Are two of Polish COVID-19 winners, Mercator Medical and X-Trade Brokers, still attractive investments?

Published 07/10/2020

The worldwide active producer of one-time medical gloves and distributor of medical supplies Mercator Medical S.A. (Market cap PLN 5.5bn/EUR 1.2bn) and the broker X-Trade Brokers S.A. (Market cap PLN 1.9bn/EUR 424.8m) have been two of the best-performing stocks so far in 2020 in Poland, with a YTD performance of 5154.1% and 324% respectively. Mercator Medical, which apart from Poland has factories in Thailand, has massively benefitted from a strong increase of demand for hygienical products worldwide after the outbreak of the coronavirus pandemia, which given a relatively stiff supply resulted in much higher market prices. At the same time, XTB, which is one of the largest listed CFD & Forex brokers worldwide with operations in 13 countries and has the famous soccer coach Jose Mourinho as brand ambassador, has reported a very strong improvement of results so far in 2020 due to high volatility of global stock markets and strong growth of its client base (52,434 new clients in H1/20 vs. 16,089 in H1/19; average number of active clients reached 52,084 vs. 23,688 last year; total number of clients of >140,000).

Recent results

With Poland, the US and UK being its three largest markets in terms of sales, in H1/20 Mercator Medical generated total revenues of PLN 577.9m, which corresponded to a y-o-y growth of 124.4%. In Q2/20 alone, the company’s sales amounted to PLN 375.2m (Q2/19: PLN 137.7m). A massive sales growth plus a relatively high share of fixed costs resulted in a strong increase of operating margin y-o-y (44.9% vs. 0.1% in H1/19). Between January and June 2020, net income reached PLN 230.1m (H1/19: PLN -1m), of which PLN 208.8m stemmed from Q2/20. The very good profitability was reflected in the cash position at the end of June 2020, which reached PLN 153.8m (31/12/2019: PLN 14.8m). Consequently, net gearing went down from 99.5% at the end of 2019 to -10.2%.

In case of XTB, H1/20 results were also at record level. Revenues amounted to PLN 518.2m (thereof: PLN 211.5m in Q2/20), which corresponded to a y-o-y growth of 483.6%. EBIT equalled PLN 379.9m (H1/19: PLN 5.2m) and the operating margin reached 73.3% (H1/19: 5.8%). Net income came in at PLN 293.5m (Q2/20: PLN 117.5m) vs. PLN 5.2m in H1/19. As of 30/06/2020, net cash amounted to PLN 1.7bn (31/12/2019: PLN 1.1bn), or 87.3% of XTB’s current market cap.

Summary & Conclusion

In our view, the current environment continues to benefit both Mercator Medical and XTB. During a recent online conference Mercator’s management stated that they expected the positive trends from H1/20 to remain unchanged in the coming quarters. Apart from the increasing number of daily coronavirus infections, which is especially worrying in countries such as France, UK or the US, we believe that the current pandemia will increase the global demand for hygienics products in the long run. In case of XTB, the continuous market volatility, which is mainly caused by the pandemia, results in higher trading activity of the company’s clients and thus positively impacts income from commissions. While XTB offers in total c. 4,000 financial instruments, CFD (e.g. on stock indexes and commodities) and Forex trading are especially profitable for the broker.  

If we assumed that in both Q3 and Q4 2020 Mercator Medical generates a net profit of PLN 200m (thus similar to Q2/20), in full-year 2020 it would equal PLN 630m, which would imply a P/E of 8.8x at current level (historically, the stock had a P/E of >14x). In case of XTB, a net profit of in total PLN 100m in H2/20 (much lower than in Q2/20 due to seasonally lower activity of clients during the summer holidays, among others) would imply a net profit in full-year 2020 of PLN 393m and a P/E of 4.9x (in 2016-19, the average P/E was c. 7.3x). In addition, due to XTB’s low CAPEX requirements we see a chance of a significant dividend payout in 2021 and a double-digit dividend yield at current level.

While both Mercator Medical and XTB seem to be a good hedge against the worldwide uncertainty resulting from the coronavirus and their results for H2/20 and full-year 2020 will likely be very good, it remains to be seen how their businesses will perform after the world has returned to normality (after the market introduction of a vaccine against the coronavirus).

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