New orders & financials so far in 2023

In Q1/23, XTPL generated revenues of PLN 3 million from sales of products and services, representing a significant year-on-year growth of 219.9%. Revenues from grants amounted to PLN 605k (compared to PLN 689k in Q1/22). The gross margin stood at 60.4% (compared to -29.4% in Q1/22). After accounting for operating expenses of PLN 2.2 million, XTPL achieved an EBITDA of PLN 78k (compared to a loss of PLN -2.4 million). Net income improved from a loss of PLN -2.7 million in Q1/22 to a loss of PLN -301k.

During this year, XTPL announced five contracts for the sale of Delta Printing Systems, all of which were sold to Chinese clients. Additionally, two contracts were signed for printing modules, with buyers including HB Technologies, a supplier of machines for testing and repair of displays for companies like Samsung Display and Beijing BOE Display. Furthermore, a large US-based NASDAQ-listed producer of machines for the semiconductor industry (likely Lam Research Corp., with a market cap of USD 82.3bn and yearly sales exceeding USD 17bn) also purchased printing modules. According to sources such as Pocket-lint and 4kfilme, Samsung Display delivers 80 million OLED displays solely for the iPhone 14 and produces over 100,000 Quantum Dot (QD)-OLED displays for TVs each month. In our view, considering that more than 10% of these displays typically have defects, this demonstrates the significant commercial potential for XTPL.

Issuance of new equity and debt for capacity expansion and building of local sales teams

XTPL announced its intention to issue up to 275,000 new shares on May 12th, which will finance approximately 50% of the planned investments amounting to PLN 60 million from 2023E-26E. The remaining funding will come from own funds, grants, and new debt. The equity issue, in which the CEO and founder also intends to participate, is expected to be completed this week. Our research indicates that debt financing has already been secured.

According to discussions with management, the PLN 60 million will be allocated towards several initiatives, including:

1. Expanding the production capacity of printing modules from the current level of less than 10 per year to 100 per annum (which would correspond to yearly sales of EUR 7.5 million/PLN 33.75 million).
2. Increasing the production capacity of prototyping machines, specifically the Delta Printing System, from currently more than 10 units to more than 20 units per year (e.g., 20 units would equal yearly sales of EUR 3.5 million/PLN 15.75 million).
3. Quadrupling the yearly production of nanoinks.
4. Establishing local sales offices with demonstration labs primarily in the US and Asia, a strategic move to accelerate the acquisition of new clients.
5. Hiring additional staff and continuing research and development activities.

Expected boost for XTPL’s business from Intel’s new factory near Wroclaw 

Moreover, XTPL is expected to benefit from Intel’s new factory near Wroclaw, announced on June 16th. The US semiconductor giant’s investment of USD 4.6 billion/PLN 18.4 billion in a new factory for semiconductor integration and repair in Miekina, approximately 30 km from Wroclaw, is the largest foreign investment in Poland to date. Given that semiconductor and display repairs align with XTPL’s technology applications, Intel could become a potential client for XTPL.

Our forecasts for 2023E-26E imply a revenue CAGR 2022-26E of 60.2% and a target EBITDA margin of c. 40%

We have constructed a financial model for XTPL that extends until 2026E and takes into account the latest information provided by the company’s management. Our projections are slightly more optimistic than the company’s own guidance, which anticipates sales of PLN 100 million in 2026E.

What sets XTPL’s business model apart is the increasing number of Delta Printing Systems and Printing Modules being sold, which will drive recurring revenues from consumables and inks. This will ultimately result in substantial double-digit EBITDA margins.

While we initially anticipated a net profit for the current fiscal year (2023E), we now believe that planned investments, such as the establishment of local sales teams in the US and Asia, will likely lead to a negative net income. However, we are highly optimistic that 2024E will mark XTPL’s first profitable year.

Conclusion

In conclusion, XTPL’s technology commercialization appears to be on track, as promised by CEO and founder Filip Granek. The demand for the company’s products is evident from major international research facilities and industry players. Furthermore, with a significant share of high-margin recurring revenues expected to exceed 48% by 2026E, XTPL’s commercialization model holds significant appeal.

