Investment ideas – CEE blue chips


The decline of stock indices has created many opportunities, especially in Emerging Europe, where the performance of stock markets significantly lagged the one in EU and USA in 2009-2019. Below we present some CEE-based blue chips, which could thrive in a post-coronavirus environment.

PZU S.A. (PZU PW, Market cap PLN 26.6bn):  PZU, whose ROE in 2019 of 21.2% was the highest among all European peers, is the largest insurer in CEE with operations in Poland, the Baltic states and the Ukraine. The company is also one of the largest providers of private health services in Poland, with 175 own medical and diagnostic centers, 49 hospitals and 8,000 pharmacies. In addition, it owns the 4th largest asset manager in Poland (PZU AM with AuM of PLN 12.4bn), the third-largest pension fund (PZU OFE with AuM of PLN 18.6bn) and is the largest shareholder of the 2nd Polish bank Pekao and 5th largest bank Alior Bank. However, negative is the fact that PZU is controlled by the Polish state.

Although following a recommendation for financial institutions by Polish Financial Supervisory there will likely be no dividend for 2019 due to the coronavirus pandemia, in the past PZU has paid dividends on a regular basis and we expect this to continue from 2021E. Currently, the stock is trading at a cons. P/E 2020E (8.1x), which is 30.2% below its 3-year average (11.6x).

PKO S.A. (PKO PW; Market cap PLN 27.4bn): PKO is the largest Polish bank with assets of c. PLN 348bn, 1,121 branches and 23,800 employees. In 2019, it generated a ROE of 10% and had a cost/income ratio of 41.9%. Its asset manager PKO TFI is the largest in Poland with AuM of PLN 28.1bn, while its pension fund PKO OFE currently manages PLN 6.1bn.

PKO has paid a very generous dividend in the past, but due to the economic consequences of the coronavirus pandemia it will not pay one for 2019. Given a decision of the European Court of Justice in 2019 favoring CHF debtors, a risk factor is also PKO’s portfolio of CHF mortgages, which equals 11.2% of all granted loans.

Currently, PKO’s shares are trading at a cons. P/E 2020E of 7.2x, which is 48.2% below its 3-year historical average of 13.9x. Its P/BVPS is 0.6x.

Gedeon Richter Nyrt. (RICHTER HB; Market cap HUF 1.2tr):  Gedeon Richter is a Hungarian Specialty Pharma and Biotech company, which puts a particular focus on Women’s Health, Biosimilars (especially in the area of osteoporosis and rheumatology treatments) and Generic Drugs. While in 2019 it generated 30% of its yearly sales in the CIS region, 31% in EU and 17% in the US, in the future an increasing share of revenues is supposed to stem from Latin America and China.

Currently, Gedeon Richter, which as of 31/12/2019 had net cash of HUF 130.5bn, is trading at a cons. P/E 2020E of 12.7x vs. an average 3-year historical P/E of 27.1x. The company has regularly paid out dividends in the past.

Cyfrowy Polsat S.A. (CPS PW; Market cap PLN 15.9bn: Cyfrowy Polsat is the leading Polish provider of fixed-line broadband and mobile telecommunication services and pay-TV. Its mobile operator Polkomtel is currently the 3rd largest and its pay-TV platform Cyfrowy Polsat the largest in Poland. Both businesses are complemented by the broadband/fiber network operator Netia, the VOD provider ipla and the TV broadcaster and producer Telewizja Polsat. Since December 2019, Cyfrowy Polsat has also owned a minority stake of 23% in the largest Polish IT company Asseco Poland, which is its main technological partner.

Cyfrowy Polsat, which pays out dividends on a regular basis, is currently trading at a cons. 2020E P/E of 11.8x compared to a 3-year average P/E of 16.8x. While free cash flow has always been PLN >1bn in the last five years, a negative is the relatively high net gearing of 88.4%.

The coronavirus pandemia – Which CEE-based companies might benefit in the long run?


The coronavirus pandemia has shaken the financial markets worldwide, with the S&P 500 and German DAX 30 falling by c. 20% since the end of February 2020. Given significantly lower liquidity, the decline in Emerging Europe has been even steeper: Currently, Polish WIG is c. 21% lower than at the end of February, Hungarian BUX 26% and Romanian BET 22%. The lockdowns due to the pandemia, which Poland introduced as the first EU country, are already having very serious consequences on economies and companies. According to McKinsey, the negative impact will be strongest on the Travel/Airlines/Hospitality sector as people, who have to stay/work at home due to the lockdowns, cannot travel or go to restaurants. On the other hand, we believe that companies (especially those with low or zero debt) from the Pharma, Telemedicine, Video Games and Software sectors should be the main beneficiaries of the current turmoil. The corona crisis has finally made people aware of the fact that they also can conduct certain exams or consult a doctor from their home. As telehealth allows to diagnose a larger number of people faster and cheaper, at the same time freeing hospital capacity for really sick patients, US Medicare has started reimbursing respective exams and health insurances in other countries are expected to follow suit soon. Moreover, as people cannot go out to cinemas, theatres or cafes home entertainment such as video games has become more popular. Finally, software development firms of all kinds should also benefit in the long run as the current crisis and the need to work from home have emphasized the need for effective software-based processes.

