Investment ideas – CEE blue chips


The decline of stock indices has created many opportunities, especially in Emerging Europe, where the performance of stock markets significantly lagged the one in EU and USA in 2009-2019. Below we present some CEE-based blue chips, which could thrive in a post-coronavirus environment.

PZU S.A. (PZU PW, Market cap PLN 26.6bn):  PZU, whose ROE in 2019 of 21.2% was the highest among all European peers, is the largest insurer in CEE with operations in Poland, the Baltic states and the Ukraine. The company is also one of the largest providers of private health services in Poland, with 175 own medical and diagnostic centers, 49 hospitals and 8,000 pharmacies. In addition, it owns the 4th largest asset manager in Poland (PZU AM with AuM of PLN 12.4bn), the third-largest pension fund (PZU OFE with AuM of PLN 18.6bn) and is the largest shareholder of the 2nd Polish bank Pekao and 5th largest bank Alior Bank. However, negative is the fact that PZU is controlled by the Polish state.

Although following a recommendation for financial institutions by Polish Financial Supervisory there will likely be no dividend for 2019 due to the coronavirus pandemia, in the past PZU has paid dividends on a regular basis and we expect this to continue from 2021E. Currently, the stock is trading at a cons. P/E 2020E (8.1x), which is 30.2% below its 3-year average (11.6x).

PKO S.A. (PKO PW; Market cap PLN 27.4bn): PKO is the largest Polish bank with assets of c. PLN 348bn, 1,121 branches and 23,800 employees. In 2019, it generated a ROE of 10% and had a cost/income ratio of 41.9%. Its asset manager PKO TFI is the largest in Poland with AuM of PLN 28.1bn, while its pension fund PKO OFE currently manages PLN 6.1bn.

PKO has paid a very generous dividend in the past, but due to the economic consequences of the coronavirus pandemia it will not pay one for 2019. Given a decision of the European Court of Justice in 2019 favoring CHF debtors, a risk factor is also PKO’s portfolio of CHF mortgages, which equals 11.2% of all granted loans.

Currently, PKO’s shares are trading at a cons. P/E 2020E of 7.2x, which is 48.2% below its 3-year historical average of 13.9x. Its P/BVPS is 0.6x.

Gedeon Richter Nyrt. (RICHTER HB; Market cap HUF 1.2tr):  Gedeon Richter is a Hungarian Specialty Pharma and Biotech company, which puts a particular focus on Women’s Health, Biosimilars (especially in the area of osteoporosis and rheumatology treatments) and Generic Drugs. While in 2019 it generated 30% of its yearly sales in the CIS region, 31% in EU and 17% in the US, in the future an increasing share of revenues is supposed to stem from Latin America and China.

Currently, Gedeon Richter, which as of 31/12/2019 had net cash of HUF 130.5bn, is trading at a cons. P/E 2020E of 12.7x vs. an average 3-year historical P/E of 27.1x. The company has regularly paid out dividends in the past.

Cyfrowy Polsat S.A. (CPS PW; Market cap PLN 15.9bn: Cyfrowy Polsat is the leading Polish provider of fixed-line broadband and mobile telecommunication services and pay-TV. Its mobile operator Polkomtel is currently the 3rd largest and its pay-TV platform Cyfrowy Polsat the largest in Poland. Both businesses are complemented by the broadband/fiber network operator Netia, the VOD provider ipla and the TV broadcaster and producer Telewizja Polsat. Since December 2019, Cyfrowy Polsat has also owned a minority stake of 23% in the largest Polish IT company Asseco Poland, which is its main technological partner.

Cyfrowy Polsat, which pays out dividends on a regular basis, is currently trading at a cons. 2020E P/E of 11.8x compared to a 3-year average P/E of 16.8x. While free cash flow has always been PLN >1bn in the last five years, a negative is the relatively high net gearing of 88.4%.

The coronavirus pandemia – Which CEE-based companies might benefit in the long run?


