Business description

Founded in 1998, Grupa Diagnostyka is the leading provider of diagnostic services in Poland, a country that still lags behind the OECD average in terms of health spending per inhabitant and its share in GDP.

Currently, Diagnostyka operates nationwide, with over 1,100 owned and more than 7,000 partner blood collection points, 156 diagnostic laboratories, and 19 diagnostic imaging centers. Each year, the company serves more than 20m customers and conducts over 140m exams. Its service offering includes laboratory exams such as analytical, microbiological (used to detect, identify, and study microorganisms), serological (used to detect and measure the presence of antibodies or antigens in a blood sample), histopathological (analysis of tissue samples), and genetic exams (DNA analysis); diagnostic imaging (ultrasound, computed tomography, magnetic resonance imaging, and remote analysis of diagnostic images for third-party clinics); as well as the collection, analysis, and transport of biological materials for B2B clients, including clinics, doctor’s offices, and research centers, both public and private.

In 2023, the B2C segment contributed approximately 40%, while the B2B segment accounted for around 60% of Diagnostyka’s total revenues, with a retention rate of over 95% in case of institutional clients.

Since 2011, Diagnostyka has grown both organically and through 128 acquisitions, including smaller independent laboratories and diagnostic imaging centers. In the near future, the company plans to focus its investments on further developing its proprietary software, particularly by adding AI functionality. Moreover, as the diagnostic imaging market in Poland remains highly fragmented, with the largest players controlling only around 55% of the market, management plans to focus its M&A activity on this area. The company expects to invest PLN 80m per year in the short term and PLN 70m per year in the medium term.

Financials

According to the company’s IPO prospectus, in 2011-2023 Grupa Diagnostyka has increased its revenues at a CAGR of c. 24% to PLN 1.6bn. In 2023, gross and EBITDA margin equalled 63.9% (2022: 63.8%) and 24% (25.7%) compared to 42.2% and 35.7% respectively at its main Polish peer Voxel, which offers diagnostic imaging services, produces radiopharmaceuticals and distributes software and equipment for radiologistics. Net income declined by 26.3% y-o-y to PLN 123.4m. Operating cash flow amounted to PLN 336m (2022: PLN 283.9m) and the free cash flow to PLN 164.5m (PLN 182.5m). 

In 9M/24, Diagnostyka generated revenues of PLN 1.44bn (+22.5% y-o-y), a gross margin of 64.4% (9M/23: 64%), an EBITDA of PLN 378m (+30.3% y-o-y, 26.2% margin) and net income of PLN 169.6m (+80.3%). While the volume of exams increased by 13.3% y-o-y, the average price improved by 8.5%. At the end of September 2024, the company’s net gearing equalled 209.3% and thus was high. However, of the total interest-bearing debt of PLN 869.7m only 14.8% was short-term. Moreover, the net debt-to-EBITDA ratio equalled only 1.8x and in 2021-2023 never surpassed 2x.

IPO & shareholder structure

Diagnostyka, which is owned by the CEE-focused private equity fund Mid Europa Partners, announced its IPO on January 13. As part of the transaction, Mid Europa that invested in the company in 2011 is offering 16,147,124 of its shares at the maximum price of PLN 105 per share (IPO value: PLN 1.7bn, implied equity value of 100% of Diagnostyka: PLN 3.5bn). According to Polish media, the order book in the retail tranche was already filled after 1 hour, indicating a strong performance of the stock on the first trading day on February 7th. 

Below is an overview over Diagnostyka’s shareholder structure before and after the Initial Public Offering (Source: Diagnostyka’s IPO prospectus). After the IPO, the CEO Jakub Swadzba and other founders will collectively own 47.2% of the company’s shares and 64.1% of its votes. 

Summary & conclusion

We believe that Diagnostyka is a company with an excellent track record and growth prospects. According to the OECD, in 2023 Poland only spent USD 2,682.10 per inhabitant on public & private healthcare, which is significantly less than e.g. Germany (USD 5,971.30) or even the Czech Republic (USD 3,227.80). By 2027E, the government plans to increase the share of public health spending in GDP from 6.2% in 2024 to 7% (Source: money.pl). For private health spending, which include e.g. out-of-pocket spending on health, latest forecasts foresee a CAGR 2023-2028E of 10% for the respective value to PLN 54bn (Source: PwC). While in the area of laboratory diagnostics, the market in Poland was valued at EUR 1.6bn in 2023 and its CAGR by 2030E is estimated at 7-9% (Source: Business Insider), the Polish diagnostic imaging market is expected to grow at 7% on average by 2030E from a value of EUR 1.6bn in 2023 (Source: Diagnostyka). 

In our view at the max. price of PLN 105 Diagnostyka’s valuation is compelling compared to its main Polish peer Voxel. With 33,756,500 shares outstanding, net debt of PLN 834.3m and trailing EBITDA after 9M/24 of PLN 378m, Diagnostyka would be valued at a trail. EV/EBITDA of 11.6x compared to 12.5x for Voxel, whose current market capitalisation equals PLN 1.5bn.

Based on our analysis, we recommend investors to BUY Diagnostyka S.A.’s shares, which in our opinion represent an attractive long term investment opportunity. We would also like to emphasize that the company’s dividend policy includes a payout ratio of at least 50% of annual net profit going forward.

Business description

PKP Cargo is the leading railway cargo company in Poland and the second largest in Europe, serving clients across various sectors including mining, metallurgy, construction, chemicals, food, timber, and automotive. With the largest rolling stock fleet in CEE, including over 1,500 locomotives and more than 52,000 wagons, the company provides stand-alone freight transport in Poland, the Czech Republic, Slovakia, Germany, Austria, the Netherlands, Hungary, Lithuania, and Slovenia. Additionally, PKP Cargo offers forwarding, customs services, transshipment, and delivery to final recipients. The company operates 4 own modernisation facilities and 25 transshipment terminals – 12 of which are intermodal or combine intermodal and conventional functions – with an annual capacity of 1.2m TEU containers. PKP Cargo’s largest shareholder is the Polish state, which holds 33.01% of the shares and effectively controls the company.

