With a share of 26.6% of industrial production in total GDP, Germany is the most industrialized EU country. The German chemical, machine-building and automotive sectors are world leading and many family-owned companies are dependent on them. Especially, the chemical sector is regarded as the most energy-intensive one, together with the metal processing industry. According to Statista, in 2022 309,030 of Germans worked in the chemical, 1m in the machine-building, c. 786,000 in the automotive and c. 500,000 in the metal processing industry. The respective companies usually pay above-average salaries. In terms of energy sources, Germany has diversified away from (cheap) Russian oil & gas deliveries since February 2022 and nowadays Norway is its most important supplier of gas and oil. Last year, energy from gas still accounted for 11.4% of the country’s total energy consumption. When it comes to trade, the German economy heavily depends on China, which in 2022 was its No 1 partner and generated a trading volume (imports + exports) of EUR 298.2bn.

Given the above, the German economy faces two main risks: 1. High energy prices in the long run, especially as Germany is the only country worldwide, which plans to completely withdraw from fossil energy and nuclear power so fast, and 2. A China-Taiwan war. The first scenario would likely result in the movement of production capacity – and loss of high-paying jobs – from Germany to other parts of the world. Especially, North America seems to be an attractive destination as it has access to cheap energy and is a net exporter of it. The second would significantly negatively affect the German economy as a conflict in Taiwan would likely result in sanctions by the US and the EU like those imposed on Russia after its invasion in Ukraine in February 2022.

While we believe that especially the 2^nd scenario seems unlikely for now as China needs the Western world as a trading partner – USA and Germany were its No 1 and 7 trade partners respectively in 2022 and the EU as a whole No 2 after ASEAN – and supplier of advanced technology, the above-mentioned factors also bear significant risks for Eastern European countries. For most of them, Germany is the largest trading partner by far (see table below) and a significant share of employees has jobs in German companies or their suppliers. For example, automobile producers such as VW Group (9 in Poland, 4 in the Czech Republic, 2 in Slovakia, 1 in Bosnia, 1 in Hungary), Mercedes-Benz (1 in Poland, 1 in Romania, 1 in Hungary) and BMW (1 in Hungary) have many production facilities in the CEE/SEE region. The same holds for chemical companies – which are particularly energy-intensive – such as BASF (19 production facilities in CEE) and Lanxess (3).

Source: World Bank, stat.ee (most recent data)

Business description

CIECH, which is based in Warsaw, is an international chemical group with factories in Poland, Germany, Spain and Romania, >3,000 employees and a worldwide customer base. It is the 2^nd largest manufacturer of sodium carbonate and sodium bicarbonate in the EU, the no 1 manufacturer of evaporated salt in Poland, the no 1 supplier of sodium silicates in Europe, the largest Polish manufacturer of plant protection products, and a leading Polish producer of polyurethane foams in Poland. CIECH’s products are crucial elements in different industries incl. Construction, Automotive, Agriculture, Chemical, Food and Pharma. They are used in the production of articles necessary in everyday life.

In 2021, Poland was CIECH’s largest geographical market with a share of 51%, followed by other EU countries (45%), other Europe (2%) and Asia/Africa/Other (2%). The Soda segment was the company’s largest one by far and accounted for 66% of total sales and c. 81% of adjusted EBITDA. Its products soda ash, sodium bicarbonates and salt are used in the production of flat glass, glass packaging, silicates, detergents, animal feed, food, and water treatment solutions, among others. Other segments include: 

Agro (crop protection products, herbicides) – 14% of total sales in 2021 and c. 16% of adj. EBITDA

Foams (Polyurethane foams that are mainly used in the production of furniture and matrasses) – 11% of revenues and >16% of adj. EBITDA

Silicates (sodium and potassium silicates used e.g. in the production of precipitated silica, paper and welding electrodes) – 7% of 2021 sales and >4% of adj. EBITDA and 

Packaging (lanterns for vigil lights, jars) – 2% of total sales and >2% of adj. EBITDA

CIECH S.A. has been listed on the Warsaw Stock Exchange since 2005. It can also be traded in Frankfurt. Since 2014, the company has been owned by Kulczyk Investments, which belongs to the 6^th richest Pole Mr Sebastian Kulczyk. Kulczyk Investments (through KI Chemistry) bought a control stake of 51.1% in CIECH from its previous owner, the Polish state, at PLN 31 per share.

Financials

In 2021 – the last fiscal-year, for which results are available – the CIECH Group generated revenues of PLN 3.5bn (+16.3% y-o-y, 5y CAGR of 0.03%), an EBITDA of PLN 730.4m (+24.1%, 21.1% margin, 5y CAGR of -3.9%) and a net income of PLN 292.4m (+126.2%, 8.5% margin). Operating and free cash flow equalled PLN 1.3bn (2020: PLN 767.2m) and PLN 571.5m (PLN     -66.8m) respectively. Between January and December 2021, CIECH’s ROCE equalled 5.8%, while we estimate its current WACC at 14.2%, implying that the company is not generating a sufficient return on the capital employed to offset its costs of capital.

