Report v8

Transcription

Report v8

Equity Investment Strategy
With almost 26% ytd drop of the WIG 20 index, and shrinking shares supply we
believe the short-term turning point is close. We think that in 1H09 the market is likely
to regain 15%-30% from current levels. In the long run perspective the equity
performance will depend on development of global macro environment. If our
macroeconomic assumption of two weak years and recovery in 2011E is true, then we
find current valuations attractive in many cases. In this report we present our forecasts
& recommendations for 34 companies we have currently under coverage.
Valuations are attractive from the long term point of view
We have checked historical market ratios and conclude that current valuations
became very attractive. Median P/BV for all listed companies is now at 0.7
comparing with its low at 1.16 in 2001 (excluding 1991-92). Similar situation holds
for 4Q trailing P/E ratio that is now at 5.7x vs. 11 in 2001. In case of banking sector
(30% of domestic market cap) the weighted average P/BV is now at 1.3 vs. 1.4 in
2001. We conclude that while the results deterioration is in many cases inevitable,
the P/E and P/BV ratios should jump (as it was the case in 2002-03) amortising
impact of weaker results on market cap. If we assume that the slowdown we face
now is similar with 2001-03 then current valuations look very attractive.
The market is oversold. PF have the record purchasing power
Unprecedented fall in nominal value of stocks drove the value of potential supply
down to around PLN 80m (domestic market cap excluding strategic investors and
pension fund holdings). At the same time Pension Funds allocation is record low and
their purchasing power is at record high value of 27.5bn. Theoretically Polish Pension
Funds could (at current prices) buy 34% of total supply – assuming that Mutual
Funds, Foreigners and Individuals sell everything they hold. This ratio is rapidly
growing together with market fall and/or passage of time (inflows to PF).
Macro environment remains the major risk factor
We are looking for two years of relatively weak GDP growth of 1.3% in 2009E and
1.9% in 2010E. This impacts our 2009E-10E financial forecasts for the covered
company universe. However, in our long-term expectations (especially in DCF
models) we assume GDP growth to come back on the fast growth track in 2011E-
Research Team
Arkadiusz Chojnacki, CFA
+48 22 236 92 44
arkadiusz.chojnacki@ipopema.pl
12E (4.6%-5.2%). We have to admit that given current instability of global economy
there is high forecast risk related to our assumptions.
Mixed 2009E-10E Earnings Outlook
Forecasted earnings of our research universe drop by 7% in 2009E and grow by 7%
in 2010E. We expect that 4 our of nine industries will increase their earnings in
Konrad Anuszkiewicz
+48 22 236 92 30
konrad.anuszkiewicz@ipopema.pl
Tomasz Bursa
+48 22 236 92 31
tomasz.bursa@ipopema.pl
2009E. The top gainer will be Oil&Gas with fivefold earnings jump in 2009E, followed
by Wholesale, Construction and Pay TV. Our macroeconomic scenario of economic
slowdown implies that cyclical industries will suffer a drop in earnings (Property
Tomasz Duda
+48 22 236 92 32
tomasz.duda@ipopema.pl
Development -66%, Banks -26%, Chemicals -23%, Media -15%, Retail -10%).
Top-Picks
Magdalena Komaracka, CFA
+48 22 236 92 08
magdalena.komaracka@ipopema.pl
We present two categories of top picks: defensive/safe (may underperform during
market rebound but still offer nominal upside at relatively low risk) and aggressive
(attractive valuation but business is less immune to slowdown). In the “defensive
Marcin Pokorski
+48 22 236 92 28
marcin.pokorski@ipopema.pl
category” we recommend: Budimex, Cyfrowy Polsat, Eurocash, ING and PGNiG.
Our “aggressive” top-picks are: Amrest, BZ WBK, Lotos, LPP, PKO BP and
Polimex. Please find full list of our recommendations at the following pages.
Prices used in the report are as of February 13, 2009
Waldemar Stachowiak
+48 22 236 92 33
waldemar.stachowiak@ipopema.pl
Contents
Coverage Summary .............................................................................................. 3
Investment View ................................................................................................... 4
Valuations are at historical lows ....................................................................................... 4
Diminishing selling power vs. growing Pension Funds purchase capacity ....................... 5
Favored industries and top picks ..................................................................................... 6
Earnings outlook by industry ............................................................................................ 6
Macroeconomic Outlook.................................................................................... 10
Fund Flows .......................................................................................................... 14
Banks ................................................................................................................... 17
Investment Summary ..................................................................................................... 17
Valuations and Recommendations ................................................................................ 20
Banking Sector Landscape ............................................................................................ 22
Bank Millennium S.A. ..................................................................................................... 29
BRE Bank S.A................................................................................................................ 32
BZ WBK S.A. ................................................................................................................. 35
Bank Handlowy S.A. ...................................................................................................... 38
ING BSK S.A.................................................................................................................. 41
Kredyt Bank S.A............................................................................................................. 44
Pekao S.A. ..................................................................................................................... 47
PKO BP S.A. .................................................................................................................. 50
Chemicals ............................................................................................................ 53
Ciech S.A. ...................................................................................................................... 56
Synthos S.A. .................................................................................................................. 59
Zakłady Azotowe Puławy S.A. ....................................................................................... 62
Zakłady Azotowe Tarnów S.A. ....................................................................................... 65
Zakłady Chemiczne Police S.A. ..................................................................................... 69
Construction ....................................................................................................... 72
Budimex S.A. ................................................................................................................. 76
Elektrobudowa S.A. ....................................................................................................... 79
Erbud S.A....................................................................................................................... 82
PBG S.A......................................................................................................................... 85
Polimex – Mostostal S.A. ............................................................................................... 88
Media.................................................................................................................... 91
Agora S.A....................................................................................................................... 93
Cinema City International NV ......................................................................................... 97
TVN S.A. ...................................................................................................................... 101
Oil and Gas ........................................................................................................ 105
Grupa Lotos S.A. ......................................................................................................... 107
PGNiG S.A. .................................................................................................................. 112
Pay TV and Broadband .................................................................................... 115
Cyfrowy Polsat S.A. ..................................................................................................... 117
Multimedia Polska S.A. ................................................................................................ 121
Property Development ..................................................................................... 125
Echo S.A. ..................................................................................................................... 128
Globe Trade Centre S.A............................................................................................... 131
Plaza Centres NV ........................................................................................................ 134
Retail .................................................................................................................. 137
Amrest Holdings SE ..................................................................................................... 140
NFI EM&F S.A. ............................................................................................................ 143
LPP S.A. ...................................................................................................................... 146
NG2 S.A. ...................................................................................................................... 149
Wholesale .......................................................................................................... 152
Emperia Holding S.A.................................................................................................... 156
Eurocash S.A. .............................................................................................................. 159
2
Coverage Summary
Banks
Company
Bloomberg
Rating
Bank Millennium
BRE
BZ WBK
Handlowy
ING BSK
Kredyt Bank
Pekao
PKO BP
MIL PW Equity
BRE PW Equity
BZW PW Equity
BHW PW Equity
BSK PW Equity
KRB PW Equity
PEO PW Equity
PKO PW Equity
SELL - H Risk
HOLD - H Risk
BUY - H Risk
HOLD - M Risk
BUY - M Risk
SELL - H Risk
HOLD - L Risk
BUY - M Risk
Market Cap
(PLN m)
1 479.0
3 655.6
5 784.6
3 948.1
3 930.0
1 534.1
24 512.7
25 100.0
Chemicals
Market Data
Target
Price
Price (Feb 13th)
1.7
1.7
151.0
123.5
108.6
79.4
32.7
30.3
397.0
300.0
4.9
5.6
102.7
93.6
32.0
25.1
Multiples
Upside
P/E 08
P/E 09
P/E 10
P/BV 08
P/BV 09
P/BV 09
-2%
22%
37%
8%
32%
-13%
10%
27%
3.6
4.3
5.8
5.6
8.1
4.6
7.0
7.2
8.7
7.4
7.8
8.0
8.7
11.1
9.5
8.7
5.1
7.2
7.8
8.4
8.4
9.6
9.4
8.0
0.5
0.9
1.0
0.7
0.9
0.6
1.6
1.7
0.5
0.8
1.1
0.6
0.7
0.5
1.5
1.5
0.4
0.8
0.9
0.6
0.7
0.5
1.3
1.3
EV/
EBITDA
08
4.0
2.9
1.4
0.5
0.7
EV/
EBITDA
09
4.1
3.7
1.0
0.2
2.3
EV/
EBITDA
09
4.1
3.8
1.0
-0.1
2.3
EV/
EBITDA
09
6.3
7.5
6.6
8.7
5.0
EV/
EBITDA
09
5.1
6.6
6.1
6.9
4.6
EV/
EBITDA
09
5.7
5.7
7.0
EV/
EBITDA
09
6.6
7.0
7.0
Market Data
Company
Bloomberg
Rating
Ciech
Synthos
Zakłady Azotowe Puławy
Zakłady Azotowe Tarnów
Zakłady Chemiczne Police
CIE PW Equity
SNS PW Equity
ZAP PW Equity
ATT PW Equity
PCE PW Equity
HOLD - M Risk
SELL - M Risk
BUY - M Risk
BUY - M Risk
HOLD - H Risk
Multiples
Market Cap
(PLN m)
Target
Price
Price
(Feb 13th)
Upside
P/E 08
P/E 09
P/E 10
635.6
608.7
927.1
309.0
390.0
26.0
0.41
62.4
11.1
5.7
22.7
0.46
48.5
7.9
5.2
15%
-11%
29%
41%
10%
7.9
30.9
2.8
4.4
6.0
5.4
11.0
5.3
7.8
8.7
6.0
11.4
8.3
7.4
8.3
Construction
Market Data
Company
Bloomberg
Rating
Budimex
Elektrobudowa
Erbud
PBG
Polimex-Mostostal
BDX PW Equity
ELB PW Equity
ERB PW Equity
PBG PW Equity
PXM PW Equity
BUY - L Risk
BUY - M Risk
HOLD - H Risk
HOLD - L Risk
BUY - H Risk
Multiples
Market Cap
(PLN m)
Target
Price
Price
(Feb 13th)
Upside
P/E 08
P/E 09
P/E 10
1 390.1
655.2
289.1
2 551.7
1 044.8
74.0
180.0
30.0
220.0
3.8
54.5
138.0
23.0
190.0
2.3
36%
30%
30%
16%
69%
14.5
10.8
27.7
16.6
8.6
12.0
10.8
8.7
12.7
8.0
10.3
9.9
9.4
9.9
7.6
Media
Multiples
Market Data
Company
Bloomberg
Rating
Agora
Cinema City International
TVN
AGO PW Equity
CCI PW Equity
TVN PW Equity
SELL - M Risk
SELL - M Risk
SELL - H Risk
Company
Bloomberg
Rating
Grupa Lotos
PGNiG
LTS PW Equity
PGN PW Equity
BUY - H Risk
BUY - M Risk
Target
Price
Price
(Feb 13th)
Upside
P/E 08
P/E 09
P/E 10
734.1
867.7
3 365.8
14.4
17.0
9.8
14.0
17.0
9.6
3%
0%
1%
16.4
13.4
8.9
33.2
10.7
10.7
60.1
19.2
10.6
Upside
P/E 08
P/E 09
P/E 10
P/BV 08
P/BV 09
P/BV 09
86%
34%
-1.5
15.4
5.8
7.3
2.0
8.1
0.2
1.0
0.2
0.9
0.2
0.9
EV/
EBITDA
08
11.3
6.1
EV/
EBITDA
09
8.9
5.1
EV/
EBITDA
09
7.1
4.5
Market Cap
(PLN m)
1 154.1
20 296.0
Pay TV and Broadband
Market Data
Target
Price
Price (Feb 13th)
18.9
10.2
4.6
3.4
Multiples
Market Data
Bloomberg
Rating
Cyfrowy Polsat
Multimedia Polska
CPS PW Equity
MMP PW Equity
BUY - L Risk
BUY - L Risk
Company
Bloomberg
Rating
Echo
GTC
Plaza Centres
ECH PW Equity
GTC PW Equity
PLZ PW Equity
BUY - H Risk
HOLD - H Risk
HOLD - H Risk
Multiples
Market Cap
(PLN m)
Target
Price
Price (Feb
13th)
Upside
P/E 08
P/E 09
P/E 10
4 132.2
1 103.0
18.1
8.4
15.4
7.2
18%
17%
14.7
19.3
12.3
15.6
10.1
12.4
Upside
P/E 08
P/E 09
P/E 10
P/BV 08
P/BV 09
P/BV 09
57%
19%
40%
8.3
5.6
3.6
7.5
16.0
335.9
5.7
8.9
10.9
0.2
0.7
0.4
0.2
0.5
0.4
0.2
0.5
0.4
EV/
EBITDA
08
7.9
4.0
10.0
8.7
EV/
EBITDA
09
6.2
4.8
9.7
7.6
EV/
EBITDA
09
5.4
4.7
8.4
6.7
EV/
EBITDA
09
6.7
5.9
EV/
EBITDA
09
4.9
5.1
Property Development
Market Cap
(PLN m)
911.4
2 829.9
961.6
Retail
Market Data
Target
Price
Price (Feb 13th)
3.4
2.2
15.3
12.9
4.9
3.5
Multiples
Market Data
Company
Bloomberg
Rating
Amrest
EM&F
NG2
LPP
EAT PW Equity
EMF PW Equity
CCC PW Equity
LPP PW Equity
BUY - M Risk
HOLD - H Risk
HOLD - M Risk
BUY - H Risk
Multiples
Market Cap
(PLN m)
Target
Price
Price
(Feb 13th)
Upside
P/E 08
P/E 09
P/E 10
661.1
761.4
1 422.7
1 935.3
60.0
8.8
44.0
1 475.0
46.6
7.4
37.1
1 110.0
29%
20%
19%
33%
13.4
5.1
13.0
11.8
11.0
7.5
12.2
13.5
8.8
7.6
10.5
11.2
Wholesale
Market Data
Company
Bloomberg
Rating
Emperia Holding
Eurocash
EMP PW Equity
EUR PW Equity
BUY - M Risk
BUY - L Risk
EV/
EBITDA
08
4.6
8.6
6.3
Market Cap
(PLN m)
Oil&Gas
Company
EV/
EBITDA
08
8.5
7.8
5.3
11.8
5.6
Multiples
Market Cap
(PLN m)
Target
Price
Price
(Feb 13th)
Upside
P/E 08
P/E 09
P/E 10
846.4
1 157.2
80.2
11.6
56.0
8.8
43%
33%
15.1
16.2
12.1
11.9
8.4
10.6
EV/
EBITDA
08
7.0
7.6
3
Investment View
Valuations are at historical lows
Analysing historical market ratios we get the picture of historically low valuations now
(excluding beginning of 90` when the stock exchange started to work with only few
companies listed). The median P/BV ratio is now at 0.7 vs. 1.16 in 2001. The median 4Qs
trailing P/E 5.7 is also at the lowest level since 2001. The same tendency is visible in
weighted average ratios for banking industry – historical P/BV and P/E are now at 1.3
and 6.7, respectively, vs. 1.4 and 17 in 2001 or 1.3 and 11 in 1997. Looking at the long
term data published by WSE we get similar picture – P/BV is the lowest since 1991-92 –
however we argue that those data are completely incomparable as they come from the
starting phase of Polish capital market. End of January P/E of 7.5 (provided by WSE) is
only comparable to 7.8 recorded in 1995 (91-92 we find incomparable).
We conclude that current valuation levels already anticipate an economic slowdown that
is more severe than that of 2001-03. Our macroeconomic scenario is based on
assumption of two years of weaker growth (09E-10E) and rebound in 2011E, which,
taking that the stock market performance leads economic cycles, makes us believe that
the stock market is now close to its lowest levels. On the other hand we admit that
forecast risk is very high now due to instability of global economy as well as difficulties in
quantifying turbulences in Polish economy triggered by sharp weakening of the PLN.
Chart 1 WIG index, Median P/BV and P/E for all listed companies, based on quarterly data (2Q01 – 3Q08)
70 000
4
70 000
60 000
3.5
60 000
3
50 000
30
25
50 000
20
2.5
40 000
40 000
15
2
30 000
30 000
1.5
10
20 000
20 000
1
5
10 000
10 000
0.5
0
0
WIG
0
0
P/BV
WIG
P/E
Source: Bloomberg, IPOPEMA estimates (last reading is based on February 13th closing prices)
Chart 2 Weighted average historical P/BV and P/E for
th
Banks 1997- Feb 13 2009
50
45
Chart 3 Historical P/BV and P/E for Warsaw Stock
Exchange 1991 – End of Jan 09
4.0
90
4
3.5
80
3.5
40
3.0
35
70
3
60
2.5
30
2.5
50
25
2.0
2
40
20
1.5
1.0
10
5
0
P/E (LHS)
Source: IPOPEMA estimates
4
1.5
30
15
P/BV (RHS)
1
20
0.5
10
0.0
0
0.5
0
P/E (LHS)
P/BV (RHS)
Source: Warsaw Stock Exchange, IPOPEMA estimates
Diminishing selling power vs. growing Pension
Funds purchase capacity
In January 2009 pension funds have reported record low (excluding start of the program)
equity allocation level of 19.8%. At the same time their potential purchasing power
reached record high of PLN 27.5 bn (which implies additional equities that Pension Funds
could purchase if they were to increase their current allocation to a maximum allowed
level of 40% of their net assets). We calculated how purchasing power compares to the
“supply” side of the market. In this calculation we excluded strategic shareholders and
Pension Funds from the supply side (selling by Pension Funds would at the same time
result in the same increase in their purchasing power). The “supply”, which we define as
the equities currently held by Mutual Funds, Individuals and Foreign Investors is
currently estimated at approximately PLN 80 bn.
Based on the above, we can say that Polish Pension Funds could (at prices as of Feb 13th)
buy 34% of total supply – assuming that Investment Funds, Foreigners and Individuals
sell everything they hold. Obviously, we treat this as a theoretical and maximum value,
as it is highly unlikely that Pension Funds increase their allocation to 40% and that at the
same time Foreigners, Investment Funds and Individuals would sell everything.
However, we think that this ratio describes level of “overselling” of the market and
suggests a sharp upward correction move if any buying power was to emerge on the
market. It is also important that if the market continues to fall, the difference between
potential supply and demand will diminish very fast – declining market prices imply lower
“supply side” but also higher “demand side” of the equation (lower allocation + new
inflows as the time is passing).
