On October 15, 2023, the parliamentary election were held in Poland. The incumbent socially conservative political party, Law and Justice (PiS) faced strong opposition primarily from the Civic Coalition (KO), representing the centre to centre-left. The voter turnout reached 74.4%, marking the highest in the history of Third Polish Republic since 1989. Although PiS had governed independently since 2015, the election results indicated that to continue, they would need to form a coalition with another political alliance. 

Other parties that surpassed the 5% threshold in the elections included the Third Way (centre to centre-right), New Left (left), and Confederation (right to far-right).

Eight years of PiS rule can be summarized as a period of strengthening and favouring state-owned companies, significantly impacting the banking and energy sectors. The ruling party justified these initiatives as necessary measures to exert control over strategically important sectors of the Polish economy. For example, the Polish government acquired – indirectly through the largest Eastern European insurance group PZU – a controlling stake in the second largest Polish bank Pekao S.A. (PEO) from Italian Unicredit and merged its oil company Orlen (PKN) with another oil refiner & producer Lotos, the gas explorer & producer PGNiG and the utility Energa. 

The introduction of the bank asset tax in 2016, excluding government bonds, resulted in an increased reliance on banks for financing public debt and negatively affected the profitability of the banking sector. As of the end of March 2023, government and guaranteed bonds in the banks’ portfolios amounted to approximately PLN 450bn, constituting about 20% of the banking sector’s assets.  

As a result of the election, the five aforementioned political alliances secured seats in the Sejm. PiS obtained 194 seats, KO – 157, the Third Way – 65, the New Left – 26, and the Confederation – 18. To achieve a majority, 231 seats are needed. President Andrzej Duda (PiS) entrusted the winning party PiS with the formation of the government, but the opposition that has been formed after the election (KO, New Left, Third Way) has already reached an agreement to create a coalition. If successful, this coalition, led by Donald Tusk, the former President of the European Council, would have the majority in both the Senate and the Sejm. This newly formed coalition would also enable the rebuilding of relations with European Union (EU) and access to frozen funds from the national recovery and resilience plan (RRP) for Poland.

National Recovery Plan 

Poland was initially expected to receive the first tranche of funds in June 2022, but this did not happen. A crucial factor in accessing funds from the RRP is meeting the requirements of the so-called “milestone” conditions. The primary cause of the delay in disbursement of funds by the EU was a dispute with the Polish government over the independence of the judiciary. On November 21, 2023, the recently revised plan, with a base budget amounting to EUR 59.8bn (PLN 270bn) was accepted by the European Commission. Out of this substantial sum, EUR 25.3bn will be provided in the form of grants and EUR 34.5bn as loans.

We anticipate that, following the establishment of the government of Donald Tusk, Poland will promptly fulfil milestone conditions and receive funds according to the new schedule. The plan consists of 7 key components, and we find two components of this plan noteworthy for their potential impact on companies listed on the Warsaw Stock Exchange and the overall economy.

Component G: According to the plan for the allocation of funds, over EUR 25bn is earmarked for the REPowerEU program, aiming to reduce reliance on fossil fuels before 2030 and transition into renewable energy sources. Poland will soon receive a pre-financing instalment of EUR 5bn for the implementation of the REPowerEU changes. According to the European Commission, EUR 21bn in costs related to REPowerEU will require multinational cooperation. Worth noting is the allocation of EUR 17bn to the Energy Support Fund, which will finance investments related to the energy transition, and the allocation of EUR 4.8bn to the construction of offshore wind farms.

Consequently, this opens up significant development possibilities for companies in the energy sector such as PGE, Tauron Polska Energia (TPE), and especially those involved in the renewable energy market, for example, Columbus Energy (CLC), ELQ, Raen Energy or Novavis Group

Component B: Over PLN 20bn is allocated to green energy and reduction of energy-intensity, supporting the increase in the use of alternative energy sources and improving the energy efficiency of the Polish economy. This component is related to REPowerEU as it addresses decarbonisation and air pollution in Poland. Similarly, it presents an opportunity for renewable energy companies as well as for firms cooperating with them. Additionally, there is a target reduction of energy consumption by renovating buildings, providing an investment opportunity for construction companies, for example Izolacja Jarocin (IZO), Selena FM and Ferro.

In summary, the RRP funding should help the EU to achieve its ambitious goal of becoming climate-neutral by 2050, with 46.6% (EUR 27.8bn of 59.8bn) allocated to climate contributions. The remaining components of the plan include: resilience and competitiveness of the economy, digital transformation, effectiveness | availability and quality of the health care system, green and smart mobility, Improving the quality of institutions and the conditions for the implementation of the RRP. link to the European Commission’s publication on the proposal

What is next after elections?