We have confidence in our estimates, projecting a sales CAGR of 60.2% from 2022 to 2026E, along with target EBITDA margins of approximately 40%. For only one of their projects, industrial clients such as HB Technologies or Lam Research could potentially purchase up to 100 printing modules, which will need to be replaced after 5 years. As production volumes increase, these modules will generate a rapidly growing stream of recurring revenues from consumables and nanoinks, resulting in a significant operating cash flow for XTPL.

According to latest data published last week, the assets of PPKs already reached PLN 14.9bn/EUR 3.2bn. The pension plans, which were only introduced in 2019 and are co-financed by employees, employers and the Polish government, are quickly adding participants, with 3.3m (43.7% participation rate) of employees already in the program. Only in the last two months, the number of new participants has grown by 718k due to an automatic subscription, which is conducted every 4 years of 18-55 year old employees, who previously decided to not participate in the PPKs.

Currently, PPKs, which are managed by private investment management firms, are adding PLN 500m/EUR 98m of assets per month, of which up to 70% – dependent on the age of the employee – can be invested in stocks (in case of <40 years olds, the share can equal max. 70% and for the age group 60+ max. 15%).  Thereof, at least 40% of assets must be invested in Polish blue chips (WIG20 index). PPKs are also allowed to invest max. 20% of their assets dedicated to equities in Polish midcaps, max. 10% in smallcaps (incl. from the alternative Newconnect segment) and min. 20% on foreign stocks exchanges.

Latest forecasts foresee an increase of the share of PPK participants to 50% within the next 2 years. Monthly new assets should grow accordingly. This should positively impact the daily trading turnover on the Warsaw Stock Exchange and thus make the Polish capital market more attractive for foreign institutional investors.

In December 2022, the Polish capital market had a record low CAPE (= inflation-adjusted 10y average P/E ratio) of only 7.1x vs. 16.7x for Deutsche Börse and 28.4x for the NYSE. While Poland’s economy has been growing rapidly in the last years with yearly GDP growth rates of 3-6%, the stock market – and the bluechip WIG20 index in particular – have not kept pace. The WSE is the largest stock exchange in the CEE region with 754 listed companies. The No 2 – the stock exchange in Sofia – has 255 companies.

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).

Operational update

In our view, 2022 was a breakthrough year for XTPL. Sales of its proprietary nanoprinting system for prototyping, the Delta Printing System (est. sales price of EUR 150-200k each), each of which generates recurring revenues from e.g. nozzles and inks of c. EUR 1,000 per month, and the conductive nano-ink (our estimate: EUR 1-10k each) significantly picked up. We believe that since 2020, when the company started commercial sales, it has sold 10 Delta Printing Systems to international clients such as universities (e.g. University of Stuttgart, University of Brescia, Tianjin University), R&D centers (e.g. Harbin Institute of Technology) and corporate clients (one of the five largest Tech companies from the US). 

However, in our view more important for future growth are the contracts that can lead to the application of XTPL’s technology on production lines. One of them is the contract with NASDAQ-listed Israeli Tech company Nano Dimension, with which XTPL announced a contract for the development of a new kind of nano-ink in January 2022 that is supposed to be used in the production of Nano Dimension’s advanced PCB boards in the future. In our view, XTPL receives c. USD 500k after each stage of the development phase – 3 out of 4 have already been completed – and will receive a percentage fee based on the volume sold of products that will be produced with its technology in the future. Other two partners for the application of XTPL’s technology on an industrial scale, for which XTPL is supposed to construct machine prototypes, are from Taiwan (application area: production of semiconductor elements at a leading global player from this industry) and listed HB Technology from South Korea (application area: production of displays e.g. for Samsung). The implementation of XTPL’s technology on production lines will result in one-off sales of the company’s printing modules (several dozen ones worth est. EUR 50-100k each) as well as significant recurring sales of consumables such as nozzles and inks.

According to its management, XTPL currently has 45 employees, of which 90% are shareholders of the company. The fluctuation is very low (only one person left the company in 2022).

So far, XTPL has received 4 international patents and has submitted 26 patent applications. We believe that only the company’s patents have a value of dozens of millions EUR.

Latest financials

In 9M/22, XTPL generated revenues of PLN 6.6m (9M/21: PLN 213k), of which PLN 4.6m from R&D and PLN 2.1m from sale of own products. PLN 1.9m stemmed from EU grants. EBIT equalled PLN -2.1m (9M/21: PLN -6.4m) and net income PLN -2.2m (PLN -6.6m), with total operating costs (CoGS, administration & distribution expenses) of PLN 10.6m or PLN 1.18m per month. Q3/22 was the first quarter in the company’s history, which was profitable on all levels.