Chart 4 Potential Shares Supply (Foreigners, Investment Funds, Individuals) vs. Pension Funds Purchase Capacity
250
40.0%
35.0%
200
30.0%
25.0%
150
20.0%
100
15.0%
10.0%
50
5.0%
C
ur
re
nt
D
ec
20
08
20
08
Ju
n
20
07
20
07
D
ec
D
ec
Ju
n
20
06
20
06
Ju
n
D
ec
20
05
20
05
Ju
n
20
04
D
ec
20
03
D
ec
D
ec
20
01
D
ec
D
ec
19
99
D
ec
20
02
0.0%
20
00
0
Total supply of shares (PLN bn, LHS)
OPFs Potential Purchase Capacity (PLN bn, LHS)
Purchase Capacity as % of Supply (RHS)
Source: PFSA, IPOPEMA estimates
Chart 5 Pension Funds Equity Allocation vs. WIG index
OPFs Equity Allocation (LHS)
Dec-08
Apr-08
Aug-08
Dec-07
Aug-07
Apr-07
Dec-06
Aug-06
Apr-06
Dec-05
Apr-05
Aug-05
Dec-04
Aug-04
Apr-04
Dec-03
Apr-03
Aug-03
Dec-02
Aug-02
Apr-02
Dec-01
Aug-01
Apr-01
Dec-00
Apr-00
Aug-00
Dec-99
80 000
70 000
60 000
50 000
40 000
30 000
20 000
10 000
0
Aug-99
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
WIG (RHS)
5
Favored industries and top picks
We decided to present our top-picks in the two categories: defensive/safe stocks, where
we still find nominal upside from current level but the stock has been usually
outperforming the market and thus the upside level is smaller. At the same time their
businesses are usually more immune to the economic slowdown.
The other category we call “aggressive picks” where we attribute stocks that lost a lot
during the downward move but should strongly outperform if the market rebounds.
These stocks are at the same time usually more sensitive to economic environment (or,
in other words, less immune to slowdown).
When evaluating industries as a whole, we recommend Pay-TV & Broadband, Utilities,
Wholesale and Construction as relatively defensive – these industries should show
relatively good results in 2009E-10E. We do not like Chemicals and Media, which are
expected to be severely hit by the slowdown. We advise to avoid Developers (despite
low valuations) due to high risk inherent in their business models in current financial
markets environment. They should also experience significant deterioration of results.
Banks and Retailers could outperform the market when the downward trend in over –
on the other hand these industries are likely to show significant fall in 2009E results.
Our company top-picks in the defensive category are: Budimex (Construction),
Cyfrowy Polsat (Pay TV), Eurocash (Wholsale), ING (Banks) and PGNiG (Gas
Utility).
Our “aggressive” top-picks are: Amrest (Food Retailer), BZ WBK (Banks), Lotos
(Refinery), LPP, PKO BP (Banks) and Polimex (Construction).
Earnings outlook by industry
We expect that total net income of companies constituting our research universe will
drop by 6.8% yoy, however in 2010E, the earnings will rebound by 6.8% yoy. That
implies 2009E P/E ratio of 8.9x and 2010 P/E ratio of 8.4x.
Table 1 Earnings Summary 2009E-10E – Total Coverage
ALL SECTORS
Net income
Book value
Market Cap
Results (PLN m)
Results change
Multiples
2008E
2009E
2010E
09E/08E
10E/09E
14 638
110 022
121 885
13 646
120 024
14 574
132 077
-6.8%
9.1%
6.8%
10.0%
P/E
P/BV
2008E
2009E
2010E
8.3
1.1
8.9
1.0
8.4
0.9
Source: Companies, IPOPEMA estimates
Decomposing our research universe, entirely different trends are visible in banks vs.
other companies under our coverage. We expect that net income of banks in our
research universe will drop by 26% yoy in 2009 and will rebound by 5.2% yoy in 2010E.
Lower net income in 2009E is mainly an effect of higher provisioning tied to a trough in
the economic cycle as well as lower net fees and commissions. We expect that the latter
will rebound in 2010E, which, accompanied by flat provisioning and operating costs, will
allow for slight recovery of profits. We don’t expect that they exceed the profits of 2008.
Table 2 Earnings Summary 2009E-10E – Banks
BANKS
NII
NF& C
Revenues on banking activity
P rovisioning
Net income
B ook value
S ector Market Cap
Results (PLN m)
2008E
2009E
18 358.9
19 090.7
8 846.1
7 842.4
30 677.2
29 845.8
-1 801.9
-4 194.7
10 778.1
7 957.9
55 350.3
60 449.0
69 944.1
2010E
19 882.3
8 423.5
31 140.0
-4 631.8
8 372.7
68 132.5
Results change
09E/08E
10E/09E
4.0%
4.1%
-11.3%
7.4%
-2.7%
4.3%
132.8%
10.4%
-26.2%
5.2%
9.2%
12.7%
P/E
P/BV
2008E
Multiples
2009E
2010E
6.5
1.3
8.8
1.2
8 .4
1 .0
We estimate that companies other than banks will increase their earnings by 47.4%
yoy in 2009E and 9% yoy in 2010E, which implies 2009E P/E of 9.1 and 2010E P/E of
6
8.4. The increase of earnings is mainly impacted by PGNiG, with Market Cap of PLN
20.3bn, vs. PLN 51.9bn Market Cap of our total non-bank research coverage universe.
The main driver behind improvement of PGNiG’s results are lower import gas prices that
we assume for 2009E coupled by 2009 tariffs slightly exceeding the 2008 levels.
Table 3 Earnings Summary 2009E-10E – Total Coverage Excluding Banks
TOTAL ex BANKS
Revenues
EBITDA
EBIT
Net income
Book value
Market Cap
Results (PLN m)
2008E
2009E
84 383.6
83 103.2
8 772.0
11 201.0
6 112.8
7 825.1
3 859.8
5 687.7
54 671.6
59 574.9
51 941.3
2010E
94 569.4
12 299.0
8 362.9
6 201.8
63 944.5
Results change
09E/08E
10E/09E
-1.5%
13.8%
27.7%
9.8%
28.0%
6.9%
47.4%
9.0%
9.0%
7.3%
P/S
EV/EBITDA
EV/EBIT
P/E
P/BV
2008E
0.6
8.1
10.8
13.5
1.0
Multiples
2009E
0.6
6.5
10.4
9.1
0.9
2010E
0.5
5.9
8.0
8.4
0.8
Chemicals industry, with average weighted 2009E P/E of 6.6 and 2010E P/E of 8.0 is
one of the least expensive sectors under our coverage. The decline in our forecast
revenues results mainly from lower production volumes and weak commodities prices
(which result from global business cycle and weak performance of automotive industry,
textiles industry and demand for fertilizers). The above, coupled with high operating
leverage will in our view translate into falling profits – minus 23.5% yoy in 2009E and
minus 16.9% yoy in 2010E. The net income will additionally be depressed by negative
revaluation of FX options.
Table 4 Earnings Summary 2009E-10E – Chemicals
CHE MICALS
Revenues
E BITDA
E BIT
Net income
B ook value
S ector Market Cap
Results (PLN m)
2008E
2009E
13 288.2
12 196.5
1 754.5
1 361.9
1 197.9
760.7
566.3
433.1
6 497.9
6 855.3
2 870.4
2010E
12 521.8
1 196.7
573.3
359.9
7 221.6
Results change
09E/08E
10E/09E
-8.2%
2.7%
-22.4%
-12.1%
-36.5%
-24.6%
-23.5%
-16.9%
5.5%
5.3%
P/S
EV/E BITDA
EV/E BIT
P/E
P/BV
2008E
0.2
1.4
1.6
5.1
0.4
Multiples
2009E
0.2
2.3
5.1
6.6
0.4
2010E
0 .2
2 .3
4 .8
8 .0
0 .4
We estimate that the net income of construction industry will jump by 22.6% yoy this
year and 16% yoy n 2010E. The increase of 2009E net income will be three times larger
than the sales growth, as our covered companies are now executing their old backlog,
where the prices are fixed while there is room to negotiate lower subcontractor prices.
The pick-up in 2009E is driven mainly by public infrastructure projects, mainly financed
by EU funds, which we believe will be a main driver for the sector’s growth.
Table 5 Earnings Summary 2009E-10E – Construction
CONS TRUCTION
Revenues
E BITDA
E BIT
Net income
B ook value
S ector Market Cap
Results (PLN m)
2008E
2009E
11 472.0
12 321.1
825.0
976.0
695.1
818.5
441.9
541.8
3 606.7
4 160.6
5 930.9
2010E
13 774.5
1 096.8
920.4
628.5
4 770.0
Results change
09E/08E
10E/09E
7.4%
11.8%
18.3%
12.4%
17.8%
12.5%
22.6%
16.0%
15.4%
14.6%
P/S
EV/E BITDA
EV/E BIT
P/E
P/BV
2008E
0.5
7.8
8.4
13.4
2.0
Multiples
2009E
0.5
6.6
7.2
10.9
1.7
2010E
0 .4
6 .1
6 .9
9 .4
1 .5
We expect economic slowdown to persist in the next two years, hence our assumption of
lower advertising spending. Our 2009E forecast revenues for the media sector are flat
while the 2010E revenues drop by 1.4% yoy. We estimate that the total net income of
the sector falls 14.5% this year and 9.8% next year. Excluding one-off gain of Cinema
City, the drop would exceed 20% in 2009E.
7
Table 6 Earnings Summary 2009E-10E – Media
MEDIA
Revenues
E BITDA
E BIT
Net income
B ook value
S ector Market Cap
Results (PLN m)
2008E
2009E
3 870.9
3 870.3
998.8
985.2
771.2
703.7
486.8
416.2
3 480.3
3 517.1
4 967.6
2010E
3 817.5
918.8
604.9
375.2
3 827.5
Results change
09E/08E
10E/09E
0.0%
-1.4%
-1.4%
-6.7%
-8.8%
-14.0%
-14.5%
-9.8%
1.1%
8.8%
P/S
EV/E BITDA
EV/E BIT
P/E
P/BV
2008E
1.3
6.3
11.3
10.2
1.4
Multiples
2009E
1.3
5.7
10.7
11.9
1.4
2010E
1 .3
7 .0
16 .2
13 .2
1 .3
Developments in Oil & Gas sector results indisputably have the largest impact on the
total results in our research universe. We expect that both of the companies in that
sector will experience a significant results improvement. PGNiG’s results will be boosted
by lower import gas prices in 2009E as well as similar tariffs to those applied in 2008. In
case of Lotos, better results will stem from the LIFO effect.
Table 7 Earnings Summary 2009E-10E – Oil&Gas
OIL&GAS
Revenues
EBITDA
EBIT
Net income
Book value
Sector Market Cap
Results (PLN m)
2008E
2009E
35 298.9
30 370.8
3 113.6
5 574.7
1 379.7
3 647.6
551.0
2 998.3
26 650.4
28 482.1
21 450.1
2010E
35 814.9
6 008.0
3 789.3
3 079.3
30 120.1
Results change
09E/08E
10E/09E
-14.0%
17.9%
79.0%
7.8%
164.4%
3.9%
444.2%
2.7%
6.9%
5.8%
P/S
EV/EBITDA
EV/EBIT
P/E
P/BV
2008E
0.6
19.0
-5.5
38.9
0.8
Multiples
2009E
0.7
6.3
13.5
7.2
0.8
2010E
0.6
4.1
6.6
7.0
0.7
As for Pay TV and Broadband, we expect stable growth of revenues, resulting from
inclusion of new subscribers. We expect that the net income of the sector will additionally
be helped by effects of operating leverage and will increase by approximately 20% yoy in
both of 2009E and 2010E, yielding P/E of 12.9 in 2009E and P/E of 10.5.
Table 8 Earnings Summary 2009E-10E – Pay TV and Broadband
P AY TV AND BROADBAND
Revenues
E BITDA
E BIT
Net income
B ook value
S ector Market Cap
Results (PLN m)
2008E
2009E
1 585.5
1 901.6
592.7
703.5
428.7
519.2
338.4
406.3
883.5
1 104.1
5 235.2
2010E
2 183.5
807.8
618.4
498.7
1 381.5
Results change
09E/08E
10E/09E
19.9%
14.8%
18.7%
14.8%
21.1%
19.1%
20.1%
22.7%
25.0%
25.1%
P/S
EV/E BITDA
EV/E BIT
P/E
P/BV
2008E
3.3
8.7
13.7
15.5
5.9
Multiples
2009E
2.8
7.0
10.9
12.9
4.7
2010E
2 .4
5 .8
8 .9
10 .5
3 .8
The net income in our property research universe drops by 65% yoy in 2009E mostly
due to lack of revaluation profit. We expect that Plaza is able to sell its existing portfolio
in 4Q10, which drives our net profit for the sector in 2010E. Additionally we should see
positive impact of rents from projects completed by GTC and Echo in 2009/10E.
Table 9 Earnings Summary 2009E-10E – Property Development
P ROPERTY DEV ELOPMENT
Revenues
E BITDA
E BIT
Net income
B ook value
S ector Market Cap
Results (PLN m)
2008E
2009E
1 163.5
1 089.7
361.7
375.5
812.6
535.1
876.2
302.1
10 673.8
12 102.3
4 703.0
8
2010E
3 025.9
877.8
885.6
566.1
12 717.5
Results change
09E/08E
10E/09E
-6.3%
177.7%
3.8%
133.8%
-34.2%
65.5%
-65.5%
87.4%
13.4%
5.1%
P/S
EV/E BITDA
EV/E BIT
P/E
P/BV
2008E
4.0
15.8
13.8
5.4
0.4
Multiples
2009E
4.3
25.0
10.3
15.6
0.4
2010E
1 .6
19 .4
18 .4
8 .3
0 .4
Our assumed revenues growth of 36% yoy for retail sector may misleading – it is mainly
caused by consolidation (Amrest – inclusion of Applebee’s, LPP – consolidation of Artman
and EM&F – consolidation of Spiele Max); we do not assume dynamic growth of sales of
WSE- listed retailers. We expect that the sector’s net income will drop by 10.4% yoy in
2009E (on the back of slow retail sales growth and weak PLN) and will rebound in 2010E
(up by 14.7% yoy, due to stabilising currency and better cost transmission mechanism).
Table 10 Earnings Summary 2009E-10E – Retail
RETAIL
Revenues
E BITDA
E BIT
Net income
B ook value
S ector Market Cap
Results (PLN m)
2008E
2009E
6 227.8
8 450.6
824.9
874.7
621.1
599.3
471.4
422.2
1 867.5
2 195.8
4 780.5
2010E
9 530.4
979.0
678.2
484.1
2 579.4
Results change
09E/08E
10E/09E
35.7%
12.8%
6.0%
11.9%
-3.5%
13.2%
-10.4%
14.7%
17.6%
17.5%
P/S
EV/E BITDA
EV/E BIT
P/E
P/BV
2008E
0.8
8.3
11.0
10.1
2.6
Multiples
2009E
0.6
6.9
10.5
11.3
2.2
2010E
0 .5
6 .0
9 .1
9 .9
1 .9
Wholesale, which currently trades at 2009E P/E of 11.9 and 2010E P/E of 9.5, should in
our view be one of the most stable sector in terms of EPS growth. The revenues growth
of 12% in 2009E is partly due to annualisation of McLane (consolidated by Eurocash),
and organic growth. We expect that in both cases the margins have a chance to improve
slightly as effects of scale are factored in. We assume that the results of Emperia
improve as a result of ongoing restructuring efforts of the Company.
Table 11 Earnings Summary 2009E-10E – Wholesale
WHOLESALE
Revenues
E BITDA
E BIT
Net income
B ook value
S ector Market Cap
Results (PLN m)
2008E
2009E
11 476.8
12 902.5
300.8
349.5
206.4
240.9
127.7
167.7
1 011.5
1 137.3
2 003.6
2010E
13 901.0
413.9
292.8
210.0
1 283.3
Results change
09E/08E
10E/09E
12.4%
7.7%
16.2%
18.5%
16.7%
21.5%
31.3%
25.2%
12.4%
12.8%
P/S
EV/E BITDA
EV/E BIT
P/E
P/BV
2008E
0.2
7.3
10.6
15.7
2.0
Multiples
2009E
0.2
6.3
9.2
11.9
1.8
2010E
0 .1
5 .0
7 .1
9 .5
1 .6
9
Macroeconomic Outlook
This landing would not be soft
Based on our macro model Polish economy will suffer a hard landing to 1.3% in 09E and
According to our macro
model Polish economy
will suffer a hard landing
to 1.3% in 09E and 1.9%
in 10E
1.9% in 10E after the period of fast growth in 06-08E (6.2%, 6.5% and 4.8%
respectively). We expect that the economy will be hit predominantly by the slump of
foreign economies. As a result, the downturn in export demand will have a negative
impact on domestic real economy. Negative trends are also strengthened by credit
crunch and significant slowdown in corporate investment.
Real economy to slow sharply...
In 2008 Polish GDP increased by 4.8% driven by strong consumption, investments and
by industrial production (in 1H08). However during the last months of 2008 we saw the
first signs of coming crisis. Firstly significant drop in industrial production was observable,
We do not expect
significant GDP growth
in 10E
coming predominantly from slowing export. That had an impact on the corporate
investment decisions. In the last two months of 2008 we have also seen growth
slowdown in retail sales and the unemployment rate increase in December. It proves that
the world crisis is also starting to hit the domestic consumption, which will exert a
negative influence on the GDP growth forecast in the coming years. In 09E we expect the
economy to increase just 1.3% with a slight pick up to 1.9% in 10E. We do not expect
significant GDP change in 10E as in our view it takes more than 4Qs to recover from
economic slowdown (similar trend was observable in 01-02E period). We expect the
consumption to increase by 2.5% and 3% in 09-10E, while the investments are likely to
increase just 3% in 09E and 18% in 10E (thanks to low base effect and EU projects
realization).
Chart 6 GDP Growth in Poland, 1999-2011E
Chart 7 GDP growth contributors 1Q03-3Q08
7.0%
10.0%
6.0%
8.0%
6.0%
5.0%
4.0%
4.0%
2.0%
3.0%
-2.0%
1.0%
1Q03
2Q03
3Q03
4Q03
1Q04
2Q04
3Q04
4Q04
1Q05
2Q05
3Q05
4Q05
1Q06
2Q06
3Q06
4Q06
1Q07
2Q07
3Q07
4Q07
1Q08
2Q08
3Q08
0.0%
2.0%
-4.0%
0.0%
Individual Consumption
Public Consumption
Investments
Inventories
Net Export
Source: Central Statistical Office, IPOPEMA estimates
We strongly believe that the economy will be able to reach 4.6% and 5.2% growth level
We strongly believe that
the economy will be able
to reach 4.6% and 5.2%
growth level in 11-12E
10
in 11-12E on the back of big infrastructure projects and EURO 2012 story. However this
scenario is possible under two major conditions: (1) banking sector reverts to a more
expansionary lending action (2) the economic situation in the EU improves to support
Polish export sales and FDIs.