In 9M/22, the company generated revenues of PLN 3.9bn (+57.4% y-o-y), an adj. EBITDA of PLN 661.2m (+19.3%) and net income of PLN 234.5m (+0.2%). At the end of September, its net gearing equalled 56.1%.

In the last years, CIECH has paid out dividends, but not regularly. For 2022, the company paid out PLN 1.50 per share, which corresponds to a DYield of 2.9% at present.

Comment on the tender offer

On March 9, Kulczyk Investments through its subsidiary KI Chemistry Sarl announced a tender offer for all the remaining 48.86% shares of CIECH Group at PLN 49 per share, which starts on March 10 and is supposed to end on April 12. After reaching a threshold of at least 95% of the shares outstanding, Kulczyk Investments plans to delist CIECH as it believes that as a listed company it cannot “react in a fast and flexible manner to rapidly changing economic, geopolitical and regulatory environments, and turbulences on global financial and raw material markets”. 

In our view, the tender price is far too low and does not reflect CIECH’s fair value. The current share price of PLN 52.35, which is 6.8% above the tender price, implies an EV/EBITDA 2023E and P/E 2023E of 3.9x and 6.8x respectively. The 5-year hist. average EV/EBITDA and P/E multiples of 5.1x and 11.5x respectively are 31.3% and 69.8% higher. 

We expect that especially the Polish investment and pension funds, which hold approx. 27% of CIECH’s shares at present, will urge Kulczyk Investments to increase the tender price. Consequently, we advise current investors not to sell their shares in the tender and to increase their stake in the company.

In this blog post, we analyze the public finances of the EU member states that before 1990 were part of the Soviet bloc. Slovenia, Slovakia, Croatia, Estonia, Latvia, and Lithuania are already members of the Euro zone and thus do not have control over their currency. When it comes to the budget and current account deficits, we have compared the most recent data from 2021, which was affected by the pandemic, with the pre-COVID year 2019. While our analysis concludes that Poland, Czechia, Estonia and Slovenia are relatively reliable debtors, the condition of public finances in Hungary, Romania and Bulgaria looks much riskier.

Sources: Eurostat, central banks, tradingeconomics.com, Worldbank, S&P, CIA World Factbook

Especially after the PiS (Law and Justice party)-led government came to power in 2015, the Polish economy has been supported a lot through various social programs e.g. the “500+” child benefit, “Dobry Start” PLN 300 one-off support for pupils and the one-off retirement payment of PLN 1,100 “Emerytura+”. While these programs are considered negative by many economists as they stimulate consumption instead of investments, apparently they have not increased the debt level as well as budget and current account deficits in Poland as much as similar measures in Hungary. Especially a high current account deficit, which reflects imports and exports of goods and services, payments to foreign holders of a country’s investments, payments received from investments abroad, and transfers such as foreign aid and remittances, can negatively affect the foreign exchange rate of a country’s currency. On the one hand, a weak currency makes exports more profitable, however on the other makes the import of important components, the servicing of foreign debt or popular consumption goods more expensive.

Apart from Poland, Czechia is another non-Euro country, whose public finances look solid. What is particularly impressive, are its significant foreign exchange reserves, which are 3.5 times higher than in Hungary that however has a similar population. The larger the foreign exchange reserves, the better a country can fight pressure on its own currency.

In Romania and Bulgaria, especially the relatively high share of foreign currency denominated debt is worrying, which can lead to issues with repayment of debt in case the local currency significantly weakens versus EUR or USD. 

Based on the methodology of S&P, Hungary’s and Romania’s current BBB- rating is the weakest investment grade rating. The rating agency’s definition is as follows: “An obligation rated ‘BBB’ exhibits adequate protection parameters, however adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.” Estonia, whose debt only equals 18.1% of its GDP, and Czechia both have an AA- rating. According to S&P, it “differs from the highest-rated obligations only to a small degree”. Of all ex-communist EU member states, Slovenia has the best S&P credit rating (AA).

Business description

Founded in 1954 as a state-owned company, Krka, which is based in Novo Mesto/Slovenia, is among the world’s leading producers and developers of generic pharmaceuticals. In its own and leased production and R&D facilities in Slovenia, Croatia, Germany, Poland, the Russian Federation and China, the company employs c. 11,500 people. Generic medicines are original medicines, which have never had a patent protection or whose patent protection has expired. Both contain the same active pharmaceutical ingredients and are equivalent in terms of quality. So-called Super Generics are generics with an added value compared to their original drugs e.g. with improved pharmacokinetics, delivery or therapeutic effects. Their significant advantages are a shorter development (3-4 years vs. 12 years) and much lower costs (c. USD 50m vs. USD >1bn).

