Business description

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

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

Revenues of business lines of LPP for 2023 and 2022 

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

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

Hindenburg Research Report on LPP

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

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

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

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

Financials

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

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

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

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

Conclusion

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

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

The main risks we have identified are as follows:

1. Supply chain disruptions

2. New country performance risk

3. Changes in consumption trends

Business description

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

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

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

Financials

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

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

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

Conclusion

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

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

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

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

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

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

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

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

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

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

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