Why establishing a holding in Western Europe is the best way to go for CEE-based startups


Since the global financial crisis, the world’s major central banks have pumped USD >25tr into the financial system Global QE Tracker – Atlantic Council. Because of record-low interest rates the only asset classes, which have provided attractive returns in the last years, have been stocks, real estate and startups. Nowadays, Western VC funds have significant capital to invest, but according to our experience only c. 5% of them are allowed to invest locally in countries such as Poland or Romania. While especially Poland has a vivid startup scene – according to PFR, the value of VC transactions in Poland reached a record of PLN 3.6bn/EUR 798m in 2021 after PLN 2.1bn/EUR 466m one year earlier and only PLN 156m/EUR 34m in 2018 Transakcje na polskim rynku VC w 2021 (pfrventures.pl) – CEE-based startups usually have to look for money among local business angels and VC funds, which often use EU funds.

Lack of “smart money” is the main reason, why there are still not many unicorns in CEE

The main problem, which startups in CEE are facing, is that these investors usually do not have experience how to scale up businesses on international markets and have relatively small tickets of EUR <1m, which corresponds to pre-seed or seed phase of startup funding. Thus, CEE-based startups are able to finance product development, but often have problems with raising financing for the market roll-out.

While many startups choose to conduct a capital increase and list their shares in the alternative NewConnect segment instead, during the next funding round they often realize that they are in a “death trap”, meaning that most institutional investors are not allowed to invest in them as they are too small in terms of market capitalization and still do not generate revenues. We believe that all this is a major reason, why in CEE and in Poland in particular there are still almost no unicorns, which is a description of startups with a market value of at least USD 1bn.

Solution: Establishing a holding company in Western Europe

In our view, a solution may be establishing a holding company in Western Europe. This would become an owner of the local operating company, which usually benefits from still 4-5x lower salaries in CEE and EU R&D grants. In our view, the Western holding company could raise “smart money” from Western business angels or VC funds much easier. In addition, it could ultimately be listed on one of the Western European stock exchanges such as Deutsche Börse, Stockholm or Euronext. Especially the Swedish and Amsterdam stock exchanges are considered the best ones in Europe for innovative Tech and Biotech companies.

The process of establishing a holding company in Western Europe is relatively easy. For example, in Germany there are two kinds of limited companies, which require EUR 25,000 (GmbH) and EUR 1 (UG) of initial capital respectively GmbH und UG (haftungsbeschränkt) – IHK Rhein-Neckar (ihk24.de). Set up costs equal max. EUR 900 and yearly costs of accountants and tax advisors c. EUR 2,000. A Dutch BV requires at least EUR 0.01 7 Things you need to know about the Dutch BV – FIRM24 initially, with likely similar founding and yearly costs as in Germany.

We at East Value Research have gained significant experience with consulting for startups over the last years and have built a strong network of brokers, consultants and investors. We stand ready to assist CEE-based startups with the establishment of a holding company in Western Europe and fundraising.

Why investing in Russia remains promising despite the current Ukraine crisis


The EU is dependent on Russia, but this also holds vice versa

Over the last months, Russia has deployed at least 100,000 troops and heavy military equipment to its border with Ukraine. In addition, it has sent c. 30,000 soldiers to Belarus and 20 war ships to the Baltic Sea. While the Russian government denies that it plans to attack the Ukraine, Western politicians are very nervous and threaten Russia with sanctions. Many Western commentators fear that as retaliation state-owned Gazprom could stop gas deliveries to the EU, which would hit the European economies hard. According to ec.europa.eu, in 2019 Russia accounted for 41.1% of EU’s gas, 26.9% crude oil and 46.7% coal imports. Germany, where in 2021 gas and coal power plants still generated 10.5% and 29.7% of the country’s energy production, imports c. 36% of its oil, c. 51% of gas and c. 56% of coal from Russia (Sources: destatis, BAFA, Handelsblatt). In our opinion, this dependence will become even stronger in the coming years as the current German government plans to shut down all nuclear and coal plants by the end of 2022 and 2030 respectively and wants to build more gas power plants in order to cover periods when renewable energy sources will not be able to fully cover the domestic energy demand.

