Business description

CIECH, which is based in Warsaw, is an international chemical group with factories in Poland, Germany, Spain and Romania, >3,000 employees and a worldwide customer base. It is the 2^nd largest manufacturer of sodium carbonate and sodium bicarbonate in the EU, the no 1 manufacturer of evaporated salt in Poland, the no 1 supplier of sodium silicates in Europe, the largest Polish manufacturer of plant protection products, and a leading Polish producer of polyurethane foams in Poland. CIECH’s products are crucial elements in different industries incl. Construction, Automotive, Agriculture, Chemical, Food and Pharma. They are used in the production of articles necessary in everyday life.

In 2021, Poland was CIECH’s largest geographical market with a share of 51%, followed by other EU countries (45%), other Europe (2%) and Asia/Africa/Other (2%). The Soda segment was the company’s largest one by far and accounted for 66% of total sales and c. 81% of adjusted EBITDA. Its products soda ash, sodium bicarbonates and salt are used in the production of flat glass, glass packaging, silicates, detergents, animal feed, food, and water treatment solutions, among others. Other segments include: 

Agro (crop protection products, herbicides) – 14% of total sales in 2021 and c. 16% of adj. EBITDA

Foams (Polyurethane foams that are mainly used in the production of furniture and matrasses) – 11% of revenues and >16% of adj. EBITDA

Silicates (sodium and potassium silicates used e.g. in the production of precipitated silica, paper and welding electrodes) – 7% of 2021 sales and >4% of adj. EBITDA and 

Packaging (lanterns for vigil lights, jars) – 2% of total sales and >2% of adj. EBITDA

CIECH S.A. has been listed on the Warsaw Stock Exchange since 2005. It can also be traded in Frankfurt. Since 2014, the company has been owned by Kulczyk Investments, which belongs to the 6^th richest Pole Mr Sebastian Kulczyk. Kulczyk Investments (through KI Chemistry) bought a control stake of 51.1% in CIECH from its previous owner, the Polish state, at PLN 31 per share.

Financials

In 2021 – the last fiscal-year, for which results are available – the CIECH Group generated revenues of PLN 3.5bn (+16.3% y-o-y, 5y CAGR of 0.03%), an EBITDA of PLN 730.4m (+24.1%, 21.1% margin, 5y CAGR of -3.9%) and a net income of PLN 292.4m (+126.2%, 8.5% margin). Operating and free cash flow equalled PLN 1.3bn (2020: PLN 767.2m) and PLN 571.5m (PLN     -66.8m) respectively. Between January and December 2021, CIECH’s ROCE equalled 5.8%, while we estimate its current WACC at 14.2%, implying that the company is not generating a sufficient return on the capital employed to offset its costs of capital.

In 9M/22, the company generated revenues of PLN 3.9bn (+57.4% y-o-y), an adj. EBITDA of PLN 661.2m (+19.3%) and net income of PLN 234.5m (+0.2%). At the end of September, its net gearing equalled 56.1%.

In the last years, CIECH has paid out dividends, but not regularly. For 2022, the company paid out PLN 1.50 per share, which corresponds to a DYield of 2.9% at present.

Comment on the tender offer

On March 9, Kulczyk Investments through its subsidiary KI Chemistry Sarl announced a tender offer for all the remaining 48.86% shares of CIECH Group at PLN 49 per share, which starts on March 10 and is supposed to end on April 12. After reaching a threshold of at least 95% of the shares outstanding, Kulczyk Investments plans to delist CIECH as it believes that as a listed company it cannot “react in a fast and flexible manner to rapidly changing economic, geopolitical and regulatory environments, and turbulences on global financial and raw material markets”. 

In our view, the tender price is far too low and does not reflect CIECH’s fair value. The current share price of PLN 52.35, which is 6.8% above the tender price, implies an EV/EBITDA 2023E and P/E 2023E of 3.9x and 6.8x respectively. The 5-year hist. average EV/EBITDA and P/E multiples of 5.1x and 11.5x respectively are 31.3% and 69.8% higher. 

We expect that especially the Polish investment and pension funds, which hold approx. 27% of CIECH’s shares at present, will urge Kulczyk Investments to increase the tender price. Consequently, we advise current investors not to sell their shares in the tender and to increase their stake in the company.

In this blog post, we analyze the public finances of the EU member states that before 1990 were part of the Soviet bloc. Slovenia, Slovakia, Croatia, Estonia, Latvia, and Lithuania are already members of the Euro zone and thus do not have control over their currency. When it comes to the budget and current account deficits, we have compared the most recent data from 2021, which was affected by the pandemic, with the pre-COVID year 2019. While our analysis concludes that Poland, Czechia, Estonia and Slovenia are relatively reliable debtors, the condition of public finances in Hungary, Romania and Bulgaria looks much riskier.

Sources: Eurostat, central banks, tradingeconomics.com, Worldbank, S&P, CIA World Factbook

Especially after the PiS (Law and Justice party)-led government came to power in 2015, the Polish economy has been supported a lot through various social programs e.g. the “500+” child benefit, “Dobry Start” PLN 300 one-off support for pupils and the one-off retirement payment of PLN 1,100 “Emerytura+”. While these programs are considered negative by many economists as they stimulate consumption instead of investments, apparently they have not increased the debt level as well as budget and current account deficits in Poland as much as similar measures in Hungary. Especially a high current account deficit, which reflects imports and exports of goods and services, payments to foreign holders of a country’s investments, payments received from investments abroad, and transfers such as foreign aid and remittances, can negatively affect the foreign exchange rate of a country’s currency. On the one hand, a weak currency makes exports more profitable, however on the other makes the import of important components, the servicing of foreign debt or popular consumption goods more expensive.

