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

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

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

Recent results

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

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

Summary & Conclusion

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

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

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

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

Business description

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

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

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

Recent results

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

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

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

Summary & Conclusion

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

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

Business description

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

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

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

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

Recent results

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

Summary & Conclusion

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

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

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

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

While inflation has gone up everywhere since 2020 due to supply chain issues, COVID-19-related fiscal programs and the Ukraine war, Central and Eastern Europe (CEE) has been hit particularly hard. The Baltic countries Lithuania (24.1%), Estonia (23.7%) and Latvia (22.2%) lead the ranking of those with the highest inflation rate in the EU. In the main CEE economies Poland, Czechia and Hungary, inflation reached 17.9%, 18% and 20.7% respectively in September 2022. Over the last quarters, their central banks have increased interest rates from almost zero to 6.75%, 7% and 13% respectively. This means that in all these countries real interest rates have become strongly negative and money expensive, which is bad especially for real estate and growth stocks.

Given that the end of the interest rate increases is not in sight, which makes investments in bonds still risky, the best choice for investors seem to be fundamentally strong dividend-paying companies with reasonable net gearing. Below is a list of stocks from the CEE region with a long history of dividend payouts. The two companies with the longest track record of uninterrupted dividend distributions are the Hungarian and Slovenian pharma wholesalers Gedeon Richter (www.gedeonrichter.com/en) and Krka (www.krka.biz). They only have a net gearing of 3.4% and -11.8% respectively and are trading at P/E 2022E ratios below 10x. The stocks, which currently offer the highest dividend yield, are the Romanian natural gas producer Romgaz (12.2%, www.romgaz.ro) and the Polish manufacturer of aluminum products Grupa Kety (10.8%, www.grupakety.com).

All of the companies below can also be traded on a Western stock exchange e.g. in Frankfurt.

With 163.3% vs. -23.3% for WIG index, Polish Votum S.A. (www.votum-sa.pl) has significantly outperformed the broad market index over the last 12 months. Nevertheless, given its business performance so far in 2022 and sell-side expectations for 2023E-2024E, we believe that the stock is still undervalued by >40%.

Business description

Votum, which was founded in 2005, helps individuals that are clients of financial institutions to obtain compensation for personal and asset damages as well as abusive clauses in foreign currency loans. Other segments are the provision of rehabilitation services as well as photovoltaic installations, eco-friendly heating systems and Smart Energy Management for private households and corporate clients. With >300,000 customers, Votum is the largest company in its segment in Central and Eastern Europe. To date, the company’s clients received PLN >2.4bn of compensations.

After the decision by the Court of Justice of the European Union in 2019, the fastest growing and most promising segment of Votum’s business is however the one related to abusive clauses in FX loans. The court stated that agreements for loans that are denominated in foreign currencies could be declared illegal if they contain abusive clauses and the borrower requests it. It excluded the possibility that these agreements could be amended.

According to the Polish Financial Supervisory (KNF), at the end of 2018 Polish banks had 555.9k loans that were denominated in foreign currencies. Their value equalled PLN 128.6bn/EUR 26.7bn, thereof PLN 104.8bn/EUR 21.8bn were CHF loans. According to bankier.pl, until Q1/22 the total volume of CHF denominated loans declined to PLN 61.7bn/EUR 12.8bn, of which by far the most had the Polish state-owned bank PKO BP. What is relevant for Votum: In the second quarter of this year, the number of legal cases related to CHF-denominated mortgage loans equalled 67,000 and was >7,000 higher q-o-q.

Financials

In 2021, Votum, whose sales increased at a CAGR of 19.2% in 2007-2021, generated revenues of PLN 195.6m (+29.4% y-o-y), of which 37.1% stemmed from the segment Personal damages, 21.4% from Banking claims, 16% from Rehabilitation, 12.3% from Vehicle damages and 11.2% from Renewables. The most profitable segment was Banking claims, which generated a net margin of 24.5%. Last year, Votum generated a net profit of PLN 10.1m (+16.1% y-o-y; CAGR 2007-2021 = 9.3%). Operating and free cash flow equalled PLN 205k and PLN -2.1m respectively and ROCE 15.6%.

For Q1/22, Votum reported revenues of PLN 55.7m (+30.2% y-o-y), whereby Banking claims (+173% y-o-y to PLN 35.2m) accounted for 63.1% of the total. EBIT advanced by 464.8% y-o-y to PLN 18.8m and net income by 549.5% to PLN 16.2m. The two most profitable segments were Banking claims (net margin of 42.1%) and Personal damages (15.4%). At the end of March 2022, Votum had interest-bearing debt of PLN 26.8m, thereof 55.2% short-term. Net gearing equalled 24.8%.