Currently, PiS is attempting to secure the required majority of 231 mandates. Specifically, PiS is trying to persuade the Third Way to join them in a coalition, which seems unlikely to happen as the Third Way, in its electoral plan, includes postulates directly targeting PiS. Although over a month has passed since the election, and the most likely scenario is that the opposition coalition (KO, New Left, Third Way) will form the government, there is still a lot of uncertainty. 

In the electoral plans of the parties, forming the opposition coalition, there is a lack of specific demands regarding the stock exchange, and economic issues are somewhat overshadowed by primarily social matters. The main topics related to publicly traded companies include the depoliticization of state-owned companies, obtaining funds from the aforementioned recovery and resilience plan, investing in renewable energy sources, and the abolishment of the capital gains tax for savings and investments.

We believe that the abolition of this tax could lead to an increase in the share of individual investors, consequently boosting liquidity on the polish stock exchange, which is far lower than in western markets. Nevertheless, there is a relatively high chance that this tax abolition will be just an unfulfilled election promise, as within the coalition there is a leftist party that will likely oppose it and such a tax is common in other European countries.

In our view, there is a chance that state-owned companies, many of which are trading far below their book values and at low single-digit P/Es, will perform well over the next months as investors hope that the new KO-led government will improve corporate governance, rights of minority shareholders and dividend payouts. The last few weeks have shown that international investors have already become more active especially in the bluechip WIG20 index (it has increased by c. 28% over the last 3 months). We believe that if the new government really was to fulfil its promises, the whole Polish capital market would significantly benefit.

Author: Mateusz Pudlo

This blog post marks the beginning of a series of analyses focused on Polish companies and their listed direct German counterparts.

In this installment, we will delve into the examination of Oponeo.pl S.A., a company listed on the main market of the Warsaw Stock Exchange since 2007, and Delticom AG, headquartered in Hannover. Delticom AG holds the position of a European leader and has been listed on the Frankfurt Stock Exchange since 2006.

History & current business 

Oponeo.pl was founded in 1999 by university friends Dariusz Topolewski and Ryszard Zawieruszynski, who continue to own and manage the company today. It is headquartered in Bydgoszcz, Poland. Over the years, the company has grown to become the largest online retailer of tires and rims in Poland, holding a market share of over 75%. In recent years, Oponeo has expanded its operations to 12 foreign markets, primarily in EU countries but also in Turkey. The company has successfully established or acquired other e-commerce businesses, including Dadelo, an online shop for bikes and sports accessories that is also listed on the Warsaw Stock Exchange, and Rotopino.pl, an online retailer of tools. Oponeo Group currently operates 25 online shops, employs 348 individuals, and owns a modern, automated warehouse in Poland spanning 72,000 square meters. Additionally, Oponeo has formed partnerships with over 1,000 fitting service providers in Poland and more than 3,000 in its other markets. The company relies on wholesalers and producers for distribution to foreign clients.

Delticom, also founded in 1999, has become the largest online retailer of tires and rims not only in Germany but also across Europe. While Delticom faces strong competition from Oponeo in countries like the Netherlands and Belgium, it held a presence in the United States until 2022, when Delticom North America was sold (the transaction generated a one-off gain of EUR 3.8m). In 2016, Delticom’s founders, Andreas Prüfer, Rainer Binder, Philip von Grolman, and Timon Samusch, attempted to diversify their business by acquiring an online distributor of used cars in France and online shops for gourmet and regular food in Germany. However, due to liquidity issues, these diversification efforts were ultimately discontinued in 2019-2020. Presently, Delticom has refocused its efforts on its core activity of selling tires and rims. The company operates approximately 300 online shops in nearly 50 countries, employing 168 individuals. Delticom runs warehouses in Sehnde, Germany (over 60,000 square meters), and Ensisheim, France (around 50,000 square meters).

Historical & current financials

Oponeo boasts an impressive track record when it comes to its financial performance. Between 2012 and 2022, the company managed to increase its revenues from PLN 207.1m to PLN 1.7bn, achieving a CAGR of 23.4%. Concurrently, its EBITDA also saw a substantial rise, climbing from PLN 6.7m to PLN 82.5m (CAGR of 28.5%). Over the past five years, Oponeo has maintained EBITDA and ROCE figures within the range of 3.5% to 6.2% and 9.8% to 16.5%, respectively.