Krka distributes 800 pharmaceutical products and 600 formulations based on 250 APIs. It operates in the following business segments: Prescription & non-prescription pharmaceuticals targeting e.g. the areas cardiovascular diseases, central nervous system, gastrointestinal system, pain, infections, digestion, oncology and urinary tract (83.7% and 8.8% of total sales in 2021 respectively); Animal Health products (5.2%); and, through 100% subsidiary Terme Krka d.o.o, Health resort & tourist services (2.3%). Krka’s products, which are sold exclusively under the company’s own brands, are distributed in >70 countries worldwide. In 2021, 94% of total sales stemmed from outside Slovenia, thereof 35.1% from the East Europe region (former CIS region incl. Russia & Ukraine), 22.5% from Central Europe (mainly Poland, Czechia, Hungary and Lithuania), 19.5% from West Europe (e.g. Germany), 13.4% from South-East Europe (mainly Croatia, Romania and Bulgaria) and 3.4% from other markets in Africa, the Middle East and Asia. 

Krka spends 9.9% of its yearly sales on R&D – is mainly related to oncology and autoimmune diseases, thus two of the largest segments of the global Pharma market – compared to 9.7% in case of its listed regional peer, Hungarian Gedeon Richter. It has c. 170 products in the pipeline in different R&D phases and has received/submitted patents for more than 210 innovations.  

Krka, which has been listed since 1997, can be traded on the stock exchanges in Ljubljana, Warsaw and Frankfurt. The company has paid out a dividend in each of the last 11 years and since 2012 its DPS has increased at a CAGR of 13.8%. Only in 2017, the DPS was slightly lower y-o-y.

Krka’s largest shareholders are entities associated with the Slovenian state, which own in total 26.7% of the company’s shares and 35.7% of its votes. According to marketscreener.com, the company has both US-based and Western European investment funds as shareholders. The Norwegian sovereign wealth fund holds a stake of c. 0.8%. Treasury shares make up 5.5% of all shares outstanding.

Management’s 5-year guidance foresees a sales CAGR of at least 5% and an EBITDA margin of min. 25%.

Latest financials

In 2021, Krka, which before the pandemic grew at a 5y CAGR of 4.6%, produced c. 16bn (+2% y-o-y) pills and generated revenues of EUR 1.57bn (+2% y-o-y). With 18% and 9% respectively, the regions Slovenia and Other overseas countries reported the highest growth y-o-y. In 2021, the company introduced 16 new products. Drugs related to cardiovascular diseases accounted for >50% of all prescription drug sales. 

Despite serious COVID-19-related shortages of materials and transport issues, between January and December 2021 Krka’s EBITDA reached EUR 463.6m (-7.7% y-o-y; 29.6% margin) and net income EUR 309.2m (+6.3%; 19.7% margin) respectively. While operating cash flow amounted to EUR 386.1m (2020: EUR 360.8m), free cash flow equalled EUR 13.5m (EUR 251.2m). In 2021, Krka generated a ROCE of 13.7% compared to 12.1% at Gedeon Richter.

For the first nine months of 2022, Krka reported revenues of EUR 1.24bn (+5.6% y-o-y). In Ukraine, where the company is the No 2 provider of generics, sales declined by -14% y-o-y, but in Russia, where it is No 4, they grew by 5%. In 9M/22, EBITDA reached EUR 314.2m (-10.9% y-o-y; 25.3% margin) and net income EUR 300.9m (+25%; 24.2% margin) respectively. The main factors, which affected profitability, were 9.6% higher CoGS y-o-y, 21% higher marketing & distribution expenses and a EUR 113.6m higher net financial result, which was positively affected by FX effects. At the end of September, the company’s net gearing amounted to -15.4% compared to 1% in case of Gedeon Richter. 

Summary & conclusion

In our opinion, Krka is one of the best companies in Eastern Europe, a leading global player in a growing, non-cyclical sector and can be considered a dividend aristocrat in CEE. The generics segment is highly promising as governments and healthcare institutions in many countries are cutting back on their healthcare expenses and encouraging the use of relatively cheap generic products. 

In our view, only a few CEE-based companies have such a history of earnings and dividend growth as Krka. Since its IPO, the company’s market capitalization has increased 18 times. As negatives, we consider the significant share of revenues from the CIS region (especially Russia) as well as the low share ownership of the company’s Management and Supervisory Board, which at the end of December 2021 equalled 0.12%.

While Krka seems fairly valued at present – its current EV/EBITDA 2023E multiple equals 5.8x compared to a 6y average of 5.9x – its stock is highly interesting in the long run, in our view. Currently, the dividend yield for 2022E and 2023E equals 5.9% and 6.4% respectively. The company has a long-term dividend policy, which foresees the payout of min. 50% of its net profit.

Business description

The LSI Software Group, which has c. 300 employees (full-time and freelancers), was founded in 1998 and is based in Lodz. It is a provider of Enterprise Resource Planning (ERP) software for hotels, restaurants (products: Gastro, tAPP Gastro, POSitive Restaurant), cinemas (POSitive Cinema) – in these three areas, it is Polish market leader with a share of between 43% and 75% – sports facilities and retailers. In addition, it is the exclusive distributor of POS management systems and peripheral devices of the company Posiflex and, since year-end 2021, the robots of the Chinese company PUDU, which operates in 60 countries worldwide. Due to the structure of the company’s sales – the sector HoReCa accounts for c. 70% of its annual sales – LSI Software was hit hard by the COVID-19 pandemic, with a revenue and EBITDA decline of 17% and 43% respectively y-o-y. 

