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


Business description

Pepco is a multi-national retail chain, which is indirectly owned by the South African company Steinhoff and which is currently in the process of conducting an IPO on the Warsaw Stock Exchange. The original offering comprised 102.7m shares (17.9% of the total) of Pepco’s management (1.2% of the offering) and Pepco Holdco (98.8%), which is controlled by Steinhoff that needs cash in order to repay debt. Pepco, whose first day of trading on the Warsaw Stock Exchange is scheduled for May 26, was valued during the bookbuilding at PLN 40 per share (initial IPO price range was PLN 38-PLN 46) or PLN 23bn/EUR 5.08bn. The final number of sold shares equals 80.4m and is worth PLN 3.2bn. Given its market capitalization, Pepco will likely become member of the Polish WIG20 bluechip index soon.

Pepco was founded in 2014 as a subsidiary of the South African company Pepkor SA and is currently 98.8%-owned by Pepco Holdco, which is controlled by one of the largest furniture companies worldwide, Steinhoff. The company is a discount variety retailer and its target group are families, who care about their wallets, meaning those with below-to-average incomes.

The company’s operations can be divided in four segments:


PEPCO was established in Poland in 2009 and offers various products in the “all for one dollar” format e.g. clothing, pet food, toys and household goods. Apart from Poland, it also operates in 12 other countries including Romania, Hungary, Czechia, Slovakia, Croatia, Lithuania, Slovenia, Latvia, Estonia, Bulgaria, Italy and Serbia. PEPCO’s >2,100 stores are located in small and medium-sized cities and have 350-550 sqm. In 2021 and the coming years, it plans to open new stores and enter new markets e.g. Spain.

(2) Poundland

Poundland opened its first store in 1990 and has since then expanded its network to c. 920 shops in the UK and Ireland. Its offering comprises everything from food, health & beauty, cleaning & pet products and clothing. The retail chain’s pricing ranges above and below one pound.  

(3) Dealz

Dealz is a brand of Poundland and through currently 150 stores is present in Ireland, Spain and Poland. The chain mainly offers basic necessities such as food, drugstore products and clothing.

(4) PGS

PGS provides sourcing, product development and technical services for Pepco’s brands. It is present in mainland China, Hong Kong, Bangladesh, Pakistan and India, from where it supports PEPCO, Poundland and Dealz stores with USD 1bn worth of goods every year. It also has contracts with external retailers from around the world.


With total sales split almost evenly between PEPCO and Poundland, in fiscal-year 2019/20 Pepco generated EUR 3.5bn of revenues, which corresponds to a y-o-y growth of 3% and LFL (same store) decline of 5.2%. While UK accounted for 42.7% of total sales, Poland and Rest of Europe contributed 25% and 32.3% respectively in 2019/20.

In 2018-2020, Pepco’s top-line grew at a CAGR of 7.6%. Last year, gross margin declined from 42.3% in 2018/19 to 40.7% and EBITDA (pre-IFRS 16) reached EUR 228.9m (-31.2% y-o-y; 2y CAGR = -9.1%). The EBITDA margin equalled 6.5% compared to 9.7% in 2018/19. Due to lower EBITDA and higher net financial costs net income was negative (EUR -0.5m vs. EUR 210.4m in 2018/19). However, positive was the strong increase of the operating (EUR 579.6m vs. EUR 182.1m in 2019) and free cash flow (EUR 414.2m vs. EUR 51.3m). At the end of September 2020 (end of fiscal-year 2019/20), net debt amounted to EUR 328.3m (2019: EUR 460.6m) or 1.4x of EBITDA (pre-IFRS 16).

Summary & Conclusion

We believe that at PLN 40 per share Pepco is an attractive investment in the long run. Based on information in the IPO prospectus, we expect that in 2020/21 total sales will increase by 7% y-o-y to EUR 3.8bn, but at a higher gross and EBITDA margin y-o-y. In 2020/21, Pepco plans to open 450 new stores, thereof 320-350 Pepco, 30 Poundland and 100 Dealz, with expected CAPEX of c. EUR 250m and EUR 200m per year in the medium term. Based on our estimate, the implied EV/Sales would be 1.4x compared to 2.2x for Dino Polska (fast-growing grocery chain in Poland), 1.5x for CCC (Polish shoe retailer) and 1.9x for LPP (Polish fashion retailer).