Since 2008, Oponeo has consistently been distributing dividends to its shareholders and has also regularly engaged in stock buyback initiatives. Despite the challenging situation prevailing in the retail sector at present, the company displayed notable resilience. In the first half of 2023 (H1/23), Oponeo achieved a year-on-year revenue growth of 14.1%, amounting to PLN 789.4m. However, there was a decline of 9.6% in EBITDA, reaching PLN 18.9m during the same period. The company has managed to maintain a reasonably low net gearing level of 11.3%.

Oponeo.pl S.A.:  Gross & EBITDA margins and ROCE in 2018-2022

Oponeo.pl S.A.: Cash Conversion Cycle, Operating and Free Cash Flow in 2018-2022

Source: Company information, East Value Research GmbH

An examination of Delticom’s historical performance presents a mixed overview. Between 2012 and 2018, the company experienced a consistent growth in sales, averaging a 6.5% increase annually, accompanied by a clearly positive EBITDA margin. However, due to an unsuccessful expansion into the online food business, the company’s profitability suffered a steep decline in 2019. During that year, Delticom reported an EBITDA of EUR -6.6m and an EBIT of EUR -42.1m. Consequently, the company’s net debt escalated to EUR 87.8m, causing a substantial drop in Delticom’s share price from its peak of around EUR 80 in 2011 to below EUR 3.

Nonetheless, following a restructuring effort, the company managed to restore a positive operating profit trajectory. Presently, Delticom is poised to achieve an estimated EBITDA of approximately EUR 14m this year. In the first half of 2023, the company’s revenues experienced a year-on-year decline of 10%, amounting to EUR 197.7m. This contraction was primarily attributed to a redirection of revenues towards Delticom’s newly established marketplace, Reifen.com. Within this platform, the company sells car accessories from third-party retailers, earning commissions.

The net gearing ratio stood at 200.5%, but this included an estimated EUR 50m of IFRS 16 related leasing debt, thus the actual net debt figure was not EUR 82.8m but EUR 32.8m (equity equalled EUR 41.3m). At the end of 2021 and 2022, the respective net gearing amounted to 138.5% and 178% respectively. In H1/23, the increase was driven by the accumulation of inventories in preparation for the crucial winter season, a common practice in Delticom’s sector. However, it is anticipated that by the end of 2023, the net gearing ratio will once again substantially decrease compared to the value recorded as of June 30, 2023.

Delticom AG:  Gross & EBITDA margins and ROCE in 2018-2022

Source: Company information, East Value Research GmbH

Delticom AG:  Cash Conversion Cycle, Operating and Free Cash Flow in 2018-2022

Source: Company information, East Value Research GmbH

Current valuation & conclusion

Compared to Delticom, Oponeo has a more favorable track record, and we possess greater confidence in its management. Nevertheless, we believe that much of this positivity is already factored into the company’s current valuation metrics. For instance, Oponeo’s estimated enterprise value to sales ratio (EV/Sales) for 2023E is 0.3x, which is in line with the 5-year average of 0.4x. Similarly, its EV/EBITDA ratio for 2023E is 7.7x compared to the 5-year average of 6.7x.

On the other hand, Delticom presents an intriguing restructuring narrative, particularly due to its current historically low valuation. The projected EV/Sales ratio for 2023E is 0.2x, consistent with the 5-year average. Likewise, the projected EV/EBITDA ratio for 2023E is 6.9x as opposed to the 5-year average of 9.9x. Notably, Delticom exhibits a notably higher revenue per employee compared to Oponeo, amounting to EUR 1.18m versus EUR 507.5k.

Assuming that inflationary pressures ease, which we anticipate occurring in Q4/23E, and if online sales rebound, Delticom’s financial performance and market valuation are likely to follow suit. A scenario reminiscent of 2020-21 could emerge, wherein Delticom experienced a significant improvement in EBITDA compared to 2019, leading to a substantial increase in its stock price. During the period between mid-2020 and mid-2021, the stock price surged from a low of approximately EUR 2.50 to EUR 9.70. Although we believe the potential return currently exceeds 100%, it’s important to acknowledge key risks such as elevated net gearing and concerns surrounding Delticom’s founder and CEO, a figure who generates controversy among institutional investors. Nevertheless, we hold the view that the company’s prevailing trading multiples already adequately account for these factors.