Since its IPO on the Warsaw Stock Exchange in 2013, PKP Cargo’s market position — at that time holding a market share of 48.6% in Poland — has significantly weakened to 27.9% after November 2024. In our view, this decline results from both increasing competition, particularly from cargo companies in neighbouring countries, and mismanagement by previous leaders, who were appointed based on political loyalties rather than merit. While Poland’s and the EU’s GDP (in USD) grew at a CAGR of 4.6% and 1.9%, respectively, from 2013 to 2023, PKP Cargo’s revenues increased at an average annual rate of just 1.5% over the same period.

In 2024, PKP Cargo faced a severe liquidity crisis, which forced management to submit an application to the court for the initiation of restructuring proceedings and reduce the Group’s workforce by approximately 18.4% (a total of 3,665 employees). The market consensus is that this was primarily due to a politically motivated decision by former Polish Prime Minister Morawiecki in 2022, combined with excessive and unnecessary expenses (e.g. sponsorships and legal services) incurred by PKP Cargo’s management. In 2022, during the energy crisis, the Polish Prime Minister instructed PKP Cargo to transport coal from abroad to address shortages in Poland. To free up capacity, the company was forced to terminate existing contracts with clients, resulting in substantial contractual penalties and the loss of customer relationships, as many clients excluded PKP Cargo from new tenders.

However, PKP Cargo’s new management, appointed by the Civic Coalition government in Q1/24, appears to be more competent and experienced. While the management board in place temporarily since January 2024 has reduced operating expenses and CAPEX and carried out the necessary layoffs, the newly appointed CEO, Agnieszka Wasilewska-Semail, who will officially take over on January 20, brings a wealth of experience. She has had a long and successful career in banking in both Poland and Belgium, as well as experience as the CEO of an industrial company undergoing restructuring.

Latest results

In its most recent full fiscal year 2023 (with the new Polish government in place since December 2023), PKP Cargo generated revenues of PLN 5.49bn (+1.9% y-o-y), with 75.8% from Poland, 10.7% from the Czech Republic, and 4.5% from Germany. The gross margin was 63% (compared to 58.7% in 2022), while the operating margin equalled 5.3% (down from 6.2%). Personnel expenses, at PLN 1.96bn, were by far the largest cost item. Net income amounted to PLN 82.1m (-44.5% y-o-y). Operating cash flow increased by 18.9% to PLN 1.21bn, but free cash flow declined from PLN 245.5m in 2022 to PLN 223.9m.

The first nine months of 2024 were very challenging for the company. A relatively weak economic environment in Europe and fewer orders from clients led to a 19.1% decline in revenues, which amounted to PLN 3.37bn. Germany was the only regional market where revenues saw a significant y-o-y increase (+29.1% to PLN 253m). Meanwhile, the gross margin improved slightly from 62.7% in 9M/23 to 63.4%, but the EBIT margin worsened from 6.2% to -23.5%, primarily due to a 53.2% increase in depreciation and amortisation expenses (including write-downs of rolling stock and other fixed assets). With a net interest result of PLN -142.2m (9M/23: PLN -133.3m), net income dropped from PLN 101.9m to PLN -795.7m.

As of the end of September 2024, PKP Cargo’s interest-bearing debt stood at PLN 2.85bn (compared to PLN 2.89bn on 31 December 2023), with 32.3% (up from 27.8%) of it being short-term. Net gearing rose to 99.7% (from 82.1%). Due to staff reductions, the PKP Cargo Group likely employed 16,268 people (down from 19,933 as of 31 December 2023). Following the signing of 17 letters of intent, subsidiaries of Polish State Railways (PKP S.A.) and other Polish companies have expressed their intention to hire around 2,500 of PKP Cargo’s former employees. 

Summary & conclusion

Last year was challenging for PKP Cargo’s shareholders and employees. However, the company now has a CEO with a strong reputation, and forecasts for the European rail freight sector are promising. By 2028E, TechNavio expects the market value to grow at a CAGR of 4.5% from c. USD 87.7bn in 2024, driven by the following factors:

1. Rail freight is the most cost-effective and eco-friendly way to transport goods over long distances (one train can carry as much cargo as 64 trucks).

2. The European economy — particularly in Central and Eastern Europe (CEE) — continues to grow, driving demand for building materials, coal, fuels, and other goods.

3. Growth in the intermodal segment, which combines rail and road transport.

4. Technological advancements, such as GSM-R and GPS, enabling real-time tracking and monitoring of cargo from the point of loading to unloading.

Moreover, with significantly lower personnel costs expected this year and a disciplined approach to CAPEX spending, PKP Cargo’s current valuation of PLN 637m (compared to PLN 4.2bn at its peak in 2014) looks very attractive. We believe the company could generate an EBITDA of PLN 800m in 2025E (Sell-side estimate for 2024E: PLN 277m), which would imply an EV/EBITDA ratio of just 3.7x. The current P/BVPS stands at 0.27x, thus the company’s equity is almost 4 times higher than its current market capitalisation.

In terms of future investments, we consider the intermodal segment particularly promising and worthy of attention. Additionally, we expect PKP Cargo will need to invest in modernising its rolling stock and furthering its digitalisation efforts.

Current trading

On January 3rd, XTPL announced its long-awaited first industrial implementation with a multi-billion USD Chinese partner from the display sector. While the initial order for six printing modules (UPDS) is relatively small, the potential of the deal is significant (several dozen printing modules in 2025E alone, along with corresponding service revenues and substantial volumes of nanoink). More importantly, the first industrial implementation is likely to accelerate the three others that are very close to being signed. These include deals from the US and Taiwan, related to PCBs and semiconductors, which could generate higher revenues going forward than the Korean one, which is focused on the display industry.