We are optimistic that Pepco will continue to develop well going forward. We like the focus on the “thifty” consumer with below-to-average incomes, who e.g. in Poland will have more spending power from 2022 due to tax reductions and subsidies for families that are foreseen in the recently published “New Order” government program. In our view, the planned opening of new stores in mainly CEE/SEE is positive as consumption in these countries will likely continue to increase at higher levels than in Western Europe due to rapidly growing GDP and incomes.

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


Business description

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

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

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


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

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

Summary & Conclusion

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

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

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

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

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


Private savings at record level after decline in Q1/20

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

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

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

Outlook for the Warsaw Stock Exchange remains positive

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

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


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

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

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

Recent results

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

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

Summary & Conclusion

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

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

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

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

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

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

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


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

Recent results

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

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

Summary & Conclusion

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

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

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

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


Business description

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


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

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

Summary and Conclusion

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

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

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

Disclaimer: The author of this article owns shares of PZU

Investment idea: R22 S.A. – Another Polish long-term COVID-19 beneficiary?


Business description

R22 (Market cap PLN 482m/EUR 109.8m) is a Polish IT & Advertising group, which is owned by Mr Jacek Duch, a very experienced IT professional, who previously was CEO of Oracle Poland and now serves as Head of the Supervisory Board of the 6th largest European software company Asseco Poland; Jakub Dwernicki, the company’s CEO and founder; his father Robert Dwernicki; and Sebastian Gorecki. All four gentlemen, whose combined stake in R22 equals 62.9% of all shares, signed a shareholders’ agreement. Currently, R22 has >400 employees and offices in Poland, Romania and Croatia.  

R22 provides complex services, which support the clients’ online presence and the automation of their processes, especially those related to communication, marketing and sales. Among its customers, are companies of all sizes. Sales in the subscription or Software-as-a-Service model, which generate recurring revenues, make up c. 95% of R22’s total sales.

Currently, the company has the following brands:  1.  cyber_Folks – Services relating to hosting, sale of domains and SSL certificates, SEM/SEO as well as creating and managing web shops; 2. Appchance, EmailLabs, RedLink, ConversionLabs, EmailHeroes, CloudSender, SMSLabs, SerwerSMS –  Mobile App development, SMS and marketing automation; 3. Oxylion Group – provider of radio, cable and fibre internet services (has 1,300 receivers and 100 km of fibre networks in Poland); and 4. Profitroom – software, which allows hotels to sell rooms through their own website and automate the offering and payment processing.


In fiscal-year 2019/20, which ended on 30 June 2020, R22 generated revenues of PLN 194.6m (+33.6% y-o-y; 2y CAGR = 32.6%). While the Polish business accounted for 87.1% of total sales, Romanian and Croatian made up 10.9% and 2% respectively. Compared to last fiscal-year, revenues from Poland went up by 25% y-o-y and from Romania by 110.2% y-o-y (Croatia did not contribute in 2018/19). In terms of R22’s business segments, Omnichannel was the largest one in 2019/20 with a share in total revenues of 48.1%, while Hosting and Telco accounted for 45% and 6.9% respectively.

Between July 2019 and June 2020, R22’s EBIT increased by 44.5% y-o-y to PLN 36.7m (18.9% margin) and net income by 44.9% to PLN 16.8m (8.6% margin; 2y CAGR = 57%). In terms of business segments, Omnichannel generated an EBIT margin of 21.1%, Hosting 19.7% and Telco 21.1%. In 2019/20, R22’s operating cash flow reached PLN 54.8m (2018/19: PLN 37.5m) and free cash flow PLN -4.2m (PLN -4.6m). As of 30/06/2020, net debt equalled PLN 161.8m vs. PLN 76.6m in the previous fiscal-year, which stemmed from acquisitions e.g. of Romanian Top Level Hosting S.R.L for PLN 8m and Croatian provider of hosting and domain services Avalon d.o.o for PLN 8.4m. While it debuted on the Warsaw Stock Exchange in 2017, R22 paid out the first dividend for fiscal-year 2018/19 (PLN 0.30 per share). The company’s 5-year dividend policy, which was approved in September 2019, foresees the distribution of 30% of yearly net profit to shareholders.