Although a conflict with the Ukraine and NATO seems totally irrational as Russia is strongly dependent on exports of oil, gas and coal and imports of technologically-advanced goods, the risk of a war has unsettled investors and has hit the Russian stock market hard. The Moscow Exchange Broad Market Index (RTS), which includes 100 companies, has declined by >30% to a level last seen in April 2021. Many blue chip companies, which even before the recent declines traded at single-digit P/Es and double-digit dividend yields, are now even more attractively valued.

While the recent share price declines created many opportunities, investors should be selective

However, despite bargain prices we recommend to be selective. In our opinion, the biggest losers in case of a conflict with Ukraine and NATO will be companies, which are controlled by the Russian government or oligarchs that are close to Mr Putin. We also believe that it is wise to omit Russian banks and industrial conglomerates as they would likely be hit hard by a restricted access to foreign capital and technical equipment, which the President of the EU Commission has recently threated to introduce in an interview with German Handelsblatt.

We prefer companies that are controlled by investors without ties to Russian politicians, target Russian/CIS consumers and are not cyclical. Russia, which has grown its GDP at a CAGR of 6.7% since 1990 (Source: World Bank), has 142.3m inhabitants (Source: CIA World Fact Book), of which c. 75% in the Western part of the country and only 6% in the Far East. The whole CIS regions has a population of c. 240m people. In contrast to major Western economies, the Russian retail market is still very dispersed, with the 10 largest retailers accounting for just 37.4% of total food retail sales worth RUB 17.5tr (Source: X5 Retail Group). The E-Commerce sector is large and rapidly growing, with an estimated CAGR 2020-2024E of 6.9% from USD 21.6bn in 2020 (Source: esw.com). However, at the same time the share of online shoppers still equals only c. 52% compared to an EU average of 74% (Source: ec.europa.eu), which shows the tremendous growth potential of this sector in Russia.

Our Russian top picks

We recommend to take a closer look at PAO Magnit, Ozon Holdings PLC and Yandex NV, which can all be traded on Western stock exchanges.

Magnit Magnit at a glance – PJSC «Magnit», which has a free float of 61.1%, is the No 1 retailer in Russia when it comes to the number of stores and geographical coverage. As of 31/12/2021, the company, which has an expected DYield of 10.9% for 2021, operated in total 26,077 stores (supermarkets, drugstores, pharmacies, convenience stores, “ready-to-go“ & “ready-to-eat” shops with basic grocery and non-food items) and 45 distribution centers in 67 Russian regions. Apart from its activity in retail, Magnit also operates 4 agricultural and 13 food production sites for growing vegetables and production of dry food and confectionery. In 2021, the company’s revenues grew by 19.5% y-o-y to RUB 1.86tr (+7% Like-For-Like growth; 2,036 net store additions), gross profit by 20.1% to RUB 439.2bn (gross margin: 23.7% vs. 23.5% in 2020) and net income by 36.8% to RUB 51.7bn. The implied P/E 2021 equals 11.7x compared to a 3y historical average of 22.8x.

Ozon Holdings Ozon – about the company is the No 1 E-Commerce platform in CIS with >80m products, >90,000 active merchants, >25m buyers and c. 1m sqm of warehousing space across Russia. Apart from the online marketplace Ozon.ru, the company also operates the largest online travel company in Russia Ozon.Travel and owns a stake in the largest Russian digital book platform LitRes. It also develops FinTech services (Ozon FinTech) and is expanding into quick commerce and online grocery sales (Ozon Express). In 2021, Ozon grew its GMV (Gross Merchandise Value) by >125% y-o-y to RUB 445bn and the number of orders by c. 200% to 220m. However, adj. EBITDA and free cash flow strongly deteriorated due to the rapid growth, which is expected to reach at least 80% in 2022E. While in 9M/21 adj. EBITDA and free cash flow reached RUB -25.3bn (9M/20: RUB -8.1bn) and RUB -41.9bn (RUB -10.4bn) – for full-year 2021, they are not yet available – net cash as of 30/09/2021 equalled RUB 23.3bn, which makes a capital increase likely this year, in our view. Current cons. EV/Sales 2022E multiple is 1.1x compared to a 2y hist. average of 3.1x. 

