to PLN 9.6m (+53.4%). The only negative was the decline in operating and free cash flow, which fell from PLN 38.2m in Q1/23 to PLN -86.1m, and from PLN 30.4m to PLN -94m, respectively. As of March 31, 2024, the company’s net debt stood at PLN 163m (net gearing of 36.6%), a reasonable level. 

Summary & Conclusion

We appreciate that Comp is the market leader in its segments in Poland and that it has successfully introduced proprietary products and services with recurring revenues in recent years, which should positively impact operating profitability, cash flow generation, and ROCE going forward. It is also a positive sign that the company’s management team, holding over 6% of its shares, has been stable over time. Given its track record, Comp is well-positioned to benefit from the upcoming replacement cycle of older fiscal registers, potential extensions of the fiscalisation in Poland, increasing investments in IT security by large private enterprises (funded, for example, by the EU Reconstruction and Resilience Funds, which foresees EUR 4.6bn for digital transformation & cybersecurity until 2026E), and defense and security investments (with Poland’s defence budget at >4% of GDP).

Current sell-side forecasts for Comp project EBITDA of PLN 135m (+22.2% y-o-y) in 2024E and PLN 148m (+9.6% y-o-y) in 2025E, translating to an attractive EV/EBITDA multiple of 4.8x and 4.4x, respectively. Additionally, Comp plans to continue its distribution policy, with expected dividends and share buybacks for both 2024E and 2025E valued at PLN 8/share (yield of 7.9%).