Business description

LPP, founded in 1991 by Messrs Jerzy Lubianiec and Marek Piechocki, has become a leading player in the Central and Eastern European clothing market. Currently, LPP operates in 39 countries across three continents, with over 2,000 stores and approximately 33,000 employees. The company is the ninth largest in Poland by market capitalisation. LPP made its debut on the Warsaw Stock Exchange in 2001 and is currently included in the WIG20 and MSCI Poland indices. LPP’s majority shareholder is the Semper Simul Foundation, established by one of the company’s founders. 

The Group’s sales are primarily derived from five fashion brands: Reserved, Cropp, House, Mohito and Sinsay. The company has no production facilities of its own and sources over 90% of its goods from Asia. Clothing is designed in Spain and Poland, with distribution centres in Poland, Slovakia and Romania. Management is looking to expand further, with plans to increase retail space by 25% in 2024E and c. 20% per annum in 2025E and 2026E. CAPEX for 2024E is forecast at PLN 1.5bn, of which PLN 1.2bn is for new stores as LPP plans to open over 700 new shops.

Revenues of business lines of LPP for 2023 and 2022 

Source: LPP S.A., East Value Research GmbH

Over the years, LPP’s affordable prices and new designs have earned the Group a loyal customer base. Sales are primarily generated through offline stores, with e-commerce accounting for only 24.6% of total sales (-3% y-o-y pp). Despite being the youngest brand in the group, Sinsay generated more than 43.1% of total sales in 2023. Furthermore, Sinsay is the group’s fastest-growing brand, having tripled its number of offline stores in just four years.         This promising brand not only offers clothing but also home accessories, competing with Pepco, KiK or Primark in the offline segment, and is also a leading player in e-commerce, where it competes with Chinese online shops Shein and Temu. 

Hindenburg Research Report on LPP

In 2022, following the invasion of Ukraine by Russia, LPP’s management decided to sell its Russian business to a Chinese consortium and Anna Pilyugina (former CEO of LPP Russia). The purchase agreement foresees the payment for stores and inventories in instalments, with the final payment scheduled for 2026E. The company opted for the least costly option for exiting the Russian market, which benefits LPP investors. Nevertheless, from a long-term perspective, it was a misguided decision to continue expanding into the Russian market and increasing inventory for this market. 

In March 2024, Hindenburg Research wrote a lengthy report on LPP’s exit from the Russian market. The report had a significant negative impact on the company’s share price, which fell by approximately 35% shortly after publication. The report’s title, “A Fake Russia ‘Sell-Off'”, suggests that LPP is willing to return to the Russian market after the war. The primary concern is the option for LPP to buy back the Russian part of the business. However, in the lengthy report, this option is mentioned in just one sentence. In an attempt to justify its title statement, Hindenburg presents other arguments, such as a change of auditor and encrypted barcodes. However, LPP has debunked these arguments. After several weeks of clarification and the dismissal of the allegations by LPP, the share price has almost returned to its pre-scandal peak

In our view, LPP Group has successfully defended its position against the majority of Hindenburg Research’s arguments. Regarding the main concern, the option to buy back the business, LPP has stated that the option was requested by the buyer and that exercising the option is not feasible due to the need for approval from a Russian government body. Russia has designated Poland as a hostile nation and a significant portion of LPP’s shares are held by Polish investors.

We believe that the consequence of the Hindenburg Report will be a stronger focus of LPP on expansion in Western and South-Eastern Europe than previously predicted.  

Financials

Over the past decade, LPP has experienced rapid growth, with a CAGR of 15.5% in sales and the addition of almost 1,000 stores. In 2023, the Polish clothing company generated revenues of PLN 17.4bn (+9.3% y-o-y), EBIT of PLN 2.28bn (+92.8%; margin 13.1%), and a net income of PLN 1.6bn (+232.3%; margin 9.3%). The sales performance has been enhanced by the Sinsay brand, which has reported a 24.7% y-o-y growth. The profitability improvement has been achieved through cost optimisation in the following areas: Slower increase in CoGS in the amount of PLN 8.4bn (+6.7% y-o-y), that mostly consists of valuation of inventories at purchase price from suppliers. Operating costs decreased by 2.1% y-o-y to 6.6bn, with advertisement costs PLN 432.5m (-44.5%) declining the most. Operating cash flow improved significantly from PLN 622m to PLN 4.34bn, free cash flow improved as well from PLN -534.6m to PLN 3.3bn, with net debt/EBITDA ratio dropping from 1.9x to 1.0x. 