Yandex Yandex, which is controlled by the family of its founder Arkady Volozh and the company’s staff, is the No 1 search engine in Russia and CIS. In addition, it provides services such as classifieds, food delivery, ride hailing and video & music streaming and conducts R&D in the area of autonomous driving. Thus, Yandex can be considered a Russian version of Alphabet. Apart from Russia, the company is also active in Turkey, Belarus, Kazakhstan, and the Ukraine. In 9M/21, Yandex generated revenues of RUB 245.8bn (+53.4% y-o-y), an adj. EBITDA of RUB 22.4bn (-28.6%) and adj. net income of RUB 5.4bn (-55.8%). The reason for the hefty decline of profitability were high investments in e-commerce, cloud and fintech services and self-driving business. At the end of September 2021, Yandex had net cash of RUB 4.3bn. Based on consensus estimates, the company’s stock is currently trading at an EV/Sales 2021E of 3.4x compared to a 3y hist. average of 5.5x.

XTPL S.A. (Market cap EUR 29.5m) – Polish nanoprinting company, which has just announced a commercial deal with NASDAQ-listed Nano Dimension


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.


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.

Opportunities for dividend investors in Eastern Europe


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: 

CompanyDescriptionMarket capDYield 2021E
PZULargest insurance and banking group in CEE and Top 3 provider of private healthcare services in Poland.EUR 6.7bn7.5%
Asseco Poland6th largest IT company in Europe with c. 80% share of revenues from outside Poland.EUR 1.6bn3.0%
Grupa KetyManufactures and sells aluminum products to Polish and international clients with an export share in total sales of c. 41.2%.EUR 1.2bn9.8%
Moneta Money Bank Leading Czech bank for retail and SME sector that considers itself a digitisation leader.EUR 1.9bn6.6%
Magyar TelecomProvides fixed-line and mobile telecommunication services for residential and small business customers in Hungary. EUR 1.1bn3.7%
OMV PetromIs the largest energy company in Southern and Eastern Europe. Produces oil & gas, refines and distributes fuels and generates power. EUR 5.4bn6.4%
Mobile TelesystemsLargest provider of fixed-line, mobile telco and pay-TV services in Russia and CIS.EUR 5.7bn10.2%
X5 Retail GroupLargest grocery chain in Russia and market leader in the area of e-food.EUR 6.6bn9.6%
Magnit2nd largest provider in the area of food retail in Russia.EUR 6.6bn9.9%

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

IPO Analysis: Pepco Group NV (exp. Market cap EUR 5.08bn)


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:


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.


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.

Investment idea: Mo-Bruk S.A. (Sector Waste Management; MBR PW)


Business description

Mo-Bruk (Market cap PLN 1.36bn / EUR 302.2m) is the market leader of the Polish waste management sector, which is highly promising as Poland is still far behind other EU countries when it comes to waste processing (e.g. 42% of Polish waste is dumped on waste landfills vs. 1% in Germany) and has to comply with the EU “Green Deal”. In order to increase the share of processed & recycled waste, the government is increasing the Marshall Fee, which is the price per tonne of dumped waste (the higher it is, the more waste management companies can charge for their services). The Marshall Fee currently equals PLN 301.84/tonne and since 2018 has increased at a CAGR of 29.2%.

Compared to its listed peers Geotrans, Krynicki Recycling and Grupa RECYKL, Mo-Bruk is able to process c. 95% kinds of waste. Also, as the only listed company in Poland it provides waste incineration, solidification and stabilisation in own facilities and sells alternative fuels and construction material. Mo-Bruk, whose roots go back to 1985 and which is controlled by the Mokrzycki family, has grown its sales and net income at a CAGR of 35.2% and 164.8% respectively since 2016. After investments of c. PLN 200m in the last few years, it operates own facilities in 5 locations in Southern Poland, where most of Polish industry is based.

In 2019, Mo-Bruk’s segments had the following share in the company’s total sales:  (1) Solidification and stabilisation of inorganic waste (mainly from chemical and construction companies) – 45.4% (2) Production of alternative fuels (mainly from car manufacturers) – 22.2% (3) Incineration of toxic waste (mainly from hospitals, drug producers and refineries) – 32.3%. The end products of waste incineration/solidification/stabilisation – heat, alternative fuels and cement granules – are sold e.g. to cement producers, utilities, construction companies and mines. Thus, the company’s business model perfectly fits into the concept of the so-called “circular economy”, which is the main objective of the EU “Green Deal”.


In 2019, Mo-Bruk generated revenues of PLN 130.6m (+41% y-o-y), an EBITDA of PLN 58.7m (44.9% margin) and net income of PLN 40.1m (30.7% margin). 7.5% of sales stemmed from abroad compared to 6.3% in 2018. In 2019, the company employed 233 people on average.