Chart 8 Industrial Production (YoY %), Jan00-Dec08
30%
Chart 9 Retail Sales (YoY %), Jan00-Dec08
35%
25%
25%
20%
15%
15%
10%
5%
5%
5%
Jan-00
Jun-00
Nov-00
Apr-01
Sep-01
Feb-02
Jul-02
Dec-02
May-03
Oct-03
Mar-04
Aug-04
Jan-05
Jun-05
Nov-05
Apr-06
Sep-06
Feb-07
Jul-07
Dec-07
May-08
Oct-08
0%
-15%
5%
0%
-5%
0%
-10%
-5%
-15%
-20%
-10%
Industrial Production
10%
10%
Jan-00
Jun-00
Nov-00
Apr-01
Sep-01
Feb-02
Jul-02
Dec-02
May-03
Oct-03
Mar-04
Aug-04
Jan-05
Jun-05
Nov-05
Apr-06
Sep-06
Feb-07
Jul-07
Dec-07
May-08
Oct-08
10%
-10%
20%
15%
15%
20%
25%
20%
-5%
25%
30%
1Q Mov avg
... unemployment risk increases
We expect a significant increase in unemployment rate, driven especially by lower
investments growth and falling demand for our exports. According to our model the
According to our model
the employment will
decrease by 2%
employment will decrease by 2%, which should correspond with unemployment growth
to 11.7% at the end of 09E. We expect unemployment to stay flat in 10E (11.4% YE
level). Strong supply pressure in labour force will result in wage growth of just 2% and
1% in 09-10E. The decrease in wage bill will have a negative impact on retail sales,
which are expected to grow by just 5.5% and 7.1% in 2009 and 2010, respectively.
Chart 10 Retail sales and real wage bill growth (%yoy)
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
-10.0%
Jan-01
May-01
Sep-01
Jan-02
May-02
Sep-02
Jan-03
May-03
Sep-03
Jan-04
May-04
Sep-04
Jan-05
May-05
Sep-05
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
0.0%
-5.0%
-15.0%
-20.0%
Retail Sales YoY
Real Wage Bill YoY
EU Funds – Still in the game ?
Poland is to receive EUR 67 bn of EU funds in 2007-2013 financing period, which implies
Poland is to receive EUR
67 bn of EU funds in
2007-2013 financing
period
-5%
-10%
Retail Sales
1Q Mov avg
0%
an increase of 75% on average annual basis comparing to the recent 2004-2006
financing timeframe. These figures amounts to 2.66% of GDP (vs. 1.95% of GDP in
2004-2006). Previous financing timeframe was extended till the end of 2008 and at that
time the absorption amounted to 92.2%. Polish authorities applied for additional 6
months to be able to spend the remaining part. The prolongation of the program resulted
in higher absorption, but also in negligence of current EU funds; at the end of 2008 the
11
absorption of new funds stood at a mere 3.4%. This might be worrying, especially given
that the first reevaluation of funds’ usage is scheduled for 2010. The majority of the
allocation (c. 65%) is to be spent on infrastructure, which will make the construction
sector the main beneficiary of EU money.
Chart 11 Comparison of Annual allocation of EU funds for Poland in 2004-2006 and
2007-20113 perspectives and vs. GDP
10.0
9.0
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
2004-2006
2007-2013
Annual Allocation
Source: Ministry of Regional Development and IPOPEMA Research
CPI should go back to MPC target
Slowing wage growth pressure and decreasing demand for products should help the
inflation rate to go below MPC target of 2.5% (we expect that average CPI will be 2.3%
The main driver behind
lower CPI are slowing
pressure on investment
goods’ prices
in 09E and 3.0% in 10E). The main driver behind lower CPI are slowing pressure on
investment goods’ prices (cars, finishing materials), flat food prices and the decrease of
telco prices. We also expect low price of commodities (fuels mainly) to persist. A
potential threat for CPI is administrative prices growth (electricity in particular) and
weakening Zloty (the impact of import prices).
We think, however that the
administrative price growth poses a larger risk for inflation growth than the Zloty
weakening (in 01-02E Zloty has also depreciated, but CPI stood at the level below 1%).
Chart 12 Unemployment Rate vs. Nominal Wage Growth YoY (%)
25.0%
20.0%
15.0%
10.0%
5.0%
-5.0%
Jan-01
May-01
Sep-01
Jan-02
May-02
Sep-02
Jan-03
May-03
Sep-03
Jan-04
May-04
Sep-04
Jan-05
May-05
Sep-05
Jan-06
May-06
Sep-06
Jan-07
May-07
Sep-07
Jan-08
May-08
Sep-08
0.0%
Unemployment Rate
12
Wage Growth YoY
Money market and interest rates
In December 2008 MPC cut interest rates by 75bps. The same decision was made in
However in view of the
current situation on the
financial market, it is
unclear whether the MPC
activity has a strong
impact on interbank
rates
January. Currently the reference interest rate is 4.25% and we expect it to decline to
3.5%-3.75% at the end of 2008, which would imply a real interest rate of 1.2-1.5%. The
interest rate difference of 2-2.5% between Poland and Eurozone should also persist. In
our view MPC will be under the pressure of the economic slowdown and will use
monetary policy tools to support the growth. However in view of the current situation on
the financial market, it is unclear whether the MPC activity has a strong impact on
interbank rates. We assume that the lack of trust and lower liquidity of interbank market
will result in a visible spread between 3M WIBOR and the reference rate. For 09E we
expect average 3MWIBOR of PLN 4.8% and 5.2% in 10E.
Chart 13 CPI, WIBOR 3M and Discount Rate, Jan99Dec08
Chart 14 Spread between WIBOR and Reference Rate
25%
2.5%
20%
2.0%
15%
1.5%
10%
1.0%
5%
0.5%
-0.5%
Jan/99
Jun/9
Nov/9
Apr/00
Sep/0
Feb/0
Jul/01
Dec/0
May/0
Oct/02
Mar/0
Aug/0
Jan/04
Jun/0
Nov/0
Apr/05
Sep/0
Feb/0
Jul/06
Dec/0
May/0
Oct/07
Mar/0
Aug/0
Jan-09
0.0%
0%
-1.0%
CPI YoY Growth
WIBOR 3M
Discount Rate
Source: Central Bank of Poland,Bankier.pl, IPOPEMA
estimates
Spread between WIBOR and Reference Rate
Source: Central Bank of Poland,Bankier.pl, IPOPEMA estimates
FX rates and trade balance
We expect average EURPLN and the level of 4.4 this year and 4.1 in 10E, however the
We expect average
EURPLN and the level of
4.4 this year and 4.1 in
10E, however the
volatility should be
significant
volatility should be significant. Generally we expect Zloty to strengthen in 2H09, when FX
currency “hedge” issue should come to an end. We assume USDPLN at a level of 3.08
and 3.0 in 09-10E, respectively.
In terms of foreign trade we expect net trade deficit at the level of PLN 23.3bn (1.8% of
GDP). The deficit should be significantly below 2008 (the improvement in trade balance
was also observed in 01-02 period). In 10E we expect net exports to be PLN -48bn,
which is close to the 2008 figure.
13
Fund Flows
Pension Funds – Enormous Space For Equity Buying
According to our estimates, Pension Funds have spent PLN 9bn on equity purchases in
2008, from PLN 20.5bn received from Social Insurance Institution (ZUS). 2008 YE equity
allocation was 21.8% - the lowest since November 2008.
We expect Polish pension funds to increase the equity allocation to 25% level, especially
We expect Polish
pension funds to
increase the equity
allocation to 25% level,
especially in the second
half of 2009
in the second half of 2009. Transfers from ZUS should be at the same level as in 2008
(PLN 20bn) due to the fact that we expect flat wage bill. OPFs now have a record high
capacity for shares purchases and record low equity allocation. Assuming that 09YE
allocation reaches 25% level and the prices remain unchanged, OPFs will have to spend
PLN 12bn on equities this year, which accounts for 60% of active equity allocation ratio
(ratio of equity purchases to ZUS transfers).
Chart 15 Pension Funds – Equity Purchases vs. ZUS transfers (in PLN m)
25 000
20 492
20 000
17 719
15 411
15 000
14 022
11 422
10 000
9 546
8 707
10 274
8 952
7 603
4 924
5 000
2 286 2 530
2 467
2 901
2 172
2 412
2 267
518
1 660
279
132
0
Estimated Annual Stock Purchases (in PLN m)
ZUS Annual Transfers (in PLN m)
According to our
estimates the potential
capacity of new equity
purchases is PLN 27bn
According to our estimates the potential capacity of new equity purchases is PLN 27bn,
which corresponds with 11.1% of domestic market cap and 34% of potential shares
supply (assuming that the funds can allocate max. 40% of the assets in equities and
share prices do not change).
Chart 16 Pension Funds – OPFs Equity Purchase Capacity in PLN bn
30
12%
25
10%
20
8%
15
6%
10
4%
5
2%
0
0%
OPF Equity Purchase Capacity in PLN bn (LHS)
Equity Purchase Capacity as % of Domestic Mcap (RHS)
14
Mutual Funds – Is It The Time ?
In 2008 mutual funds sector suffered heavy outflows of PLN 25 bn, which nearly 50% of
inflows from 2006-2007 period. Total assets decreased from PLN 134bn to PLN 74bn. The
equity allocation ratio reached 36%, vs. 52% on the market peak in June 2007. So what
to expect in 2009?
Chart 17 Flows breakdown (PLN m), Jan2006-Dec2008
10 000
5 000
Jan 2006
Feb 2006
Mar 2006
Apr 2006
May 2006
June 2006
July 2006
Aug 2006
Sep 2006
Oct 2006
Nov 2006
End of 2006
Jan 2007
Feb 2007
Mar 2007
Apr 2007
May 2007
June 2007
July 2007
Aug 2007
Sep 2007
Oct 2007
Nov 2007
Dec 2007
Jan 2008
Feb 2008
Mar 2008
Apr2008
May2008
Jun 2008
Jul 2008
Aug 2008
Sep 2008
Oct 2008
Nov 2008
Dec 2008
0
-5 000
-10 000
-15 000
Flow to Money's Funds (in PLNm)
Flow to Bonds' Funds (in PLN m)
Flow to Mixed Funds (in PLN m)
Flow to Stock Funds (in PLN m)
Poor mutual funds performance was driven by two main factors: poor sentiment for
The key question is if it
is possible to shift cash
from deposits to
investment funds
segment
equity investment and increasing interest rate on deposits. We cannot estimate the first
factor (however in our view those clients that stayed in mutual funds will have long-term
investment horizon and will not provide additional supply to the market). So the key
question is if it is possible to shift cash from deposits to investment funds segment and
what are the alternatives. Let’s look at history.
Table 12 Flows to savings (PLN bn), 1999-2010E
Year
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009E
2010E
Flows in PLN bn
Insurance
Listed
Debt Investment
capital Pension
Comps Securities
Funds
Funds
funds Deposits
2.5
4.6
-2.8
-2.2
-0.3
4.3
0.6
8.5
6.7
-9.3
-2.0
0.0
-0.1
-0.4
-0.3
1.9
2.7
8.1
-1.0
-6.8
-2.2
-0.1
-1.0
-1.0
0.8
3.0
4.8
9.3
8.4
2.4
17.9
23.9
27.8
-25.4
-1.4
6.6
0.0
0.0
0.0
5.0
4.3
7.1
-1.8
6.9
6.0
-13.3
-3.0
-3.0
2.2
7.6
8.7
9.5
10.2
11.4
14.0
15.0
17.7
20.5
20.0
20.0
-0.6
8.8
-2.2
-23.2
-14.0
-13.2
2.2
11.1
13.2
52.5
12.0
-5.0
Macro assumptions
Cash
Except
GDP
Nominal
Real wage
banks Total growth chg in %
GDP Savings rate
growth
8.1
-4.0
4.1
4.0
7.2
1.4
6.4
11.6
8.4
12.9
3.0
3.0
12.9
19.7
12.3
4.3
18.5
21.4
38.2
70.3
77.6
37.8
27.6
20.6
4.1%
4.0%
1.0%
1.4%
3.8%
5.3%
3.5%
3.2%
6.5%
4.8%
1.3%
1.9%
-0.7%
-0.1%
-3.0%
0.4%
2.4%
1.5%
-1.8%
-0.3%
3.3%
-1.7%
-3.5%
0.6%
652.5
723.8
760.6
780.4
842.2
922.2
983.3
1060.2
1162.9
1266.0
1311.0
1376.0
2.0%
2.7%
1.6%
0.5%
2.2%
2.3%
3.9%
6.6%
6.7%
3.0%
2.1%
1.5%
0.4%
-0.7%
-1.8%
-0.8%
2.0%
3.3%
3.1%
7.4%
11.3%
10.4%
2.3%
4.0%
Source: Analizy Online, PFSA, IPOPEMA estimates
15
In 2004-2007 mutual funds received solid flows (especially in 2006-2007 period).
Looking at previous
crisis in real economy in
01-02 the savings rate
(relation of new savings
to GDP) collapsed to
1.6% in 2001 and just
0.5% in 2002.
Interest rates on deposits were relatively low due to no CPI pressure and over-liquidity
of the banking sector. Currently market interest rates are also low however the macro
environment is different. Looking at previous crisis in real economy in 01-02 the savings
rate (relation of new savings to GDP) collapsed to 1.6% in 2001 and just 0.5% in 2002.
After excluding pension funds effect it means that people decreased their savings (so
Duesenberry’s hypothesis of relative income
could exist, meaning that people try to
maintain their lifestyle regardless of the loss of income). It does also do not provide good
news this time. We assume that savings rate will decrease to 2.1% in 09E and 1.5% in
10E but it gives just PLN 28.6bn and PLN 20.6bn of new savings, respectively. Assuming
that flows to pension funds will stay at stable PLN 20bn annually we anticipate that the
competition for remaining part of new savings would be very fierce. We expect that in
2009 mutual funds sector will report slight outflows of PLN 1.5bn (on the back of still
strong competitive flows to deposits driven by high interest rates in 1Q09). In 10E the
situation should be better. We even expect small transfer from deposits to investment
funds (interest paid on new deposit products will be lower and old “high interest”
deposits will mature). Finally in 2010E we estimate PLN 6-7bn of new inflows. The real
improvement may come in 11-12E but two basic assumptions must be made: (1) the
recovery in the Polish economy, (2) still low interest rates.
Chart 18 Polish Households savings structure, 1999-2008 (PLN bn)
800
700
600
500
400
300
200
100
0
1999
2000
2001
2002
2003
WSE listed companies (PLN bn)
Mutual Funds (PLN bn)
OPFs (PLN bn)
Cash in (PLN bn)
Source: Analizy Online, PFSA, IPOPEMA estimates
16
2004
2005
2006
2007
Debt instruments (PLN bn)
Insurance Funds (PLN bn)
Retail deposits (PLN bn)
2008
Banks
Banks
Investment Summary
Our macro model for Polish economy indicates a significant slowdown to 1.3% yoy in 09E
In 2009E we expect
earnings decline of 25%
yoy and a mild recovery
of 5.8% yoy in 2010E
and a slight pick up to 1.9% yoy in 10E (from 4.8% yoy in 08). As a result of the
downturn, which will be surely visible in corporate segment and in unemployment
growth, banking sector will be hit predominantly by significantly lower mortgage
production, slowdown in corporate lending and high provisioning. In 2009E we expect
earnings decline of 26% yoy and a mild recovery of 5.8% yoy in 2010E. Moreover under
the current economic backdrop, we believe that Polish banks should see:
1.
The significant drop in lending action and slight margins compression – we are
expecting some of the banks to see significant contraction in new loans sale and
a slight recovery in 2010. In our view a significant growth in lending will come
not before 2011-2012 period. Banks will also have to re-price their offer
especially in corporate business.
2.
Continued sharp fight for deposits – deposits base increase will be a key factor
influencing the lending growth, however especially in 10E it may be very difficult
to source new deposits as we expect low savings flows. Initially some support
may come from unfavorable capital market environment this year, however
large market players will have to fight with smaller aggressive banks or new
competitors (Allior, Allianz, Meritum).
3.
Shift towards costs control and efficiency – we think that in 2009 banks will look
for significant savings primarily in administrative area and - if the crisis lasts
longer – in employment. We expect our banking universe cost base to decrease
slightly in 09-10E, vs. 13% growth in 06-08.
4.
Significant growth in provisioning – this is the major threat. Driven by expected
deterioration in corporate lending and slight decrease in consumer portfolio we
estimate cost of risk to increase to PLN 4.2bn in 09E and PLN 4.6bn in 10E. Low
penetration of mortgage business should have a positive impact on this portfolio
quality.
5.
Growing importance of cross-sale activities and shift to retail banking – banks
involved in corporate and mortgage segment will try to shift their activities
towards retail (consumer banking), which is still less penetrated area.
Table 13 Banking Universe* Results Summary 2007-2010E (in PLN bn)
(in PLN m)
Net interest income
NF&C
Total banking revenues
Operating costs
Net provisions
Net Profit
2007
15
9
15
15
177
896
177
658
-339
9 035
2008E
2009E
2010E
18
8
18
16
-1
10
19
7
19
16
-4
7
19
8
19
16
-4
8
359
846
359
786
802
778
091
842
091
444
195
958
882
423
882
191
632
373
08/07
09/08 10/09
21.0%
4.0% 4.1%
-10.6% -11.3% 7.4%
21.0%
4.0% 4.1%
7.2% -2.0% -1.5%
431.8% 132.8% 10.4%
19.3% -26.2% 5.2%
Source: Banks, IPOPEMA estimates, *includes PKO BP, Pekao, BRE, BZ WBK, Kredyt Bank, ING,
Handlowy and Bank Millennium
In 09-10E we would prefer banks , which:
1.
Have a strong capital base and good ability to attract new deposits. We believe
that in the coming years lending action growth will be influenced by the growth
of deposits base. In our view PKO BP, ING and BZ WBK have the strongest
competences
2.
Have attracted a large clients base, which would be crucial for cross-sale action.
PKO BP, BRE, BZ WBK and ING have the largest number of retail clients
17
Banks
3.