At the end of September 2022, XTPL’s cash position amounted to PLN 3.2m (31/12/2021: PLN 4.5m). In 9M/22, operating cash flow equalled PLN 1m (9M/21: PLN -3m) and free cash flow PLN -621k (PLN -5.6m). The convertible bond on the balance sheet (PLN 3.38m) – was issued to XTPL’s German shareholders Deutsche Balaton AG and ACATIS – has a yearly interest rate of 5%, matures on 30 January 2024 and has a conversion price of PLN 74 per share (33.9% below current level; conversion to in total 45,655 new shares that correspond to 2.2% of the total number of shares outstanding). During our recent meeting XTPL’s management maintained its view that at the end of 2022 cash was at the same level as at the end of December 2021.

Summary & forecasts for 2023

After talking to the company’s clients and market experts in the last months, we are confident that XTPL’s technology offers tremendous advantages and there is strong market demand for it. Apparently, large global players from the semiconductor or display industries are already approaching the company themselves. Also, we now believe that the company’s team knows how to effectively commercialize its know-how.

We expect significant growth of XTPL in the coming years, especially due to the implementation of its technology on production lines of several international Tech companies. For 2023E, we estimate the company’s backlog at PLN >10m and revenues at PLN 17.5m. Despite a likely increase of operating costs e.g. due to the planned recruitment of c. 10 additional people and higher investments in marketing, management guide for a profit on all levels. 

Below is our detailed calculation of revenues in 2023. During our meeting management clearly emphasized that in the coming years its focus would be on top-line growth.

Russia’s aggression on Ukraine, which started on February 24 this year, has lasted 10 months to date. The UN estimates the number of Ukrainian civilian casualties, which have so far been caused by the war, at >17,000 (>6,700 deaths, >10,400 injured), while according to the NYTimes the number of dead or wounded soldiers equals >100,000. The Kiev School of Economics believes that the losses due to destruction of infrastructure amount to USD >130bn. In November, Ukrainian President Wolodymir Zelensky confirmed that up to 40% of his country’s critical energy infrastructure had been destroyed. 

From the beginning, Poland has been one of Ukraine’s largest supporters. According to Kiel Institute for the World Economy, only Latvia and Estonia have so far spent more on financial, humanitarian, and military aid as percentage of GDP than Poland. Moreover, since the outbreak of the war the country has provided refuge to >8.5m Ukrainians, who had fled their country after the outbreak of the war (Source: 300gospodarka.pl).

While the war continues, it is clear that the fighting will stop sooner or later. In this blog post, we analyse, which Polish companies could potentially benefit from contracts related to the re-building of Ukraine in the coming years. 

Most obvious beneficiaries are construction companies

After a ceasefire agreement, the Ukraine will start re-building its infrastructure e.g. bridges, roads, energy infrastructure, buildings. In our view, it is likely that the public administration will mandate foreigners with a large part of this task. Apart from US-based companies – the US is by far the largest provider of military support to Ukraine – we expect that Polish firms will strongly benefit from Ukrainian orders. 

Here are some examples of listed companies, whose results could be positively affected in the coming years: 

1. Budimex S.A. (Market cap EUR 1.5bn):  Owned by Spanish construction giant Ferrovial, Budimex’s main activities consist of the construction of roads, bridges, and airports; the design, development, construction and maintenance of industrial plants and environmental facilities; the construction of public and commercial facilities, and development of residential property. In 2021, the company generated revenues of PLN 7.9bn (CAGR 2016-2021 = 7.3%) and an EBITDA margin of 9.3%. Last year, 4.6% of its total revenues stemmed from abroad. Budimex has paid a dividend in each of the last 14 years.

2. Erbud S.A. (Market cap EUR 89.7m):  Erbud, whose largest shareholder is German family-owned construction company Wolff & Müller Holding GmbH & Co. KG, operates in the areas of building & residential construction, road construction, industrial construction as well as engineering & services for the Energy sector. In 2021, the company generated revenues of PLN 3.1bn (CAGR 2016-2021 = 11.6%) and an EBITDA margin of 4.3%. Last year, approx. 13.3% of its total sales stemmed from abroad, especially Germany, Belgium, Norway, France, Sweden and Austria. Between 2014 and 2018, Erbud paid a dividend every year.