Apart from Poland, Czechia is another non-Euro country, whose public finances look solid. What is particularly impressive, are its significant foreign exchange reserves, which are 3.5 times higher than in Hungary that however has a similar population. The larger the foreign exchange reserves, the better a country can fight pressure on its own currency.

In Romania and Bulgaria, especially the relatively high share of foreign currency denominated debt is worrying, which can lead to issues with repayment of debt in case the local currency significantly weakens versus EUR or USD. 

Based on the methodology of S&P, Hungary’s and Romania’s current BBB- rating is the weakest investment grade rating. The rating agency’s definition is as follows: “An obligation rated ‘BBB’ exhibits adequate protection parameters, however adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.” Estonia, whose debt only equals 18.1% of its GDP, and Czechia both have an AA- rating. According to S&P, it “differs from the highest-rated obligations only to a small degree”. Of all ex-communist EU member states, Slovenia has the best S&P credit rating (AA).

KRUK S.A., which is based in Wroclaw and has been listed on the Warsaw Stock Exchange since 2011, is the Polish market leader in the area of debt servicing and one of the leading players in its segment in Europe. With sophisticated software tools, the company’s staff analyses the financial situation of each customer and spreads his debt into manageable instalments. 

Since its foundation in 2004 by its current CEO and second-largest shareholder Piotr Krupa, the company has developed from a small firm with less than 20 employees to an international financial group with a focus on complex and integrated service offerings related to receivables management in Poland (50.1% of total sales in 2021), Romania (23.7%), Italy (16%), Spain (6.5%) and other markets incl. Germany, Czechia and Slovakia (together 3.5%). KRUK manages debt, which it has bought itself, or for which it has been commissioned by institutional clients – e.g. banks, credit intermediaries, insurances, leasing companies, telecommunication and cable & satellite operators and FMCG companies – in three segments: uninsured consumer debt, mortgage debt and corporate debt. This approach has many advantages as statistical information from the servicing business allows the company to lower the risk of the debt portfolios that it acquires.   

The KRUK Group comprises 25 fully consolidated subsidiaries incl. subsidiaries in all countries, in which it operates, RAVEN (a legal office), RD ERIF BIG (provides credit information) and NOVUM (provides loans to KRUK’s clients, who have already paid back their debt). 

Recent results

With a revenue and net income CAGR of 8.8% and 22.8% respectively, KRUK has grown rapidly on both top- and bottom-line in the last 5 years. In 2021, which followed the difficult pandemic year 2020, the company increased its revenues by 50.5% y-o-y to PLN 1.7bn, EBITDA by 139.7% to PLN 908m (52.1% margin vs. 32.7% in 2020) and net income by 757.9% to PLN 694.9m. All of its regional markets were profitable on EBITDA level. ROCE and ROE were very strong and reached 17.6% and 29.9% respectively. The company’s main peers Intrum (15.5%) and Hoist (negative ROE) from Sweden and Banca IFIS (6.4%) from Italy generated a lower ROE.

In 9M/22, KRUK continued its strong development as debt repayments by customers remained at a good level due to low unemployment and high salary increases. Between January and September 2022, the company’s revenues equalled PLN 1.6bn (+20.1% y-o-y), EBITDA PLN 874.8m (+17.5%; 54.3% margin) and net income PLN 676.9m (+19.7%). At the end of September, it had a net debt of PLN 3.2bn, which corresponds to a net gearing of 103.5%. This was less than Intrum (254.4%), Hoist (123.7%) and Banca Banca IFIS (290.4%).

Summary & Conclusion

We like KRUK as it is No 1 in Poland and a leader in Europe in its market, has grown strongly over the last years and since its IPO has been considered one of the best companies on the Warsaw Stock Exchange. Most of its shareholders are long-term oriented Polish pension funds and international institutional investors, while its insiders own 10.5% of its shares. Moreover, KRUK’s stock is currently pretty cheap – cons. P/E 2022E equals 7.7x compared to a 5y historical average of 16.1x – and this week the company passed a share buyback until 2026E of up to PLN 1bn at max. PLN 400 per share (40.5% above current market price). This corresponds to 20% of its current shares outstanding. 

Since 2014, KRUK has paid a dividend for all fiscal years except 2019. For 2022E, the sell-side consensus assumes a DPS of PLN 12.50, which implies a dividend yield of 4.3% at present. The company’s dividend policy for 2021-2024 foresees the payout of 30% of its annual net profit to shareholders.

In terms risks, we see two main ones: (1) change of government regulations and (2) the significant increase of interest rates e.g. in Poland as it makes refinancing more difficult. Nevertheless, we expect that the debt repayment ratios of KRUK’s clients will remain solid due to high salary increases. Also, the share buyback should support the company’s share price in the coming months. 

KRUK is part of the Polish bluechip index WIG20, but its shares can also be traded in Germany.