Have a diversified business structure– we would highlight banks, which are
balanced between corporate and retail business (in fact we believe that retail
segment would be less exposed to macro deterioration). In our view the most
balanced are BZ WBK and BRE, however we would also highlight strong position
of PKO BP in retail
4.
Know how to control their costs – according to our estimates the strongest
capabilities to cut costs are in PKO BP, BRE and Pekao SA
5.
Have built a strong capital base – PKO BP, Pekao SA, and Handlowy are in the
best capital position in terms of CAR
Table 14 Banks – Recommendation Summary
Bank
Re com m e ndation Targe t price Curre nt Price
Ups ide
Ris k
High Risk
Bank Millennium
SELL
1.7
1.7
-2.3%
BRE
HOLD
151
123.5
22.3%
High Risk
BZ WBK
BUY
108.4
79.35
36.6%
Medium Risk
Handlow y
HOLD
32.7
30
7.9%
Medium Risk
ING BSK
BUY
397
300
32.3%
Medium Risk
Kredyt Bank
SELL
4.9
5.6
-13.1%
High Risk
Pekao
HOLD
102.7
93.65
9.7%
Low Risk
PKO BP
BUY
32
25.1
27.5%
Medium Risk
Source: IPOPEMA estimates, Bloomberg
Our top picks are BZ WBK, PKO BP and ING. We recommend BUY for these 3 banks
Our top picks are BZ
WBK, PKO BP and ING
and we believe their stock prices will be able to enjoy a relatively better performance
than their peers. They also give a very good exposure for banking business growth after
the period of slowdown is over. BZ WBK provides a very good business model, it is
becoming more involved in retail banking and continues the strategy of diversification.
We also appreciate its cost control (C/I of 53%) and solid funding position. However we
continue to see clear risks to the bank’s involvement in the property segment, which may
hurt the bank’s results on the provisioning level. According to our estimates the bank
trades at 09E P/E of 7.9, which looks quite attractive comparing to its large Polish peers.
PKO BP should keep its strong position in Polish banking sector driven by strong ability
PKO BP should keep its
strong position in Polish
banking sector driven by
strong ability for
deposits collection and
costs control
for deposits collection and costs control (although the bank has C/I of 45%, there is still
ample room for efficiency improvement). PKO will be hit by growing provisions in retail
segment, however the top line development should mitigate the negative cost of risk
impact. The bank trades with a slight premium to peers but the decrease in the net profit
will be lower than in medium-sized banks. We also believe that the current price
weakness would be a good opportunity to purchase the stock.
ING should still outperform Polish banks, due to the safety of its balance sheet structure,
conservative lending strategy and good funding position. The bank should also be one of
the beneficiaries of the interest rates decline as it has large bonds position and relatively
small amount of current account deposits.
18
Banks
Table 15 Banking Universe Ranking
Bank
ROE NIM
C/I CAR L/D
EPS
grow th
Le nding
M ix
Re venue s
M ix
09P/E
09P/BV
Total
BZ WBK
7
6
6
6
5
7
3
8
7
3
58
PKO BP
8
8
8
4
4
6
8
6
3
2
57
Pekao
6
7
7
5
6
2
7
7
4
1
52
ING
5
1
2
7
8
8
2
5
5
5
48
Handlow y
2
4
4
8
7
1
5
2
6
7
46
BRE
4
3
5
2
1
4
4
3
8
4
38
Kredyt Bank
3
5
1
1
2
5
6
4
2
6
35
Bank Millennium
1
2
3
3
3
3
1
1
1
8
26
Source: Bank reports, IPOPEMA estimates. Ranking created on the summary of individual ranks, ROE
– avg ROE in 09E-18E period, NIM – average NIM in 09E-18E period, CAR – YE 08E CAR, L/D –
Loans to Deposits ratio (from non-financial clients) 08 YE, EPS growth – EPS CAGR in 09-18E
Pekao SA is in a good business position (in terms of CAR, L/D and funding) however we
Pekao SA is in a good
business position (in
terms of CAR, L/D and
funding) however we
expect that it will not
beat the banking sector
in terms of EPS growth.
expect that it will not beat the banking sector in terms of EPS growth. That is why we
think there is no rationale to purchase the stock, which trades with a premium to peers.
In short term Pekao SA may outperform Polish banks, however in a long run its
conservative strategy will result in losing the market share in corporate segment. The
bank has low exposure to retail business, which could help to grow dynamically in the
next years. We recommend to HOLD the stock. The same with Handlowy - the bank is
safe in terms of solvency and liquidity and its valuation looks quite attractive now.
However it does not provide significant “growth option”. During the equity market decline
Handlowy should not underperform the market from current price level (especially as we
expect DPS of nearly PLN 2.9 in 09, which implies DY of 10%), however on the bull rally
it will perform worse than its peers.
We also recommend to HOLD BRE Bank. Although we believe that in the long time
period the bank may one of the fastest growing in the sector, we are concerned about its
funding position and decreasing position in retail deposits collection. The funding side
may limit BRE’s development in the nearest future - in our view the bank will have to
slow down its growth and in the next 2-3 years build solid funding base. BRE is also
significantly exposed to corporate segment (threat of provisioning) and mortgage
business (lack of new sales).
We rate Bank Millennium and Kredyt Bank as a SELL. Both of the banks have
We rate Bank Millennium
and Kredyt Bank as a
SELL.
developed a significant exposure to mortgage business and both have non-diversified
businesses. Based on our estimates BM and KB trades at the highest 09 P/E among
Polish peers. We also think that they both still have problems with the funding side,
which limits their growth opportunities. Except the problems with new sales BM and KB
have to cope with low efficiency and high cost base.
Is it cheap or not ?
Looking at historical
valuation, Polish banks
seem to be extremely
cheap.
Looking at historical valuation, Polish banks seem to be extremely cheap. Based on 12M
trailing P/E (MCap weighted) our banking universe is traded at P/E of 5.2. On P/BV it is
1.3, which is the same level as in 2001. During the previous crisis in 01-02 banks traded
at P/E of 17.0 and 47.0 and P/BV of 1.4 and 1.6. Of course the current market valuation
implies a significant decrease in financial results, however the same should have been in
00-01. If the valuation of our banks universe came back to the average 97-08 level of
14.2, this would imply that the 2009E net profit of the sector would be 50% lower than in
2008,which in our view is an overly pessimistic assumption. Fundamental P/E ratio also
implies 4% of dividend decline in termination period.
19
Banks
Chart 19 Banking Universe Historical P/E Valuation
4.0
50
45
3.5
40
3.0
35
2.5
30
25
2.0
20
1.5
15
1.0
10
0.5
5
0
0.0
P/E (LHS)
P/BV (RHS)
Source: Bank reports, IPOPEMA estimates
As Polish banks valuation seem to be very low it is possible that in 2009-2010 some
merger deals may happen. The acquisition hypothesis is also supported by some
problems of Polish banks’ mother companies. Who may be a potential buyer? Here are
some of our ideas:
From domestic institutions PZU is on the top of speculations. PZU’s CEO claims that
he would like to purchase a bank from the top10 list. PZU has a significant capital so
the value of transaction of PLN 10bn should not be a challenge
PKO BP – always a story, however the bank was interested in AIG Bank Poland
acquisition. In our view PKO BP may be a potential consolidator but it may purchase
smaller market players, which would need extra capitalization
From foreign companies we would rather bet on Iberian or French banks. Those
banks have rather strong position after the credit crunch and they are not exposed
much to Polish market. From the potential buyers we would mention :BBVA,
Santander, Credit Mutuel.
According to managements’ statements none of Polish banks is for sale. However
according to press speculation BRE, Handlowy, Millennium, Pekao SA and BZ WBK are on
the top of the list of potential takeover targets.
Valuations and Recommendations
Our valuation for Polish banks is derived from the weighted average of 4 methods. –
multiples method, residual income method, discounted dividend method and fundamental
P/BV method. In our opinion multiple valuation method gives an accurate short-term
view on company’s price in comparison with groups of peers. Residual income valuation,
DDM and Fundamental P/BV method reflect mid-term and long-term growth potential.
To arrive at the final stock’s valuation we decided to apply the following weights:
20
Residual Income Valuation – 20%
Multiple Valuation – 40%
Fundamental P/BV – 20%
DDM – 20%
Banks
Table 16 Banks – Valuation Methods Summary
DDM
V aluation
Bank
Bank Millennium
BRE Bank
PKO BP
M ultiple
V aluation
Fundam e nt
al P/BV
V aluation
Re s idual
Incom e
V aluation
Final
valuation
0.9
2.1
2.1
1.6
1.7
129.3
112.4
183.5
218.3
151
35.4
18.2
42.5
46.0
32
135.2
61.7
111.3
135.0
102.7
83.9
67.1
130.3
193.6
108.6
3.5
4.9
6.8
4.4
4.9
39.4
28.9
39.1
24.8
32.7
ING BSK
395.4
243.5
579.2
522.9
397
We ight
20%
40%
20%
20%
Pekao
BZ WBK
Kredyt Bank
Handlow y
1.
We value banks using residual income method. The models discounts expected
residual incomes in the high growth period of 2009E – 2018E, including required
equity charge. In the terminal period we use a 3% growth rate.
2.
Multiple valuation
Chart 20 Polish Banks - Multiples
P/E
Bank
Bloom be rg Code Country
LC
Bank Millennium
BRE Bank
PKO BP
Pekao SA
BZ WBK
Kredyt Bank
Bank Handlow y
Getin Holding
Noble
ING BSK
MIL PW
BRE PW
PKO PW
PEO PW
BZW PW
KRB PW
BHW PW
GTN PW
NBL PW
BSK PW
PLN
PLN
PLN
PLN
PLN
PLN
PLN
PLN
PLN
PLN
POLAND
POLAND
POLAND
POLAND
POLAND
POLAND
POLAND
POLAND
POLAND
POLAND
Curre nt Price Curre nt M cap (in
(LC)
USD '000)
1.7
123.5
25.1
93.7
79.4
5.6
30.3
3.5
2.3
300.0
404
1 003
6 873
6 715
1 585
419
1 084
681
133
1 068
633
890
607
818
420
579
164
406
763
832
M e dian (Poland)
P/BV
ROE
PBV/ROE
2008E 2009E 2010E 2008E 2009E 2010E 2008E 2009E 2010E 2008E 2009E 2010E
3.6
8.7
5.1
0.5
0.5
0.4 15.5% 5.8% 9.1%
3.4
8.4
4.9
4.3
7.4
7.2
1.0
0.8
0.8 20.5% 12.0% 11.0%
4.7
7.0
6.8
7.2
8.7
8.0
1.7
1.5
1.3 26.5% 18.5% 17.4%
6.5
8.1
7.5
7.9
9.5
9.4
1.6
1.5
1.3 23.0% 16.3% 15.2%
6.9
9.4
8.7
5.8
7.9
7.8
1.0
1.1
0.9 19.5% 13.1% 12.3%
5.1
8.1
7.2
4.7
11.1
9.6
0.6
0.5
0.5 13.2% 5.0% 5.3%
4.4
10.6
9.4
5.8
8.0
8.4
0.7
0.6
0.6 12.2% 7.9% 6.8%
5.7
7.3
8.3
4.7
7.3
6.7
0.7
0.6
0.6 17.0% 9.3% 9.1%
4.1
6.6
6.2
3.2
6.3
4.8
0.7
0.6
0.5 25.5% 10.0% 10.9%
2.8
6.5
4.5
9.9
8.7
8.3
0.9
0.7
0.7 12.0% 9.5% 8.5%
7.8
7.8
8.1
5.2
8.3
7.9
0.8
0.7
0.6 18.2%
9.7% 10.0%
4.9
8.0
7.3
Source: Company, IPOPEMA estimates, for Getin Holding and Noble Bank data from Bloomberg, price as of the 13th of February
In multiple valuation section we compare each bank’s 09-10E results with a
group of Polish and CEEMEA peers. P/E multiple has a total weight of 50%, while
P/BV and PBV/ROE have 25% each. The valuation based on Polish and CEEMEA
peers have the same 50% weight in total valuation.
Chart 21 CEEMEA Banks - Multiples
P/E
Bank
Bloom be rg Code Country
LC
Komercini
OTP
SBERBA NK
NOVA KREDITNA
Tukrkiye Is Bankasi
Yapi ve Kredi Bankasi AS
Akbank TA S
BRD
Erste
Raiff iesen
KOMB CP
OTP HB
SBER RU
TLV RO
ISCTR TI
YKBNK TI
AKBNK TI
BRD RO
EBS AV
RIBH AV
CZK
HUF
USD
EUR
TRY
TRY
TRY
RON
EUR
EUR
CZECH
HUNGARY
RUSSIA
SLOV ENIA
TURKEY
TURKEY
TURKEY
ROMA NIA
AUSTRIA
AUSTRIA
Curre nt Price Curre nt M cap (in
(LC)
USD '000)
2 112.0
2 490.0
0.5
9.3
3.6
1.8
4.1
5.3
9.7
16.7
3 561
2 977
11 984
71
5 896
4 606
7 375
1 087
3 921
3 293
948
916
890
689
962
321
114
178
261
766
M e dian (CEEM EA)
P/BV
2008
6.3
4.9
3.4
4.4
5.7
5.6
6.2
2.9
2.6
2.7
2009
7.3
4.1
4.6
3.7
5.8
6.3
5.8
4.2
4.4
5.0
2010
6.7
3.0
3.5
na
5.2
5.5
4.7
3.7
3.5
4.1
2008
1.5
0.5
0.5
0.6
1.0
1.0
1.0
0.9
0.3
0.4
2009
1.4
0.5
0.5
0.5
0.9
0.9
1.0
0.7
0.3
0.4
4.7
4.8
4.1
0.7
0.6
ROE
2010
1.3
0.4
0.4
na
0.8
0.8
0.9
0.6
0.3
0.3
2008
24.4%
11.9%
17.3%
na
16.9%
20.9%
15.7%
37.2%
13.1%
15.8%
2009
19.8%
12.1%
13.1%
na
15.6%
18.1%
16.6%
25.0%
8.9%
8.8%
PBV/ROE
2010
19.1%
14.3%
13.4%
na
16.1%
17.9%
17.7%
23.6%
9.5%
9.1%
2008
6.0
4.4
3.1
na
5.7
4.8
6.6
2.4
2.3
2.5
2009
6.9
3.9
3.7
na
5.5
4.9
5.8
2.9
3.2
4.2
2010
6.5
2.7
3.3
na
4.7
4.5
5.0
2.7
2.8
3.7
0.6 16.9% 15.6% 16.1%
4.4
4.2
3.7
Source: Bloomberg, price as of the 13th of February
3.
In fundamental P/BV method we employed Gordon’s dividend model with the
following formula:
P / BV =
ROE − g
COE − g
ROE – Return on Equity
COE – Cost of Equity from CAPM model
21
Banks
g – long term growth assumption
In our model we calculate fundamental P/BV for 2011E from 11E ROE’s
(assuming it is sustainable) and 11E COE’s and dividends long term growth
assumption of 3%. As a result we received target P/BV which multiplied by BVPS
for 11E corresponds with bank’s value in 11E. When discounted to the current
year and added to expected dividends in the period of 2008E-2010E, we receive
the target price
4.
In the DDM model we discount dividend expected in 2009E-2018E based on DPR
assumption and in terminal period. When applying 11.2% cost of equity and 3% of
dividend growth in the residual period, we receive a target price
Banking Sector Landscape
Although the last quarter of 2008 is expected to be difficult for banks, the sector reached
record high net profit last year. It was driven mainly by significant growth in lending
action (mortgages in 1H08 and consumer finance during the whole year). The banks
were also very active in deposits collection. However the last quarter of 2008 brought
new challenges that Polish banking sector will have to face in 09-10E period.
Generally we expect both 09E and 10E to be very difficult years for banks. In our opinion
Generally we expect
both 09E and 10E to be
very difficult years for
banks.
the results will recover in 11E, on the back of macro growth and corporate condition
improvement. We estimate total sector’s assets to increase by 8.5% yoy in 09E and
8.8% yoy in 10E (in 05-08E the assets grew at CAGR of 19.8%). We also expect banking
sector profitability to decrease due to significant increase in provisioning (especially in
corporate segment). We assume slight margins deterioration – on one hand banks will be
under deposits spread pressure (the result of “deposits war” and declining market
interest rate) but on the other hand we believe that re-pricing of lending action will
happen quickly both in corporate and retail business. Banks will also focus on cross-sale
strategies among existing clients base and will concentrate on cost and efficiency
improvement. These activities should diminish the negative impact of the economic
slowdown, but we expect the net profit of our banking universe will drop by 26% yoy in
09E and recover by 6% yoy in 10E.
Lending – Difficult time for borrowers
According to our sector
model total lending of
Polish banks will
increase by 9% yoy in
09E and 8.7% yoy in 10E,
driven by consumer
loans.
According to our sector model total lending of Polish banks will increase by 9% yoy in
09E and 8.7% yoy in 10E, driven by consumer loans. In 11E we expect the lending to
market to grow at 11% yoy. In the coming years the lending action is expected to
develop visibly slower than in 06-08 (CAGR of 30%).
We expect new mortgage sale to drop 60% in 2009…
Stricter lending rules, and the turmoil on international interbank market have created an
unfavorable environment for mortgage lending business development in the next two
years. In the last quarter of the year banks increased margins and tightened the
underwriting standards (especially in FX mortgage offer). In fact the banks try to shift
the demand towards PLN products however we do not think it will help to maintain high
level of volumes. The decision of giving up the CHF mortgage offer comes mainly from FX
funding problems (in 4Q08 banks started facing severe problems with CHF funding as
due to low market liquidity prices of short term swaps spreads soared from 20-30bps to
200bps).
22
Banks
Chart 22 Mortgage Loans Stock (LHS),New Mortgage Sale (Dashed Line, RHS), PLN bn
250
2008-2010E CAGR of 7.4%
70
60
200
50
150
40
1997-2008 CAGR of 53.2%
30
100
20
50
10
0
0
Source: Central Bank of Poland, IPOPEMA estimates
We forecast PLN 1520bn of new mortgages
sale which is 60% below
2008 figure
Under the condition that the exchange rates remain stable we forecast PLN 15-20bn of
new mortgages sale which is 60% below 2008 figure. In 10E we expect PLN 25bn of new
sales so CAGR of mortgage lending stock should be 7.4% yoy in 08-10E. In 11E 11% yoy
increase is expected. We also think that the margins of 2-4% will stay for a longer time.
