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.

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