In our view, there are also companies in Emerging Europe, which should be able to benefit from the above-mentioned trends. Especially, on the Warsaw Stock Exchange there are several listed providers of Software, Telehealth Services and Video Games. Below we present some examples, which seem particularly attractively valued:

PGS Software S.A. (PSW PW, market cap PLN 237m):  The owner-managed company (Messrs Gurgul hold 63.8% of the shares), whose share price has increased by 137% over the last 5 years, offers on-demand software development for smaller clients, especially from the DACH region, UK and Scandinavia. The company, which since 2014 has increased its sales at a CAGR of >30% and generated EBIT margins of up to 28%, has been a regular dividend payer. Also, it plans to buy back up to 10% of its shares outstanding by year-end 2021.

According to German IT industry association Bitkom, the current coronavirus pandemia will lead to increased investments in digitalisation in the future.

11bit Studios S.A. (11B PW, market cap PLN 817m):  11bit Studios is a Polish video games developer, whose share price has increased by 408.8% in the last 5 years. The company develops own games for PCs, consoles and mobiles. Moreover, it publishes third-party games. Its main titles are “This War of Mine” (Average score: 78-90/100), “Frostpunk” (79-84/100),  “Moonlighter” (74-84/100) and “Children of Morta” (79-82/100), which all have above-average customer and player ratings. While 2019 sales reached PLN 71.7m (5y CAGR = 35.3%) and net income PLN 21.7m (5y CAGR = 18.8%), current consensus for 2021E, when the next bigger title “Project 8” is supposed to be released, equals PLN 178m for sales and PLN 89.3m for net income (implied P/E 2021E = 9.1x).  

According to Newzoo, the global video games market was worth USD 152.1bn in 2019 and is growing at a CAGR of c. 10%.

QuarticOn S.A. (QON PW, market cap PLN 17.4m):  QuarticOn provides cloud-based software, which allows online shops and VOD services to deliver customised product and content recommendations. A major shareholder is German ACATIS Investment with AuM of EUR 6bn. In 2019, QON’s sales reached PLN 4.3m (of which >30% were international ones), with SaaS sales on E-Commerce platforms e.g. Shoplo or Shoptet showing particularly strong growth. QON already was at break-even on EBITDA level in December 2019 and will likely also report a profit in 2020.

With Amazon planning to hire 100,000 additional staff in order to handle increasing order volumes, E-Commerce is regarded as one of the main beneficiaries of the current coronavirus crisis as customers are not allowed or are too scared to go out for shopping. With its software, which allows a more targeted customer approach, QON seems well positioned to benefit from this trend.    

Nestmedic S.A. (NST PW, market cap PLN 10.2m) & INFOscan S.A. (IST PW, market cap PLN 9m):  Nestmedic has developed a patented telehealth device for CTG exams of pregnant women. The device is already available in Poland, Finland, Bulgaria and Nigeria. In Q1/20, the company conducted 1,313 exams (+75% y-o-y). While NST’ monthly cash burn is PLN <300k, its financing is secured due to an investment agreement with German family office Deutsche Balaton. In 2019, NST’ sales reached PLN 428k, or +259.7% y-o-y.

INFOscan is another listed Polish telehealth company. It has developed a device for sleep apnea diagnostics, which is already available in Poland, French-speaking countries, Spain, Bulgaria, Iran and East Asia (incl. for example Philippines). While the company’s monthly cash burn is just c. PLN 130k, its sales went up from PLN 68k in 2018 to PLN 795k in 2019.

According to e.g. Marketwatch, the relevant market for NST and IST is set to grow at a CAGR of 18.2% to USD 103.9bn by 2024E.