With regard to R22’s results in the next 2-3 years, we expect a continuous improvement due to widely expected increased investments in digitalisation and process automation following the coronavirus pandemia. We also like the company’s strong market position especially in the  area of Hosting & Domain Services (No 3 in Poland, No 1 in Romania) as well as its strategy, which foresees acquisitions with the objective to create a leading player in the area of Hosting & Domain Services in CEE.


Based on EPS estimates from CapitalIQ of PLN 2.32 (+23.4% y-o-y) for 2020/21E, R22’s stock is currently trading at a P/E 2020/21E of 14.7x and PEG of 0.63x. We believe that there is potential for similar EPS growth beyond 2020/21E due (1) the favourable market demand, which the company is currently facing, and (2) management’s prudent growth strategy.

As main risks, we regard a negative impact of integration costs relating to M&A on results in the short term, a wrong choice of acquisition targets and relatively high financial debt (30/06/2020: PLN 176.4m, however thereof 89.9% long term).

Disclaimer:  The author of this article owns shares of R22 himself

Investment idea: LiveChat Software S.A. – Current cons. EPS growth from 2021/22E seems too low


Business description

LiveChat Software S.A. (www.livechat.com; Market cap PLN 2.4bn/EUR 553m) is a Software-as-a-Service company that is based in Wroclaw/Poland. It is controlled by the founders & management (incl. CEO Mariusz Cieply), who own 47.1% of the company’s shares. Among  LiveChat’s (LVC) clients are companies from >150 countries, thereof >25 from the Fortune 500 list e.g. McDonalds’, Adobe, CBS, Comcast, PPG, PayPal.

The company’s by far most important product is Live Chat, which according to thechatshop.com is No 3 worldwide (market share of 11%). It is a chat window for online communication between a customer and company’s representative with many additional functionalities incl. monitoring of website traffic and users’ actions, possibility to conduct and analyse transactions in the window, which is serviced by c. 30 LVC’s customer representatives. As of 5 June 2020, the number of clients of the Live Chat product reached >30,000 compared to 28,784 as of 31/03/2020 (end of fiscal-year 2019/20) and 26,379 at the end of March 2019. The ARPU of new clients has massively increased since the beginning of 2020 as customers have been choosing more expensive subscription models (currently, there are four different plans, which are payable monthly or yearly in USD).

While it has several other software products (Helpdesk, Knowledgebase etc.), the only one, which is currently generating meaningful results apart from Live Chat, is Chatbot. Chatbot allows AI-based text communication between a customer and a machine in various business scenarios (the machine has to be “trained” first). The product, which already has >1,100 clients (March 2019: 480), generated sales of PLN 2.3m in fiscal-year 2019/20 (2018/19: PLN 664k).


In 2019/20, which ended at the end of March 2020, LiveChat generated revenues of PLN 130.9m (+19.7% y-o-y), thereof 98% abroad and c. 47% in North America. The Live Chat product accounted for 98.2% of total sales. In 2017/18-2019/20, LVC’s revenues grew at a CAGR of 21%.

Compared to 2018/19, EBIT increased by 15.7% to PLN 81.9m (62.6% margin) and net income by 33% to PLN 76.1m (58.2% margin; CAGR 17/18-19/20 = 25.5%). As of 31/03/20, Free Cash Flow equaled PLN 58.3m (2018/19: PLN 50.6m) and net cash PLN 35.6m.

In Q1 2020/21 (ended in June 2020), LiveChat’s results were likely also very solid (full Q1 2020/21 report is due on August 28). Preliminary sales grew by 31.3% to USD 10.4m due to higher ARPU (both month-on-month and year-on-year) and number of users of Live Chat and Chatbot as well as a lower churn (in April 2020, customer churn temporarily went up to c. 4% vs. 3% previously).

Given its strong cash generation, LVC is able to pay a generous dividend to its shareholders. Between 2017/18 and 2019/20, DPS equaled PLN 1.77-PLN 2.48. In the last two years, the company paid out the dividend in three installments.


In our view, LiveChat will be among the main beneficiaries of the coronavirus pandemia, which increases the pressure at companies around the world to digitalize business processes and move them online. Moreover, due to the pandemia a significantly higher share of employees will likely work remotely most of the time in the future. In terms of products, for Chatbot the company assumes a similar (strong) growth trajectory than Live Chat had in the past. In addition, the weaker PLN vs. USD should support LVC’s results in the short term.