On July 15, Votum reported its preliminary Q2/22 figures for the Banking claims segment. In Apr-Jun, revenues reached PLN 43.7m and net income PLN 27.5m. In Q1/22, revenues and net income, which relate not only to the remuneration for first instance court rulings but also upfront payments and binding court decisions, amounted to PLN 35.2m and PLN 14.8m respectively.

Between 15 June and 14 July 2022, there were 667 court rulings for legal cases of Votum’s clients. That compares to <100 such rulings in June 2021 and c. 260 in Jan 2022. The number of new contracts for legal support related to abusive clauses in FX-denominated loans reached 722 compared to c. 480 in June 2021 and c. 720 in Jan 2022.

Summary & Conclusion

Votum is a company with a strong majority shareholder – Wroclaw-based financial group DSA Financial and its founder Andrzej Dadello – and leading market position in CEE in its segment. Members of its management team own >3.2% of the company’s shares and have been buying stock over the last months. Since 2007, the company has shown very solid growth on top and bottom line. Given that abusive clauses in loan agreements constitute a significant issue for Poles and the decision in 2019 in this regard by the Court of Justice of the EU was clearly in favor of consumers, we believe that Votum will report significantly improving results at least in the next two years. This should also allow the company to pay out attractive dividends to its shareholders.

Sell-side analysts seem to be of the same opinion. Their latest estimates for 2022E assume a net profit of PLN 60.4m, which however given the company’s recent news flow is very conservative, in our view. We believe that for full-year 2022E Votum will report a net profit of at least PLN 70m (+593.1% y-o-y) which despite the very strong share price performance since January 2022 would still imply a P/E 2022E of just 6.8x at present. In 2022E-2024E, sell-side analysts expect a net income CAGR of 21.5%.

Regarding DPS, the current sell-side estimate for 2022E is PLN 2.52, which implies a DYield of 6.4% at present. For 2023E, the company is expected to pay out 50% of its yearly net profit or PLN 3.32 per share.

Disclaimer: The author of this blog post owns shares of Votum S.A.

Business description

The founder-managed MedTech company Genomtec (www.genomtec.com) was established in 2016 by scientists from the Wroclaw Medical University. It has developed a molecular diagnostic device, which compared to standard PCR devices costs 6 times less, is mobile, much faster and energy efficient. We believe that given its already announced distribution contract in Greece, Genomtec will likely generate first revenues of PLN >1m in 2022 upon receipt of CE/IVD certification in the EU for its molecular diagnostic device Genomtec ID within the next two months. The global PoC Molecular Diagnostics Market, which the company targets, is worth USD 2.8bn and growing at a CAGR of 8.2% (Source: MarketsandMarkets)

Genomtec, which already has international shareholders, is listed in the NewConnect segment of the Warsaw Stock Exchange but can also be traded in Frankfurt. Its founders own >33% of the total shares outstanding, while its largest shareholder is the major Polish VC fund Leonarto VC (www.leonarto.vc). The team includes Polish scientists, but also foreign experts incl. Charudutt Shah (Chief Business Officer), who previously worked in Business Development at the major global MedTech company biomerieux; and Jason Reece (Chief Technology Officer), who has previously been in charge of several IVD (In-Vitro Diagnostics) systems e.g. at Novartis and Perkin Elmer. In its UK-based facility, Genomtec employs several experienced production engineers.

Genomtec’s products

Genomtec ID is GMT’s flagship molecular diagnostic device for the analysis of DNA. Compared to stationary PCR devices, it is small, much more energy efficient and faster (it only needs 30-40 min to deliver results), but also offers 10-100 times higher reaction efficiency. It can be used everywhere and does not need to be handled by skilled personnel with laboratory training.

Genomtec ID includes an analyzer and a reaction card with integrated genetic tests and provides multiplexing capability of simultaneously up to five genetic targets. One of the diagnostic panels, which is supposed to cost c. EUR 45 and will generate recurring revenues for Genomtec in the future, is for respiratory diseases and includes SARS-CoV-2. Others, which are however still under development, cover e.g. Sexually-transmitted infections and SEPSIS.

Apart from Genomtec ID, the company also offers rapid genetic tests, including two-gene SARS-CoV-2 tests. In the future, it also plans to develop Genomtec Tumor, another SNAAT-based device that could be used to quickly identify neoplastic mutations.