In total, XTPL is in talks with 20 international partners regarding industrial implementation, with eight of these at an advanced stage of negotiations. Based on information from management, we estimate the total revenue potential of the 20 potential industrial projects at approximately PLN 890m per year, which is nearly three times XTPL’s current market capitalization. In terms of production capacity, XTPL plans to rely on third-party contract manufacturers.

In 9M/24, XTPL’s revenues (excluding grants) reached PLN 6.7m, which represents a 27.4% decline compared to last year. This decrease was mainly due to lower sales of Delta Printing Systems (-6.6% to PLN 5.7m). Additionally, in contrast to 9M/24 last year the company generated revenues from an R&D project with NASDAQ-listed Nano Dimension related to the development of a nanoink, which is why the segment “R&D services” only reported sales of PLN 421k (-84.4% y-o-y). The segment nanoinks increased its revenues by 40.4% y-o-y to PLN 584k.

The number of staff almost doubled year-on-year to approximately 90 (including 2 highly qualified and experienced employees in the US and 1 in Asia) and distribution, administration, and other expenses increased by 58.6% year-on-year to PLN 11.8m. Thus, these costs will likely significantly exceed our previous estimate of PLN 11.5m by the end of December 2024. Gross profit amounted to PLN -6m, compared to PLN 5m in 9M/23, primarily due to a 128.6% increase in R&D expenses year-on-year.

Nevertheless, we believe the heavy investments in staff, a sales and distribution center in Boston, and production capacity related to Delta Printing Systems (DPS)—which now allows XTPL to produce three times more DPS per year and deliver them in a few weeks instead of several months—should pay off in the long run. Furthermore, the company has developed an advanced version of the Delta Printing System, called DPS+, which enables more automated production of over 100,000 units per year with high flexibility and is supposed to be targeted at Tech corporations and producers of electronics.

In general, Delta Printing Systems are used by research and corporate clients for R&D on new application areas, which opens up more possibilities for XTPL regarding industrial implementations. By 2026E, management plans to open two more demonstration centers e.g. in South Korea and Taiwan.

At the beginning of December, XTPL completed an equity issue worth PLN 31m (300,000 shares at PLN 92 per share), which we believe was primarily subscribed by long-term institutional investors from Poland and Germany (as of 30/09/2024, the company’s cash reserves amounted to PLN 4.8m after PLN 27.3m at the end of 2023). With the first signed contract for industrial implementation, the company can now apply for debt financing from banks. Therefore, XTPL’s financing until cash break-even—expected in 2026E at the latest—is now secured.

Our revised forecasts

After 9M/24, we have lowered our assumption for the number of Delta Printing Systems in 2024 from 12 to 10. For 2025E, we are more conservative than management (20 devices sold vs. guidance of 30). In our new forecasts, we have also accounted for the new DPS+, of which XTPL should sell 2 devices in 2026E.

Although one industrial implementation will likely lead to orders of 10-several hundred printing heads, which we assume cost EUR 80,000 each on average, and discussions with new potential partners are much faster than with previous ones, from today’s perspective we believe that XTPL will only reach the EBITDA break-even in 2026E. We now expect a negative gross margin of -15% in 2024E (previously: 56%) and higher OPEX than before (PLN 19.2m/year compared to PLN 12m before). Below are the updated estimates for 2024E-2026E. While XTPL’s stock remains highly promising in the long run, investors must be patient and prepared for significant volatility in the share price. In our view, the first industrial implementation has demonstrated that the global Tech industry places a high value on XTPL’s technology and that the Polish company provides substantial added value to its commercial clients. As more industrial implementations are expected to be signed in 2025-26E – with management anticipating at least one additional implementation this year – we believe XTPL will ultimately be acquired by a major global player in the Tech, display, or semiconductor sectors. It is also worth emphasizing that, with 40 international patents already granted and at least 40 more pending, the company’s IP portfolio holds significant value.

On November 5, the scenario many Western European politicians had feared became a reality: Donald Trump won the U.S. presidential election by a significant margin, securing 312 electoral votes to Kamala Harris’s 226.

If Trump follows through on the promises he made during his campaign — and based on his actions during his first four years in office, we believe he will — times could become difficult for Europe. Two of his main objectives are the widespread use of tariffs on both Chinese and European goods to support American industry, and the immediate end of the Russia-Ukraine war, where the U.S. has so far been Ukraine’s largest supporter.

Trump’s economic policy — e.g. there are discussions about a min. 10% tariff on European and a 60% tariff on Chinese products https://www.reuters.com/world/europe-will-pay-big-price-trump-warns-tariffs-2024-10-30/ — would make European goods significantly more expensive for US consumers and thus reduce Europe’s competitiveness. It’s worth noting that the U.S. is currently among the top three trading partners for many EU member states, including Germany and France (Source: destatis, World Bank, Google search) and the largest partner for the whole EU https://ec.europa.eu/eurostat/statistics-explained/index.php?title=File:Principal_partners_for_EU_exports_of_goods,_2023.png  Furthermore, Trump could pressure the EU to choose between aligning with the US in its policy against China or maintaining its current business relationship with the Asian country, which is the bloc’s 3^rd largest trading partner. This would be a particularly bad scenario for German car manufacturers, which generate between 16.1% (BMW) and 23.3% (Porsche) of their yearly revenues in China.

In terms of geopolitics, Trump aims to keep the U.S. out of foreign conflicts that cost American taxpayers billions. He also insists that all NATO countries spend at least 2% of their annual GDP on defence. During his first term as president, he even threatened that the US — by far the bloc’s largest financial contributor — could withdraw from NATO.

Trump’s plans could have severe economic and political consequences for the EU. His tariffs would likely hit Germany — the largest European economy and home to a car & machine building industry that support c. 800,000 and c. 955,000 jobs respectively — particularly hard. For most EU countries, including those in Central and Eastern Europe, Germany is by far the largest trading partner. For example, it currently accounts for approximately 27% of Poland’s exports, 33% of Czechia’s, 26% of Hungary’s, and 21% of Romania’s. Unless Europe quickly reduces its dependence on the US and China, the likely outcome could be a deep, Europe-wide recession, deindustrialization, and significant long-term destruction of wealth.