Because of the above, we believe that the current consensus EPS CAGR in 2020/21E-2022/23E of just 16.6% is too low, especially given the fact that in 2017/18-2019/20 (thus, before the pandemia and when LVC basically only had one product) it equaled 25.5%. For EPS 2020/21E, current CapitalIQ consensus implies a y-o-y growth of 36.3% vs. current P/E 2020/21E of 23.5x (Price-Earnings-Growth ratio of 0.65x).

The main risks, which we see, are an already strong performance of the stock YTD of 120.7% and LVC’s focus on text-based communication (in our view, speech-based bots are becoming increasingly important).

Disclaimer:  The author of this article owns shares of LiveChat himself

Investment idea: MakoLab S.A. – Fast-growing family-owned Polish software company


Business description

MakoLab (Market cap PLN 56.2m/EUR 12.5m) is a Polish software company, which is owned by Vice President of the Board Dr. Miroslaw Sopek (Master’s degree in Technical Physics, Information Technology and Applied Mathematics, PhD in Theoretical Chemistry) and his wife (they both control 73.6% of the shares). The company describes itself as a Digital Project House and has been on the market since the mid-1990s. It is headquartered in Lodz, but also has offices in Warsaw, Lublin, Paris, London and Tampa (USA). MakoLab currently employs more than 188 full-time employees (thereof: 3 in UK and 2 in US) from 9 countries and has so far conducted >500 projects.

The company’s client portfolio comprises well-known names such as for example Renault, Maspex, Toyota, Pfizer, PZU, Amcor, International Paper, BASF and Europcar, who mostly have been with the company for the last 10-15 years. MakoLab’s services include Content Management Systems (incl. for example semantic search), dedicated business solutions (e.g. IT body leasing, financial simulators, lease/cost/facility management tools), Customer Relationship Management tools, e-shops, mobile apps (e.g. 3D Car/Interior Visualizer, Virtual Reality/Augmented Reality solutions), online marketing (e.g SEM/SEO, content marketing), graphic/multimedia design & user experience, Web Analytics, solutions for the Connected Car, and Data Center Services. The company is official software partner of e.g. Microsoft, IBM Sitecore, Adobe, Magento and Google.


In 2019, MakoLab generated revenues of PLN 43.4m (+36.4% y-o-y), thereof 74% abroad. International sales grew by 32% y-o-y, while domestic ones advanced by 52%. The main growth drivers were software projects for the “Connected Car” as well as outsourcing of IT services. Most sales stemmed from clients from the Automotive and Financial sectors. In 2016-2019, MakoLabs sales grew at a CAGR of 28.7%. In Jan-Dec 2019, EBIT increased by 99.1% to PLN 6.3m (14.6% margin) and net income by 93.4% to PLN 4.8m (11% margin; CAGR 16-19 = 58.6%). While Free Cash Flow equaled PLN 5.3m (2018: PLN 1.8m), net cash as of 31/12/2019 amounted to PLN 7.8m.

In 2020, growth slowed down due to COVID-19. Sales grew by 11.9% y-o-y to PLN 48.6m (thereof: +19% y-o-y abroad following robust sales of “Connected Car”, “Data Center” and on-demand digital services, -9% in Poland mainly due to weaker sales from IT outsourcing), EBIT declined by 10.6% (11.6% margin) to PLN 5.7m and net income advanced by 0.5% to PLN 4.8m (9.9% margin). While profitability was negatively affected by higher personnel costs and expenses relating to the new German subsidiary MakoLab Deutschland GmbH, there was a positive impact from FX changes and lower tax y-o-y. Between January and December 2020, operating cash flow reached PLN 9.8m compared to PLN 5.7m in the previous year. Free cash flow amounted to PLN 9m, while net cash reached PLN 15.8m.

Currently, management see price pressure by MakoLab’s clients, which could negatively affect results in 2021E. However, given the demand for digitalisation solutions worldwide, which will likely become even stronger following the pandemic, the company’s long relationships to international clients and its cost advantage vs. foreign peers, we believe that MakoLab could even accelerate its growth in the next 2-3 years. An additional growth trigger are the company’s EU-funded R&D projects such as Blockchain-based systems for sophisticated databases.