Between January and September 2020, the company’s sales reached PLN 122.6m (+40.9%). EBITDA equalled PLN 69.8m (+102.2% y-o-y; 56.9% margin) and net income PLN 52.9m (+122.2%; 43.2% margin). Operating and free cash flow reached PLN 41.5m and PLN 47.7m respectively. As of 30/09/2020, Mo-Bruk had net cash of PLN 11.9m.

Summary & Conclusion

Mo-Bruk is a market leader in a sector, which requires high initial investments. Moreover, as the shadow economy still accounts for 30-40% of the waste management sector in Poland, companies, which want to provide respective services, need government permissions. In addition, public clients usually prefer to work together with companies, which have a good track record. Thus, we believe that in Poland Mo-Bruk will remain the undisputed market leader at least in the next 3 years.  

Another reasons, which make Mo-Bruk an attractive investment, are the low capacity utilisation of its facilities (c. 40% currently); the increasing Marshall Fee in Poland, which in our view will continue to increase by 5-10% over the next 2-3 years; and its prices, which are >2x below those in Western Europe. All of the above should allow Mo-Bruk to grow its revenues significantly in the near future and to maintain a very high profitability and cash generation. The volume of waste, which is produced in Poland every year, equals 114.1m tons and grows roughly in-line with GDP.

Our expectation for net profit in 2020 is PLN 79m (+197.1% y-o-y), which implies a P/E of 17.1x at present and PEG ratio of 0.09. While in our view the current broker estimates for 2021E (Revenues: PLN 240m; Net income: PLN 92.9m) are realistic, we believe that the market forecasts for 2022E (Revenues: PLN 273m, Net income: PLN 101m) are too conservative. We expect that Mo-Bruk will pay out a dividend both for 2020 (exp. DYield = 3.6%) and the following years. The company’s dividend policy foresees the pay out of 50-100% of its yearly net profit.

Disclaimer: The author of this analysis owns shares of Mo-Bruk himself

Update on private savings in Poland and the activity on the Warsaw Stock Exchange in 2020


Private savings at record level after decline in Q1/20

According to most recent information on savings of Polish private households, the respective volume reached PLN 1.65tr at the end of June 2020, which is twice as much as 10 years ago. This corresponds to an increase of almost PLN 100bn compared to Q1/20, when they declined for the first time since 2014 mainly due to weak stock markets following the outbreak of the coronavirus.

Record low interest rate benefit Polish asset manager & activity on WSE

The savings of Polish households mostly consist of bank deposits & savings accounts, which accounted for PLN 969bn as of 30/06/2020. However, as the Polish central bank lowered the reference rate to a record-low of 0.1% in Q1/20, Poles started withdrawing money from savings accounts and invest it in mutual funds instead. The value of AuM of Polish mutual funds increased by PLN >40bn to PLN 279.7bn (thereof: PLN 31bn in equity & absolute return funds) between January and November 2020. In addition, while in the old pension funds OFE the value of AuM has grown by PLN 15.6bn to PLN 131.7bn since March mostly due to a strong performance of global capital markets, the AuM of the Employee Capital Plans (PPK), which were only created in 2019, already reached PLN 2bn. All together helped to increase the total trading volume on the Warsaw Stock Exchange in Jan-Nov 2020 by 12.1% y-o-y to PLN 5.6tr.

Outlook for the Warsaw Stock Exchange remains positive

Despite a relatively high inflation (October 2020: 3.1%), which is currently the highest in the EU), we believe that the Polish central bank NBP will not increase interest rates soon as it actively supports the government and Polish enterprises in their fight against the COVID-19 pandemic. According to ING, the fiscal program of the Polish government will mostly be financed indirectly through NBP’s QE program (includes purchases of bonds of the Polish government, government bank BGK and the Polish Development Fund on the secondary market), which is expected to reach a volume of 8.5%-10% of Polish GDP in 2020 (in 2019, the Polish GDP equaled USD 565.9bn). In our view, continuously low interest rates will accelerate the shift of savings towards riskier assets such as stocks and should support valuations on the Warsaw Stock Exchange in the coming months.

Biomed-Lublin (BML PW): A Polish opportunity for short sellers?