Financials

We estimate Genomtec current cash position at c. PLN 5m. This should allow the company to launch production of the Genomtec ID device after certification in Q3/22. However, in order to grow its sales team and ramp up production it will likely have to conduct another capital increase soon. We estimate Genomtec’s current monthly cash burn at c. PLN 1m.

Valuation

We have strong faith in Genomtec’s management and its technology, which in our view offers significant advantages compared to the current PCR standard. In particular, we believe that the track record of Charudutt Shah and Jason Reece significantly increases the probability of a successful commercialization of Genomtec ID.

Given the sales potential of its Genomtec ID device, the company is currently very attractively valued, in our view. Its current market capitalization equals USD 12.8m, while similar companies have been sold for at least 15 times higher valuations in the last years. For example, in 2014 Swiss Roche acquired US-based company iQuum (provided the Liat Analyzer and the Liat Influenza A/B Assay) for USD 450m including milestone payments. In another M&A deal in 2018, German Qiagen bought Spanish STAT-Dx (offered the DiagCORE system, an easy-to-use platform that consolidates molecular and immunoassay techniques in a single PCR device) for in total USD 191m.

Disclaimer: The author of this blog post may own shares of Genomtec

Something, of which Polish politicians have been warning since at least 2008, became reality on February 24: on this day, Russia launched its attack on Ukraine. After it had initially tried to conquer the capital Kiev, since recently the Russian army has focused its activity on the Eastern part of Ukraine, with the apparent objective to create a land corridor between the Crimean Peninsula and Russia. There are speculations that Putin wants to end the “Special Military Operation” against Ukraine until the annual Russian Victory Day on May 9. However, despite the superiority of its army, Russia has not made any significant military advances in Eastern Ukraine yet. 

Several scenarios are possible for Ukraine after the fighting stops, which will happen sooner or later. In our view, the country will most likely be forced into a kind of neutrality but will not become a member of EU and NATO. On the other hand, due to the current conflict NATO will probably further strengthen its eastern border including a significant presence of the US army in countries such as Poland and the Baltics. In our view, given the experience from Germany during the Cold War, this could positively impact the GDP in regions, where these troops are/will be located. In 1985, >240,000 US soldiers served in military bases in Western Germany and this created 16,500 jobs for Germans. Also, it is estimated that they spent 40% of their salaries in local German shops or restaurants and not just on American products  https://www.sueddeutsche.de/politik/amerikanische-streitkraefte-welche-bedeutung-us-truppen-in-deutschland-haben-1.4035390

The above shows that military bases can indeed be a significant economic factor, especially in regions with a weak industrial base. In Poland, there are currently c. 9,000 US soldiers, which are mainly based in relatively poor parts of the country e.g. the South-East. https://forsal.pl/swiat/bezpieczenstwo/artykuly/8386335,wojska-usa-w-polsce-obecnie-nad-wisla-przebywa-ok-9-tys-amerykanskich-zolnierzy.html In the Baltic countries, where between 6% and 27% of the population are Russians, there are in total >3,000 NATO troops. We expect that in the whole CEE region the number of NATO soldiers will significantly increase in the next three years. Apart from Poland and the Baltic countries, Romania will particularly benefit from this, in our view.

While the stronger permanent presence of NATO troops in CEE will likely positively impact the demand for local goods and services, the economies of the respective countries should also benefit from joint (R&D) projects with NATO partners. In addition, as all NATO countries will grow their military spending to at least 2% of GDP in the short term, there will be higher demand for military equipment and technology. Thus, we expect that such listed companies as e.g. VIGO Photonics S.A. www.vigo.com.pl (Market cap EUR 104.5m), Protektor S.A. www.protektorsa.pl (EUR 13m) and Lubawa S.A. www.lubawa.com.pl (EUR 81.6m) will be among the biggest winners. Moreover, we believe that especially the public sector and the armed forces will invest much more in IT security as cyber attacks will become a growing threat. This should be positive for e.g. Comp S.A. www.comp.com.pl (Market cap EUR 61.6m), Asseco Poland S.A. www.asseco.pl (EUR 1.4bn) and Passus S.A. www.passus.com (EUR 17.3m). Additionally, retailers such as Pepco Group NV www.pepcogroup.eu (EUR 5.2bn) and Jeronimo Martins SGPS, S.A. www.jeronimomartins.com (EUR 12.5bn) could benefit from increased purchasing power in regions with military bases.

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.

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.

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.

Financials

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.