Our conservative view on the mortgage segment stems from deteriorating economic
growth outlook, flat wage bill, higher underwriting standards and as a result reduced
affordability of mortgage products.
… so the only hope in consumer finance
Consumer finance should a key factor for lending base growth in 2009. However we are
Consumer finance
should a key factor for
lending base growth in
2009
much more conservative in terms of business development and expect 12% yoy increase
this year and 7.6% yoy in 10E. We believe that in the first phase of the economic
slowdown retail clients may not suffer much, some of them may finance “income gap” by
credit. More problems may come in 10E, when banks will have to tighten lending policies
and verify risk profile in retail. Although the competition in consumer finance may be
relatively high (many of Polish banks, which were involved in mortgages now tries to fill
the gap in retail by growing sales in consumer finance), we do not expect visible
downward movement in margins (banks will have to off-set higher clients’ risk).
Chart 23 Retail Loans Stock, 1997-2010E PLN bn
400
2008-2010E CAGR of 8.3%
350
300
1997-2008 CAGR of 6.4%
250
200
150
100
50
0
23
Banks
Corporate lending – Just 3% growth in 09E
We forecast just 3% yoy growth of lending stock for corporate in 09E and 10% yoy in
We forecast just 3% yoy
growth of lending stock
for corporate in 09E and
10% yoy in 10E
10E. In our opinion the lending dynamics will be negatively affected by lower
investments, stricter lending standards, poor expectations of economic growth both in
Poland and in export sale. In our view the banks will shift their attention to large, liquid
corporate and to those, which realize EU-funding projects as well as to local authorities.
SMEs will face serious problems with financing this year. In 10E we expect a slight
recovery on the back of infrastructure investments. We also think that the bank will reprice their offer significantly.
Deposits – Driven by retail in 09E but 10E will be the challenge
We forecast that the retail deposits will increase 8.6% yoy next year (or PLN 12.5bn of
We forecast that the
retail deposits will
increase 8.6% yoy next
year (or PLN 12.5bn)
new deposits flow). The dynamics will be visibly lower than in 2008 (26.3% yoy, or PLN
59bn of new flow), due to no growth of wage bill. Deposits base growth in 2009 will be
supported by advantageous adjustment of personal income tax and lack of other
investment opportunities. In 10E we expect retail deposits stock to grow by just 4% yoy
(PLN 5bn of outflows) due to households’ financial position deterioration and a possible
effect of savings consumption. In our view retail deposits be will the key driver,
influencing the ability of lending action growth (for 09E-18E we expect CAGR of c7.5%).
Chart 24 Retail Deposits Stock, 1997-2010E PLN bn
250
2008-2010E CAGR of 6.1%
200
150
1997-2008 CAGR of 9.9%
100
50
0
Corporate deposits – Negative dynamics
We expect corporate deposits to decline by 3% in 09E and to recover slightly in 10E
(+5% yoy). Although current macro deterioration will surely hit corporate segment we
think that deposits base decline will be almost the same as recorded in 2000. In the long
term corporate deposits should grow slower than the retail deposits (CAGR 09E-18E of
6.3%).
Margins – The end of cheap loans
Our margins forecast for the sector assumes the decrease in retail lending margins and
Our margins forecast for
the sector assumes the
decrease in retail
lending margins and
visible growth in
corporate.
24
visible growth in corporate. Especially in 09E banking sector should still suffer from low
deposits spreads in retail (continuation of deposits war and the decrease of WIBOR,
which does not give much space for spreads maintenance). As lending spreads are
discussed,
in
mortgage
business
banks
will
increase margins
(mainly
on
new
agreements) but we are still concerned about “old” portfolio profitability. Consumer
finance segment should report slightly lower spreads due to growing competition.
Banks
Chart 25 Margins on Corporate Lending, New agreements,
Jan05-Dec08
9.0%
Chart 26 Corporate and Retail Deposits Spreads, New
agreements, Jan05-Dec08
3.0%
8.0%
2.5%
7.0%
2.0%
6.0%
1.8%
8.0%
1.6%
7.0%
1.4%
6.0%
1.2%
5.0%
1.0%
5.0%
1.5%
0.8%
4.0%
0.6%
4.0%
3.0%
1.0%
2.0%
0.5%
1.0%
2.0%
0.2%
0.0%
1.0%
Int on Corporate Loans
-0.2%
0.0%
-0.4%
Jan-05
Mar-05
May-05
Jul-05
Sep-05
Nov-05
Jan-06
Mar-06
May-06
Jul-06
Sep-06
Nov-06
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
0.0%
0.4%
Jan-05
Mar-05
May-05
Jul-05
Sep-05
Nov-05
Jan-06
Mar-06
May-06
Jul-06
Sep-06
Nov-06
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
0.0%
3.0%
Margin on Corporate Loan
WIBOR 3M
Retail Deposits Spread
Corporate Deposits Spread
Chart 27 Interests on New Lending agreements, Jan05Dec08
Chart 28 Retail and Corporate Lending Spread, Jan05-Dec08
8.0%
14.0%
7.0%
12.0%
6.0%
10.0%
5.0%
8.0%
4.0%
6.0%
3.0%
4.0%
2.0%
2.0%
1.0%
0.0%
0.0%
Jan-05
Mar-05
May-05
Jul-05
Sep-05
Nov-05
Jan-06
Mar-06
May-06
Jul-06
Sep-06
Nov-06
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
9.0%
16.0%
Jan-05
Mar-05
May-05
Jul-05
Sep-05
Nov-05
Jan-06
Mar-06
May-06
Jul-06
Sep-06
Nov-06
Jan-07
Mar-07
May-07
Jul-07
Sep-07
Nov-07
Jan-08
Mar-08
May-08
Jul-08
Sep-08
Nov-08
18.0%
Int on Consumer Loans
Int on Mortgage Loans
Retail Lending Spread
Margin on Consumer Loans
Margin on Mortgage Loans
WIBOR 3M
Corporate Lending Spread
In corporate segment we expect significant change in lending prices, which should
support the improvement of margins. Overall, we estimate that the total margin should
decrease slightly in 09E and return to 08 levels in 10E, but the situation will depend on
deposits supply and deposits spreads. We also think that smaller market players will still
aggressively compete for clients’ money (especially banks operating in consumer
finance), while large banks (PKO BP, Pekao, BRE and ING) will try to keep positive
deposits spreads.
25
Banks
Net interest income
The expected slowdown of lending action and our margin assumptions have led us to be
conservative in terms of NII. We expect NII of our universe to rise to 4% in 2009, and
4% in 2010.
Fees and commission
According to our forecast NF&C of our research universe will decline 12% yoy in 09E and
According to our
forecast NF&C of our
research universe will
decline 12% yoy in 09E
and increase by 8% yoy
in 10E.
increase by 8% yoy in 10E. This year banks will still suffer from the capital market
slowdown so fees from mutual funds and brokerage operations will be visibly lower. The
rebound on the capital market may come in late 2009 or 2010 so we think the significant
improvement in revenues from funds and brokers is expected to come in 2011.
We expect further growth in cards coming both from rising volumes and increasing
number of transactions. Bancassurance business should also record a positive dynamics
this year however it will not report as impressive growth as in 2008. We believe that in
terms of insurance sale banks will suffer from mortgages production slowdown but the
support may come from increasing insurance broking services. In our view the gainers
should be banks with open-architecture model (BRE, BZ WBK), while Bank Millennium
and PKO BP will be hit strongly by lower mortgages sale. We also expect that banks will
report lower fees from new loans sale. Other fees revenues (accounts, transfers, etc.)
should grow at a one-digit figure in 09E thanks to increase in prices of those products.
How to Replace FX?
The significant drop in new mortgages sale will significantly hit banks FX revenues.
The significant drop in
new mortgages sale will
significantly hit banks
FX revenues
Assuming than no more that 5-10% of FX gains related to mortgages come from FX
spread on installment and the remaining part comes from initial debt revaluation banks
have a very little opportunity to soften the decline of CHF volumes. In the table below we
present the impact of initial revaluation on our banking universe results in 1Q07-3Q08
period.
Table 17 Impact of Initial FX Mortgage Loan Revaluation on Pre-Tax (PLN m)
PKO BP
as % of pre-tax gain
BRE
Kredyt Bank
BZ W BK
ING
Bank Millennium
1Q07
2Q07
3Q07
4Q07
2007
1Q08
2Q08
3Q08
YTD
19.0
25.0
21.9
20.9
86.7
31.2
34.9
18.7
84.8
2.2%
3.4%
2.4%
2.0%
2.4%
2.6%
3.0%
1.7%
2.4%
23.4
30.4
22.8
31.1
107.6
27.6
40.2
39.4
107.3
11.4%
13.2%
10.8%
15.6%
12.7%
6.5%
13.8%
15.1%
11.0%
4.9
13.4
9.3
11.7
39.4
9.5
15.8
28.4
53.8
4.8%
10.5%
7.0%
8.5%
7.9%
9.6%
18.0%
19.5%
16.1%
0.2
0.0
0.2
0.6
1.1
0.8
4.8
5.2
10.8
0.1%
0.0%
0.1%
0.2%
0.1%
0.2%
1.1%
1.5%
1.0%
0.0
0.0
0.0
0.0
0.0
0.0
2.6
6.2
8.8
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
0.9%
3.0%
2.0%
35.0
49.1
36.8
36.8
157.7
33.1
41.3
40.3
114.7
33.1%
30.2%
22.7%
23.9%
27.0%
20.8%
25.9%
25.7%
24.2%
Source: Banks, IPOPEMA estimates
The significant drop in FX due to lower mortgages production is expected in Bank
Millennium, Kredyt Bank and that would have significant impact on pre-tax results. BRE
and PKO BP will also visibly suffer but the impact on the results would be lower. We also
expect the decrease in FX products sale related to pure corporate business, especially in
ING, BZ WBK, Pekao and Handlowy due to lower corporate activities and bad “fame” of
FX hedges.
Desperately Looking For Savings
In the last 2 years some of the banks expended visibly, which had an impact on cost
base significant growth. Now there is a time to look for savings and improve the
efficiency. We think that in 09-10 period banks will take a closer look at:
Branch development, in our view 2008 was the last year of significant territorial
expansion. The market leader (PKO BP and Pekao) as well as banks which have
significant amount of openings (BZ WBK, Millennium) will focus on new branches
26
Banks
profitability. We also expect that the banks, which have plans to grow territorially,
will suspend their plans (except new entrants – Alior and Meritum, which have to
build the clients base).
Employment optimization, in some banks there is a space for employment reduction
(especially in PKO BP, where 1.7ths employment decrease in possible, Pekao SA,
Kredyt Bank and BRE). We also think that banks my apply more elastic employment
conditions
Salary freeze and bonuses reduction due to lower sales
Advertisement costs reduction, which could support cost base very quickly
IT costs and development costs cuts
Where possible banks my try to renegotiate rental agreements, however for a some
part they are hit by EUR strengthening
We forecast operating expense of our Polish banks universe to rise 1% in 2009E and 1%
in 2010E. We think that the strongest ability to cut costs are in PKO BP (mainly due to
employment decrease and the branches efficiency improvement), BRE (employment,
branches optimization), BZ WBK (finished branch openings program and is also very
efficient in terms of C/I) and Pekao SA (after the merger the bank must finally find cost
synergies).
Provisioning – The Key Threat
The significant growth in provisioning is the major threat for 09-10E financial results. We
We expect that the cost
of risk for the sector will
increase to 4.2bn in 09E
and 4.6bn in 10E
expect that the cost of risk for the sector will increase to 4.2bn in 09E and 4.6bn in 10E,
driven primarily by corporate segment lending portfolio deterioration and consumer
finance. In mortgage segment cost of risk should remain low as only the 10% of Poles
has purchased the product so far.
Table 18 Net Provisions - Polish Banks, 2000-2010E (PLN m)
2000 2001
PKO BP
Pekao
ING
BRE
2002
2003
-661
-970
-704
-297
2004 2005 2006 2007 2008 2009E 2010E
-86
-161
-1
-57
682
-657
-1504
-503
-354
-237
-222
-320
-232
-708
-944
-420
-424
-380
-408
-202
118
166
104
-8
-272
-357
-800 -1 284 -1 475
61
-60
-529
-12
-343
-79
-46
-77
-269
-488
-504
BZ WBK
-286
-190
-169
-142
-131
-62
-28
-4
-144
-389
-397
Kredyt Bank
-223
-368
-666
-1533
-108
-9
19
30
-113
-329
-350
Bank Millennium
-254
-337
-139
-87
-102
-15
-40
-68
-137
-353
-250
-366
-430
-448
-181
-9
34
23
53
-99
-372
-307
-1 468 -3 437
-4 540
-3 164
-1 335
-412
-129
Handlow y
Total
-339 -1 802 -4 195 -4 583
Among our universe we expect PKO BP, Bank Millennium, BRE to suffer the most. BZ
WBK also bears additional risk related to its exposure to property segment.
Net profit down 25 % in 09E
We expect total net
income of our universe
to decline by 26% yoy in
2009 and to increase
slightly by 5.8% yoy in
2010
We expect total net income of our universe to decline by 26% yoy in 2009 and to
increase slightly by 5.8% yoy in 2010. The most significant drop in 09E EPS is expected
in Kredyt Bank and Bank Millennium
27
Banks
Table 19 Net Profit - Polish Banks, 2000-2010E (PLN m)
2000 2001 2002 2003 2004 2005 2006 2007 2008
PKO BP
823
887
1 051
1 193
1 511
1 735
2 149
2 904
3 500
2 886
3 130
Pekao
795
1 254
770
920
1 343
1 538
1 788
2 157
3 498
2 588
2 607
ING
151
100
141
31
366
549
591
631
484
451
470
BRE
338
221
-381
10
-278
248
421
710
857
493
508
BZ WBK
139
149
273
129
444
516
758
955
989
737
739
Kredyt Bank
149
-34
-421 -1 582
185
416
468
391
333
138
160
56
20
179
41
241
567
301
462
413
169
289
182
163
239
297
416
618
657
826
703
495
471
2 633
2 760
1 851
1 038
4 228
6 187
7 133
9 035 10 778
7 958
8 373
Bank Millennium
Handlow y
Total
28
2009E 2010E
Bank Millennium S.A.
Cheap but risky to hold
We expect a very difficult time ahead of Bank Millennium. The bank is heavily
exposed to mortgage loans business and lack of diversification seems to be a
major threat now. According to our market estimates mortgage business will
17 February 2009
SELL – High Risk
12M TP PLN 1.7 / (Feb 13th) PLN 1.74
contract 50-60% in 2009E and will impact significant revenues drop in BM. We
also do not see significant support from consumer finance business, which will only
partially offset lack of revenues from mortgages. Lower mortgage business will
170
have a negative impact on cross-sale activity, which was one of the pillars of BM’s
150
growth strategy.
130
Millennium vs. WIG=100
Millennium vs. WIG-Banks=100
110
Assets mismatch brings serious problems
90
We also expect significant threat of assets currency mismatch. The bank will have
to deal with the problem of illiquid interbank market, which influences the cost of
70
50
Jan- Apr06
06
Jul06
Oct- Jan- Apr06
07
07
Jul07
Oct- Jan- Apr07
08
08
Jul08
Oct- Jan08
09
PLN-EUR-CHF swaps. As these swap’s quotations soared in 4Q08 and we do not
expect full recovery in 2009, the margins on mortgage products will suffer this
year. Lack of new mortgages sale will also hit the FX revenues (according to our
estimates FX revenues from selling mortgage loans constituted for 25% of pre-tax
profit in 2008).
On the bottom line Millennium will have to cope with visible provisioning growth
Ke y Ratios
coming from higher lending volumes and from Bank’s exposure to FX structure
Banking Revenues Grow th
sale (the bank has to create additional provisions on credit risk due to settlement
09/08 EPS adj grow th
problems with clients).
Operating costs still remain high as the bank has gone
through extensive branch development program and increased the employment
visibly. Management will have
to
focus
on costs
savings
and
efficiency
improvement but will take some time to adjust to the new market conditions.
Is Millennium 2010 the cure ?
2009E
-6.1%
-59.1%
2009E ROE
5.8%
2009E DPS
0.0
Share data
Number of shares (m)
849.2
Market Cap (€m)
317.2
12M A vg daily volume (th)
757.5
To sum up, Bank Millennium has implemented over the last years a profitable but
12M A verage daily turnover (€m)
risky strategy focused on mortgage loans ,with strong cross-sale actions and low
52 W High / Low
8.8 / 1.7
pricing strategy. The bank has also invested much in branch development base.
WIG Weight (%)
Reuters
BIGW.WA
But it did not developed aleternative way of running business. In recent times
Millennium has a strong clients base, good braches network but it has no core
product to sell. What is more in corporate segment is exposed to risk of FX options
settlement. The bank has no growth drivers and will have face with a lot of risks
and significant costs base (however Millennium 2010 strategy may bring some
savings, we expect PLN 100-150m in two years time).
2.7
0.58
Bloomberg
MIL PW
Pe rform ance
Abs .
3M
-52%
vs . WIG
-46%
Y TD
-85%
-65%
12M
-77%
-52%
We do not see any positive market drivers to support BM’s business growth in the
next 2-3 years and the bank will face a lot of risks by then. That is why we
Share holde rs
Stak e
recommend to SELL the stock with High Risk grade and 12M TP of PLN 1.7.