In terms of defense policy, a forced peace deal in Ukraine — under which Russia would likely retain the territories it has already seized, likely resulting in even more Ukrainian refugees in Western Europe — would have mixed implications. While Europe might participate in the rebuilding of Ukraine, the negatives would likely outweigh the positives. Reports suggest that members of Trump’s inner circle want Europe to bear the cost of securing a planned demilitarised zone between Ukraine and Russia’s occupied territories such as Donbas. Additionally, the EU would need to significantly increase its defense spending to deter further aggression from Russia.

In our view, sectors in Europe that could benefit from this new reality include defense, construction (particularly companies with prior experience in the CIS region), building materials, mining (e.g. producers of coke coal that is critical for steel production), and steel. Moreover, if a peace treaty is signed, the following Ukrainian companies — most of which are listed in Warsaw — could see significant recovery: Astarta, Ferrexpo, IMC, and Ovostar Union. However, we must emphasise that investing in Ukrainian equities carries significant risks, as these companies often lack adherence to Western corporate governance standards, and minority shareholder rights are frequently disregarded.

Investment case

Zabka Group was founded in 1998 and is the largest chain of convenience stores in CEE (small local stores, often 24/7, where you can buy food, newspapers, send a package or withdraw cash) with currently 10,880 stores in Poland and 26 in Romania. The store locations, which are often in apartment buildings, are being selected by Zabka with an AI-based tool, which analyses millions of addresses and takes into account hundreds of KPIs. 

The Zabka Group consists of two business units: Zabka Polska (focuses on operational and commercial aspects of the Group’s domestic business) and Zabka International (supervises the implementation of the foreign expansion strategy, especially in Romania, where Zabka cooperates with DRIM Daniel Distributie, one of the largest FMCG distributors there). The fully consolidated, 62%-owned subsidiary MasterlifeSolutions sp. z o.o. operates 1. Maczfit.pl – a diet catering that serves customers in Warsaw and almost 3,000 other locations in Poland with 418.8k monthly total visits according to Similarweb.com – and 2. Dietly.pl – a search and comparison engine for more than 300 diet catering and box diet companies in >1,000 Polish cities with 785.5k monthly total visits. The 100%-owned Lite ecommerce Sp. z.o.o is an Ecommerce startup that develops rapid grocery delivery services (Zabka Jush app, 100k-500k users according to sensortower.com) and e-commerce (delio app, 10k-50k users), including a dark stores network serving exclusively online orders.

Zabka, which currently has c. 2,000 employees & c. 9,000 franchisees, listed on the Warsaw Stock Exchange on October 17, 2024. During the IPO, which was valued at EUR 1.5bn/PLN 6.45bn and was the 4th largest in Polish history, the company’s owners, UK-based private equity fund CVC Capital Partners (76.89% stake before the IPO, now 40.82%), Australian Partners Group (18.02%, now 12.64%) and the European Bank for Reconstruction and Development, as well as members of the company’s board of directors sold in total 300m shares. 

Zabka’s guidance for 2023-28E looks as follows: 

1. 1,000+ new stores per year

2. c. 14,500 stores in Poland by 2028E

3. Mid-to-high single digit annualized LFL growth (7.5%-9% in 2024E)

4. 2x increase of the sales to end customers by 2028E vs. 2023

In terms of risks for Zabka’s business model, we believe that the main ones are 1. Changes in consumer trends 2. Increasing franchisee turnover (2023: 16%), and 3. Changes to the current Sunday trading bank law in Poland, which benefits Zabka.

Financial results

The available financial data for Zabka shows a significant double-digit growth on top-line and high profitability. In 2021-23, the company’s revenues grew at a CAGR of 25.9%, gross and EBIT margin reached 17.8-19% and 7-7.7% respectively and average ROCE equalled 12.4%. However, as the table below shows, this was weaker than the two largest players in the Polish food retail sector, Dino Polska S.A. and Portuguese Jeronimo Martins (Biedronka chain). 

For 9M/24, Zabka reported revenues of PLN 17.7bn (+20% y-o-y), a gross margin of 17.9% (9M/23: 16.9%), EBIT of PLN 1.2bn (+28.7%, 7% margin) and a net income of PLN 377m (+154.7%). In January-September 2024, the company reached a LFL sales growth of 8.6% (Q3/24: +6%) and opened 892 new shops (366). While small format stores and hypermarkets lost market share in Poland, Zabka’s went up by 1.2% to 18.6%.

In 9M/24, Zabka reported an operating cash flow of PLN 3.4bn (+71.9% y-o-y) and a Free Cash Flow of PLN 1.4bn (9M/23: PLN 823m). At the end of September 2024, its interest-bearing debt equalled PLN 10.1bn (incl. PLN 4.7bn of leasing liabilities), thereof 11.3% was short term. However, negative was the fact that Zabka’s goodwill (PLN 3.4bn) was higher than ist equity (PLN 1.1bn).

Summary & conclusion

Although Zabka is a solid company with a strong brand, we believe that its current valuation, implying a P/E ratio of 33x-22x for 2024-25E (compared to a P/E ratio of 19.4x-17.1x for Jeronimo Martins and 26.8x-20.8x for Dino Polska, both of which generate a higher ROCE), can only be justified by the growth potential in the Romanian market (19.1m people, GDP growth >3% per year, real wage growth of approximately 7% year-on-year). While Poland remains attractive due to significant single-digit real wage growth and improving consumer sentiment, the growth potential for Zabka in its domestic market appears to be largely exhausted, with Zabka stores now located on nearly every corner.

Given the above, we advise investors to remain on the sidelines at the current price level. Another risk to consider is the likely further share sales by CVC Capital Partners and Partners Group in the coming quarters, which, in our view, will weigh on Zabka’s share price.

In our opinion, Zabka would be a BUY at a share price below PLN 16 (current price: PLN 20.91 per share).