Four investment ideas from Emerging Europe for volatile markets


In the current environment with continuous low interest rates (in the Euro zone interest rates will likely remain at 0% until 2025), but growing economic uncertainty due to the unresolved Brexit and the trade conflict between the US and China, capital markets remain volatile. In the current phase, we recommend to take a look at stocks from CEE, where many offer a combination of low P/Es, net cash and high dividend yields. Nowadays, such an attractive risk-return-profile is difficult to find in Western Europe and North America due to the excellent performance of the respective stock markets since 2009. Below are four companies from Emerging Europe, which are interesting in our view:

Stalexport S.A. / DYield 11.4% / Net gearing -28.6% / PE 2019E 6.5x

Krka d.d. / DYield 5.2% / Net gearing -12.3% / PE 2019E 9.4x

SNGN Romgaz SA / DYield 16.6% / Net gearing -12.2% / PE 2019E 9.1x

OMV Petrom SA / DYield 6.4% / Net gearing -13.9% / PE 2019E 7x

Introduction of a new employee pension savings scheme in Poland and its impact on the Warsaw Stock Exchange


In November 2018, the new Act on Employee Capital Plans (ECPs) was signed and in January 2019 implemented to the Polish legal system. The new regulations are coming into force in tranches starting from July 2019. Firstly, the biggest enterprises (employing >250 workers) are encompassed with the new system. Eventually, starting from January 2021, ECP will cover all employees between 19 and 55 years of age (workers between 55 and 70 years can join voluntarily), hired in accordance with the Labor Code (c. 11.5m Poles according to the Polish Statistical Office GUS).

The scheme is based on an auto-enrollment mechanism with a possible opt-out. Contributions to the system will be financed by employers, employees and the state budget and will consist of a mandatory stake of at least 3.5% of employee’s gross salary with an optional additional contribution of up to 4.5% of salary. Additional funds will be provided by the state’s budget entity, Labor Fund – an introductory payment of PLN 250 and an annual contribution of PLN 240 for those contributing above the mandatory required amount. ECPs are run by investment funds, pension funds, insurance companies and employee pension funds for a fee of up to 0.6% depending on the portfolio performance. Currently, c. 60 investment companies fulfill the requirements but as of 1 August 2019 19 companies registered for running ECPs.

The reasons for the reform were the Open Pension Fund liquidation reform in 2014, considerably low level of retirement savings (only c. 20% of workers in Poland save for their retirement themselves according to Aegon), and growing number of retirees after a reduction of the retirement age for men (67 to 65 year old) and women (65 to 60 year old) in 2017, which will likely lead to lower state pensions in the future.

From the stock market perspective, the reform means capital inflow as the institutions entitled to run ECPs will be obliged to invest a significant share of the accumulated funds on the Polish capital market. Therefore, we see the new regulations as a positive stimulus for the Warsaw Stock Exchange (WSE). The ECPs investment policy assumes allocating at least 40% of assets in shares and share-based instruments (i.e. futures, options) listed in the blue chip WIG20 index, including assets where the index is the underlying instrument, and no more than 30% of assets in other WSE-listed companies. It is worth mentioning that ECPs are allowed to invest in the alternative NewConnect segment, where pension funds have legally been banned from since 2014. Taking all ECP investment policy restrictions together, around 70% of the assets eligible for share-based instruments will be invested on the WSE. The total cash inflow, which will support the Polish capital market in the coming years, is estimated between PLN 6bn/EUR 1.4bn and PLN 15bn/ EUR 3.5bn per year.

As offerings similar to ECP have already been established by the biggest corporations (i.e. Citibank Europe), c. 30% of the biggest companies in Poland will not provide ECPs (Source: Gazeta Prawna). This means that the expected funds that e.g. will support the Warsaw Stock Exchange may be lower than expected. Secondly, press’ and NGO’s opinions on the new scheme is far from being positive. Various think tanks and newspapers stress the fiscal burden of the government’s co-payments formula, which may require higher taxes in the coming years. According to GRAPE, the cost of the state’s contribution is estimated at 0.7% of currently collected VAT tax amount. In addition, the cost of the reform will be co-financed by those who will not benefit from it – i.e. entrepreneurs (>2m Poles).

Romania – the EU’s Cinderella


With around 20m inhabitants, Romania is the second largest of the ex-communist countries that have joined the European Union since 2004. Though, comparing to other Eastern European states, Romania fell behind in the reform process in the 1990s, nowadays it is one of the fastest developing economies in the EU. Since 2007, the yearly GDP has averaged 2.5% (3rd best growth rate among the Eastern European EU countries), while disposable incomes have increased by 8.8% y-o-y. Based on Berenberg‘s calculations, Romania will remain the fastest-growing European economy over the next two years. According to the latest estimate of the National Statistics Institute (INS), the GDP growth accelerated to 8.8% in Q3 2017, which was the fastest rate in the EU.

The Bucharest Stock Exchange (BVB)

The Bucharest Stock Exchange was launched in 1995 and has been growing dynamically with 386 companies currently quoted in the main and AeRO segments. BVB is also close to meet the criteria of an Emerging Market in the FTSE Russell ranking.

