Business description

Mo-Bruk (Market cap PLN 1.36bn / EUR 302.2m) is the market leader of the Polish waste management sector, which is highly promising as Poland is still far behind other EU countries when it comes to waste processing (e.g. 42% of Polish waste is dumped on waste landfills vs. 1% in Germany) and has to comply with the EU “Green Deal”. In order to increase the share of processed & recycled waste, the government is increasing the Marshall Fee, which is the price per tonne of dumped waste (the higher it is, the more waste management companies can charge for their services). The Marshall Fee currently equals PLN 301.84/tonne and since 2018 has increased at a CAGR of 29.2%.

Compared to its listed peers Geotrans, Krynicki Recycling and Grupa RECYKL, Mo-Bruk is able to process c. 95% kinds of waste. Also, as the only listed company in Poland it provides waste incineration, solidification and stabilisation in own facilities and sells alternative fuels and construction material. Mo-Bruk, whose roots go back to 1985 and which is controlled by the Mokrzycki family, has grown its sales and net income at a CAGR of 35.2% and 164.8% respectively since 2016. After investments of c. PLN 200m in the last few years, it operates own facilities in 5 locations in Southern Poland, where most of Polish industry is based.

In 2019, Mo-Bruk’s segments had the following share in the company’s total sales:  (1) Solidification and stabilisation of inorganic waste (mainly from chemical and construction companies) – 45.4% (2) Production of alternative fuels (mainly from car manufacturers) – 22.2% (3) Incineration of toxic waste (mainly from hospitals, drug producers and refineries) – 32.3%. The end products of waste incineration/solidification/stabilisation – heat, alternative fuels and cement granules – are sold e.g. to cement producers, utilities, construction companies and mines. Thus, the company’s business model perfectly fits into the concept of the so-called “circular economy”, which is the main objective of the EU “Green Deal”.

Financials

In 2019, Mo-Bruk generated revenues of PLN 130.6m (+41% y-o-y), an EBITDA of PLN 58.7m (44.9% margin) and net income of PLN 40.1m (30.7% margin). 7.5% of sales stemmed from abroad compared to 6.3% in 2018. In 2019, the company employed 233 people on average.

Between January and September 2020, the company’s sales reached PLN 122.6m (+40.9%). EBITDA equalled PLN 69.8m (+102.2% y-o-y; 56.9% margin) and net income PLN 52.9m (+122.2%; 43.2% margin). Operating and free cash flow reached PLN 41.5m and PLN 47.7m respectively. As of 30/09/2020, Mo-Bruk had net cash of PLN 11.9m.

Summary & Conclusion

Mo-Bruk is a market leader in a sector, which requires high initial investments. Moreover, as the shadow economy still accounts for 30-40% of the waste management sector in Poland, companies, which want to provide respective services, need government permissions. In addition, public clients usually prefer to work together with companies, which have a good track record. Thus, we believe that in Poland Mo-Bruk will remain the undisputed market leader at least in the next 3 years.  

Another reasons, which make Mo-Bruk an attractive investment, are the low capacity utilisation of its facilities (c. 40% currently); the increasing Marshall Fee in Poland, which in our view will continue to increase by 5-10% over the next 2-3 years; and its prices, which are >2x below those in Western Europe. All of the above should allow Mo-Bruk to grow its revenues significantly in the near future and to maintain a very high profitability and cash generation. The volume of waste, which is produced in Poland every year, equals 114.1m tons and grows roughly in-line with GDP.

Our expectation for net profit in 2020 is PLN 79m (+197.1% y-o-y), which implies a P/E of 17.1x at present and PEG ratio of 0.09. While in our view the current broker estimates for 2021E (Revenues: PLN 240m; Net income: PLN 92.9m) are realistic, we believe that the market forecasts for 2022E (Revenues: PLN 273m, Net income: PLN 101m) are too conservative. We expect that Mo-Bruk will pay out a dividend both for 2020 (exp. DYield = 3.6%) and the following years. The company’s dividend policy foresees the pay out of 50-100% of its yearly net profit.

Disclaimer: The author of this analysis owns shares of Mo-Bruk himself

Private savings at record level after decline in Q1/20

According to most recent information on savings of Polish private households, the respective volume reached PLN 1.65tr at the end of June 2020, which is twice as much as 10 years ago. This corresponds to an increase of almost PLN 100bn compared to Q1/20, when they declined for the first time since 2014 mainly due to weak stock markets following the outbreak of the coronavirus.

Record low interest rate benefit Polish asset manager & activity on WSE

The savings of Polish households mostly consist of bank deposits & savings accounts, which accounted for PLN 969bn as of 30/06/2020. However, as the Polish central bank lowered the reference rate to a record-low of 0.1% in Q1/20, Poles started withdrawing money from savings accounts and invest it in mutual funds instead. The value of AuM of Polish mutual funds increased by PLN >40bn to PLN 279.7bn (thereof: PLN 31bn in equity & absolute return funds) between January and November 2020. In addition, while in the old pension funds OFE the value of AuM has grown by PLN 15.6bn to PLN 131.7bn since March mostly due to a strong performance of global capital markets, the AuM of the Employee Capital Plans (PPK), which were only created in 2019, already reached PLN 2bn. All together helped to increase the total trading volume on the Warsaw Stock Exchange in Jan-Nov 2020 by 12.1% y-o-y to PLN 5.6tr.

