Investment ideas – CEE blue chips

Published 19/04/2020

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%.

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