Business Description

Founded in 1990, Comp is currently the No. 1 provider of fiscal devices and IT security solutions in Poland. The company, which generates c. 7% of its total revenues abroad, operates two business units:

1. Retail Segment

-> Production and distribution of proprietary cash registers (including online and virtual versions), payment terminals, and add-on services such as M/Platform (an online big data platform for smaller shops for managing promotions, e-payments and e-invoices in cooperation with Eurocash, a leading wholesaler/retailer in Poland). Approximately 900,000 (thereof: c. 550k online ones that can be equipped with add-on services) of the total 1.8m (c. 1.1m) cash registers in Poland were produced by Comp.

-> Contributed 35% of total revenues in 2023

-> EBITDA margin of 12.9% in 2023

2. IT Segment

-> Provides IT security software and equipment for large enterprises and public administration. Comp holds all necessary certifications to conduct business with the Polish Ministry of Defence and the Armed Forces, which are difficult to obtain. Over the last 30 years, the company has built strong relationships with both public and private clients, as well as with international IT security solution providers such as Cisco Systems, Check Point Software, HP, IBM, Juniper, McAfee, and Symantec.

-> Contributed 65.1% of total revenues in 2023

-> EBITDA margin of 13.9% in 2023

Historically, Comp has been heavily dependent on third-party providers of IT security software and equipment, as well as on investment cycles related to cash registers and budgets for IT security projects. However, in our view the company now already generates over PLN 40m in monthly recurring revenues from proprietary add-on services for cash registers and from its own products (e.g. encryptors, identification tools). We believe that these high-margin categories are growing at >25% year-over-year and are expected to help Comp 1) reduce the seasonality of its business, which has historically been skewed towards H2, and 2) increase its EBITDA margin to 15-20% in the near future.

Comp’s shareholder structure is stable and long-term oriented. Polish pension funds own over 43% of the shares, the US-based fund Perea Capital Partners owns 6.7%, and CEO Robert Tomaszewski holds 6.3%. Since 2021, Comp has distributed PLN >70m to shareholders through dividends and share buybacks.

Latest Results

Over the past five years, Comp has increased its revenues and EBITDA at a CAGR of 8% and 9%, respectively. ROCE has historically ranged between 3% and 7%, but improved significantly to 9.9% in 2023, with further growth expected due to a focus on service revenues. For Q1/24, the company reported revenues of PLN 153.1 million (-28.8% y-o-y), including PLN 83.7m (-2.2%) from the Retail segment and PLN 69.6m (-46.4%) from the IT segment. In Q1/23, sales were positively impacted by several large but low-margin IT projects such as E-Health in the Pomorskie province and the Electronic Surveillance System. At the Group level, the EBITDA margin in Q1/24 increased to 18.4%, up from 11.6% in the previous year. In the Retail segment, the margin was 18.9% (Q1/23: 13.3%), and in IT, it equalled 24.9% (Q1/23: 14.3%). Between January and March 2024, Comp’s net income amounted to PLN 9.6m (+53.4%). The only negative was the decline in operating and free cash flow, which fell from PLN 38.2m in Q1/23 to PLN -86.1m, and from PLN 30.4m to PLN -94m, respectively. As of March 31, 2024, the company’s net debt stood at PLN 163m (net gearing of 36.6%), a reasonable level. 

Summary & Conclusion

We appreciate that Comp is the market leader in its segments in Poland and that it has successfully introduced proprietary products and services with recurring revenues in recent years, which should positively impact operating profitability, cash flow generation, and ROCE going forward. It is also a positive sign that the company’s management team, holding over 6% of its shares, has been stable over time. Given its track record, Comp is well-positioned to benefit from the upcoming replacement cycle of older fiscal registers, potential extensions of the fiscalisation in Poland, increasing investments in IT security by large private enterprises (funded, for example, by the EU Reconstruction and Resilience Funds, which foresees EUR 4.6bn for digital transformation & cybersecurity until 2026E), and defense and security investments (with Poland’s defence budget at >4% of GDP).

Current sell-side forecasts for Comp project EBITDA of PLN 135m (+22.2% y-o-y) in 2024E and PLN 148m (+9.6% y-o-y) in 2025E, translating to an attractive EV/EBITDA multiple of 4.8x and 4.4x, respectively. Additionally, Comp plans to continue its distribution policy, with expected dividends and share buybacks for both 2024E and 2025E valued at PLN 8/share (yield of 7.9%).

Business description

LPP, founded in 1991 by Messrs Jerzy Lubianiec and Marek Piechocki, has become a leading player in the Central and Eastern European clothing market. Currently, LPP operates in 39 countries across three continents, with over 2,000 stores and approximately 33,000 employees. The company is the ninth largest in Poland by market capitalisation. LPP made its debut on the Warsaw Stock Exchange in 2001 and is currently included in the WIG20 and MSCI Poland indices. LPP’s majority shareholder is the Semper Simul Foundation, established by one of the company’s founders. 

The Group’s sales are primarily derived from five fashion brands: Reserved, Cropp, House, Mohito and Sinsay. The company has no production facilities of its own and sources over 90% of its goods from Asia. Clothing is designed in Spain and Poland, with distribution centres in Poland, Slovakia and Romania. Management is looking to expand further, with plans to increase retail space by 25% in 2024E and c. 20% per annum in 2025E and 2026E. CAPEX for 2024E is forecast at PLN 1.5bn, of which PLN 1.2bn is for new stores as LPP plans to open over 700 new shops.

Revenues of business lines of LPP for 2023 and 2022 

Source: LPP S.A., East Value Research GmbH

Over the years, LPP’s affordable prices and new designs have earned the Group a loyal customer base. Sales are primarily generated through offline stores, with e-commerce accounting for only 24.6% of total sales (-3% y-o-y pp). Despite being the youngest brand in the group, Sinsay generated more than 43.1% of total sales in 2023. Furthermore, Sinsay is the group’s fastest-growing brand, having tripled its number of offline stores in just four years.         This promising brand not only offers clothing but also home accessories, competing with Pepco, KiK or Primark in the offline segment, and is also a leading player in e-commerce, where it competes with Chinese online shops Shein and Temu. 