Outlook for the Warsaw Stock Exchange remains positive

Despite a relatively high inflation (October 2020: 3.1%), which is currently the highest in the EU), we believe that the Polish central bank NBP will not increase interest rates soon as it actively supports the government and Polish enterprises in their fight against the COVID-19 pandemic. According to ING, the fiscal program of the Polish government will mostly be financed indirectly through NBP’s QE program (includes purchases of bonds of the Polish government, government bank BGK and the Polish Development Fund on the secondary market), which is expected to reach a volume of 8.5%-10% of Polish GDP in 2020 (in 2019, the Polish GDP equaled USD 565.9bn). In our view, continuously low interest rates will accelerate the shift of savings towards riskier assets such as stocks and should support valuations on the Warsaw Stock Exchange in the coming months.

Biomed-Lublin S.A. (Market cap PLN 1.16bn/EUR 253.4m) is a company with traditions: Its origins date back to 1944. With two production facilities in the city of Lublin (eastern part of Poland), it mainly produces drugs and serums/vaccines e.g. 1. BCG 10 – a vaccine against tuberculosis 2. Onko BCG – a drug used in the treatment of urinary bladder cancer 3. Blood plasma-derived immunoglobulin Histaglobulin – used in chronic asthma illnesses 4. Blood plasma-derived immunoglobulin GAMMA anti-hbs – used in prophylaxis of liver inflammation Hepatitis B 5. Blood plasma-derived immunoglobulin Gamma anti D – used in prevention of hemolitic illness of the newborn, and 6. Distreptaza – drug used in treatment of hemorrhoids and adnexitis. Through partners, the company also distributes its products abroad, especially in CEE/SEE and countries of the former Soviet Union (exports account for c. 33% of yearly revenues). BML’s strategy foresees investments in production capacity and a R&D center for further development of BCG 10 and Onko BCG in the coming years. 

Biomed-Lublin has been listed on the Warsaw Stock Exchange since 2011 (first in the NewConnect segment and from 2015 in the Main Market). While BML traded in a range of PLN 0.58-PLN 7.90 between 2011 and March 2020, since April 2020 massive demand from Polish retail investors has led to a significant increase of its market capitalization, which was a consequence of rumors that the company could introduce a COVID-19 treatment based on blood plasma of people, who recovered from the coronavirus, and use its vaccine against tuberculosis in the fight against COVID-19.

Members of BML’s management and supervisory board used the strong share price performance and sold in total 5.36m shares (c. 8.6% of BML’s shares outstanding) at PLN 4-33 per share in April-August 2020. As a planned capital increase failed, the insiders partially returned the cash to the company in the form of credit lines worth in total PLN 20m (duration of one year; interest rate is similar to current market rates) that are supposed to be used for the construction of a new R&D center and extension of production capacity for the product Onko BCG (total value of the project is PLN >48m, of which PLN 29m are supposed to be financed by EU grants).

Recent results

The publicly available results for Biomed-Lublin date back to 2009. In 2009-2019, its revenues increased from PLN 32.3m to PLN 39.1m (CAGR of 1.3%). Net income grew at a CAGR of 4.6% to PLN 2.5m over the same period, however in 2015, 2016 and 2018 the company reported very high write-downs relating to a failed investment in a new production facility for fractioning of blood plasma in Mielec. In early 2016, BML had to file for insolvency protection as it was not able to fulfill its financial obligations relating to this project (according to the most recent agreement with creditors, it has to pay all obligations that are worth PLN >15m in total by the end of 2024 in monthly installments). 

In H1/20, Biomed-Lublin generated revenues of PLN 19.7m (+7.3% y-o-y), EBITDA of PLN 5.2m (+6.2% y-o-y) and net income of PLN 719k (H1/19: PLN 609k). As of 30/06/2020, the company’s cash position equaled PLN 1.2m and it had net debt of PLN 13.2m (net gearing of 39.2%).

Summary & Conclusion

Based on median EV/EBITDA 2019 multiples of 11 Western and CEE-based pharma companies, the fair value of Biomed-Lublin’s existing business is PLN 2.13 per share (88.3% below its current share price). Thus, its current valuation seems to be solely based on its COVID-19-related projects (especially the COVID-19 treatment based on blood plasma-derived immunoglobulin), whose effectiveness still has to be proven in clinical trials and which have to go through a formal registration process before market introduction.

Currently, there are many Pharma/Biotech companies worldwide, which work on COVID-19 treatments and have much stronger financing capabilities than Biomed-Lublin (e.g. German BioNTech, which has a strategic partnership with Big Pharma company Pfizer; US-based Johnson & Johnson; or CureVac, which conducted a very successful IPO on NASDAQ in August 2020).  But this is not the only reason, why we have serious doubts whether Biomed-Lublin will be successful with its immunoglobulin COVID-19 treatment:

1) While Chinese officials stated that treatment with blood plasma of recovered coronavirus patients had helped COVID-19 patients and NHS Blood & Transplant is optimistic that its current large-scale clinical study with plasma that has high levels of neutralizing antibodies will show positive results, a recent study that was published on 16 October 2020 in the British Medical Journal concluded that blood plasma of recovered coronavirus patients fails to reduce deaths and stop progression to severe COVID-19. The study was conducted in Apr-July 2020 in dozens of public and private hospitals in India on 464 adult patients with an average age of 52 (however, with blood plasma that had relatively few antibodies).

2) Biomed-Lublin wants to conduct clinical trials of its COVID-19 treatments only in Poland and not in Western Europe or US, which would in our view make a successful registration and market introduction there a lot more likely.

3) The large-volume sales of shares by BML’s key staff on the stock exchange since April 2020 make us skeptical whether management/supervisory board members, whose track record at the company does not convince us, really believe in the future prospects of their business.

Investors, who believe that BML’s share price performance in 2020 does not reflect the company’s fundamentals, have the possibility to use futures that the Warsaw Stock Exchange introduced on 24 September 2020. BML’s average 3-month daily turnover is PLN 71m/EUR 15.5m and 59.7% of its shares are in the free float. According to publicly available information, no institutional investor has a stake of >5% in the company.