Biomed-Lublin S.A. (Market cap PLN 1.16bn/EUR 253.4m) is a company with traditions: Its origins date back to 1944. With two production facilities in the city of Lublin (eastern part of Poland), it mainly produces drugs and serums/vaccines e.g. 1. BCG 10 – a vaccine against tuberculosis 2. Onko BCG – a drug used in the treatment of urinary bladder cancer 3. Blood plasma-derived immunoglobulin Histaglobulin – used in chronic asthma illnesses 4. Blood plasma-derived immunoglobulin GAMMA anti-hbs – used in prophylaxis of liver inflammation Hepatitis B 5. Blood plasma-derived immunoglobulin Gamma anti D – used in prevention of hemolitic illness of the newborn, and 6. Distreptaza – drug used in treatment of hemorrhoids and adnexitis. Through partners, the company also distributes its products abroad, especially in CEE/SEE and countries of the former Soviet Union (exports account for c. 33% of yearly revenues). BML’s strategy foresees investments in production capacity and a R&D center for further development of BCG 10 and Onko BCG in the coming years. 

Biomed-Lublin has been listed on the Warsaw Stock Exchange since 2011 (first in the NewConnect segment and from 2015 in the Main Market). While BML traded in a range of PLN 0.58-PLN 7.90 between 2011 and March 2020, since April 2020 massive demand from Polish retail investors has led to a significant increase of its market capitalization, which was a consequence of rumors that the company could introduce a COVID-19 treatment based on blood plasma of people, who recovered from the coronavirus, and use its vaccine against tuberculosis in the fight against COVID-19.

Members of BML’s management and supervisory board used the strong share price performance and sold in total 5.36m shares (c. 8.6% of BML’s shares outstanding) at PLN 4-33 per share in April-August 2020. As a planned capital increase failed, the insiders partially returned the cash to the company in the form of credit lines worth in total PLN 20m (duration of one year; interest rate is similar to current market rates) that are supposed to be used for the construction of a new R&D center and extension of production capacity for the product Onko BCG (total value of the project is PLN >48m, of which PLN 29m are supposed to be financed by EU grants).

Recent results

The publicly available results for Biomed-Lublin date back to 2009. In 2009-2019, its revenues increased from PLN 32.3m to PLN 39.1m (CAGR of 1.3%). Net income grew at a CAGR of 4.6% to PLN 2.5m over the same period, however in 2015, 2016 and 2018 the company reported very high write-downs relating to a failed investment in a new production facility for fractioning of blood plasma in Mielec. In early 2016, BML had to file for insolvency protection as it was not able to fulfill its financial obligations relating to this project (according to the most recent agreement with creditors, it has to pay all obligations that are worth PLN >15m in total by the end of 2024 in monthly installments). 

In H1/20, Biomed-Lublin generated revenues of PLN 19.7m (+7.3% y-o-y), EBITDA of PLN 5.2m (+6.2% y-o-y) and net income of PLN 719k (H1/19: PLN 609k). As of 30/06/2020, the company’s cash position equaled PLN 1.2m and it had net debt of PLN 13.2m (net gearing of 39.2%).

Summary & Conclusion

Based on median EV/EBITDA 2019 multiples of 11 Western and CEE-based pharma companies, the fair value of Biomed-Lublin’s existing business is PLN 2.13 per share (88.3% below its current share price). Thus, its current valuation seems to be solely based on its COVID-19-related projects (especially the COVID-19 treatment based on blood plasma-derived immunoglobulin), whose effectiveness still has to be proven in clinical trials and which have to go through a formal registration process before market introduction.

Currently, there are many Pharma/Biotech companies worldwide, which work on COVID-19 treatments and have much stronger financing capabilities than Biomed-Lublin (e.g. German BioNTech, which has a strategic partnership with Big Pharma company Pfizer; US-based Johnson & Johnson; or CureVac, which conducted a very successful IPO on NASDAQ in August 2020).  But this is not the only reason, why we have serious doubts whether Biomed-Lublin will be successful with its immunoglobulin COVID-19 treatment:

1) While Chinese officials stated that treatment with blood plasma of recovered coronavirus patients had helped COVID-19 patients and NHS Blood & Transplant is optimistic that its current large-scale clinical study with plasma that has high levels of neutralizing antibodies will show positive results, a recent study that was published on 16 October 2020 in the British Medical Journal concluded that blood plasma of recovered coronavirus patients fails to reduce deaths and stop progression to severe COVID-19. The study was conducted in Apr-July 2020 in dozens of public and private hospitals in India on 464 adult patients with an average age of 52 (however, with blood plasma that had relatively few antibodies).