Geographically, LPP’s home market Poland accounted for 42.4% of total sales or PLN 7.38bn (+7.6% y-o-y). However, international markets have seen even faster growth (sales of PLN 10bn, or +10.5% y-o-y). The largest foreign market is Romania, with sales of PLN 1.45bn (+8.9% y-o-y; 8.3% sales share). Ukraine is the second largest foreign market, with sales of PLN 1.18bn (+70.7%; 6.8%). The fastest growing foreign markets that LPP recently entered are Greece (+462.5% y-o-y; sales) and Italy (+409.2%).

LPP S.A.: Revenue, EBIT margin, Net Income and Number of stores (2017-2023/24)*

The most recent results for Q1/2024 indicate that the company is set for a very successful year in 2024E. In Jan-Mar 2024, LPP generated revenues of PLN 4.3bn (+18.3% y-o-y), with the Sinsay brand showing the strongest growth (+54.1%). There has been a significant improvement in profitability, with an EBIT of PLN 411m (+78.2% y-o-y; margin 9.5%; +3.2% pp), resulting in a net income of PLN 277m (+147.8%; margin 6.4%; +3.4% pp). Western Europe has been the fastest growing region, with sales growth of 31% y-o-y (6% of total sales) and retail space growth of 59.7%.  

Conclusion

We like LPP due to its successful track record spanning over 30 years and the fact that, thanks to its excellent logistics, it still has plenty of opportunities for international growth. For 2024E, the company predicts revenues amounting to PLN 21bn, and the current consensus EV/EBITDA 2024E is 7.9x. This valuation seems attractive both compared to its 3-year average (9.6x) and its peers (e.g., Abercrombie & Fitch Company -> EV/EBITDA 2024E of 9.4x, Inditex -> 12.6x, H&M -> 8.2x; Source: marketscreener.com).

In our opinion, LPP is a superb stock for investors looking for a company with characteristics of both growth and value stocks. LPP generously rewards its investors: the current dividend policy for 2023-2025E foresees the payment of a minimum of 50% of non-consolidated net profit.

The main risks we have identified are as follows:

1. Supply chain disruptions

2. New country performance risk

3. Changes in consumption trends

Business description

Founded in 2000 by the Canadian James van Bergh, who directly and indirectly is still its largest shareholder, Benefit Systems (www.benefitsystems.pl) is today the No 1 provider of non-payroll work benefits incl. discounts for fitness, culture, restaurants, health in CEE. At the end of March 2024, the company worked with >41,000 employers (2011: 2,850) in all its regional markets. The number of its primary product, the MultiSport card, equalled 1,996,600 (2011: 235,000), thereof 1,508,800 in Poland, 231,800 in the Czech Republic (BFT has been active there since 2010), 62,000 in Slovakia, 142,200 in Bulgaria (both since 2015), 44,600 in Croatia (since 2018) and 7,200 in Turkey (since 2021). In addition to its bonus card business, for the last few years Benefit Systems has also built a chain of own fitness centers (Q1/24: in total 255 centers, thereof 224 in Poland under 14 different brands e.g. Zdrofit, Good Luck and Fit Fabric as well as 31 abroad). According to management, it currently operates the largest such chain in Poland.

Benefit Systems’ business model is comparable to an insurance in the sense that its corporate clients (sometimes also their employees to 50%) pay the company a monthly flat fee for each bonus card and the company will only have costs if the employee uses the card. Employees gain access to >9,300 facilities within a single product and can use a wide range of services, including various online add-ons/courses, for a relatively small amount of money. When users want to try out a new place to work out, they do not have to worry about filling out paperwork on site – all they need to do is show their BFT bonus card with proof of identity or the BFT app. 

When it comes to employers, the bonus card makes them more attractive on the labour market, promotes employee retention and improves employee’ fitness and health, which can translate into lower costs. Moreover, Benefit Systems’ corporate clients receive one invoice rather than dozens from different facilities, which reduces their administrative work significantly.

Financials

Since 2011, when it was listed on the Warsaw Stock Exchange at a price of PLN 107/share, Benefit Systems has increased its revenues and net income at a CAGR of 22.4% and 22.9% respectively. For 2023, the company paid a dividend of PLN 41/share (DYield = 1.3% at present), but between 2016 and 2022 it re-invested all its profits. In 2023, it generated a ROCE of 22.3% compared to 10.6% in 2022.

