With 163.3% vs. -23.3% for WIG index, Polish Votum S.A. (www.votum-sa.pl) has significantly outperformed the broad market index over the last 12 months. Nevertheless, given its business performance so far in 2022 and sell-side expectations for 2023E-2024E, we believe that the stock is still undervalued by >40%.
Business description
Votum, which was founded in 2005, helps individuals that are clients of financial institutions to obtain compensation for personal and asset damages as well as abusive clauses in foreign currency loans. Other segments are the provision of rehabilitation services as well as photovoltaic installations, eco-friendly heating systems and Smart Energy Management for private households and corporate clients. With >300,000 customers, Votum is the largest company in its segment in Central and Eastern Europe. To date, the company’s clients received PLN >2.4bn of compensations.
After the decision by the Court of Justice of the European Union in 2019, the fastest growing and most promising segment of Votum’s business is however the one related to abusive clauses in FX loans. The court stated that agreements for loans that are denominated in foreign currencies could be declared illegal if they contain abusive clauses and the borrower requests it. It excluded the possibility that these agreements could be amended.
According to the Polish Financial Supervisory (KNF), at the end of 2018 Polish banks had 555.9k loans that were denominated in foreign currencies. Their value equalled PLN 128.6bn/EUR 26.7bn, thereof PLN 104.8bn/EUR 21.8bn were CHF loans. According to bankier.pl, until Q1/22 the total volume of CHF denominated loans declined to PLN 61.7bn/EUR 12.8bn, of which by far the most had the Polish state-owned bank PKO BP. What is relevant for Votum: In the second quarter of this year, the number of legal cases related to CHF-denominated mortgage loans equalled 67,000 and was >7,000 higher q-o-q.
Financials
In 2021, Votum, whose sales increased at a CAGR of 19.2% in 2007-2021, generated revenues of PLN 195.6m (+29.4% y-o-y), of which 37.1% stemmed from the segment Personal damages, 21.4% from Banking claims, 16% from Rehabilitation, 12.3% from Vehicle damages and 11.2% from Renewables. The most profitable segment was Banking claims, which generated a net margin of 24.5%. Last year, Votum generated a net profit of PLN 10.1m (+16.1% y-o-y; CAGR 2007-2021 = 9.3%). Operating and free cash flow equalled PLN 205k and PLN -2.1m respectively and ROCE 15.6%.
For Q1/22, Votum reported revenues of PLN 55.7m (+30.2% y-o-y), whereby Banking claims (+173% y-o-y to PLN 35.2m) accounted for 63.1% of the total. EBIT advanced by 464.8% y-o-y to PLN 18.8m and net income by 549.5% to PLN 16.2m. The two most profitable segments were Banking claims (net margin of 42.1%) and Personal damages (15.4%). At the end of March 2022, Votum had interest-bearing debt of PLN 26.8m, thereof 55.2% short-term. Net gearing equalled 24.8%.
On July 15, Votum reported its preliminary Q2/22 figures for the Banking claims segment. In Apr-Jun, revenues reached PLN 43.7m and net income PLN 27.5m. In Q1/22, revenues and net income, which relate not only to the remuneration for first instance court rulings but also upfront payments and binding court decisions, amounted to PLN 35.2m and PLN 14.8m respectively.
Between 15 June and 14 July 2022, there were 667 court rulings for legal cases of Votum’s clients. That compares to <100 such rulings in June 2021 and c. 260 in Jan 2022. The number of new contracts for legal support related to abusive clauses in FX-denominated loans reached 722 compared to c. 480 in June 2021 and c. 720 in Jan 2022.
Summary & Conclusion
Votum is a company with a strong majority shareholder – Wroclaw-based financial group DSA Financial and its founder Andrzej Dadello – and leading market position in CEE in its segment. Members of its management team own >3.2% of the company’s shares and have been buying stock over the last months. Since 2007, the company has shown very solid growth on top and bottom line. Given that abusive clauses in loan agreements constitute a significant issue for Poles and the decision in 2019 in this regard by the Court of Justice of the EU was clearly in favor of consumers, we believe that Votum will report significantly improving results at least in the next two years. This should also allow the company to pay out attractive dividends to its shareholders.
Sell-side analysts seem to be of the same opinion. Their latest estimates for 2022E assume a net profit of PLN 60.4m, which however given the company’s recent news flow is very conservative, in our view. We believe that for full-year 2022E Votum will report a net profit of at least PLN 70m (+593.1% y-o-y) which despite the very strong share price performance since January 2022 would still imply a P/E 2022E of just 6.8x at present. In 2022E-2024E, sell-side analysts expect a net income CAGR of 21.5%.
Regarding DPS, the current sell-side estimate for 2022E is PLN 2.52, which implies a DYield of 6.4% at present. For 2023E, the company is expected to pay out 50% of its yearly net profit or PLN 3.32 per share.
Disclaimer: The author of this blog post owns shares of Votum S.A.