LSI Software, where in 2021 international revenues made up 24% of the total, generates sales from software integration, consulting, services, and hardware delivery. Last year, revenues from own software and maintenance/servicing accounted for 53.7% of the total, however the distribution activities (mainly sales of Posiflex products and PUDU robots) were most profitable with a gross margin of 30%. Recently, the company started offering its software products in the SaaS model, which is particularly attractive for smaller clients due to the low monthly fee of c. PLN 250. In our view, this should increase the share of recurring revenues from currently c. 50% and improve profitability in the coming years. 

According to management, LSI’s clients include >5,000 restaurants, c. 1,500 cinemas and several dozen cinema chains. The 3-4 largest customers account for only 15-20% of the company’s yearly sales and the customer churn only equals <5%. Examples of clients include the cinema chains Helios S.A. (Poland), Muvi Cinemas (Saudi-Arabia), KITAG Cinemas (Switzerland) and the leading Polish retail and restaurant chains CCC and Amrest.

Currently, LSI Software has c. 300 employees, of which 75% work as software developers and testers and 25% in other functions such as sales & marketing, HR and administration. Although there is no employee incentive scheme, the employee fluctuation is below peers, according to management.

LSI Software’s largest shareholder is its CEO Grzegorz Siewiera, who owns 30.8% of its shares, but 53.6% of the votes. The Spanish family office Inmuebles Polo SL owns a stake of 13.2%.

Recent results

Between 2013 and 2019, LSI Software grew at a CAGR of 14.8% on top line. After the pandemic year 2020, in which the company was hit hard due to its dependance on the HoReCa sector, in 2021 LSI Software’s revenues went up by 25.5% to PLN 54m. While the gross margin jumped to 30.7% (2020: 21.3%), EBIT and net income improved by 256% to PLN 5.9m (11% margin) and by 169.1% to PLN 6.5m respectively. However, due to higher investments in working capital and CAPEX operating and free cash flow deteriorated to PLN 4.5m (2020: PLN 9.9m) and PLN -3m (PLN 6.1m) respectively. In 2021, LSI generated a ROCE of 10% compared to an estimated WACC of 18% at present. 

Due to the recovery in most of its markets after COVID-19-related lockdowns for 9M/22 LSI Software reported revenues of PLN 40m, which corresponds to a y-o-y increase of 19.9%. 18% (9M/21: 11%) of total sales were generated abroad, of which 6% (4%) in the US. The share of revenues from own products and services declined to 52.8% (54.7%), which mainly stemmed from 24.9% higher sales of hardware such as PUDU robots. In 9M/22, the Group’s gross margin improved from 22% last year to 23.4%. However, following 85.7% lower other operating income due to a one-off effect – in 9M/21, LSI reported PLN 3.4m of COVID 19-related government grants vs. PLN 245k in 9M/22 – as well as 21.6% higher sales costs y-o-y (e.g. trade fairs, sales staff), which should have already positively impacted results in Q4/22, EBIT declined from PLN 1.6m to PLN -1m and net income from PLN 1.4m to PLN -1.3m. Between January and September 2022, free cash flow equalled PLN -10.9m (9M/21: PLN -698k), which was related to significant investments in inventories of PLN 5.7m due to longer delivery times of suppliers, among others. At the end of September 2022, the company had net debt of PLN 2.9m, which corresponds to 6.5% of its equity. Its interest-bearing debt mainly reflects the valuation of its office leasing contract in Warsaw according to IFRS 16.

Summary & Conclusion

In our view, LSI Software is a solid, owner-managed software company with a leading position in its domestic market and strong growth potential related to the roll-out of SaaS-based products and further international expansion. Based on most recent broker estimates, it is currently trading at an EV/EBITDA 2022E of 4.5x, EV/EBITDA 2023E of 3.7x, P/E 2023E of 7.5x and PEG of 0.23. For the coming years, we expect an acceleration of growth and regular dividend payouts. We also believe that due to its strong product portfolio and attractive valuation LSI Software could be taken over by a larger player soon. 

Operational update

In our view, 2022 was a breakthrough year for XTPL. Sales of its proprietary nanoprinting system for prototyping, the Delta Printing System (est. sales price of EUR 150-200k each), each of which generates recurring revenues from e.g. nozzles and inks of c. EUR 1,000 per month, and the conductive nano-ink (our estimate: EUR 1-10k each) significantly picked up. We believe that since 2020, when the company started commercial sales, it has sold 10 Delta Printing Systems to international clients such as universities (e.g. University of Stuttgart, University of Brescia, Tianjin University), R&D centers (e.g. Harbin Institute of Technology) and corporate clients (one of the five largest Tech companies from the US). 