Hindenburg Research Report on LPP

In 2022, following the invasion of Ukraine by Russia, LPP’s management decided to sell its Russian business to a Chinese consortium and Anna Pilyugina (former CEO of LPP Russia). The purchase agreement foresees the payment for stores and inventories in instalments, with the final payment scheduled for 2026E. The company opted for the least costly option for exiting the Russian market, which benefits LPP investors. Nevertheless, from a long-term perspective, it was a misguided decision to continue expanding into the Russian market and increasing inventory for this market. 

In March 2024, Hindenburg Research wrote a lengthy report on LPP’s exit from the Russian market. The report had a significant negative impact on the company’s share price, which fell by approximately 35% shortly after publication. The report’s title, “A Fake Russia ‘Sell-Off'”, suggests that LPP is willing to return to the Russian market after the war. The primary concern is the option for LPP to buy back the Russian part of the business. However, in the lengthy report, this option is mentioned in just one sentence. In an attempt to justify its title statement, Hindenburg presents other arguments, such as a change of auditor and encrypted barcodes. However, LPP has debunked these arguments. After several weeks of clarification and the dismissal of the allegations by LPP, the share price has almost returned to its pre-scandal peak

In our view, LPP Group has successfully defended its position against the majority of Hindenburg Research’s arguments. Regarding the main concern, the option to buy back the business, LPP has stated that the option was requested by the buyer and that exercising the option is not feasible due to the need for approval from a Russian government body. Russia has designated Poland as a hostile nation and a significant portion of LPP’s shares are held by Polish investors.

We believe that the consequence of the Hindenburg Report will be a stronger focus of LPP on expansion in Western and South-Eastern Europe than previously predicted.  

Financials

Over the past decade, LPP has experienced rapid growth, with a CAGR of 15.5% in sales and the addition of almost 1,000 stores. In 2023, the Polish clothing company generated revenues of PLN 17.4bn (+9.3% y-o-y), EBIT of PLN 2.28bn (+92.8%; margin 13.1%), and a net income of PLN 1.6bn (+232.3%; margin 9.3%). The sales performance has been enhanced by the Sinsay brand, which has reported a 24.7% y-o-y growth. The profitability improvement has been achieved through cost optimisation in the following areas: Slower increase in CoGS in the amount of PLN 8.4bn (+6.7% y-o-y), that mostly consists of valuation of inventories at purchase price from suppliers. Operating costs decreased by 2.1% y-o-y to 6.6bn, with advertisement costs PLN 432.5m (-44.5%) declining the most. Operating cash flow improved significantly from PLN 622m to PLN 4.34bn, free cash flow improved as well from PLN -534.6m to PLN 3.3bn, with net debt/EBITDA ratio dropping from 1.9x to 1.0x. 

Geographically, LPP’s home market Poland accounted for 42.4% of total sales or PLN 7.38bn (+7.6% y-o-y). However, international markets have seen even faster growth (sales of PLN 10bn, or +10.5% y-o-y). The largest foreign market is Romania, with sales of PLN 1.45bn (+8.9% y-o-y; 8.3% sales share). Ukraine is the second largest foreign market, with sales of PLN 1.18bn (+70.7%; 6.8%). The fastest growing foreign markets that LPP recently entered are Greece (+462.5% y-o-y; sales) and Italy (+409.2%).

LPP S.A.: Revenue, EBIT margin, Net Income and Number of stores (2017-2023/24)*

The most recent results for Q1/2024 indicate that the company is set for a very successful year in 2024E. In Jan-Mar 2024, LPP generated revenues of PLN 4.3bn (+18.3% y-o-y), with the Sinsay brand showing the strongest growth (+54.1%). There has been a significant improvement in profitability, with an EBIT of PLN 411m (+78.2% y-o-y; margin 9.5%; +3.2% pp), resulting in a net income of PLN 277m (+147.8%; margin 6.4%; +3.4% pp). Western Europe has been the fastest growing region, with sales growth of 31% y-o-y (6% of total sales) and retail space growth of 59.7%.  

Conclusion

We like LPP due to its successful track record spanning over 30 years and the fact that, thanks to its excellent logistics, it still has plenty of opportunities for international growth. For 2024E, the company predicts revenues amounting to PLN 21bn, and the current consensus EV/EBITDA 2024E is 7.9x. This valuation seems attractive both compared to its 3-year average (9.6x) and its peers (e.g., Abercrombie & Fitch Company -> EV/EBITDA 2024E of 9.4x, Inditex -> 12.6x, H&M -> 8.2x; Source: marketscreener.com).

In our opinion, LPP is a superb stock for investors looking for a company with characteristics of both growth and value stocks. LPP generously rewards its investors: the current dividend policy for 2023-2025E foresees the payment of a minimum of 50% of non-consolidated net profit.

The main risks we have identified are as follows:

1. Supply chain disruptions

2. New country performance risk

3. Changes in consumption trends

Business description

Founded in 2000 by the Canadian James van Bergh, who directly and indirectly is still its largest shareholder, Benefit Systems (www.benefitsystems.pl) is today the No 1 provider of non-payroll work benefits incl. discounts for fitness, culture, restaurants, health in CEE. At the end of March 2024, the company worked with >41,000 employers (2011: 2,850) in all its regional markets. The number of its primary product, the MultiSport card, equalled 1,996,600 (2011: 235,000), thereof 1,508,800 in Poland, 231,800 in the Czech Republic (BFT has been active there since 2010), 62,000 in Slovakia, 142,200 in Bulgaria (both since 2015), 44,600 in Croatia (since 2018) and 7,200 in Turkey (since 2021). In addition to its bonus card business, for the last few years Benefit Systems has also built a chain of own fitness centers (Q1/24: in total 255 centers, thereof 224 in Poland under 14 different brands e.g. Zdrofit, Good Luck and Fit Fabric as well as 31 abroad). According to management, it currently operates the largest such chain in Poland.