For the Jan-Mar 2024 period, Benefit Systems reported revenues of PLN 801.1m (+28.1%). While the number of bonus cards went up by 12.7% y-o-y, ARPU in all markets increased by low double-digit percentage points. The Polish business contributed 72.6% to total revenues and generated an EBIT margin of 17.7% (Q1/23: 11.6%). The international business (thereof Czech Republic: +14.1% y-o-y to PLN 124.3m, Bulgaria: +11.6% to PLN 53.2m) reported an EBIT margin of 11.6% (8.6%). With PLN -3.6m, Turkey was the only geographical market that reported an operating loss in Q1/24.

At 29.7% (Q1/23: 23.3%), BFT’s Q1/24 gross margin was strong. In Q1/24, the company’s EBIT increased to PLN 123m (+87.2% y-o-y, 15.4% margin vs. 10.5% in Q1/23, EBIT ex ESOP: PLN 130.6m) and net income to PLN 92.1m (+75.9%, 11.5% margin). Consequently, operating and free cash flow improved from PLN 177.1m in Q1/23 to PLN 244.8 and from PLN 137.5m to PLN 194.8m respectively. As of 31/03/2024, Benefit Systems’ net cash (excl. IFRS 16 leasing) amounted to PLN 505.6m compared to PLN 373.5m at the end of 2023 and PLN 7.8m as of 31 March 2022. 

Conclusion

We like Benefit Systems’ attractive and highly profitable business model, which given the strong competition for employees and the popularity of non-monetary employee’ benefits in CEE/SEE has excellent growth prospects. Given its long track record and clever strategy (-> combination of bonus cards and own fitness clubs), we believe that other players such as Medicover will not threaten the company’s market leadership in the foreseeable future. In our view, there is especially strong growth potential in Turkey, a country with 85m inhabitants, 9 cities with 1m+ inhabitants and a highly dispersed fitness market.

We believe that Benefit Systems is a great stock to hold for the long term. While in 2024E management guides for max. 230k new cards (150k in Poland, max. 80k on foreign markets), a high single-digit ARPU growth and a similar unadjusted EBIT margin y-o-y (without the costs of the employee incentive scheme that management estimates at PLN 68m), we see the possibility for an increase of the guidance especially in Q4/24E, which is typically the best period of the year for the company (>30% of its annual net profit).

Benefit Systems also has an attractive dividend policy. For the years 2023-2025, it foresees the payout of at least 60% of the consolidated net profit.

Regarding risks, we believe the main ones are: 1. The outbreak of another pandemic, 2. Overinvestment in new fitness centers (in 2024E, BFT plans to open 15 new centers in Poland and min. 20 abroad).

Recently, we had a call with XTPL’s management. We have once again confirmed our conviction that the company has chosen the right commercialisation strategy and the business is moving in the right direction.

In the US and Asia, XTPL has been able to hire experienced sales managers from its main competitor Optomec, which confirms the results of our research that the company’s technology is considered superior to all comparable international providers. In addition to its local sales teams, XTPL works with currently 12 distributors. So far, the company has sold its products to clients from 21 countries worldwide.

In terms of staff size, in 2023 XTPL increased its team by 25 people to 70. Since January 2024, it has hired 20 more employees, which are necessary for reducing production times and growing sales, but we believe will negatively affect profitability this year. Further, larger hirings are only planned in 2026E. Currently, XTPL employs 11 own sales & marketing staff. 

Regarding the sales pipeline and products, the most important area of activity is of course industrial implementation, which will allow XTPL to significantly ramp up its revenues and generate a high share of recurring revenues. According to the CEO, there are currently 20+ industrial projects in the company’s pipeline, of which 9 are at least in the 2nd evaluation phase (out of 5 in total), and 4 in the 4th stage. We believe that at one of XTPL’s industrial partners a machine that uses the company’s technology is already ready and undergoing final tests, which makes a first industrial implementation in 2024E likely.

When it comes to other products, apparently 80 Delta Printing Systems are currently in the sales pipeline and due to investments in 2023 the company has reduced their production time by half. Moreover, XTPL has extended its offer by gold nanoinks and plans to introduce copper-based ones soon. 

With a cash level of c. PLN 20m, we estimate XTPL’s current monthly cash burn at PLN 2-2.5m. In our view, additional funding – if at all necessary in the future – will be debt.