For 2021E, we expect that MakoLab’s net income will reach PLN 5.7m (+19% y-o-y), while in the following years it should grow at >20%.


Based on our estimated net income and growth rate, the stock is currently valued at a P/E 2021E of just 9.9x and PEG ratio of 0.51x vs. P/E 2021E 14.6x of another Polish software company, PGS Software S.A. We expect that in 2021E MakoLab will again pay out a dividend, which in 2016-2019 equaled PLN 0.02-PLN 0.06 per share. In our view, there is a chance that the payout ratio, which in 2019 equaled just 8.8%, will significantly increase in the coming years.

Disclaimer:  The author of this article owns shares of MakoLab himself

Allegro & Canal+ Polska: Two interesting Polish IPOs in 2020


After a strong underperformance in 2010-2019 vs. main Western markets due to the pension fund reform of the Civic Platform government as well as several scandals e.g. Getback, the Polish capital market has experienced a huge recovery so far this year, with stock market turnover in Jan-Jun 2020 reaching a 34.7% higher level than over the same period last year. In our view, the main reasons for this are (1) historically very attractive valuations (2) record-low interest rates, which in May 2020 were lowered to 0.1% for the first time ever (3) introduction of a QE by the Polish Central Bank NBP in 03/2020, and (4) first stock purchases by the newly created Employee Pension Plans (PPK).

As always, the good condition of the Warsaw Stock Exchange has also reinvigorated the IPO activity in Poland. In our view, the two most interesting companies, which have so far announced their plans for an Initial Public Offering in 2020, are Allegro Group and Canal+ Polska. Below we provide a short description of both:

Allegro Group: Allegro, whose business model is comparable to Ebay, is by far the largest player on the PLN 70bn/EUR 15.7bn Polish E-Commerce market (2019: PLN 50bn/EUR 11.2bn, exp. CAGR >10%), with a history dating back to 1999. The company, which was acquired from South-African technology group Naspers by the private equity funds Permira, Cinven and Mid Europa Partners in 2016 for USD 3.25bn, has more than >21m registered clients and displays 130m offers of 140,000 professional sellers. According to Similarweb.com, the website allegro.pl is the 5th most popular one in Poland with 214.5m total visits in May 2020. Apart from allegro.pl, the group also consists of ceneo.pl (the most popular price comparison portal in Poland with 55.1m total visits in May 2020) and ebilet.pl (No 1 web portal in Poland where users can purchase tickets for different kinds of events; 310k total visits in May 2020 but 1.95m in Feb 2020).

According to financial data from 2018, the most recent which is publicly available, Allegro Group had revenues of PLN 1.75bn/EUR 391.5m, EBIT of PLN 621.5m/EUR 139m and net income of PLN 230.1m/EUR 51.5m. Based on consensus estimates from CapitalIQ, Ebay, Allegro’s closest peer, is currently trading at an EV/Sales 2020E of 4.1x and EV/EBITDA 2020E of 10.9x. According to Bloomberg, the Allegro Group could also conduct a secondary IPO on a Western European stock exchange e.g. Euronext or LSE. 

Canal+ Polska: Canal+ Polska (previously: nc+) is the first Polish provider of Pay-TV and has been present on the market since 1995. Its >170 channels, which broadcast movies, series, documentaries and sport events, are available through the Hot Bird satellite and as VoD. The offering is complemented by super-fast mobile LTE telephony. Canal+ Polska also acts as co-producer of Polish movies and sponsors the Polish soccer league. With currently c. 2.2m subscribers, it is the No 2 Pay-TV satellite platform on the Polish market. Canal+ Polska’s shareholders are French Canal+ (51%), Discovery Channel/owner of Polish TV station TVN (32%) and Liberty Global (17%).

Canal+ Polska’s closest listed peer is the Media/Telco group Cyfrowy Polsat, which is its largest competitor with currently 5m subscribers. Cyfrowy Polsat is currently trading at an EV/Sales 2020E of 2.3x, an EV/EBITDA 2020E of 7.8x and P/E 2020E of 13.5x. In 2019, Canal+ Polska had revenues of PLN 2.29bn/EUR 512.3m and net income of PLN 88.1m/EUR 19.7m.