Benefit Systems’ business model is comparable to an insurance in the sense that its corporate clients (sometimes also their employees to 50%) pay the company a monthly flat fee for each bonus card and the company will only have costs if the employee uses the card. Employees gain access to >9,300 facilities within a single product and can use a wide range of services, including various online add-ons/courses, for a relatively small amount of money. When users want to try out a new place to work out, they do not have to worry about filling out paperwork on site – all they need to do is show their BFT bonus card with proof of identity or the BFT app. 

When it comes to employers, the bonus card makes them more attractive on the labour market, promotes employee retention and improves employee’ fitness and health, which can translate into lower costs. Moreover, Benefit Systems’ corporate clients receive one invoice rather than dozens from different facilities, which reduces their administrative work significantly.

Financials

Since 2011, when it was listed on the Warsaw Stock Exchange at a price of PLN 107/share, Benefit Systems has increased its revenues and net income at a CAGR of 22.4% and 22.9% respectively. For 2023, the company paid a dividend of PLN 41/share (DYield = 1.3% at present), but between 2016 and 2022 it re-invested all its profits. In 2023, it generated a ROCE of 22.3% compared to 10.6% in 2022.

For the Jan-Mar 2024 period, Benefit Systems reported revenues of PLN 801.1m (+28.1%). While the number of bonus cards went up by 12.7% y-o-y, ARPU in all markets increased by low double-digit percentage points. The Polish business contributed 72.6% to total revenues and generated an EBIT margin of 17.7% (Q1/23: 11.6%). The international business (thereof Czech Republic: +14.1% y-o-y to PLN 124.3m, Bulgaria: +11.6% to PLN 53.2m) reported an EBIT margin of 11.6% (8.6%). With PLN -3.6m, Turkey was the only geographical market that reported an operating loss in Q1/24.

At 29.7% (Q1/23: 23.3%), BFT’s Q1/24 gross margin was strong. In Q1/24, the company’s EBIT increased to PLN 123m (+87.2% y-o-y, 15.4% margin vs. 10.5% in Q1/23, EBIT ex ESOP: PLN 130.6m) and net income to PLN 92.1m (+75.9%, 11.5% margin). Consequently, operating and free cash flow improved from PLN 177.1m in Q1/23 to PLN 244.8 and from PLN 137.5m to PLN 194.8m respectively. As of 31/03/2024, Benefit Systems’ net cash (excl. IFRS 16 leasing) amounted to PLN 505.6m compared to PLN 373.5m at the end of 2023 and PLN 7.8m as of 31 March 2022. 

Conclusion

We like Benefit Systems’ attractive and highly profitable business model, which given the strong competition for employees and the popularity of non-monetary employee’ benefits in CEE/SEE has excellent growth prospects. Given its long track record and clever strategy (-> combination of bonus cards and own fitness clubs), we believe that other players such as Medicover will not threaten the company’s market leadership in the foreseeable future. In our view, there is especially strong growth potential in Turkey, a country with 85m inhabitants, 9 cities with 1m+ inhabitants and a highly dispersed fitness market.

We believe that Benefit Systems is a great stock to hold for the long term. While in 2024E management guides for max. 230k new cards (150k in Poland, max. 80k on foreign markets), a high single-digit ARPU growth and a similar unadjusted EBIT margin y-o-y (without the costs of the employee incentive scheme that management estimates at PLN 68m), we see the possibility for an increase of the guidance especially in Q4/24E, which is typically the best period of the year for the company (>30% of its annual net profit).

Benefit Systems also has an attractive dividend policy. For the years 2023-2025, it foresees the payout of at least 60% of the consolidated net profit.

Regarding risks, we believe the main ones are: 1. The outbreak of another pandemic, 2. Overinvestment in new fitness centers (in 2024E, BFT plans to open 15 new centers in Poland and min. 20 abroad).

Recently, we had a call with XTPL’s management. We have once again confirmed our conviction that the company has chosen the right commercialisation strategy and the business is moving in the right direction.

In the US and Asia, XTPL has been able to hire experienced sales managers from its main competitor Optomec, which confirms the results of our research that the company’s technology is considered superior to all comparable international providers. In addition to its local sales teams, XTPL works with currently 12 distributors. So far, the company has sold its products to clients from 21 countries worldwide.

In terms of staff size, in 2023 XTPL increased its team by 25 people to 70. Since January 2024, it has hired 20 more employees, which are necessary for reducing production times and growing sales, but we believe will negatively affect profitability this year. Further, larger hirings are only planned in 2026E. Currently, XTPL employs 11 own sales & marketing staff. 

Regarding the sales pipeline and products, the most important area of activity is of course industrial implementation, which will allow XTPL to significantly ramp up its revenues and generate a high share of recurring revenues. According to the CEO, there are currently 20+ industrial projects in the company’s pipeline, of which 9 are at least in the 2nd evaluation phase (out of 5 in total), and 4 in the 4th stage. We believe that at one of XTPL’s industrial partners a machine that uses the company’s technology is already ready and undergoing final tests, which makes a first industrial implementation in 2024E likely.

When it comes to other products, apparently 80 Delta Printing Systems are currently in the sales pipeline and due to investments in 2023 the company has reduced their production time by half. Moreover, XTPL has extended its offer by gold nanoinks and plans to introduce copper-based ones soon. 

With a cash level of c. PLN 20m, we estimate XTPL’s current monthly cash burn at PLN 2-2.5m. In our view, additional funding – if at all necessary in the future – will be debt.

Below are our updated estimates for XTPL in 2024E-2026E. While our assumptions for 2025E-2026E remain unchanged, we now believe that growth this year will be weaker and the company will still not be at EBITDA break-even . We expect higher sales of Delta Printing Systems y-o-y, the majority of which will be generated in H2/24E. By 2026E, XTPL is supposed to sell up to 100 (2023: 3) industrial modules – the production of which is very scalable and will also be conducted by contract manufacturers, according to management – and max. 40 Delta Printing Systems. 50% of sales then should stem from industrial implementations. 