Below are our updated estimates for XTPL in 2024E-2026E. While our assumptions for 2025E-2026E remain unchanged, we now believe that growth this year will be weaker and the company will still not be at EBITDA break-even . We expect higher sales of Delta Printing Systems y-o-y, the majority of which will be generated in H2/24E. By 2026E, XTPL is supposed to sell up to 100 (2023: 3) industrial modules – the production of which is very scalable and will also be conducted by contract manufacturers, according to management – and max. 40 Delta Printing Systems. 50% of sales then should stem from industrial implementations. 

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

The LSI Software Group, which has c. 300 employees (full-time and freelancers), was founded in 1998 and is based in Lodz. It is a provider of Enterprise Resource Planning (ERP) software for hotels, restaurants (products: Gastro, tAPP Gastro, POSitive Restaurant), cinemas (POSitive Cinema) – in these three areas, it is Polish market leader with a share of between 43% and 75% – sports facilities and retailers. In addition, it is the exclusive distributor of POS management systems and peripheral devices of the company Posiflex and, since year-end 2021, the robots of the Chinese company PUDU, which operates in 60 countries worldwide. Due to the structure of the company’s sales – the sector HoReCa accounts for c. 70% of its annual sales – LSI Software was hit hard by the COVID-19 pandemic, with a revenue and EBITDA decline of 17% and 43% respectively y-o-y. 

LSI Software, where in 2021 international revenues made up 24% of the total, generates sales from software integration, consulting, services, and hardware delivery. Last year, revenues from own software and maintenance/servicing accounted for 53.7% of the total, however the distribution activities (mainly sales of Posiflex products and PUDU robots) were most profitable with a gross margin of 30%. Recently, the company started offering its software products in the SaaS model, which is particularly attractive for smaller clients due to the low monthly fee of c. PLN 250. In our view, this should increase the share of recurring revenues from currently c. 50% and improve profitability in the coming years. 

According to management, LSI’s clients include >5,000 restaurants, c. 1,500 cinemas and several dozen cinema chains. The 3-4 largest customers account for only 15-20% of the company’s yearly sales and the customer churn only equals <5%. Examples of clients include the cinema chains Helios S.A. (Poland), Muvi Cinemas (Saudi-Arabia), KITAG Cinemas (Switzerland) and the leading Polish retail and restaurant chains CCC and Amrest.

Currently, LSI Software has c. 300 employees, of which 75% work as software developers and testers and 25% in other functions such as sales & marketing, HR and administration. Although there is no employee incentive scheme, the employee fluctuation is below peers, according to management.

LSI Software’s largest shareholder is its CEO Grzegorz Siewiera, who owns 30.8% of its shares, but 53.6% of the votes. The Spanish family office Inmuebles Polo SL owns a stake of 13.2%.

Recent results

Between 2013 and 2019, LSI Software grew at a CAGR of 14.8% on top line. After the pandemic year 2020, in which the company was hit hard due to its dependance on the HoReCa sector, in 2021 LSI Software’s revenues went up by 25.5% to PLN 54m. While the gross margin jumped to 30.7% (2020: 21.3%), EBIT and net income improved by 256% to PLN 5.9m (11% margin) and by 169.1% to PLN 6.5m respectively. However, due to higher investments in working capital and CAPEX operating and free cash flow deteriorated to PLN 4.5m (2020: PLN 9.9m) and PLN -3m (PLN 6.1m) respectively. In 2021, LSI generated a ROCE of 10% compared to an estimated WACC of 18% at present. 

Due to the recovery in most of its markets after COVID-19-related lockdowns for 9M/22 LSI Software reported revenues of PLN 40m, which corresponds to a y-o-y increase of 19.9%. 18% (9M/21: 11%) of total sales were generated abroad, of which 6% (4%) in the US. The share of revenues from own products and services declined to 52.8% (54.7%), which mainly stemmed from 24.9% higher sales of hardware such as PUDU robots. In 9M/22, the Group’s gross margin improved from 22% last year to 23.4%. However, following 85.7% lower other operating income due to a one-off effect – in 9M/21, LSI reported PLN 3.4m of COVID 19-related government grants vs. PLN 245k in 9M/22 – as well as 21.6% higher sales costs y-o-y (e.g. trade fairs, sales staff), which should have already positively impacted results in Q4/22, EBIT declined from PLN 1.6m to PLN -1m and net income from PLN 1.4m to PLN -1.3m. Between January and September 2022, free cash flow equalled PLN -10.9m (9M/21: PLN -698k), which was related to significant investments in inventories of PLN 5.7m due to longer delivery times of suppliers, among others. At the end of September 2022, the company had net debt of PLN 2.9m, which corresponds to 6.5% of its equity. Its interest-bearing debt mainly reflects the valuation of its office leasing contract in Warsaw according to IFRS 16.