However, in our view more important for future growth are the contracts that can lead to the application of XTPL’s technology on production lines. One of them is the contract with NASDAQ-listed Israeli Tech company Nano Dimension, with which XTPL announced a contract for the development of a new kind of nano-ink in January 2022 that is supposed to be used in the production of Nano Dimension’s advanced PCB boards in the future. In our view, XTPL receives c. USD 500k after each stage of the development phase – 3 out of 4 have already been completed – and will receive a percentage fee based on the volume sold of products that will be produced with its technology in the future. Other two partners for the application of XTPL’s technology on an industrial scale, for which XTPL is supposed to construct machine prototypes, are from Taiwan (application area: production of semiconductor elements at a leading global player from this industry) and listed HB Technology from South Korea (application area: production of displays e.g. for Samsung). The implementation of XTPL’s technology on production lines will result in one-off sales of the company’s printing modules (several dozen ones worth est. EUR 50-100k each) as well as significant recurring sales of consumables such as nozzles and inks.

According to its management, XTPL currently has 45 employees, of which 90% are shareholders of the company. The fluctuation is very low (only one person left the company in 2022).

So far, XTPL has received 4 international patents and has submitted 26 patent applications. We believe that only the company’s patents have a value of dozens of millions EUR.

Latest financials

In 9M/22, XTPL generated revenues of PLN 6.6m (9M/21: PLN 213k), of which PLN 4.6m from R&D and PLN 2.1m from sale of own products. PLN 1.9m stemmed from EU grants. EBIT equalled PLN -2.1m (9M/21: PLN -6.4m) and net income PLN -2.2m (PLN -6.6m), with total operating costs (CoGS, administration & distribution expenses) of PLN 10.6m or PLN 1.18m per month. Q3/22 was the first quarter in the company’s history, which was profitable on all levels.

At the end of September 2022, XTPL’s cash position amounted to PLN 3.2m (31/12/2021: PLN 4.5m). In 9M/22, operating cash flow equalled PLN 1m (9M/21: PLN -3m) and free cash flow PLN -621k (PLN -5.6m). The convertible bond on the balance sheet (PLN 3.38m) – was issued to XTPL’s German shareholders Deutsche Balaton AG and ACATIS – has a yearly interest rate of 5%, matures on 30 January 2024 and has a conversion price of PLN 74 per share (33.9% below current level; conversion to in total 45,655 new shares that correspond to 2.2% of the total number of shares outstanding). During our recent meeting XTPL’s management maintained its view that at the end of 2022 cash was at the same level as at the end of December 2021.

Summary & forecasts for 2023

After talking to the company’s clients and market experts in the last months, we are confident that XTPL’s technology offers tremendous advantages and there is strong market demand for it. Apparently, large global players from the semiconductor or display industries are already approaching the company themselves. Also, we now believe that the company’s team knows how to effectively commercialize its know-how.

We expect significant growth of XTPL in the coming years, especially due to the implementation of its technology on production lines of several international Tech companies. For 2023E, we estimate the company’s backlog at PLN >10m and revenues at PLN 17.5m. Despite a likely increase of operating costs e.g. due to the planned recruitment of c. 10 additional people and higher investments in marketing, management guide for a profit on all levels. 

Below is our detailed calculation of revenues in 2023. During our meeting management clearly emphasized that in the coming years its focus would be on top-line growth.

Russia’s aggression on Ukraine, which started on February 24 this year, has lasted 10 months to date. The UN estimates the number of Ukrainian civilian casualties, which have so far been caused by the war, at >17,000 (>6,700 deaths, >10,400 injured), while according to the NYTimes the number of dead or wounded soldiers equals >100,000. The Kiev School of Economics believes that the losses due to destruction of infrastructure amount to USD >130bn. In November, Ukrainian President Wolodymir Zelensky confirmed that up to 40% of his country’s critical energy infrastructure had been destroyed. 

From the beginning, Poland has been one of Ukraine’s largest supporters. According to Kiel Institute for the World Economy, only Latvia and Estonia have so far spent more on financial, humanitarian, and military aid as percentage of GDP than Poland. Moreover, since the outbreak of the war the country has provided refuge to >8.5m Ukrainians, who had fled their country after the outbreak of the war (Source: 300gospodarka.pl).

While the war continues, it is clear that the fighting will stop sooner or later. In this blog post, we analyse, which Polish companies could potentially benefit from contracts related to the re-building of Ukraine in the coming years. 

Most obvious beneficiaries are construction companies

After a ceasefire agreement, the Ukraine will start re-building its infrastructure e.g. bridges, roads, energy infrastructure, buildings. In our view, it is likely that the public administration will mandate foreigners with a large part of this task. Apart from US-based companies – the US is by far the largest provider of military support to Ukraine – we expect that Polish firms will strongly benefit from Ukrainian orders. 

