Company description

XTPL, whose founder and CEO Dr. Filip Granek made his PhD in the German city of Freiburg and previously worked for Fraunhofer Institute, has developed an additive printing technology, which allows to print ultra-fine (up to 1 micrometer thin) transparent conductive and non-conductive lines. This technology has the potential to revolutionize various multi-billion USD industries e.g. Printed Electronics, Smart Glass, Displays, Semiconductors, Photovoltaics, Biosensors in terms of cost and resource efficiency, miniaturization and flexibility, among others. So far, XTPL has filed 24 international patent applications, which cover e.g. the formulations of its nanoinks, its printing heads and a method of printing conductive structures for the Electronics sector. Since its IPO in 2017, the company has been supported by German ACATIS Investment and Deutsche Balaton, which hold 9.6% and 11.8% respectively of its shares. However, its largest shareholder is CEO Granek with a stake of 15.6%.

While in the first two years after IPO it did not meet investors’ expectations, in 2020 XTPL changed its commercialization strategy and started to search for international distribution partners. Since then, it has signed contracts with Bandi Consortia in South Korea, Yi Xin Technology in China, Semitronics Sales in UK & Ireland and most recently with merconics in the DACH region & France. Moreover, the company has initiated sales of proprietary nanoinks (e.g. based on silver) and own Delta Printing Systems (highly precise system for printing microelectronic systems), which have so far been sold to research facilities in Stuttgart, Karlsruhe, Glasgow, Wroclaw and Brescia. XTPL’s strategy foresees the implementation of its technology into industrial scale applications and serial production in a licensing or strategic partnership model.

Financials

In 9M/21, XTPL had revenues from sales of products of PLN 213k (9M/20: PLN 44k), thereof PLN 45k from nanoinks and PLN 161k from Delta Printing Systems (require nanoinks). Operating and net loss remained at a similar level y-o-y of PLN 6.4m each (PLN 2.1m/c. EUR 470k per quarter on average). At the end of September 2021, XTPL had cash of PLN 4.8m and (long-term) interest-bearing debt of PLN 3.3m.

New contract with Nano Dimension & Valuation

On January 10, 2022, XTPL announced the signing of a contract with the Israeli provider of additive electronics Nano Dimension Ltd. Both parties agreed that XTPL would develop a conductive nanoink based on metallic nanoparticles for use in the devices of Nano Dimension that target the PCB segment. While details of the contract have not been revealed, we believe that the yearly revenues from this contract will cover XTPL’s current operating expenses and thus allow the company to reach the break-even already in 2022E.

A comparison with Nano Dimension, which currently has a market capitalization of USD 977m, indicates a significant undervaluation of XTPL, despite the recent share price rally. Based on marketscreener.com data, Nano Dimension is expected to generated revenues of USD 30m in 2022E, which implies a P/Sales 2022E of 32.6x. If we multiply this P/Sales multiple with a conservative revenue estimate for 2022E of USD 2.5m/PLN 10m, we arrive at a fair equity value of XTPL of PLN 326.5m or PLN 160.90 per share. Thus, our calculation derives an upside for XTPL’s shares of 140.2% at current level.

Apart from the Main Market of the Warsaw Stock Exchange, interested investors can buy XTPL’s shares on the stock exchanges in Frankfurt, München and Stuttgart.

* The author of this blog post owns shares of XTPL S.A.

Since roughly two years, we have seen significant growth of interest among Western investors for Eastern European equity markets and for the Polish one in particular. The reasons have been significant lower valuations than on Western stock exchanges, especially NASDAQ, where stock prices have been fuelled by the expansive monetary policy of central banks, and much better possibilities for retail investors to trade equities e.g. on the Warsaw Stock Exchange than only five years ago.

Due to a lack of alternatives and trust in government pension schemes an increasing number of retail investors from Western countries nowadays invests on the stock market on own account and many focus on dividend stocks. However, not many are aware, which great opportunities Eastern European equity markets offer in this regard. In Poland, Czechia, Russia or Romania, listed companies often offer yearly dividend yields close to 10%, which is particularly attractive given current inflation rates in major Western economies. There are various reasons for such high dividends e.g. (1) in many companies, the state is a controlling shareholder and needs the cash to be able to finance investments or social programs (2) pension funds are dependent on regular cash inflow to be able to fulfill their obligations towards retirees, and (3) investment funds often prefer to receive high dividend payouts as they guarantee that cash surpluses of companies are used in the interest of minority shareholders.

