On November 5, the scenario many Western European politicians had feared became a reality: Donald Trump won the U.S. presidential election by a significant margin, securing 312 electoral votes to Kamala Harris’s 226.

If Trump follows through on the promises he made during his campaign — and based on his actions during his first four years in office, we believe he will — times could become difficult for Europe. Two of his main objectives are the widespread use of tariffs on both Chinese and European goods to support American industry, and the immediate end of the Russia-Ukraine war, where the U.S. has so far been Ukraine’s largest supporter.

Trump’s economic policy — e.g. there are discussions about a min. 10% tariff on European and a 60% tariff on Chinese products https://www.reuters.com/world/europe-will-pay-big-price-trump-warns-tariffs-2024-10-30/ — would make European goods significantly more expensive for US consumers and thus reduce Europe’s competitiveness. It’s worth noting that the U.S. is currently among the top three trading partners for many EU member states, including Germany and France (Source: destatis, World Bank, Google search) and the largest partner for the whole EU https://ec.europa.eu/eurostat/statistics-explained/index.php?title=File:Principal_partners_for_EU_exports_of_goods,_2023.png  Furthermore, Trump could pressure the EU to choose between aligning with the US in its policy against China or maintaining its current business relationship with the Asian country, which is the bloc’s 3^rd largest trading partner. This would be a particularly bad scenario for German car manufacturers, which generate between 16.1% (BMW) and 23.3% (Porsche) of their yearly revenues in China.

In terms of geopolitics, Trump aims to keep the U.S. out of foreign conflicts that cost American taxpayers billions. He also insists that all NATO countries spend at least 2% of their annual GDP on defence. During his first term as president, he even threatened that the US — by far the bloc’s largest financial contributor — could withdraw from NATO.

Trump’s plans could have severe economic and political consequences for the EU. His tariffs would likely hit Germany — the largest European economy and home to a car & machine building industry that support c. 800,000 and c. 955,000 jobs respectively — particularly hard. For most EU countries, including those in Central and Eastern Europe, Germany is by far the largest trading partner. For example, it currently accounts for approximately 27% of Poland’s exports, 33% of Czechia’s, 26% of Hungary’s, and 21% of Romania’s. Unless Europe quickly reduces its dependence on the US and China, the likely outcome could be a deep, Europe-wide recession, deindustrialization, and significant long-term destruction of wealth.

In terms of defense policy, a forced peace deal in Ukraine — under which Russia would likely retain the territories it has already seized, likely resulting in even more Ukrainian refugees in Western Europe — would have mixed implications. While Europe might participate in the rebuilding of Ukraine, the negatives would likely outweigh the positives. Reports suggest that members of Trump’s inner circle want Europe to bear the cost of securing a planned demilitarised zone between Ukraine and Russia’s occupied territories such as Donbas. Additionally, the EU would need to significantly increase its defense spending to deter further aggression from Russia.

In our view, sectors in Europe that could benefit from this new reality include defense, construction (particularly companies with prior experience in the CIS region), building materials, mining (e.g. producers of coke coal that is critical for steel production), and steel. Moreover, if a peace treaty is signed, the following Ukrainian companies — most of which are listed in Warsaw — could see significant recovery: Astarta, Ferrexpo, IMC, and Ovostar Union. However, we must emphasise that investing in Ukrainian equities carries significant risks, as these companies often lack adherence to Western corporate governance standards, and minority shareholder rights are frequently disregarded.

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.