2) Biomed-Lublin wants to conduct clinical trials of its COVID-19 treatments only in Poland and not in Western Europe or US, which would in our view make a successful registration and market introduction there a lot more likely.

3) The large-volume sales of shares by BML’s key staff on the stock exchange since April 2020 make us skeptical whether management/supervisory board members, whose track record at the company does not convince us, really believe in the future prospects of their business.

Investors, who believe that BML’s share price performance in 2020 does not reflect the company’s fundamentals, have the possibility to use futures that the Warsaw Stock Exchange introduced on 24 September 2020. BML’s average 3-month daily turnover is PLN 71m/EUR 15.5m and 59.7% of its shares are in the free float. According to publicly available information, no institutional investor has a stake of >5% in the company.

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


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).

Investment idea: PZU S.A. – An attractive long-term investment?


Business description

PZU S.A. is the No 1 insurer in Poland and the largest in the CEE region with foreign operations in the Ukraine and the Baltic countries. Apart from its insurance business, the state-controlled company is also active in the areas of asset management (Pekao TFI and PZU TFI together are No 1 in Poland), pension funds (PZU OFE is No 3 in Poland), banking (20% stake in the 2nd largest Polish bank Pekao S.A. and 31.9% stake in the 8th largest bank Alior) and private healthcare services (3th market position).  PZU has been listed on the Warsaw Stock Exchange since 2010 and currently has a market cap of PLN 21.1bn/EUR 4.7bn.


While its H1/20 results were affected by COVID-19 and write-downs of its banking assets of PLN 1.3bn, net income excl. one-offs reached a record level of PLN 1.7bn (+31.1% y-o-y) and the Return-on-Equity 19.1%. Gross written insurance premiums slightly declined by 1.3% y-o-y to PLN 11.7bn. Foreign operations contributed c. 6.4% to the operating income, which excl. one-off equalled PLN 2.2bn (H1/19: PLN 1.7bn). In the area of Healthcare services, where PZU already operates 130 own medical facilities, 48 hospitals and c. 8,700 pharmacies in Poland, revenues (incl. health insurance products) reached PLN 439m (+20.6% y-o-y) and the EBITDA margin 12.5% (H1/19: 10.1%). In our view, the write-downs relating to banking assets were conducted in order to reflect (1) the reduction of interest rates by the Polish central bank in H1/20 to a record-low 0.1%, (2) potential negative consequences of the weaker economy due to the coronavirus pandemia on the loan portfolios, and (3) weak performance of shares of both Alior Bank (-58.6% YTD) and Pekao (-51.9% YTD) on the Warsaw Stock Exchange.

In 2017-2019, PZU has been growing on the top-line at a CAGR of 2.9% (in 2019, gross written insurance premiums equalled PLN 24.2bn) and the EBIT margin amounted to 23.9%-30.2%, thus was significantly higher than of e.g. Allianz SE (8.3%-8.8%).

Summary and Conclusion

PZU, which has the highest S&P credit rating (A-) of all Polish companies, is very strong in two areas that in Poland (and its foreign markets) are particularly promising in the long run:  (1) Insurance, as the penetration of insurance products to GDP per capita is still low in Poland or Ukraine compared to other European countries such as Switzerland or Denmark, and (2) Private health services, for which there is increasing demand as the quality of service at public health facilities in Poland and other PZU’ markets is not considered to be the best. In addition, the stock seems attractively valued when taking into account its average historical 3-year P/E and consensus P/E 2020E (11.6x vs. 8.9x). German Allianz is currently trading at a consensus P/E 2020E of 10.5x.

As PZU has historically paid very attractive DPS, we expect that the company will again become a dividend payer in 2021E (like all financial institutions, this year it was forced to scrap the dividend for 2019 by the Polish Financial Supervisory KNF due to the coronavirus pandemia).

The main risk, which we see, is the owner (the Polish state), whose decisions are not necessarily always in the interest of minority shareholders. However, the Polish state depends on the dividends from its shareholdings, which supports our view that PZU will return to its historical dividend policy as soon as possible.

Disclaimer: The author of this article owns shares of PZU