3. Torpol S.A. (Market cap EUR 92.9m): Torpol focuses on construction services related to transport infrastructure e.g. railway and tramway tracks and stations, as well as engineering services. It also provides services in the field of construction, modernization, and renovation of medium- and low-voltage overhead electricity networks, traffic control light signals, street lighting systems and telecommunications networks, as well as design services. In 2021, Torpol generated revenues of PLN 1.1bn (CAGR 2016-2021 = 7.8%) and an EBITDA margin of 11.4%. Only a very small share of revenues stemmed from abroad. Between 2014 and 2021, Torpol did not pay a dividend only once: for 2017.

4. Unibep S.A. (Market cap EUR 60.4m):  Unibep operates in Poland (80.6% of total sales in 2021), Norway (10.9%), Germany (2.7%), Sweden (1%), Belarus (0.2%) and in the Ukraine (4.7%). The company builds roads and apartments and provides services related to construction and repair of bridges. Unibep, whose largest shareholders are Members of the Supervisory Board or their family, generated total revenues of PLN 1.7bn (CAGR 2016-2021 = 6.5%) and an EBITDA margin of 4.9% in 2021. The company has paid dividends for every year since 2008.

IT companies could also benefit 

Due to the need to re-build the IT infrastructure of both the private and the public sector after the war we believe that the following Polish IT companies could receive significant orders from Ukraine in the coming years:

1. Asseco Poland S.A. (Market cap EUR 1.3bn):  Asseco Poland is the 6^th largest IT company in Europe and the largest in Poland. Approx. 78% of its revenues stem from own software and c. 90% from abroad. While no detailed sales figures are available, the company also does business in the CIS region.

Asseco Poland is market leader in the areas of public sector software in Poland, Czechia, Slovakia, and Israel. Moreover, it is a leading provider of software products for the sectors Healthcare, Energy, Telco, SMEs and Financials. The company has NATO certificates and provides cybersecurity solutions, which contribute PLN 200-300m to its total yearly sales. In 2021, Asseco Poland generated revenues of PLN 14.5bn (CAGR 2016-2021 = 12.8%) and an EBITDA margin of 15.5%. Since 2007, the company has always paid dividends.

2. Comarch S.A. (Market cap EUR 303.2m):  Comarch is the No 2 Polish IT company with a share of c. 58% of international sales (of which c. 1.5% stemmed from Russia & Ukraine in 2021) and c. 16% of own products. The company provides its services to clients from various industry sectors (e.g. TMT, Finance/Banking, Retail, SMEs) and public administration. In 2021, Comarch generated revenues of PLN 1.6bn (CAGR 2016-2021 = 7.9%) and an EBITDA margin of 17.2%. The company has always been paying dividends since 2017. However, investors should be aware of corporate governance issues.

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.

Business description

Kino Polska TV S.A. (KPL PW), which is based in Warsaw, is a leading producer and broadcaster of thematic TV channels with operations in 68 countries worldwide and a 36% share of international sales in total revenues. The company owns one of the largest catalogues with Polish content (movies, series, documentaries etc.) and through its owner SPI International, which since March 2022 has been part of the leading European media company Canal+ Group, has access to high-quality international movie content on an exclusive basis in Poland. Of the sales related to TV channels, which last year accounted for 88.1% of the total, 56.9% stem from recurring transmission/subscription fees, which makes KPL less dependent on very profitable but cyclical advertising sales.

KPL broadcasts channels under the six main brands Telewizja Kino Polska, Kino Polska Muzyka, Kino TV, FilmBox, Zoom TV and Stopklatka TV. All are wholly-owned and, except Zoom TV, profitable. Telewizja Kino Polska and Kino Polska Muzyka are focused on high-quality Polish movies and related music videos and FilmBox, Kino TV and Stopklatka on international movies. Zoom TV, which is supposed to become profitable in 2023E according to management, broadcasts series, documentaries and shows. All KPL’s channels can be watched on multiple platforms including digital terrestrial TV (DVB-T), satellite & cable, online and on mobile devices. The FilmBox channel family, which KPL produces, is already available in 68 countries in the CEE & SEE region, North- and South America and Asia. 