The coronavirus pandemia has shaken the financial markets worldwide, with the S&P 500 and German DAX 30 falling by c. 20% since the end of February 2020. Given significantly lower liquidity, the decline in Emerging Europe has been even steeper: Currently, Polish WIG is c. 21% lower than at the end of February, Hungarian BUX 26% and Romanian BET 22%. The lockdowns due to the pandemia, which Poland introduced as the first EU country, are already having very serious consequences on economies and companies. According to McKinsey, the negative impact will be strongest on the Travel/Airlines/Hospitality sector as people, who have to stay/work at home due to the lockdowns, cannot travel or go to restaurants. On the other hand, we believe that companies (especially those with low or zero debt) from the Pharma, Telemedicine, Video Games and Software sectors should be the main beneficiaries of the current turmoil. The corona crisis has finally made people aware of the fact that they also can conduct certain exams or consult a doctor from their home. As telehealth allows to diagnose a larger number of people faster and cheaper, at the same time freeing hospital capacity for really sick patients, US Medicare has started reimbursing respective exams and health insurances in other countries are expected to follow suit soon. Moreover, as people cannot go out to cinemas, theatres or cafes home entertainment such as video games has become more popular. Finally, software development firms of all kinds should also benefit in the long run as the current crisis and the need to work from home have emphasized the need for effective software-based processes.

In our view, there are also companies in Emerging Europe, which should be able to benefit from the above-mentioned trends. Especially, on the Warsaw Stock Exchange there are several listed providers of Software, Telehealth Services and Video Games. Below we present some examples, which seem particularly attractively valued:

PGS Software S.A. (PSW PW, market cap PLN 237m):  The owner-managed company (Messrs Gurgul hold 63.8% of the shares), whose share price has increased by 137% over the last 5 years, offers on-demand software development for smaller clients, especially from the DACH region, UK and Scandinavia. The company, which since 2014 has increased its sales at a CAGR of >30% and generated EBIT margins of up to 28%, has been a regular dividend payer. Also, it plans to buy back up to 10% of its shares outstanding by year-end 2021.

According to German IT industry association Bitkom, the current coronavirus pandemia will lead to increased investments in digitalisation in the future.

11bit Studios S.A. (11B PW, market cap PLN 817m):  11bit Studios is a Polish video games developer, whose share price has increased by 408.8% in the last 5 years. The company develops own games for PCs, consoles and mobiles. Moreover, it publishes third-party games. Its main titles are “This War of Mine” (Average score: 78-90/100), “Frostpunk” (79-84/100),  “Moonlighter” (74-84/100) and “Children of Morta” (79-82/100), which all have above-average customer and player ratings. While 2019 sales reached PLN 71.7m (5y CAGR = 35.3%) and net income PLN 21.7m (5y CAGR = 18.8%), current consensus for 2021E, when the next bigger title “Project 8” is supposed to be released, equals PLN 178m for sales and PLN 89.3m for net income (implied P/E 2021E = 9.1x).  

According to Newzoo, the global video games market was worth USD 152.1bn in 2019 and is growing at a CAGR of c. 10%.

QuarticOn S.A. (QON PW, market cap PLN 17.4m):  QuarticOn provides cloud-based software, which allows online shops and VOD services to deliver customised product and content recommendations. A major shareholder is German ACATIS Investment with AuM of EUR 6bn. In 2019, QON’s sales reached PLN 4.3m (of which >30% were international ones), with SaaS sales on E-Commerce platforms e.g. Shoplo or Shoptet showing particularly strong growth. QON already was at break-even on EBITDA level in December 2019 and will likely also report a profit in 2020.

With Amazon planning to hire 100,000 additional staff in order to handle increasing order volumes, E-Commerce is regarded as one of the main beneficiaries of the current coronavirus crisis as customers are not allowed or are too scared to go out for shopping. With its software, which allows a more targeted customer approach, QON seems well positioned to benefit from this trend.    

Nestmedic S.A. (NST PW, market cap PLN 10.2m) & INFOscan S.A. (IST PW, market cap PLN 9m):  Nestmedic has developed a patented telehealth device for CTG exams of pregnant women. The device is already available in Poland, Finland, Bulgaria and Nigeria. In Q1/20, the company conducted 1,313 exams (+75% y-o-y). While NST’ monthly cash burn is PLN <300k, its financing is secured due to an investment agreement with German family office Deutsche Balaton. In 2019, NST’ sales reached PLN 428k, or +259.7% y-o-y.

INFOscan is another listed Polish telehealth company. It has developed a device for sleep apnea diagnostics, which is already available in Poland, French-speaking countries, Spain, Bulgaria, Iran and East Asia (incl. for example Philippines). While the company’s monthly cash burn is just c. PLN 130k, its sales went up from PLN 68k in 2018 to PLN 795k in 2019.

According to e.g. Marketwatch, the relevant market for NST and IST is set to grow at a CAGR of 18.2% to USD 103.9bn by 2024E.