Business description

CCC S.A. was formally established in 1999 and has been listed on the Warsaw Stock Exchange since 2004. With over 15,000 employees and operations in 23 countries, 90 e-commerce platforms, and 979 physical stores, the company is the leading footwear retailer in Central and Eastern Europe. Since its debut on the WSE, CCC has increased its revenues by 3296% (CAGR of 20.4%), reflecting the enormous growth that Poland has experienced in the last 20-30 years. CCC stores, with its own shoe brands and top global brands, can be found in almost every shopping center in Poland. Over the years, CCC has acquired many local brands that have become leading sellers in Poland, including Gino Rossi and Lasocki.

CCC’s largest shareholder is its founder, Mr. Dariusz Milek, one of Poland’s richest people, with a 33.33% stake. Many Polish funds have invested in CCC in the past, the largest being OFE Allianz Polska (a pension fund) with a 7.65% stake. Mr. Mi?ek returned to the position of CEO in 2023, having previously been Chairman of the Supervisory Board. The company’s shares can be traded on stock exchanges in Poland (Warsaw), the UK (London), and Germany (Munich, Stuttgart, Frankfurt, Berlin, Düsseldorf).

CCC Group’s business is divided into 5 main divisions: CCC (offline footwear retailer), eobuwie.pl (e-commerce footwear), Modivo (online fashion platform), HalfPrice (off-price stationary fashion stores), and DeeZee (fashion brand). Originally known as a footwear retailer, CCC Group aims to become the number one omnichannel fashion platform in the CEE region, and there are already signs of this, as recently it generated only 68.9% (-2.5% y-o-y) of total sales from footwear, while clothing already accounted for 16.5% (+3.7%).

In the last fiscal year ending February 2024, both footwear business units reported declines, while the offline/online fashion units HalfPrice and Modivo reported sales increases of 68.2% and 21.9%, respectively. In terms of profitability, the mainly offline CCC business segment reported the highest EBITDA margin of 17.3% (2022/23: 8.1%), while Modivo reported the lowest at -2.4% (+1.9%). Last year, the share of e-commerce fell to 46% (-2% y-o-y).

CCC’s management expects the rapid growth of its off-price stores under the HalfPrice brand to continue and that they will be the company’s main growth driver in the coming years.

Financials

Before the pandemic, the company experienced dynamic growth with a revenue CAGR of 21.9% (2004-2019 period). However, due to the global consumption slowdown and inflation, revenue growth slowed significantly (CAGR 15% for 2019-2023/24) in the last years. In 2023/24, CCC generated revenues of PLN 9.4bn (+3.5% y-o-y), EBITDA of PLN 778.4m (+46.6%, margin 8.2%, an improvement of 2.4% y-o-y), and a net loss of PLN -124.7m (2022/23: PLN -443.9m). The Group generated operating cash flow of PLN 820.9m (+51.8% y-o-y), free cash flow of PLN 495.8m (+479.2%), while net debt / EBITDA decreased to 2.35x (2022/23: 4x). CCC’s ROCE was 5.1% compared to Zalando’s 3.7%. Key factors contributing to improved profitability were the absence of foreign exchange losses (2022/23: PLN 60.7m), a lower number of write-offs on trade receivables (PLN -3.9m vs. PLN -44.7m in 2022/23), and financial income (PLN 124.1m vs. PLN 54m in 2022/23).

CCC S.A. Revenue, EBITDA margin and Net Income (2019-2023/24)*

*From 2020, the reporting period has started in February of the given year and has ended in January of the following year

  Net income/loss including non-controlling interests 

Source: CCC S.A., East Value Research GmbH

In 2023/24, CCC Group generated 54.4% (PLN 5.1bn) of its revenues in the Polish market. The largest foreign market was Romania (revenues of PLN 817.8m, +3.9% y-o-y, 8.7% of total revenues), while the fastest-growing one is Ukraine (PLN 187.9m, +587%). CCC had operated under a franchise model in Ukraine until 2023 but last year acquired a controlling stake (75.1%) in CCC Ukraine Sp. z o.o. and is now developing its own distribution chain. After stabilization in Ukraine, it is highly likely that CCC will achieve sales levels similar to those in Romania there. CCC is a recognizable brand within the CEE region, and recent results have demonstrated significant growth potential for CCC in the Ukraine.

In terms of dividends, before the pandemic CCC paid them for 11 consecutive years. The company’s current dividend policy foresees the payout of 33%-66% of consolidated net profit.

Summary & Conclusion 

In our view, CCC is a strong brand with a long and successful history and potential for further growth in the e-commerce segment. Despite being heavily indebted due to the pandemic, the company has swiftly reduced its debt to reasonable levels. We anticipate a further improvement in the EBITDA margin and expect double-digit revenue growth in 2024/25E. Favorable conditions boosting consumption in Poland, such as a positive real change in wages, suggest potential for CCC to enhance its financial performance for 2024E and beyond.

By the end of 2024E, the company plans to spin off its subsidiary Modivo S.A. (MODIVO and eobuwie.pl), which are responsible for its e-commerce business and accounted for 41.7% of the group’s total sales in 2023/24. The aim is to position it as a strong competitor to Germany’s Zalando. Modivo S.A., in which CCC holds a controlling 74.6% stake, was recently valued at PLN 4.9bn, with CCC’s stake valued at PLN 3.67bn (= 60.6% of its current market capitalisation). The Japanese Tech giant Softbank owns PLN 739.3m of Modivo’s convertible bonds with a duration until April 2026E and the right to convert to shares at a valuation of PLN 6bn.

Investors have taken note of CCC’s positive traction, with the stock gaining 43.9% YTD. With a consensus EV/EBITDA 2024/25E of 7.8x respectively compared to a 3y average of 14.9x (Source: marketscreener.com), we believe that CCC represents an attractive opportunity for investors seeking exposure to consumer stocks in CEE. In the long run, the company should also become a reliable dividend payer.

Author: Mateusz Pudlo