According to wirtualnemedia.pl, there is a trend towards consolidation of thematic channels because many broadcast the same content that is often repeated. In the future the remaining TV channels will be well-profiled to certain operators and advertisers and available not just on digital terrestrial TV, satellite and cable platforms but also via streaming services such as Netflix or HBO. Moreover, with improving internet speed video content will increasingly be consumed on mobile devices. According to We Are Social, movies and videos are by far the most popular type of paid content worldwide. 

Recent results

KPL is a fast-growing and highly profitable company with a revenue CAGR in 2015-2021 of 15.7% and double-digit EBIT margins in each of the last seven years. In 2021, revenues came in PLN 257.2m (+21.4% y-o-y), EBITDA at PLN 117.3m (+32.5%; 45.6% margin) and net income at PLN 48.6m (+78.6%). Operating and free cash flow amounted to PLN 57.3m (2020: PLN 28.4m) and PLN 50.9m (PLN 24.6m) respectively. At 24.9%, ROCE was very strong. Despite the Ukraine conflict, in H1/22 the company’s sales advanced by 17.1% y-o-y to PLN 139.3m, EBITDA by 4.9% to PLN 57.3m (41.1% margin vs. 45.9% in H1/21) and net income by 5.8% to PLN 21.2m (15.2% margin). At the end of June 2022, Kino Polska TV had a net gearing of -12.5% and thus was net cash. 

On November 9^th, KPL issued preliminary results for Q3 and 9M/22. Between June and September, consolidated revenues equalled PLN 65m (+2.3% y-o-y), while in Jan-Sep they amounted to PLN 204.3m (+12%). However, in Q3/22 net income declined by 39% y-o-y to PLN 6.7m due to exchange rate differences and higher expenses related to ZOOM TV. This year, the PLN reached the weakest level ever compared to the USD and EUR. 

After paying dividends in each year after its IPO in 2011 until 2018, the company resumed its dividend payouts in 2022. For fiscal-year 2021, it paid out a DPS of PLN 0.50, which corresponds to a payout ratio of 20.5% and a dividend yield of 4% at present.

Summary & Conclusion

We like Kino Polska TV due to its competent management, the strong anchor shareholder Canal+ (is wholly owned by Vivendi Group), a cash-generating and fast-growing TV business, which is based on high-quality content, and very attractive valuation (currently, its trailing EV/EBITDA after H1/22 results equals just 4.1x and trailing P/E after prel. 9M/22 figures 8.8x). We also believe that in the next 3-4 years Canal+ will buy all outstanding shares of the company and de-list it, which will likely be conducted at a significant premium to the current share price. Regarding dividend payouts, we expect that Kino Polska TV will distribute at least 20% of its annual net income to shareholders in the coming years.

When it comes to risks, investors should be aware of the following: (1) An economic slowdown would negatively affect KPL’s advertising sales, which are highly profitable, (2) KPL’s content costs are in EUR and USD, but >60% of revenues in PLN, (3) Competition by streaming platforms such as Netflix, which nowadays invest billions of USD in own content, (4) Inability to renew co-operation agreements with cable operators and satellite platforms, and (5) Kino Polska TV’s stock can only be traded in Warsaw, which reduces the number of potential new investors

Business description

The Krakow-based gaming studio Starward Industries S.A. was founded by former employees of the most famous Polish games developer CD Projekt S.A. The CEO Marek Makuszewski is the company’s largest shareholder with a stake of 18.2%, while members of the management and supervisory board and employees own in total 31.9% of the company.

Starward Industries owns the rights to the IP of Stanislaw Lem, the author of the world-famous science fiction novel “Solaris”. According to our research, the licensing contract, which was signed with the heir of Stanislaw Lem, comprises a single-digit percentage fee on future sales of the company’s products.

Based on Mr Lem’s IP, Starward Industries is currently working on the AA+ game “The Invincible”, which it expects to release in 2023E for PC, Google Stadia, and all next-gen consoles. The game, which is currently No 79 on Steam Global Wishlist, has so far cost PLN 12m/EUR 2.7m. The marketing of the game will be financed by Starward’s new publisher 11bit Studios S.A., which has developed the successful games “Frostpunk” and “This War of Mine” and is considered one of the best-managed Polish video game companies.

According to its representatives, Starward Industries currently employs 34 people, thereof 25 developers and 9 marketing, communication, legal and administration staff. Many of them have worked at the largest Polish video game studios Techland and CD Projekt in the past. As almost all employees are or will soon be the company’s shareholders, the fluctuation is very low. When it comes to software developers, Starward has all necessary skills on board and thus does not need to outsource much work. In our view, this gives it full control over the quality. 