BCP
65.5%
Table 20 Summary Financial Data
CU OFE
Other
5.1%
29.4%
Year
2006
2007
2008E
2009E
2010E
Total Revenues
1 268
1 709
1 849
1 732
1 801
EBIT
371
585
510
209
357
Net Prof it
301
462
413
169
289
EPS(adj)
0.4
0.5
0.5
0.2
0.3
Analys ts
DPS
0.5
0.2
0.2
0.0
0.0
Tomasz Bursa
P/E
22.5
21.4
3.6
8.7
5.1
3.1
3.9
0.5
0.5
0.4
P/BV
+ 48 22 236 92 31
Source: Company, IPOPEMA estimates
29
Table 21 Bank Millennium - Financials
Bank M ille nnium - P&L (PLN m )
2005
2006
2007
2008E
2009E
2010E
Ne t Inte r e s t Incom e
480
642
772
981
1 090
1 152
NF&C
265
365
543
472
424
433
Other Banking revenues
720
246
333
375
203
204
Other income/loss
16
15
61
21
15
12
Total Re ve nue s
1 481
1 268
1 709
1 849
1 732
1 801
Net Provisioning
-15
-40
-68
-137
-353
-250
Operating Expenses
-756
-857
-1 057
-1 201
-1 170
-1 194
EBIT bef provisioning
725
410
652
647
562
607
EBIT
710
371
585
510
209
357
Pre-Tax profit
710
371
585
522
209
357
-143
-70
-123
-108
-40
-68
Ne t Profit
567
301
462
413
169
289
Net A ttributable Profit
176
301
462
413
169
289
2005
2006
2007
2008E
2009E
2010E
Net Loans
12 830
16 061
23 080
35 328
33 277 32 736
Total As s e ts
22 151
24 692
30 530
47 115
48 972 52 279
Customer Deposits
15 062
19 670
24 369
34 763
39 680 42 378
Risk Weighted A ssets
10 647
9 011
10 977
15 693
20 756 35 303
Share holde rs Equity
1 999
2 215
2 520
2 815
3 027
3 310
Tax
Bank M ille nnium - Balance She e t (PLN m )
Profitability/Slove ncy Ratios
2005
2006
2007
2008E
2009E
2010E
ROE
30.4%
14.3%
19.5%
15.5%
5.8%
9.1%
ROE(adjusted)
30.4%
14.3%
19.5%
15.5%
5.8%
9.1%
Net Interest Margin
1.8%
2.3%
2.5%
1.5%
0.5%
1.0%
Cost/Income Ratio
51.0%
67.6%
61.8%
64.4%
66.7%
65.4%
NPLs Ratio
10.0%
5.7%
3.4%
3.4%
4.2%
4.7%
Loans/Deposit Ratio
81.0%
81.7%
94.7% 101.6%
83.9%
77.2%
Total Capital Ratio
19.1%
13.6%
13.7%
9.4%
12.7%
13.4%
Valuation Ratios
2005
2006
2007
2008E
2009E
2010E
P/E
7.8
22.5
21.4
3.6
8.7
5.1
P/E adjusted
7.8
22.5
21.4
3.6
8.7
5.1
P/BV
2.2
3.1
3.9
0.5
0.5
0.4
P/BV adjusted
2.2
3.1
3.9
0.5
0.5
0.4
Dividend Y ield
5.4%
6.8%
1.5%
10.9%
0.0%
0.0%
Pe r s har e Data
2005
2006
2007
2008E
2009E
2010E
EPS
0.66
0.35
0.54
0.49
0.20
0.34
EPS adjusted
0.66
0.35
0.54
0.49
0.20
0.34
BV PS
2.4
2.6
3.0
3.3
3.6
3.9
BV PS adjusted
2.4
2.6
3.0
3.3
3.6
3.9
DPS (paid in current year)
0.3
0.5
0.2
0.2
0.0
0.0
We expect slight total assets increase to PLN 52bn as the bank will not sell new loans
strongly. Millennium will be able to acquire PLN 8bn of new deposits, which should
support L/D ratio decline to 77% in 2010E. According to our estimates Millennium’s ROE
will reach the level of 5.8% in 2009E and 9.1% in 2010E. Cost/Income ratio should stay
above 60 level.
30
Table 22 Bank Millennium – Valuation
Bank M ille nnium - Re s idual Incom e Valuation
Net Profit (current year)
Be gining BV of Equity
Cost of Equity
Equity charge
Exce s s Equity Re turn (Re s idual Incom e )
Discount Factor
PV of Exce s s Equity
2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E Te rm inal
169
289
324
451
286
267
393
396
413
336
346
2 815 3 027 3 310 3 616 4 013 4 233 4 475 4 798 5 112 5 435
11.2% 11.2% 11.2% 11.1% 11.1% 11.1% 11.1% 11.1% 11.0% 11.0%
315
338
369
403
446
470
496
531
564
598
-146
-49
-45
48 -160 -203 -103 -135 -151 -262
0.90
0.81
0.73
0.65
0.59
0.53
0.48
0.43
0.39
0.35
-131
-40
-33
32
-94 -107
-49
-58
-58
-91
Terminal Period Calculation
Expcted ROE in Terminal Period
Expe cte d BV of Equity in te rm inal Pe riod
Expected Cost of Equity
Expcted Grow th in Terminal Period
8.0%
5 199
0.11
0.03
Exce s s Equity Re turn in Te rm inal Pe riod
PV of Exce s s Equity in Te rm inal Pe riod
-2 823
-985
Bank M ille nnium - Re s idual Incom e Sum m ary
2008 Y E Book value
2 815
Sum of PV of Excess Equity in 2008E-2017E
-631
PV of Excess Equity in Terminal Period
-985
Total Equity Value
1 199
No of Shares
849
Equity V alue per share
1.4
12M Targe t Price
1.6
Bank M ille nnium - Fundam e ntal P/BV
ROE
Cost of Equity
Long term grow th assumption (g)
Targe t P/BV m ultiple (x)
BV PS (Zl)
Targe t V alue Pe r Share (Zl)
Months to Discount
Discounted Value Per Share (Zl)
DPS (Zl)
Discounted accumulated DPS (Zl)
Implied target price
Cost of Equity
12 M onth Targe t Price (Zloty)
2009E 2010E 2011E
5.8% 9.1% 7.9%
11.2% 11.2% 11.2%
3.0% 3.0% 3.0%
0.3
0.7
0.6
3.6
3.9
4.3
1.2
2.9
2.6
11
23
35
1.10
2.38
1.88
0.00
0.00
0.00
0.00
0.00
0.00
1.10
2.38
1.88
0.112
2.1
Bank M ille nnium - DDM V aluation
EPS (current year)
Pay-out Ratio
DPS (paid ne xt ye ar)
Cost of Equity
Months to discount
Target Dividend Value
Terminal Value
Discounted Dividend Value
Discounted Terminal V alue
Sum of dis counte d divide nds
Cost of equity
0.2
0.3
0.4
0.5
0.3
0.3
0.5
0.5
0.5
0.4
0.5
0.0% 0.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%
20.0%
0.0
0.0
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
0.1
11.2% 11.2% 11.2% 11.1% 11.1% 11.1% 11.1% 11.1% 11.0% 11.0%
11.0%
11
23
35
47
59
71
83
95
107
119
0.03
0.00
0.00
0.08
0.11
0.07
0.06
0.09
0.09
0.10
0.08
1.25
0.00
0.00
0.06
0.07
0.04
0.03
0.04
0.04
0.04
0.03
0.490
0.84
0.112
0.94
31
BRE Bank S.A.
Break in the long run
Although we still believe BRE is the one of the best Polish banks it terms of top
17 February 2009
line business development we would be very cautious in short term period. For the
HOLD – High Risk
last few years BRE has proven that it can successfully transform from corporate
12M TP PLN 151 / (Feb 13th) PLN 123.5
into universal bank but the impressive growth caused some imbalances. It can
affect BRE negatively especially during the financial market turmoil. In particular:
(1) BRE has one of the higher L/D ratio in the banking sector (138%, howver only
81% on adjusted basis), which makes its further growth much depended on either
210
190
BRE vs. WIG=100
BRE vs.WIG-Banks=100
170
strong deposits collection the possibility of FX loans roll-over, (2) Tier 1 and CAR
150
ratio are one of the lowest in the Polish banking sector, (3) exposure to corporate
130
segment, which will be hit strongly during the recent macro contraction.
110
90
Deposits structure is important challenge
70
Jan- Apr06
06
Jul06
Oct- Jan- Apr06
07
07
Jul07
Oct- Jan- Apr07
08
08
Jul08
Oct- Jan08
09
We still see positive factors in BRE’s business. BRE is one of the most efficient
bank in Poland thanks to its technological advance, strong IT platform and
relatively low dependence on sales via physical branch network. We strongly
believe that its internet arm mBank will be a key competitive advantage in
deposits collection and cross-sale. However in the coming months the bank will
have to look for activities to improve L/D ratio and what is more important to
Ke y Ratios
2009E
balance its funding structure (however it is overliquid in PLN segment). BRE will
surely focus less on mortgage lending and will also suffer from corporate business
slowdown, where it hopes to build strong cross-sale position.
2009E ROE
12.0%
2009E DPS
0.0
-0.8%
-32.2%
Where is the chance?
In our view BRE will increase its presence in consumer lending and in EU projects
financing (where the bank has strong experience). BRE will also look for savings
(accoriding to our esitmates it will reduce the employment by 200-300 next year),
which should help to keep overall costs flat yoy. The bank has also significant
corporate clients base and wil surely revise margins in that segment. It should
Share data
29.6
Market Cap (€m)
785.0
12M Avg daily volume (th)
41.2
12M Average daily turnover (€m)
6.8
52 W High / Low
459.0 / 107.3
Comparing to other banks, BRE has also lower exposure of NF&C to capital market
WIG Weight (%)
Reuters
BREP.WA
fluctuation (however we expect 10.5% yoy decline in 2009).
Bloomberg
help to soften negative impact of lower deposits spreads in retail segment.
We recommend to HOLD the stock and we highlight relatively higher investment
risk. The bank trades at 09P/E of 7.4 and 10P/E of 7.2., which is slightly below the
market. If BRE turns its strategy to more balanced developement it will be able to
improve its assets/liabiliets position it may build strong fundaments for long term
1.25
BRE PW
Pe rform ance
Abs .
vs . WIG
3M
-52%
-24%
YTD
-76%
-42%
12M
-72%
-41%
growth. We also believe that during the stock market recovery BRE’s shares may
one of the best investments but short term risks related to funding and corporate
Share holde rs
Stak e
segment slowdown encourage us to have more conservative view.
Commerzbank
69.8%
CU OFE
Other
5.0%
30.2%
Year
2006
2007
2008E
2009E
2010E
Total Revenues
1 625
2 202
2 686
2 595
2 786
EBIT
535
846
867
651
663
Net Prof it
421
710
857
493
508
EPS(adj)
13.0
21.1
29.0
16.6
17.1
DPS
0.0
0.0
0.0
0.0
0.0
P/E
23.5
21.1
4.3
7.4
7.1
3.9
4.5
0.9
0.8
0.8
P/BV
32
Analys ts
Tomasz Bursa
+ 48 22 236 92 31
BRE Bank S.A.
Table 24 BRE Bank – Financials
BRE Bank - P&L (PLN m )
2005
2006
2007
2008E
2009E
2010E
Ne t Inte re s t Incom e
651
724
1 028
1 392
1 534
1 678
NF&C
338
416
564
551
494
532
322
439
493
629
524
513
Other income/loss
22
45
117
113
43
56
Total Re ve nue s
1 333
1 625
2 202
2 686
2 595
2 779
Net Provisioning
Operating Expenses
-79
-46
-77
-269
-488
-552
-906
-1 044
-1 280
-1 550
-1 456
-1 564
427
581
922
1 136
1 139
1 223
EBIT
348
535
846
867
651
663
Pre-Tax prof it
348
534
846
867
651
663
Tax
-65
-124
-185
-108
-137
-133
Ne t Profit
248
421
710
857
493
508
Net A ttributable Prof it
262
385
623
857
493
508
BRE Bank - BP Balance She e t (PLN m )
Net Loans
2005
2006
2007
2008E
2009E
2010E
19 999
25 889
35 773
58 247
55 021
60 526
Total As s e ts
32 739
42 331
55 983
82 606
79 184
85 322
Customer Deposits
24 606
32 642
44 689
65 239
55 358
59 013
16 439
27 419
37 616
55 982
53 633
57 968
2 035
2 531
3 325
3 894
4 344
4 866
2005
2006
2007
2008E
2009E
2010E
ROE
12.8%
18.5%
24.3%
23.8%
12.0%
11.0%
ROE(adjusted)
11.0%
13.5%
17.0%
21.6%
20.5%
12.0%
Net Interest Margin
0.8%
1.1%
1.4%
1.2%
0.6%
0.6%
Cost/Income Ratio
68.0%
64.3%
58.1%
57.7%
56.1%
56.3%
NPLs Ratio
8.5%
5.5%
3.6%
3.2%
4.8%
4.3%
Loans/Deposit Ratio
81.5%
79.3%
80.0%
89.3%
99.4%
102.6%
Total Capital Ratio
10.3%
10.4%
10.2%
10.0%
12.3%
12.5%
V aluation Ratios
2005
2006
2007
2008E
2009E
2010E
P/E
19.6
23.5
21.1
4.3
7.4
7.2
P/E adjusted
18.6
25.8
24.0
4.3
7.4
7.2
2.4
3.9
4.5
0.9
0.8
0.8
P/BV
P/BV adjusted
2.4
4.0
4.6
1.0
0.8
0.8
Dividend Y ield
0.0%
0.0%
0.0%
0.0%
0.0%
0.0%
Pe r s hare Data
2005
2006
2007
2008E
2009E
2010E
EPS
8.60
14.27
23.98
28.96
16.64
17.15
EPS adjusted
9.10
13.05
21.06
0.00
16.64
17.15
BV PS
70.7
85.7
112.3
131.5
146.7
164.4
BV PS adjusted
64.6
67.7
82.5
107.9
131.5
146.7
0.0
0.0
0.0
0.0
0.0
0.0
We expect total assets to increase from PLN 82bn last year to PLN 85bn in 2010E The
bank will be focused mainly on existing clients base and will keep total L/D ratio at 95100%. We expect net loans to stay flat, while deposits are expected to decline.
According to our estimates BRE’s ROE will reach the level of 12% in 2009E decreasing to
11% in 2010E. Cost/Income ratio should come 56.1%-56.3% in 2009E-2010E.
33
BRE Bank S.A.
Table 25 BRE Bank – Valuation
BRE - Re s idual Incom e Valuation
Net Profit (current year)
Cost of Equity
Equity charge
Exce s s Equity Re turn (Re s idual Incom e )
Discount Factor
2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E
493
508
823
987
751
853 1 077 1 232
3 894 4 344 4 866 5 710 6 686 6 971 7 462 8 266
11.2% 11.1% 11.0% 11.0% 10.9% 10.8% 10.7% 10.6%
436
483
537
626
727
753
799
879
57
32
286
362
24
100
278
353
0.90 0.81 0.73 0.66 0.59 0.53 0.48 0.44
51
26
208
237
14
54
134
154
2017E
1 187
9 287
10.6%
980
207
0.39
82
2018E Te rm inal
1 303
1 223
10 032
11.0%
1 104
199
0.36
71
Expe cte d BV of Equity in te rm inal Pe riod
13.0%
9 159
11.2%
3.0%
Exce s s Equity Re turn in Te rm inal Pe riod
PV of Exce s s Equity in Te rm inal Pe riod
2 402
855
BRE Bank - Re s idual Incom e Sum m ary
2008 YE Book value
3 894
1 031
855
Total Equity Value
5 780
No of Shares
30
Equity Value per share
195.2
12M Targe t Price
218.3
BRE Bank - Fundam e ntal P/BV
ROE
Cost of Equity
BVPS (Zl)
Targe t Value Pe r Share (Zl)
Months to Discount
Discounted Value Per Share (Zl)
DPS (Zl)
Cost of Equity
2009E
12.0%
11.2%
3.0%
1.1
146.7
160.3
11
145.47
0.00
0.00
145.47
BRE Bank - DDM Valuation
EPS (current year)
Pay-out Ratio
Cost of Equity
Months to discount
Target Dividend Value
Terminal Value
Discounted Dividend Value
Discounted Terminal Value
Cost of equity
16.6 17.4 27.8 33.3 25.4 28.8 36.4 41.6 40.1 44.0
45.3
0.0% 0.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0%
30.0%
0.0
0.0
8.3 10.0
7.6
8.6 10.9 12.5 12.0 13.2
13.6
11.2% 11.1% 11.0% 11.0% 10.9% 10.8% 10.7% 10.6% 10.6% 11.0%
10.6%
11
23
35
47
59
71
83
95
107
119
0.03
0.00 0.00 8.34 10.00 7.61 8.64 10.91 12.49 12.03 13.20
180.02
0.00 0.00 6.15 6.66 4.58 4.71 5.40 5.61 4.92 4.69
73.6
116
11.2%
129.3
34
2010E
11.2%
11.1%
3.0%
1.0
164.1
165.4
23
135.13
0.00
0.00
135.13
2011E
13.0%
11.0%
3.0%
1.2
192.6
240.1
35
176.94
0.00
0.00
176.94
0.118
183.5
BZ WBK S.A.
Benefits of diversification
We are still positive on BZ WBK’s business development, although the bank is
expected to report EPS 24% yoy lower in 09E and recover slightly in 10E. We
expect strong earnings progression from 11E when the bank will benefit from
Polish economy growth and will utilize its competences both in retail and
17 February 2009
BUY – High Risk
12M TP PLN 108.6 / (Feb 13th) PLN 79.35
corporate.
Diversification – important step
BZ WBK went an important route towards diversification and it managed to
transform from the bank based on corporate and mutual funds activity into fully
diversified universal bank. Primarily we should see benefits from retail arm
development especially as corporate segment should contract significantly in 0910E. According to our estimates NII should increase by 11% in 09E and CAGR 0911E of 10.3% yoy. The bank is expected to grow above the market average due to
150
BZ WBK vs. WIG=100
140
BZ WBK vs.WIG-Banks=100
130
120
110
100
90
80
70
Jan- Apr06
06
Jul06
Oct- Jan- Apr06
07
07
Jul07
Oct- Jan- Apr07
08
08
Jul08
Oct- Jan08
09
good positioning in consumer finance segment and relative underweight in
mortgage where it had a very little shares.
Balance between NII and NF&C
A key element of BZ WBK’s growth is the balance between NII and NF&C (the
bank is one of the most diversified one among peers). The bank puts strong
attention to cards, FX and bancassurance revenues. We would also highlight that
Ke y Ratios
BZ WBK should perform strongly on the equity market recovery thanks to
significant exposure to mutual funds and brokerage business. For 09-11E we
expect NF&C CAGR of 12.2%, while total banking revenues are expcted to
2009E ROE
13.1%
decrease 4%, 2009 and to grow 3.6% and 17% in 2010 and 2011 respectively.
2009E DPS
0.0
Risk of lending portfolio structure
Share data
BZ WBK is our top pick for 2009. We recommend to BUY the stock with 12M TP of
108.6, which implies 37% growth potential. The bank trades at P/E of 7.9 for 09E
2009E
-4.0%
-25.5%
72.9
Market Cap (€m)
1242.4
82.7
and P/E of 7.8 in 10E, which is below Polish peers. The bank offers diversified
business, with good cost discipline, large clients’ base and strong potential for
52 W High / Low
189.8 / 74.2
structure (exposure to property development and construction segment) and
WIG Weight (%)
Reuters
BZWB.WA
possibility of corporate portfolio deterioration but consequent top line growth
Bloomberg
deposits attraction. Of course we are still worried on bank’s lending portfolio
6.5
2.07
BZW PW
should soften the negative impact of higher provisioning. We do not also believe
that AIB will sell BZ WBK. In our view sale transaction does not change AIB’s
Pe rform ance
Abs .
situation much and Irish bank would like to keep its option for further growth on
3M
-20%
-10%
Polish and CEE markets.