Summary & Conclusion

In our view, LSI Software is a solid, owner-managed software company with a leading position in its domestic market and strong growth potential related to the roll-out of SaaS-based products and further international expansion. Based on most recent broker estimates, it is currently trading at an EV/EBITDA 2022E of 4.5x, EV/EBITDA 2023E of 3.7x, P/E 2023E of 7.5x and PEG of 0.23. For the coming years, we expect an acceleration of growth and regular dividend payouts. We also believe that due to its strong product portfolio and attractive valuation LSI Software could be taken over by a larger player soon. 

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.

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 founder-managed MedTech company Genomtec (www.genomtec.com) was established in 2016 by scientists from the Wroclaw Medical University. It has developed a molecular diagnostic device, which compared to standard PCR devices costs 6 times less, is mobile, much faster and energy efficient. We believe that given its already announced distribution contract in Greece, Genomtec will likely generate first revenues of PLN >1m in 2022 upon receipt of CE/IVD certification in the EU for its molecular diagnostic device Genomtec ID within the next two months. The global PoC Molecular Diagnostics Market, which the company targets, is worth USD 2.8bn and growing at a CAGR of 8.2% (Source: MarketsandMarkets)

Genomtec, which already has international shareholders, is listed in the NewConnect segment of the Warsaw Stock Exchange but can also be traded in Frankfurt. Its founders own >33% of the total shares outstanding, while its largest shareholder is the major Polish VC fund Leonarto VC (www.leonarto.vc). The team includes Polish scientists, but also foreign experts incl. Charudutt Shah (Chief Business Officer), who previously worked in Business Development at the major global MedTech company biomerieux; and Jason Reece (Chief Technology Officer), who has previously been in charge of several IVD (In-Vitro Diagnostics) systems e.g. at Novartis and Perkin Elmer. In its UK-based facility, Genomtec employs several experienced production engineers.

Genomtec’s products

Genomtec ID is GMT’s flagship molecular diagnostic device for the analysis of DNA. Compared to stationary PCR devices, it is small, much more energy efficient and faster (it only needs 30-40 min to deliver results), but also offers 10-100 times higher reaction efficiency. It can be used everywhere and does not need to be handled by skilled personnel with laboratory training.

Genomtec ID includes an analyzer and a reaction card with integrated genetic tests and provides multiplexing capability of simultaneously up to five genetic targets. One of the diagnostic panels, which is supposed to cost c. EUR 45 and will generate recurring revenues for Genomtec in the future, is for respiratory diseases and includes SARS-CoV-2. Others, which are however still under development, cover e.g. Sexually-transmitted infections and SEPSIS.

Apart from Genomtec ID, the company also offers rapid genetic tests, including two-gene SARS-CoV-2 tests. In the future, it also plans to develop Genomtec Tumor, another SNAAT-based device that could be used to quickly identify neoplastic mutations.

Financials

We estimate Genomtec current cash position at c. PLN 5m. This should allow the company to launch production of the Genomtec ID device after certification in Q3/22. However, in order to grow its sales team and ramp up production it will likely have to conduct another capital increase soon. We estimate Genomtec’s current monthly cash burn at c. PLN 1m.

Valuation

We have strong faith in Genomtec’s management and its technology, which in our view offers significant advantages compared to the current PCR standard. In particular, we believe that the track record of Charudutt Shah and Jason Reece significantly increases the probability of a successful commercialization of Genomtec ID.

Given the sales potential of its Genomtec ID device, the company is currently very attractively valued, in our view. Its current market capitalization equals USD 12.8m, while similar companies have been sold for at least 15 times higher valuations in the last years. For example, in 2014 Swiss Roche acquired US-based company iQuum (provided the Liat Analyzer and the Liat Influenza A/B Assay) for USD 450m including milestone payments. In another M&A deal in 2018, German Qiagen bought Spanish STAT-Dx (offered the DiagCORE system, an easy-to-use platform that consolidates molecular and immunoassay techniques in a single PCR device) for in total USD 191m.

Disclaimer: The author of this blog post may own shares of Genomtec

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”.

Financials

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