Recent results

In 2021, Starward Industries had a net loss of PLN 2m with zero revenues from product sales. In H1/22, the net loss equalled PLN -878k and the free cash flow PLN -867k. We estimate the company’s current net cash at PLN 6.5m, which according to its representatives will be sufficient to finance operations until the release of “The Invincible”, which we expect in September 2023 at the latest (in Q4, usually all the largest game premieres take place).  

Summary & Conclusion

In our view, Starward Industries is one of the best gaming studios on the Warsaw Stock Exchange. We like the committed management team, the fact that insiders incl. employees hold >30% of the shares, the track record of the team and the publishing agreement with 11bit Studios, which also holds a stake of 5.1% in the company. 

Based on our estimates, we forecast that with 800,000 copies sold Starward Industries will generate revenues of PLN 134m and a net profit of PLN 45m in 2023E. This would imply a highly attractive P/E 2023E multiple of 2.6x at present. We expect that Starward Industries will pay out a significant share of its net profit as dividends. In our view, the payout ratio could reach 40%, which would correspond to a dividend yield of 15.5% at present.

The main risks, which investors should be aware of, are (1) delays with the production of the game, and (2) bad quality of the end-product, which would negatively affect its sales.

Apart from the Warsaw Stock Exchange, Starward Industries’ shares can also be traded in Germany.

While inflation has gone up everywhere since 2020 due to supply chain issues, COVID-19-related fiscal programs and the Ukraine war, Central and Eastern Europe (CEE) has been hit particularly hard. The Baltic countries Lithuania (24.1%), Estonia (23.7%) and Latvia (22.2%) lead the ranking of those with the highest inflation rate in the EU. In the main CEE economies Poland, Czechia and Hungary, inflation reached 17.9%, 18% and 20.7% respectively in September 2022. Over the last quarters, their central banks have increased interest rates from almost zero to 6.75%, 7% and 13% respectively. This means that in all these countries real interest rates have become strongly negative and money expensive, which is bad especially for real estate and growth stocks.

Given that the end of the interest rate increases is not in sight, which makes investments in bonds still risky, the best choice for investors seem to be fundamentally strong dividend-paying companies with reasonable net gearing. Below is a list of stocks from the CEE region with a long history of dividend payouts. The two companies with the longest track record of uninterrupted dividend distributions are the Hungarian and Slovenian pharma wholesalers Gedeon Richter (www.gedeonrichter.com/en) and Krka (www.krka.biz). They only have a net gearing of 3.4% and -11.8% respectively and are trading at P/E 2022E ratios below 10x. The stocks, which currently offer the highest dividend yield, are the Romanian natural gas producer Romgaz (12.2%, www.romgaz.ro) and the Polish manufacturer of aluminum products Grupa Kety (10.8%, www.grupakety.com).

All of the companies below can also be traded on a Western stock exchange e.g. in Frankfurt.

Company (Industry)	Market cap (EUR)	FCF Yield so far in 2022	Net income CAGR (3y)	DYield 2022E	Years of consecutive dividend payments
Asseco Poland S.A. (Software)	EUR 1210m	20%	12%	4.8%	16 years
Richter Gedeon Rt. (Pharma)	EUR 3648m	3.2%	58.1%	3.5%	28 years
Krka d.d (Pharma)	EUR 2779m	-5.9%	21%	6.6%	23 years
Grupa Kety S.A. (Aluminium Industry)	EUR 987m	1.5%	30.4%	10.8%	13 years
Asseco South Eastern Europe S.A. (Banking & Payments Software)	EUR 460m	3.6%	32.5%	4%	13 years
Ambra S.A. (Alcoholic Beverages)	EUR 106m	1.5%	16.3%	4.8%	14 years
Budimex S.A. (Construction)	EUR 1274m	7.8%	47.1%	7.4%	14 years
SNGN Romgaz SA (Natural Gas Producer)	EUR 2945m	26.6%	11.9%	12.2%	9 years
Mo-Bruk S.A. (Waste Management)	EUR 216m	11.4%	77.6%	10.8%	4 years
Cyfrowy Polsat S.A. (Telco & Media)	EUR 2305m	55.3%	74.2%	6.4%	4 years