Y TD
-68%
-25%
12M
-58%
-10%
Year
2006
2007
2008E
2009E
2010E
Total Revenues
2 350
2 955
3 282
3 118
3 236
EBIT
1 013
Share holde rs
Stak e
A IB European Investments Ltd
70.5%
Other
29.5%
1 032
1 391
1 385
992
Net Profit
735
955
989
737
739
EPS(adj)
10.1
13.1
13.6
10.1
10.1
DPS
6.0
6.0
3.0
0.0
0.0
Analys ts
P/E
22.3
19.2
5.8
7.9
7.8
Tomasz Bursa
0.9
P/BV
4.2
4.2
1.0
1.1
vs . WIG
+ 48 22 236 92 31
35
BZ WBK S.A.
Table 27 BZ WBK – Financials
BZ WBK - P&L (PLN m )
2005
2006
2007
2008E
2009E
2010E
909
1 032
1 287
1 650
1 839
1 851
NF&C
694
1 003
1 545
1 374
1 131
1 257
105
290
307
109
198
123
Other income/loss
22
9
14
60
25
22
Total Re ve nue s
1 915
2 350
2 955
3 282
3 118
3 236
Net Provisioning
-62
-28
-4
-144
-389
-397
-1 164
-1 290
-1 559
-1 753
-1 738
-1 826
751
1 061
1 395
1 529
1 380
1 410
EBIT
689
1 032
1 391
1 385
992
1 013
Pre-Tax prof it
689
1 042
1 391
1 383
990
1 012
-144
-221
-281
-289
-198
-202
516
735
955
989
737
739
2005
2006
2007
2008E
2009E
2010E
Net Loans
17 322
20 775
26 527
37 011
39 631
43 819
Total As s e ts
29 311
32 992
41 332
52 497
59 507
62 377
Customer Deposits
22 532
26 830
34 249
44 105
50 299
50 991
16 775
21 697
28 426
36 157
41 035
42 973
3 436
4 077
4 577
6 133
5 771
6 917
Operating Expenses
Tax
Ne t Attributable Profit
BZ WBK Balance She e t (PLN m )
2005
2006
2007
2008E
2009E
2010E
ROE
16.1%
20.1%
23.1%
19.5%
13.1%
12.3%
ROE(adjusted)
12.3%
16.1%
20.1%
23.1%
19.5%
13.1%
Net Interest Margin
3.4%
3.5%
3.6%
3.6%
3.4%
3.1%
Cost/Income Ratio
60.8%
54.9%
52.8%
53.0%
55.2%
55.9%
6.9%
4.9%
2.8%
2.3%
3.3%
4.0%
NPLs Ratio
Loans/Deposit Ratio
79.0%
77.4%
77.5%
83.9%
78.8%
85.9%
Total Capital Ratio
16.1%
16.6%
13.8%
15.2%
13.1%
15.1%
V aluation Ratios
2005
2006
2007
2008E
2009E
2010E
P/E
20.0
22.3
19.2
5.8
7.9
7.8
P/E adjusted
20.0
22.3
19.2
5.8
7.9
7.8
3.1
4.2
4.2
1.0
1.1
0.9
P/BV
P/BV adjusted
3.1
4.2
4.2
1.0
1.1
0.9
Dividend Y ield
1.7%
2.7%
2.4%
3.8%
0.0%
0.0%
Pe r s hare Data
2005
2006
2007
2008E
2009E
2010E
EPS
7.08
10.07
13.09
13.57
10.11
10.14
EPS adjusted
7.08
10.07
13.09
13.57
10.11
10.14
BV PS
46.3
54.0
59.5
79.8
75.1
90.0
BV PS adjusted
46.3
54.0
59.5
79.8
75.1
90.0
2.4
6.0
6.0
3.0
0.0
0.0
We expect total assets to increase from PLN 52.5bn last year to PLN 62bn bn in 2010E
The bank will be focused on growth in retail and on increasing revenues from corporate
clients. We expect L/D ratio to stay at save level of 80-85%. We expect net loans to grow
8.8% annually in 09-10E. According to our estimates BZ WBK’s ROE will reach the level
of 13.3% in 2009E and 12.3% in 2010E. Cost/Income ratio should be at 55%-56% level.
Table 28 BZ WBK – 4Q08E Results Preview
P&L (PLN m )
4Q07
1Q08
2Q08
3Q08
4Q08E
YoY
QoQ
754
745
875
805
796
6%
-1%
2 941
3 222
Operating Costs
-485
-400
-434
-428
-490
1%
15%
-1 559
-1 753
12%
Net Provisioning
-58
-72
-88
-73
-56
-5%
-24%
-4
-144
3554%
Net Prof it
170
243
324
247
175
3%
-29%
955
989
4%
Total Banking Revenue
36
12M 07 12M 08E
YoY
10%
BZ WBK S.A.
Table 29 BZ WBK – Valuation
BZ WBK - Re s idual Incom e V aluation
Net Prof it (current year)
Cost of Equity
Equity charge
Exce s s Equity Re tur n (Re s idual Incom e )
Discount Factor
2009E 2010E 2011E 2012E
737
739 1 064 1 375
5 818 5 475 6 561 8 072
11.2% 11.2% 11.1% 11.1%
650
611
731
898
87
128
333
478
0.90
0.81
0.73
0.66
78
104
242
313
2013E
1 456
8 264
11.1%
917
539
0.59
318
2014E
1 780
8 845
11.1%
980
800
0.53
425
2015E
1 969
9 845
11.1%
1 089
880
0.48
421
2016E
1 867
11 915
11.0%
1 315
552
0.43
237
2017E
2 142
13 043
11.0%
1 437
704
0.39
273
2018E Te rm inal
2 439
2 512
14 710
11.0%
1 618
821
0.35
287
Expe cte d BV of Equity in te r m inal Pe riod
15.7%
13 662
0.112
0.03
Exce s s Equity Re tur n in Te r m inal Pe riod
PV of Exce s s Equity in Te r m inal Pe riod
11 974
4 183
BZ WBK - Re s idual Incom e Sum m ary
2008 Y E Book value
5 818
2 697
4 183
Total Equity V alue
12 698
No of Shares
73
174.1
12M Tar ge t Price
193.6
BZ WBK - Fundam e ntal P/BV
ROE
Cost of Equity
BV PS (PLN)
Targe t V alue Pe r Share (PLN)
Months to Discount
Discounted V alue Per Share (PLN)
DPS (PLN)
Discounted accumulated DPS (PLN)
Cost of Equity
12 M onth Targe t Pr ice (PLN)
2009E
13.1%
11.2%
3.0%
1.2
75.1
92.1
11
83.51
0.00
0.00
83.51
2010E
12.3%
11.2%
3.0%
1.1
90.0
102.1
23
83.36
0.00
0.00
83.36
2011E
14.5%
11.2%
3.0%
1.4
110.7
156.5
35
114.92
3.04
2.23
117.16
11.2%
130.3
BZ WBK - DDM V aluation
EPS (current year)
Pay-out Ratio
Cost of Equity
Months to discount
Target Dividend V alue
Terminal V alue
Discounted Dividend V alue
Cost of equity
12 M onth Targe t Pr ice (PLN)
10.1
10.1
14.6
18.9
20.0
24.4
27.0
25.6
29.4
33.4
34.4
0.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0% 30.0%
30.0%
0.0
0.0
3.0
4.4
5.7
6.0
7.3
8.1
7.7
8.8
10.3
11.2% 11.2% 11.2% 11.1% 11.1% 11.1% 11.1% 11.1% 11.0% 11.0%
11.0%
11
23
35
47
59
71
83
95
107
119
0.03
0.00
0.00
3.04
4.37
5.66
5.99
7.32
8.10
7.68
8.81
128.52
0.00
0.00
2.23
2.89
3.37
3.21
3.54
3.53
3.02
3.13
50.5
75
0.112
83.9
37
Bank Handlowy S.A.
The dividend puzzle
Bank Handlowy was one of the most conservative bank on the “lending rally” in
06-08 and it managed to avoid some problems related to funding or exposure to
mortgage lending. We believe that although in the long run the bank should grow
below the sectors’ average, in the short term period it may outperform peers
17 February 2009
HOLD – Medium Risk
12M TP PLN 32.7 / (Feb 13th) PLN 30.3
thanks to good capital base and potential dividend.
130
Exposure to Treasury
120
Handlowy is significantly exposed to corporate segment, especially to enterprises.
In our view the bank may have some problems with increasing lending volumes
and what is more important to cross sale products dedicated for large companies.
Low dependence to retail segment has also an impact on credit risk concentration,
which in our view may be a negative trigger for the bank in the next 2-3 years. In
our view Handlowy will show significant increase in cost of risk, driven both by
Handlowy vs. WIG=100
Handlowy vs.WIG-Banks=100
110
100
90
80
70
60
Jan- Apr06
06
Jul06
Oct- Jan- Apr06
07
07
Jul07
Oct- Jan- Apr07
08
08
Jul08
Oct- Jan08
09
pure credit risk and the involvement in FX options sale.
Bank Handlowy is the most exposed to trading activity among Polish peers. Is it
an asset during the volatile market? Yes, but if salesmen make good decision. If
they fail then it hits banks results significantly. In our view that brings additional
risk to our financial forecasts (the volatility of the quarterly net profits).
Ke y Ratios
Safe funding structure, dividend possible
Handlowy has relatively good funding structure (L/D ratio of 70%), which comes
mainly from its conservative attitude to lending. In our view in longer term period
it is difficult to grow without significant lending base and lack of new clients (cross
2009E
-1.1%
-28.3%
2009E ROE
7.9%
2009E DPS
2.9
sale actions among existing ones are of course limited).
We do not see significant opportunities on the revenue side due to slowdown
performance of corporate segment and decreasing ranks in credit cards and
capital market activity. During the economic downturn the bank should not also
Share data
130.6
Market Cap (€m)
849.5
58.5
count on FX revenues. Handlowy may look for revenues from other banking
activity (trading, securities income) but it is very risky strategy. In the last years
52 W High / Low
95.0 / 28.6
in administrative area. To sum up, there are limited growth drivers on the top line
WIG Weight (%)
Reuters
BA HA .WA
but the cost discipline may be a good catalyst.
Bloomberg
Handlowy kept costs base under control and will try to look for new one especially
We recommend to HOLD the stock with the 12M TP of 32.7 (8% above current
market) mainly due to potential dividend (we expect the bank to keep dividend
strategy, which should give PLN 2.9 this year and attractive DY of 10%).
According to our estimates the bank trades and P/E of 8 in 09E and 8.4 in 10E,
1.9
1.13
BHW PW
Pe rform ance
Abs .
vs . WIG
3M
-33%
-25%
YTD
-70%
-28%
12M
-65%
-26%
which gives slight discount comparing to domestic peers in 2009.
Share holde rs
Year
2006
2007
2008E
2009E
2010E
Total Revenues
2 379
Citibank NA
75.0%
Other
25.0%
2 303
2 513
2 518
2 464
EBIT
824
1 043
869
613
582
Net Profit
657
824
688
495
471
EPS(adj)
5.0
6.3
5.3
3.8
3.6
DPS
3.6
4.1
4.8
2.9
2.7
Analys ts
P/E
17.3
15.8
5.8
8.0
8.4
Tomasz Bursa
P/BV
2.1
2.3
0.7
0.6
0.6
38
Stak e
+ 48 22 236 92 31
Bank Handlowy S.A.
Table 31 Bank Handlowy – Financials
Bank Handlow y - P&L (PLN m )
2005
2006
2007
2008E
2009E
2010E
1 026
1 026
1 204
1 366
1 383
1 405
NF&C
599
618
737
619
549
545
608
452
506
442
473
371
Other income/loss
76
207
66
91
60
58
Total Re ve nue s
2 309
2 303
2 513
2 518
2 464
2 379
Net Provisioning
34
23
53
-153
-372
-307
-1 543
-1 502
-1 523
-1 496
-1 479
-1 490
765
802
990
1 022
985
888
EBIT
799
824
1 043
869
613
582
Pre-Tax profit
793
832
1 034
871
612
582
-177
-175
-210
-183
-116
-110
616
657
824
688
495
471
2010E
Operating Expenses
Tax
Bank Handlow y - Balance She e t (PLNm )
2005
2006
2007
2008E
2009E
Net Loans
19 725
19 516
21 205
17 573
18 338 18 988
Total As s e ts
32 916
35 991
38 908
42 825
42 118 44 621
Customer Deposits
22 485
25 037
26 896
27 857
27 027 28 758
14 231
13 755
15 049
15 399
17 445 19 908
5 265
5 418
5 603
5 714
6 861
6 985
2005
2006
2007
2008E
2009E
2010E
ROE
10.7%
12.3%
15.0%
12.2%
7.9%
6.8%
ROE(adjusted)
10.7%
12.3%
15.0%
12.2%
7.9%
6.8%
Net Interest Margin
4.3%
4.3%
5.0%
3.7%
2.5%
2.3%
Cost/Income Ratio
66.9%
65.2%
60.6%
58.6%
58.9%
61.5%
NPLs Ratio
18.0%
15.0%
12.0%
14.6%
14.3%
14.4%
Loans/Deposit Ratio
71.5%
78.0%
78.8%
63.1%
67.9%
66.0%
Total Capital Ratio
14.6%
14.1%
12.9%
12.0%
12.1%
11.9%
Valuation Ratios
2005
2006
2007
2008E
2009E
2010E
P/E
14.1
17.3
15.8
5.8
8.0
8.4
P/E adjusted
14.1
17.3
15.8
5.8
8.0
8.4
1.7
2.1
2.3
0.7
0.6
0.6
P/BV
P/BV adjusted
1.7
2.1
2.3
0.7
0.6
0.6
Dividend Y ield
18.0%
4.1%
4.1%
15.7%
9.6%
8.8%
Pe r s har e Data
2005
2006
2007
2008E
2009E
2010E
EPS
4.72
5.03
6.31
5.27
3.79
3.61
EPS adjusted
4.72
5.03
6.31
5.27
3.79
3.61
BV PS
40.3
41.5
42.9
43.7
52.5
53.5
BV PS adjusted
40.3
41.5
42.9
43.7
52.5
53.5
12.0
3.6
4.1
4.8
2.9
2.7
We expect total assets to decrease slightly by 2010. Handlowy will be focused on the
growth from existing clients base. We expect L/D ratio to stay below 70%. We expect net
loans to grow 8.8% annually in 09-10E. According to our estimates Handlowy’s ROE will
reach the level of 7.9% in 2009E and 7.2% in 2010E. Cost/Income ratio should be at 6061% level.
39
Bank Handlowy S.A.
Table 32 Bank Handlowy – Valuation
Bank Handlow y - Re s idual Incom e V aluation 2009E 2010E 2011E 2012E 2013E 2014E 2015E 2016E 2017E 2018E Te rm inal
495
471
588
694
557
525
532
611
700
688
721
5 714 6 861 6 985 7 243 7 555 7 661 7 824 8 041 8 333 8 333
Cost of Equity
11.2% 11.2% 11.2% 11.1% 11.1% 11.1% 11.1% 11.1% 11.0% 11.0%
Equity charge
640
767
780
807
840
850
867
889
920
918
-145 -296 -192 -113 -283 -325 -335 -278 -220 -231
Disount Factor
0.88
0.79
0.71
0.64
0.58
0.52
0.47
0.42
0.38
0.34
-128 -235 -137
-73 -164 -169 -157 -117
-84
-79
7.7%
9 330
11.0%
3.0%
-3 820
-1 452
Bank Handlow y - Re s idual Incom e Sum m ary
2008 Y E Book value
5 714
-1 342
-1 452
Total Equity V alue
2 920
No of Shares
131
22.3
12M Tar ge t Price
24.8
Bank Handlow y - Fundam e ntal P/BV
ROE
Cost of Equity
BV PS (Zl)
Months to Discount
Discounted V alue Per Share (Zl)
DPS (Zl)
Cost of Equity
12 M onth Targe t Pr ice (Zloty)
2009E
7.9%
11.2%
3.0%
0.6
52.5
31.2
11
28.35
2.90
7.38
35.73
Bank Handlow y - DDM V aluation
EPS (current year)
Pay-out Ratio
Cost of Equity
Months to discount
Terminal V alue
Cost of equity
3.8
3.6
4.5
5.3
4.3
4.0
4.1
4.7
5.4
5.3
5.5
55.0% 70.0% 70.0% 65.0% 65.0% 65.0% 60.0% 60.0% 60.0% 60.0%
60.0%
2.1
2.5
3.1
3.5
2.8
2.6
2.4
2.8
3.2
3.2
3.3
11.2% 11.2% 11.2% 11.1% 11.1% 11.1% 11.1% 11.1% 11.0% 11.0%
11.0%
11
23
35
47
59
71
83
95
107
119
3.0%
2.09
2.52
3.15
3.45
2.77
2.61
2.44
2.81
3.21
3.16
41.16
1.89
2.06
2.31
2.28
1.65
1.40
1.18
1.22
1.26
1.12
16.18
35.5
11.2%
39.4
40
2010E
6.8%
11.2%
3.0%
0.5
53.5
24.9
23
20.29
2.65
9.54
29.84
2011E
7.8%
11.2%
3.0%
0.6
55.4
32.3
35
23.74
2.52
11.40
35.14
11.2%
39.1
ING BSK S.A.
To be or not to be (in retail)
ING BSK seems to stay in a very comfortable position in recent times. The concept
of “saving bank” made ING the third largest deposit holder in Poland (PLN 56bn,
11.7% market share) with total L/D ratio of 53.6%. As a result the bank does not
need to fight for new deposits heavily. The major question related to ING is if the
17 February 2009
BUY – Medium Risk
12M TP PLN 397 / (Feb 13th) PLN 300
bank decides to enter retail lending segment more extensively. ING is still
significantly exposed to corporate segment, which may bring some troubles in 0910E so we think that growing exposure to consumer and PLN mortgages may a
key trigger for further growth. If ING does the “milestone step” it will transform
into universal bank, if not ING will still operate as savings bank with very low ROE.