For dividend investing in Eastern Europe, we prefer stocks of larger companies with leading market positions, strong track record and sustainable business models. The following table provides an overview of our top picks: 

* members of East Value Research’ team my hold some of the above mentioned shares

Business description

Pepco is a multi-national retail chain, which is indirectly owned by the South African company Steinhoff and which is currently in the process of conducting an IPO on the Warsaw Stock Exchange. The original offering comprised 102.7m shares (17.9% of the total) of Pepco’s management (1.2% of the offering) and Pepco Holdco (98.8%), which is controlled by Steinhoff that needs cash in order to repay debt. Pepco, whose first day of trading on the Warsaw Stock Exchange is scheduled for May 26, was valued during the bookbuilding at PLN 40 per share (initial IPO price range was PLN 38-PLN 46) or PLN 23bn/EUR 5.08bn. The final number of sold shares equals 80.4m and is worth PLN 3.2bn. Given its market capitalization, Pepco will likely become member of the Polish WIG20 bluechip index soon.

Pepco was founded in 2014 as a subsidiary of the South African company Pepkor SA and is currently 98.8%-owned by Pepco Holdco, which is controlled by one of the largest furniture companies worldwide, Steinhoff. The company is a discount variety retailer and its target group are families, who care about their wallets, meaning those with below-to-average incomes.

The company’s operations can be divided in four segments:

(1) PEPCO

PEPCO was established in Poland in 2009 and offers various products in the “all for one dollar” format e.g. clothing, pet food, toys and household goods. Apart from Poland, it also operates in 12 other countries including Romania, Hungary, Czechia, Slovakia, Croatia, Lithuania, Slovenia, Latvia, Estonia, Bulgaria, Italy and Serbia. PEPCO’s >2,100 stores are located in small and medium-sized cities and have 350-550 sqm. In 2021 and the coming years, it plans to open new stores and enter new markets e.g. Spain.

(2) Poundland

Poundland opened its first store in 1990 and has since then expanded its network to c. 920 shops in the UK and Ireland. Its offering comprises everything from food, health & beauty, cleaning & pet products and clothing. The retail chain’s pricing ranges above and below one pound.  

(3) Dealz

Dealz is a brand of Poundland and through currently 150 stores is present in Ireland, Spain and Poland. The chain mainly offers basic necessities such as food, drugstore products and clothing.

(4) PGS

PGS provides sourcing, product development and technical services for Pepco’s brands. It is present in mainland China, Hong Kong, Bangladesh, Pakistan and India, from where it supports PEPCO, Poundland and Dealz stores with USD 1bn worth of goods every year. It also has contracts with external retailers from around the world.

Financials

With total sales split almost evenly between PEPCO and Poundland, in fiscal-year 2019/20 Pepco generated EUR 3.5bn of revenues, which corresponds to a y-o-y growth of 3% and LFL (same store) decline of 5.2%. While UK accounted for 42.7% of total sales, Poland and Rest of Europe contributed 25% and 32.3% respectively in 2019/20.

In 2018-2020, Pepco’s top-line grew at a CAGR of 7.6%. Last year, gross margin declined from 42.3% in 2018/19 to 40.7% and EBITDA (pre-IFRS 16) reached EUR 228.9m (-31.2% y-o-y; 2y CAGR = -9.1%). The EBITDA margin equalled 6.5% compared to 9.7% in 2018/19. Due to lower EBITDA and higher net financial costs net income was negative (EUR -0.5m vs. EUR 210.4m in 2018/19). However, positive was the strong increase of the operating (EUR 579.6m vs. EUR 182.1m in 2019) and free cash flow (EUR 414.2m vs. EUR 51.3m). At the end of September 2020 (end of fiscal-year 2019/20), net debt amounted to EUR 328.3m (2019: EUR 460.6m) or 1.4x of EBITDA (pre-IFRS 16).

Summary & Conclusion

We believe that at PLN 40 per share Pepco is an attractive investment in the long run. Based on information in the IPO prospectus, we expect that in 2020/21 total sales will increase by 7% y-o-y to EUR 3.8bn, but at a higher gross and EBITDA margin y-o-y. In 2020/21, Pepco plans to open 450 new stores, thereof 320-350 Pepco, 30 Poundland and 100 Dealz, with expected CAPEX of c. EUR 250m and EUR 200m per year in the medium term. Based on our estimate, the implied EV/Sales would be 1.4x compared to 2.2x for Dino Polska (fast-growing grocery chain in Poland), 1.5x for CCC (Polish shoe retailer) and 1.9x for LPP (Polish fashion retailer).

We are optimistic that Pepco will continue to develop well going forward. We like the focus on the “thifty” consumer with below-to-average incomes, who e.g. in Poland will have more spending power from 2022 due to tax reductions and subsidies for families that are foreseen in the recently published “New Order” government program. In our view, the planned opening of new stores in mainly CEE/SEE is positive as consumption in these countries will likely continue to increase at higher levels than in Western Europe due to rapidly growing GDP and incomes.