Here are some examples of listed companies, whose results could be positively affected in the coming years: 

1. Budimex S.A. (Market cap EUR 1.5bn):  Owned by Spanish construction giant Ferrovial, Budimex’s main activities consist of the construction of roads, bridges, and airports; the design, development, construction and maintenance of industrial plants and environmental facilities; the construction of public and commercial facilities, and development of residential property. In 2021, the company generated revenues of PLN 7.9bn (CAGR 2016-2021 = 7.3%) and an EBITDA margin of 9.3%. Last year, 4.6% of its total revenues stemmed from abroad. Budimex has paid a dividend in each of the last 14 years.

2. Erbud S.A. (Market cap EUR 89.7m):  Erbud, whose largest shareholder is German family-owned construction company Wolff & Müller Holding GmbH & Co. KG, operates in the areas of building & residential construction, road construction, industrial construction as well as engineering & services for the Energy sector. In 2021, the company generated revenues of PLN 3.1bn (CAGR 2016-2021 = 11.6%) and an EBITDA margin of 4.3%. Last year, approx. 13.3% of its total sales stemmed from abroad, especially Germany, Belgium, Norway, France, Sweden and Austria. Between 2014 and 2018, Erbud paid a dividend every year.

3. Torpol S.A. (Market cap EUR 92.9m): Torpol focuses on construction services related to transport infrastructure e.g. railway and tramway tracks and stations, as well as engineering services. It also provides services in the field of construction, modernization, and renovation of medium- and low-voltage overhead electricity networks, traffic control light signals, street lighting systems and telecommunications networks, as well as design services. In 2021, Torpol generated revenues of PLN 1.1bn (CAGR 2016-2021 = 7.8%) and an EBITDA margin of 11.4%. Only a very small share of revenues stemmed from abroad. Between 2014 and 2021, Torpol did not pay a dividend only once: for 2017.

4. Unibep S.A. (Market cap EUR 60.4m):  Unibep operates in Poland (80.6% of total sales in 2021), Norway (10.9%), Germany (2.7%), Sweden (1%), Belarus (0.2%) and in the Ukraine (4.7%). The company builds roads and apartments and provides services related to construction and repair of bridges. Unibep, whose largest shareholders are Members of the Supervisory Board or their family, generated total revenues of PLN 1.7bn (CAGR 2016-2021 = 6.5%) and an EBITDA margin of 4.9% in 2021. The company has paid dividends for every year since 2008.

IT companies could also benefit 

Due to the need to re-build the IT infrastructure of both the private and the public sector after the war we believe that the following Polish IT companies could receive significant orders from Ukraine in the coming years:

1. Asseco Poland S.A. (Market cap EUR 1.3bn):  Asseco Poland is the 6^th largest IT company in Europe and the largest in Poland. Approx. 78% of its revenues stem from own software and c. 90% from abroad. While no detailed sales figures are available, the company also does business in the CIS region.

Asseco Poland is market leader in the areas of public sector software in Poland, Czechia, Slovakia, and Israel. Moreover, it is a leading provider of software products for the sectors Healthcare, Energy, Telco, SMEs and Financials. The company has NATO certificates and provides cybersecurity solutions, which contribute PLN 200-300m to its total yearly sales. In 2021, Asseco Poland generated revenues of PLN 14.5bn (CAGR 2016-2021 = 12.8%) and an EBITDA margin of 15.5%. Since 2007, the company has always paid dividends.

2. Comarch S.A. (Market cap EUR 303.2m):  Comarch is the No 2 Polish IT company with a share of c. 58% of international sales (of which c. 1.5% stemmed from Russia & Ukraine in 2021) and c. 16% of own products. The company provides its services to clients from various industry sectors (e.g. TMT, Finance/Banking, Retail, SMEs) and public administration. In 2021, Comarch generated revenues of PLN 1.6bn (CAGR 2016-2021 = 7.9%) and an EBITDA margin of 17.2%. The company has always been paying dividends since 2017. However, investors should be aware of corporate governance issues.

KRUK S.A., which is based in Wroclaw and has been listed on the Warsaw Stock Exchange since 2011, is the Polish market leader in the area of debt servicing and one of the leading players in its segment in Europe. With sophisticated software tools, the company’s staff analyses the financial situation of each customer and spreads his debt into manageable instalments. 

Since its foundation in 2004 by its current CEO and second-largest shareholder Piotr Krupa, the company has developed from a small firm with less than 20 employees to an international financial group with a focus on complex and integrated service offerings related to receivables management in Poland (50.1% of total sales in 2021), Romania (23.7%), Italy (16%), Spain (6.5%) and other markets incl. Germany, Czechia and Slovakia (together 3.5%). KRUK manages debt, which it has bought itself, or for which it has been commissioned by institutional clients – e.g. banks, credit intermediaries, insurances, leasing companies, telecommunication and cable & satellite operators and FMCG companies – in three segments: uninsured consumer debt, mortgage debt and corporate debt. This approach has many advantages as statistical information from the servicing business allows the company to lower the risk of the debt portfolios that it acquires.   

The KRUK Group comprises 25 fully consolidated subsidiaries incl. subsidiaries in all countries, in which it operates, RAVEN (a legal office), RD ERIF BIG (provides credit information) and NOVUM (provides loans to KRUK’s clients, who have already paid back their debt). 