As of the end of October 2017, the market capitalization of the Romanian companies was EUR 19.5bn, while the capitalization of all the companies listed on the BVB’s Main Market (currently 88) accounted for EUR 35.5bn. (EUR 36.7bn together with AeRO segment). In 2016, Romania’s main stock market index, BET, was paying a dividend yield of 7.9%. All of the companies in the BET index have dividend yields of more than 6%, thereof some >10% (i.e. Transgaz -15.5% , Romgaz – 18%, Transelectrica – 16%).

A good place to invest

The Romanian government is creating a pro-investment environment. Since 2007 (EU accession date), several major global companies (Siemens, Ford, Bosch) have set up or expanded operations in Romania. In 2016, the VAT rate was reduced from 24% to 20% and to 19% in 2017, which was a very strong stimulus for consumption. However, it caused the rise of government deficit from 0.8% in 2015 up to 3% in 2016. From a capital gains perspective, Romania also has a relatively small dividend tax – 5% (i.e. in Poland – 19%).

Tech-savvy society

Due to the communist legacy of excellence in science, Romanians are founders of successful tech companies – they can boast about domestic companies taken over by international giants (RAV Antivirus sold to Microsoft in 2003; Clever Taxi accquired by Daimler in 2016). Though the Venture Capital environment is improving, it’s still in its infancy: overall VC investments equal 0.001% of GDP, compared to the EU’s average of 0.027% (data for 2016). We believe that the Romanian’s under-developed and fragmented funding environment should change due to the new EU budget 2014-20 (EUR 40bn in total for Romania, thereof >3 bn for innovative projects).

Overall, from a political and economical perspective, Romania is a safe country to invest. Considering the stable macroeconomic situation (inflation c. 2%, public debt c. 38% GDP, basic interest rate at 1.75% and a relatively stable exchange rate), Romanian economy is an interesting and profitable place to allocate assets.

Most important questions relating to “issuer-sponsored research”


As a non-bank research house, East Value Research offers both free and paid research, which can be sponsored either by investors, companies, brokerage houses or IR/PR agencies. Below are the most important questions relating to „paid-for equity research”:

(1) Why does paid research exist?

Paid research was created in order to fill the information gap in the area of small- and very small companies (so-called small-, micro- and nanocaps). As their main revenue source are commissions from buying and selling securities, typical brokerage houses concentrate on the analysis of the largest and most liquid companies. Small-, micro- and nanocaps are not very interesting for brokers as they are not able to cover their operating costs with them.

Paid research can help smaller listed companies to increase trading volume, visibility on the capital market and to access new investor groups.   

(2) Does research “for money” also exist on markets outside CEE and how is it regarded?

Sponsored research has been present in Western Europe and North America for many years. First companies started to offer this kind of service in the 1990s. In Germany alone, there are currently c. 13 providers of sponsored research. New research houses are being founded as investment banks are reducing staff in their research departments.

Most international investors do not see a difference between typical “sell side” reports and sponsored research, but conflicts of interest have to be clearly described. Many portfolio managers appreciate the fact that sponsored research presents companies, which are “below the radar” of investment banks. Moreover, even if they have coverage “for free”, listed companies often continue their co-operation with providers of sponsored research due to their knowledge about the specific company/sector and access to investors, which investment banks do not service.

(3) Can paid research be objective?

Similar to research that is provided by investment banks, sponsored research is subject to conflicts of interest. Thus, it is crucial that both the company, which orders a report, and the analyst understand that it is in their both interest that the report will be well-received by the market.

In our daily work, we follow CFA Institute’s rules in order to guarantee that our paid research is objective and the assumptions/estimates are as realistic as possible. For example, before signing research contracts we always conduct a due diligence of companies, which have ordered coverage, and are remunerated before the preparation of the report, which is to ensure that the client does not “buy a BUY rating”. In addition, we only make available to companies the draft of the report without valuation and rating and try to persuade our clients that from the investor’s perspective it is important that the research coverage covers at least 12 months.

(4) Why research in English and international distribution is important for CEE-listed companies?

Since its foundation, East Value Research has only been preparing research reports in English and distributing them worldwide. In our view, despite the fact that the capital markets in CEE are relatively small, they are still rather closed, although nowadays investors are looking for investment opportunities around the world. Moreover, we strongly believe that international distribution can help smaller CEE-based companies, which increasingly focus on exports, to gain not just new investors but also clients.

Why you should invest in Polish smallcaps, microcaps and nanocaps


With around 38m inhabitants, Poland is the largest of the ex-communist countries that since 2004 have joined the European Union. Its economic transformation has been one of the most successful in Central and Eastern Europe (CEE). Since 2004, the yearly GDP growth has averaged 3.9%, while disposable incomes have increased by 4.8% y-o-y on average. The Polish population is very entrepreneurial and well-educated, with >40% of 30-34 year olds having completed higher education. In a recent study by EF Education First, Poles ranked 8th worldwide (out of 60 countries) when it comes to English language skills.