New orders & financials so far in 2023

In Q1/23, XTPL generated revenues of PLN 3 million from sales of products and services, representing a significant year-on-year growth of 219.9%. Revenues from grants amounted to PLN 605k (compared to PLN 689k in Q1/22). The gross margin stood at 60.4% (compared to -29.4% in Q1/22). After accounting for operating expenses of PLN 2.2 million, XTPL achieved an EBITDA of PLN 78k (compared to a loss of PLN -2.4 million). Net income improved from a loss of PLN -2.7 million in Q1/22 to a loss of PLN -301k.

During this year, XTPL announced five contracts for the sale of Delta Printing Systems, all of which were sold to Chinese clients. Additionally, two contracts were signed for printing modules, with buyers including HB Technologies, a supplier of machines for testing and repair of displays for companies like Samsung Display and Beijing BOE Display. Furthermore, a large US-based NASDAQ-listed producer of machines for the semiconductor industry (likely Lam Research Corp., with a market cap of USD 82.3bn and yearly sales exceeding USD 17bn) also purchased printing modules. According to sources such as Pocket-lint and 4kfilme, Samsung Display delivers 80 million OLED displays solely for the iPhone 14 and produces over 100,000 Quantum Dot (QD)-OLED displays for TVs each month. In our view, considering that more than 10% of these displays typically have defects, this demonstrates the significant commercial potential for XTPL.

Issuance of new equity and debt for capacity expansion and building of local sales teams

XTPL announced its intention to issue up to 275,000 new shares on May 12th, which will finance approximately 50% of the planned investments amounting to PLN 60 million from 2023E-26E. The remaining funding will come from own funds, grants, and new debt. The equity issue, in which the CEO and founder also intends to participate, is expected to be completed this week. Our research indicates that debt financing has already been secured.

According to discussions with management, the PLN 60 million will be allocated towards several initiatives, including:

1. Expanding the production capacity of printing modules from the current level of less than 10 per year to 100 per annum (which would correspond to yearly sales of EUR 7.5 million/PLN 33.75 million).
2. Increasing the production capacity of prototyping machines, specifically the Delta Printing System, from currently more than 10 units to more than 20 units per year (e.g., 20 units would equal yearly sales of EUR 3.5 million/PLN 15.75 million).
3. Quadrupling the yearly production of nanoinks.
4. Establishing local sales offices with demonstration labs primarily in the US and Asia, a strategic move to accelerate the acquisition of new clients.
5. Hiring additional staff and continuing research and development activities.

Expected boost for XTPL’s business from Intel’s new factory near Wroclaw 

Moreover, XTPL is expected to benefit from Intel’s new factory near Wroclaw, announced on June 16th. The US semiconductor giant’s investment of USD 4.6 billion/PLN 18.4 billion in a new factory for semiconductor integration and repair in Miekina, approximately 30 km from Wroclaw, is the largest foreign investment in Poland to date. Given that semiconductor and display repairs align with XTPL’s technology applications, Intel could become a potential client for XTPL.

Our forecasts for 2023E-26E imply a revenue CAGR 2022-26E of 60.2% and a target EBITDA margin of c. 40%

We have constructed a financial model for XTPL that extends until 2026E and takes into account the latest information provided by the company’s management. Our projections are slightly more optimistic than the company’s own guidance, which anticipates sales of PLN 100 million in 2026E.

What sets XTPL’s business model apart is the increasing number of Delta Printing Systems and Printing Modules being sold, which will drive recurring revenues from consumables and inks. This will ultimately result in substantial double-digit EBITDA margins.

While we initially anticipated a net profit for the current fiscal year (2023E), we now believe that planned investments, such as the establishment of local sales teams in the US and Asia, will likely lead to a negative net income. However, we are highly optimistic that 2024E will mark XTPL’s first profitable year.

Conclusion

In conclusion, XTPL’s technology commercialization appears to be on track, as promised by CEO and founder Filip Granek. The demand for the company’s products is evident from major international research facilities and industry players. Furthermore, with a significant share of high-margin recurring revenues expected to exceed 48% by 2026E, XTPL’s commercialization model holds significant appeal.

We have confidence in our estimates, projecting a sales CAGR of 60.2% from 2022 to 2026E, along with target EBITDA margins of approximately 40%. For only one of their projects, industrial clients such as HB Technologies or Lam Research could potentially purchase up to 100 printing modules, which will need to be replaced after 5 years. As production volumes increase, these modules will generate a rapidly growing stream of recurring revenues from consumables and nanoinks, resulting in a significant operating cash flow for XTPL.