Recent results

With a revenue and net income CAGR of 8.8% and 22.8% respectively, KRUK has grown rapidly on both top- and bottom-line in the last 5 years. In 2021, which followed the difficult pandemic year 2020, the company increased its revenues by 50.5% y-o-y to PLN 1.7bn, EBITDA by 139.7% to PLN 908m (52.1% margin vs. 32.7% in 2020) and net income by 757.9% to PLN 694.9m. All of its regional markets were profitable on EBITDA level. ROCE and ROE were very strong and reached 17.6% and 29.9% respectively. The company’s main peers Intrum (15.5%) and Hoist (negative ROE) from Sweden and Banca IFIS (6.4%) from Italy generated a lower ROE.

In 9M/22, KRUK continued its strong development as debt repayments by customers remained at a good level due to low unemployment and high salary increases. Between January and September 2022, the company’s revenues equalled PLN 1.6bn (+20.1% y-o-y), EBITDA PLN 874.8m (+17.5%; 54.3% margin) and net income PLN 676.9m (+19.7%). At the end of September, it had a net debt of PLN 3.2bn, which corresponds to a net gearing of 103.5%. This was less than Intrum (254.4%), Hoist (123.7%) and Banca Banca IFIS (290.4%).

Summary & Conclusion

We like KRUK as it is No 1 in Poland and a leader in Europe in its market, has grown strongly over the last years and since its IPO has been considered one of the best companies on the Warsaw Stock Exchange. Most of its shareholders are long-term oriented Polish pension funds and international institutional investors, while its insiders own 10.5% of its shares. Moreover, KRUK’s stock is currently pretty cheap – cons. P/E 2022E equals 7.7x compared to a 5y historical average of 16.1x – and this week the company passed a share buyback until 2026E of up to PLN 1bn at max. PLN 400 per share (40.5% above current market price). This corresponds to 20% of its current shares outstanding. 

Since 2014, KRUK has paid a dividend for all fiscal years except 2019. For 2022E, the sell-side consensus assumes a DPS of PLN 12.50, which implies a dividend yield of 4.3% at present. The company’s dividend policy for 2021-2024 foresees the payout of 30% of its annual net profit to shareholders.

In terms risks, we see two main ones: (1) change of government regulations and (2) the significant increase of interest rates e.g. in Poland as it makes refinancing more difficult. Nevertheless, we expect that the debt repayment ratios of KRUK’s clients will remain solid due to high salary increases. Also, the share buyback should support the company’s share price in the coming months. 

KRUK is part of the Polish bluechip index WIG20, but its shares can also be traded in Germany.

Business description

Kino Polska TV S.A. (KPL PW), which is based in Warsaw, is a leading producer and broadcaster of thematic TV channels with operations in 68 countries worldwide and a 36% share of international sales in total revenues. The company owns one of the largest catalogues with Polish content (movies, series, documentaries etc.) and through its owner SPI International, which since March 2022 has been part of the leading European media company Canal+ Group, has access to high-quality international movie content on an exclusive basis in Poland. Of the sales related to TV channels, which last year accounted for 88.1% of the total, 56.9% stem from recurring transmission/subscription fees, which makes KPL less dependent on very profitable but cyclical advertising sales.

KPL broadcasts channels under the six main brands Telewizja Kino Polska, Kino Polska Muzyka, Kino TV, FilmBox, Zoom TV and Stopklatka TV. All are wholly-owned and, except Zoom TV, profitable. Telewizja Kino Polska and Kino Polska Muzyka are focused on high-quality Polish movies and related music videos and FilmBox, Kino TV and Stopklatka on international movies. Zoom TV, which is supposed to become profitable in 2023E according to management, broadcasts series, documentaries and shows. All KPL’s channels can be watched on multiple platforms including digital terrestrial TV (DVB-T), satellite & cable, online and on mobile devices. The FilmBox channel family, which KPL produces, is already available in 68 countries in the CEE & SEE region, North- and South America and Asia. 

According to wirtualnemedia.pl, there is a trend towards consolidation of thematic channels because many broadcast the same content that is often repeated. In the future the remaining TV channels will be well-profiled to certain operators and advertisers and available not just on digital terrestrial TV, satellite and cable platforms but also via streaming services such as Netflix or HBO. Moreover, with improving internet speed video content will increasingly be consumed on mobile devices. According to We Are Social, movies and videos are by far the most popular type of paid content worldwide. 

Recent results

KPL is a fast-growing and highly profitable company with a revenue CAGR in 2015-2021 of 15.7% and double-digit EBIT margins in each of the last seven years. In 2021, revenues came in PLN 257.2m (+21.4% y-o-y), EBITDA at PLN 117.3m (+32.5%; 45.6% margin) and net income at PLN 48.6m (+78.6%). Operating and free cash flow amounted to PLN 57.3m (2020: PLN 28.4m) and PLN 50.9m (PLN 24.6m) respectively. At 24.9%, ROCE was very strong. Despite the Ukraine conflict, in H1/22 the company’s sales advanced by 17.1% y-o-y to PLN 139.3m, EBITDA by 4.9% to PLN 57.3m (41.1% margin vs. 45.9% in H1/21) and net income by 5.8% to PLN 21.2m (15.2% margin). At the end of June 2022, Kino Polska TV had a net gearing of -12.5% and thus was net cash. 

On November 9^th, KPL issued preliminary results for Q3 and 9M/22. Between June and September, consolidated revenues equalled PLN 65m (+2.3% y-o-y), while in Jan-Sep they amounted to PLN 204.3m (+12%). However, in Q3/22 net income declined by 39% y-o-y to PLN 6.7m due to exchange rate differences and higher expenses related to ZOOM TV. This year, the PLN reached the weakest level ever compared to the USD and EUR. 

After paying dividends in each year after its IPO in 2011 until 2018, the company resumed its dividend payouts in 2022. For fiscal-year 2021, it paid out a DPS of PLN 0.50, which corresponds to a payout ratio of 20.5% and a dividend yield of 4% at present.

Summary & Conclusion

We like Kino Polska TV due to its competent management, the strong anchor shareholder Canal+ (is wholly owned by Vivendi Group), a cash-generating and fast-growing TV business, which is based on high-quality content, and very attractive valuation (currently, its trailing EV/EBITDA after H1/22 results equals just 4.1x and trailing P/E after prel. 9M/22 figures 8.8x). We also believe that in the next 3-4 years Canal+ will buy all outstanding shares of the company and de-list it, which will likely be conducted at a significant premium to the current share price. Regarding dividend payouts, we expect that Kino Polska TV will distribute at least 20% of its annual net income to shareholders in the coming years.

When it comes to risks, investors should be aware of the following: (1) An economic slowdown would negatively affect KPL’s advertising sales, which are highly profitable, (2) KPL’s content costs are in EUR and USD, but >60% of revenues in PLN, (3) Competition by streaming platforms such as Netflix, which nowadays invest billions of USD in own content, (4) Inability to renew co-operation agreements with cable operators and satellite platforms, and (5) Kino Polska TV’s stock can only be traded in Warsaw, which reduces the number of potential new investors

Business description

The Krakow-based gaming studio Starward Industries S.A. was founded by former employees of the most famous Polish games developer CD Projekt S.A. The CEO Marek Makuszewski is the company’s largest shareholder with a stake of 18.2%, while members of the management and supervisory board and employees own in total 31.9% of the company.

Starward Industries owns the rights to the IP of Stanislaw Lem, the author of the world-famous science fiction novel “Solaris”. According to our research, the licensing contract, which was signed with the heir of Stanislaw Lem, comprises a single-digit percentage fee on future sales of the company’s products.

Based on Mr Lem’s IP, Starward Industries is currently working on the AA+ game “The Invincible”, which it expects to release in 2023E for PC, Google Stadia, and all next-gen consoles. The game, which is currently No 79 on Steam Global Wishlist, has so far cost PLN 12m/EUR 2.7m. The marketing of the game will be financed by Starward’s new publisher 11bit Studios S.A., which has developed the successful games “Frostpunk” and “This War of Mine” and is considered one of the best-managed Polish video game companies.

According to its representatives, Starward Industries currently employs 34 people, thereof 25 developers and 9 marketing, communication, legal and administration staff. Many of them have worked at the largest Polish video game studios Techland and CD Projekt in the past. As almost all employees are or will soon be the company’s shareholders, the fluctuation is very low. When it comes to software developers, Starward has all necessary skills on board and thus does not need to outsource much work. In our view, this gives it full control over the quality. 

Recent results

In 2021, Starward Industries had a net loss of PLN 2m with zero revenues from product sales. In H1/22, the net loss equalled PLN -878k and the free cash flow PLN -867k. We estimate the company’s current net cash at PLN 6.5m, which according to its representatives will be sufficient to finance operations until the release of “The Invincible”, which we expect in September 2023 at the latest (in Q4, usually all the largest game premieres take place).  

Summary & Conclusion

In our view, Starward Industries is one of the best gaming studios on the Warsaw Stock Exchange. We like the committed management team, the fact that insiders incl. employees hold >30% of the shares, the track record of the team and the publishing agreement with 11bit Studios, which also holds a stake of 5.1% in the company. 

Based on our estimates, we forecast that with 800,000 copies sold Starward Industries will generate revenues of PLN 134m and a net profit of PLN 45m in 2023E. This would imply a highly attractive P/E 2023E multiple of 2.6x at present. We expect that Starward Industries will pay out a significant share of its net profit as dividends. In our view, the payout ratio could reach 40%, which would correspond to a dividend yield of 15.5% at present.

The main risks, which investors should be aware of, are (1) delays with the production of the game, and (2) bad quality of the end-product, which would negatively affect its sales.

Apart from the Warsaw Stock Exchange, Starward Industries’ shares can also be traded in Germany.