120
110
ING BSK vs. WIG=100
ING BSK vs. WIG-Banks=100
100
90
80
70
Adjusted revenues should stay flat
60
The bank offers quite balanced revenues structure, which should be a good
support for financial performance. We expect that ING should be able to keep NIM
50
Jan- Apr06
06
Jul06
Oct- Jan- Apr06
07
07
Jul07
Oct- Jan- Apr07
08
08
Jul08
Oct- Jan08
09
thakns to re-pricing in corporate segment. NF&C structure looks balanced and is
based on fees from accounts and transfers that helps to soften volatile revenues
from mutual funds and brokerage. The most uncertain revenues are the one from
financial instruments. ING offers extremely volatile gains/losses on financial
instruments, which is a result of significant involvement in debt instruments. The
bank ensures that according to IFRS it is possible to reverse significant losses on
the financial instruments, which the company had in 4Q08 but we do not know if
Ke y Ratios
2009E
7.9%
-6.9%
(1) market environment will give the opportunity to do that, (2) how the position
2009E ROE
9.5%
will be reversed. We assumed that the company will reverse that partially during
2009E DPS
0.00
their maturity.
Share data
No support from provisioning reversals
The bank will be also significantly exposed to the increase of credit risk. ING has a
Market Cap (€m)
big exposure to corporate segment and has limited opportunities of wirte-back.
We expect cost of risk to reach PLN 272m in 09E and PLN 357m in 10E.In our view
13.0
837.9
4.7
1.0
52 W High / Low
645.0 / 262.3
needs to look for administrative savings as C/I stays at poor level of 72.4%.
WIG Weight (%)
Reuters
SLA S.WA
The major question on the investment in ING BSK is if the bank will be able to
Bloomberg
the bank will stop the territorial expansion and will increase the efficiency. It also
1.06
BSK PW
change its market strategy, enter new segments and offer higher ROE for
investors. We still believe that the bank has the capacity to expand in retail (good
deposits base and wide branch network) but the volatility of trading results are the
potential risk. According to our estimates the bank trades at P/E of 8.7 in 09E and
8.4 in 10E. We recommend to BUY the stock due to balance sheet safety reasons.
The 12M target price is PLN 397. We also expect that the company will not pay
dividend in 09E.
Year
2006
2007
2008E
2009E
2010E
Total Revenues
1 771
2 017
2 150
2 335
2 469
EBIT
713
743
572
509
530
Net Prof it
591
631
484
451
470
EPS(adj)
45.5
48.5
37.2
34.7
36.1
DPS
27.5
27.9
11.7
0.0
8.7
P/E
16.9
15.0
8.1
8.7
8.3
P/BV
2.7
2.5
0.9
0.7
0.7
Pe rform ance
Abs .
vs . WIG
3M
-25%
-15%
Y TD
-59%
-2%
12M
-52%
1%
Share holde rs
Stak e
ING Bank NV
75.0%
CU OFE
Other
5.4%
19.6%
Analys ts
Tomasz Bursa
+ 48 22 236 92 31
41
ING BSK S.A.
Table 34 ING BSK – Financials
ING BSK - P&L (PLN m )
2005
2006
2007
2008E
2009E
2010E
1 369
721
936
1 049
1 164
1 252
NF&C
528
735
931
874
798
844
413
80
29
120
279
248
Other income/loss
8
19
8
-9
7
7
Total Re ve nue s
1 671
1 771
2 017
2 150
2 335
2 469
Net Provisioning
118
166
104
-8
-272
-357
-1 109
-1 223
-1 377
-1 570
-1 554
-1 582
561
548
640
580
781
886
EBIT
679
713
743
572
509
530
Pre-Tax profit
706
753
787
624
557
580
-139
-155
-150
-140
-106
-110
549
591
631
484
451
470
2010E
Operating Expenses
Tax
Ne t Profit
ING BSK - Balance She e t (PLNm )
2005
2006
2007
2008E
2009E
Net Loans
24 909
26 382
31 563
30 007
30 369 36 888
Total As s e ts
42 127
48 476
52 011
66 745
70 722 75 643
Customer Deposits
33 689
39 963
46 312
56 029
57 741 60 892
9 868
13 448
14 078
17 362
21 011 27 541
3 549
3 756
3 839
4 202
5 333
5 690
2005
2006
2007
2008E
2009E
2010E
ROE
16.4%
16.2%
16.6%
12.0%
9.5%
8.5%
ROE(adjusted)
16.4%
16.2%
16.6%
12.0%
9.5%
8.5%
Net Interest Margin
4.0%
3.8%
3.3%
2.0%
1.6%
1.5%
Cost/Income Ratio
66.4%
69.1%
68.3%
72.4%
66.2%
63.8%
NPLs Ratio
10.0%
5.7%
3.4%
3.1%
4.3%
4.7%
Loans/Deposit Ratio
66.7%
66.0%
68.2%
53.6%
52.6%
60.6%
Total Capital Ratio
14.9%
13.6%
13.7%
12.5%
15.2%
14.9%
Valuation Ratios
2005
2006
2007
2008E
2009E
2010E
P/E
13.4
16.9
15.0
8.1
8.7
8.3
P/E adjusted
13.4
16.9
15.0
9.9
8.7
8.3
2.1
2.7
2.5
0.9
0.7
0.7
P/BV
P/BV adjusted
2.1
2.7
2.5
0.9
0.7
0.7
Dividend Y ield
3.6%
3.6%
3.8%
3.9%
0.0%
2.9%
Pe r s har e Data
2005
2006
2007
2008E
2009E
2010E
EPS
42.23
45.45
48.48
37.23
34.67
36.09
EPS adjusted
42.23
45.45
48.48
30.45
34.67
36.09
BV PS
272.8
288.7
295.1
323.0
409.9
437.4
BV PS adjusted
272.8
288.7
295.1
319.3
409.9
437.4
20.5
27.5
27.9
11.7
0.0
8.7
We expect ING’s asset to increase by 6.5% and 7% in 09-10E period. We also think that
the deposits base will grow slower than competitors as the bank does not need to
compete strongly in that segment. We expect L/D ratio to stay below 60%. In our
opinion ROE will not exceed 10% in the next 2 years.
Table 35 ING BSK – 4Q08E Results Preview
P&L (PLN m )
Operating Costs
Net Provisioning
Net Prof it
4Q07
1Q08
2Q08
3Q08
4Q08E
YoY
QoQ
468
564
619
605
370
-21%
-39%
2 009
2 158
7%
-347
-364
-385
-403
-417
20%
4%
-1 379
-1 570
14%
YoY
5
0
59
-7
-58
-1338%
709%
105
-8
-107%
97
174
234
167
-90
-192%
-154%
631
484
-23%
42
12M 07 12M 08E
ING BSK S.A.
Table 36 ING BSK – Valuation
ING BSK - Re s idual Incom e Valuation
Cost of Equity
Equity charge
Disount Factor
2009E 2010E 2011E 2012E 2013E 2014E
451
470
651
893 1 058 1 157
4 202 5 333 5 690 6 224 6 678 7 193
11.2% 11.2% 11.2% 11.1% 11.1% 11.1%
471
596
635
693
743
798
-19 -127
16
199
316
358
0.86
0.77
0.70
0.63
0.56
0.51
-17
-98
11
125
178
181
2015E
1 295
7 918
11.1%
877
418
0.46
191
2016E
1 260
8 307
11.1%
919
341
0.41
140
2017E
1 339
9 426
11.0%
1 041
299
0.37
111
2018E Te rm inal
1 400
1 379
10 148
11.0%
1 118
282
0.33
94
13.0%
10 573
0.11
0.03
2 704
1 000
ING BSK - Re s idual Incom e Sum m ary
2008 Y E Book value
Total Equity V alue
No of Shares
12M Tar ge t Price
4 202
916
1 000
6 117
13
470.2
522.9
ING BSK - Fundam e ntal P/BV
ROE
Cost of Equity
BV PS (Zl)
Months to Discount
DPS (Zl)
Cost of Equity
2009E
9.5%
11.2%
3.0%
0.8
409.9
323.1
11
293.11
0.00
11.70
304.81
2010E
8.5%
11.2%
3.0%
0.7
437.4
295.1
23
240.86
8.67
18.77
259.64
2011E
14.5%
11.2%
3.0%
1.4
478.4
674.6
35
495.48
9.02
25.40
520.89
11.2%
579.2
ING BSK - DDM V aluation
EPS (current year)
Pay-out Ratio
Cost of Equity
Months to discount
Terminal V alue
Cost of equity
34.7
36.1
50.0
68.6
81.3
88.9
99.6
96.9 103.0 107.6
106.0
25.0% 25.0% 30.0% 35.0% 40.0% 40.0% 40.0% 40.0% 40.0% 40.0%
40.0%
8.7
9.0
15.0
24.0
32.5
35.6
39.8
38.7
41.2
43.1
42.4
11.2% 11.2% 11.2% 11.1% 11.1% 11.1% 11.1% 11.1% 11.0% 11.0%
11.0%
11
23
35
47
59
71
83
95
107
119
3.0%
8.67
9.02 15.01 24.01 32.53 35.56 39.83 38.74 41.18 43.06
527.59
7.86
7.36 11.02 15.88 19.37 19.08 19.25 16.89 16.19 15.27
207.38
355.6
11.2%
395.4
43
Kredyt Bank S.A.
The last in the race
In the last few years Kredyt Bank has increased its exposure towards mortgage
lending. The bank was successful in that area and in the end of 2008 it had 6% of
the market share and PLN 12.8 bn of the mortgage portfolio value. However the
mortgage business will have troubles in 09-10E and in our view the bank may
17 February 2009
SELL – High Risk
12M TP PLN 4.9 / (Feb 13th) PLN 5.64
have significant problems to increase the revenues. As KB still needs to work on
cost base (however some good trends were visible in 4Q08) and will face
significant increase in costs of risk we are very pessimistic on its financial
130
120
Kredyt Bank vs. WIG=100
Kredyt Bank vs. WIG-Banks=100
110
performance, especially in 09E.
100
90
How to replace mortgage?
80
70
The bank should still remain a strong player in mortgage segment, however it will
focus primarily on PLN products. We estimate that the bank will lose a significant
part of FX revenues (as a consequence of lower CHF loans sale). We also do not
60
50
Jan- Apr06
06
Jul06
Oct- Jan- Apr06
07
07
Jul07
Oct- Jan- Apr07
08
08
Jul08
Oct- Jan08
09
expect that the bank will be able to increase its position in total lending – the bank
is exposed mostly to mortgages and corporate loans – two segments that will
suffer the most in 09-10E.
Ke y Ratios
Question on funding
2009E
We are also worried about KB’s funding structure. The bank has a very little
“deposits power” (especially in retail) that limits growth opportunities and does
-1.7%
-57.5%
2009E ROE
5.0%
2009E DPS
0.00
not support very unfavorable L/D ratio of 110%. The solvency ratio stays at just
8.8% level. KB is quite successful in corporate deposits but in the coming years
Share data
we would not expect enterprises to bring significant amont of money.We would
271.7
also point out that the majority of revenues comes from NII and FX, which are
Market Cap (€m)
328.9
significantly exposed to mortgage and corporate segment.
53.2
Costs still the problem
Operating costs level is still a major issue in KB. In 4Q08 some improvement was
visible, but C/I is still much higher at Polish peers. In times of revenues
decceleration we would not expect it to improve. The bank should look for savings
0.4
52 W High / Low
23.0 / 5.4
WIG Weight (%)
Reuters
BKRE.WA
0.25
Bloomberg
KRB PW
and find internal ways to increase the efficiency from existing sales network. In
Pe rform ance
Abs .
3M
-45%
-38%
The bank trades significantly above Polish pears (P/E of 11.1x in 09E and 9.6x in
YTD
-76%
-43%
10E). Kredyt Bank presents very low costs efficiency and ROE below costs of
12M
-75%
-48%
our opinion costs control would be a major issue in the coming years.
vs . WIG
capital. We would also highlight growing risk of balance structure (slow deposits
collection, dependence on mothers’ company deposits) and low solvency ratio. As
Share holde rs
Stak e
there is a significant risk that revenues base will shrink and costs base will stay,
KBC Bank NV
75.0%
we we recommend to SELL the stock with 12M TP of 4.9
Sof ina
PPIM
Other
5.5%
5.0%
14.4%
Year
2006
2007
2008E
2009E
2010E
Total Revenues
1 370
1 445
1 641
1 580
1 631
EBIT
459
500
423
171
198
Net Prof it
468
391
325
138
160
EPS(adj)
1.2
1.4
1.2
0.5
0.6
DPS
0.2
0.4
0.5
0.0
0.0
P/E
12.2
16.3
4.7
11.1
9.6
P/BV
2.7
44
2.8
0.6
0.5
0.5
Analys ts
Tomasz Bursa
+ 48 22 236 92 31
Kredyt Bank S.A.
Table 38 Kredyt Bank – Financials
Kre dyt Bank - P&L (PLN m )
2005
2006
2007
2008E
2009E
2010E
753
780
871
1 060
1 139
1 147
NF&C
315
270
310
293
261
295
141
302
236
238
164
181
Other income/loss
11
18
28
50
16
8
Total Re ve nue s
1 220
1 370
1 445
1 641
1 580
1 631
Net Provisioning
-9
19
30
-113
-329
-350
Operating Expenses
-891
-930
-975
-1 105
-1 079
-1 083
329
440
470
536
501
548
EBIT
320
459
500
423
171
198
Pre-Tax prof it
321
461
502
421
171
197
94
7
-111
-96
-32
-37
Ne t Pr ofit
416
468
391
325
138
160
Net A ttributable Profit
416
336
391
325
138
160
Tax
Kre dyt Bank Balance She e t (PLN m )
2005
2006
2007
2008E
2009E
2010E
Net Loans
17 187
14 850
19 913
28 002
29 015
30 732
Total As s e ts
20 841
22 232
27 128
38 731
41 252
43 203
Customer Deposits
17 096
17 972
22 390
32 400
27 709
29 959
12 066
14 473
21 248
24 544
32 775
33 515
1 682
2 092
2 276
2 646
2 907
3 066
2005
2006
2007
2008E
2009E
2010E
ROE
26.5%
24.8%
17.9%
13.2%
5.0%
5.3%
ROE(adjusted)
26.5%
17.8%
17.9%
13.2%
5.0%
5.3%
Net Interest Margin
3.7%
3.8%
3.6%
3.3%
2.9%
2.8%
Cost/Income Ratio
69.9%
65.7%
65.0%
65.4%
65.4%
63.6%
NPLs Ratio
28.9%
13.5%
6.6%
4.9%
6.7%
6.6%
Loans/Deposit Ratio
85.0%
82.6%
88.9%
86.4%
104.7%
102.6%
Total Capital Ratio
16.4%
13.6%
9.7%
8.8%
10.3%
10.6%
Valuation Ratios
2005
2006
2007
2008E
2009E
2010E
P/E
9.2
12.2
16.3
4.7
11.1
9.6
P/E adjusted
9.2
17.0
16.3
4.7
11.1
9.6
P/BV
2.3
2.7
2.8
0.6
0.5
0.5
P/BV adjusted
2.3
3.1
2.8
0.6
0.5
0.5
Dividend Yield
0.0%
1.0%
1.6%
9.2%
0.0%
0.0%
Pe r s har e Data
2005
2006
2007
2008E
2009E
2010E
EPS
1.53
1.72
1.44
1.20
0.51
0.59
EPS adjusted
1.53
1.24
1.44
1.20
0.51
0.59
BVPS
6.2
7.7
8.4
9.7
10.7
11.3
BVPS adjusted
6.2
7.2
8.4
9.7
10.7
11.3
0.0
0.2
0.4
0.5
0.0
0.0
We expect total assets to increase by 11.6% by 2010. Kredyt Bank will be focused on the
growth from existing clients base but we do not expect it will be able to acquire
significant deposits. In our view L/D ratio will stay above 100%. We expect net loans to
grow 4.7% annually in 09-10E. According to our estimates KB’s ROE will reach the level
of 5% in 2009E and 5.6% in 2010E. Cost/Income ratio should be above 60% level.
45
Kredyt Bank S.A.
Table 39 Kredyt Bank – Valuation
Kre dyt Bank - Re s idual Incom e V aluation
Cost of Equity
Equity charge
Discount Factor
138
160
262
366
330
335
373
407
440
538
454
2 646 2 907 3 066 3 328 3 695 4 024 4 286 4 593 4 933 5 298
10.3% 10.9% 11.7% 10.4% 9.9% 9.6% 10.0% 9.9% 9.9% 10.1%
272
316
358
348
366
387
430
454
490
533
-134 -156
-96
19
-37
-52
-57
-48
-50
5
0.91
0.82
0.73
0.66
0.60
0.55
0.50
0.46
0.41
0.38
-121 -128
-70
12
-22
-29
-29
-22
-21
2
8.1%
6 653
0.100513
0.03
-3 050
-1 148
Kr e dyt Bank - Re s idual Incom e Sum m ar y
2007 Y E Book value
2 646
-427
-1 148
Total Equity V alue
1 072
No of Shares
272
3.9
12M Tar ge t Price
4.4
Kre dyt Bank - Fundam e ntal P/BV
ROE
Cost of Equity
BV PS (Zl)
Months to Discount
DPS (Zl)
Cost of Equity
2009E 2010E 2011E
5.0% 5.3% 8.9%
10.3% 10.9% 11.7%
3.0% 3.0% 3.0%
0.3
0.3
0.7
10.7
11.3
12.3
2.9
3.4
8.3
11
23
35
2.66
2.76
6.05
0.00
0.00
0.00
0.00
0.00
0.00
2.66
2.76
6.05
10.3%
6.8
Kre dyt Bank - DDM V aluation
EPS (current year)
Pay-out Ratio
Cost of Equity
Months to discount
Terminal V alue
Cost of equity
0.5
0.6
1.0
1.3
1.2
1.2
1.4
1.5
1.6
1.7
1.7
0.0% 0.0% 0.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0% 20.0%
20.0%
0.0
0.0
0.0
0.3
0.2
0.2
0.3
0.3
0.3
0.3
0.3
10.3% 10.9% 11.7% 10.4% 9.9% 9.6% 10.0% 9.9% 9.9% 0.0%
9.9%
11
23
35
47
59
71
83
95
107
0
0.03
0.00
0.00
0.00
0.27
0.24
0.25
0.27
0.30
0.32
4.81
4.81
0.00
0.00
0.00
0.18
0.15
0.14
0.14
0.14
0.14
2.07
2.1
3.1
0.1181
3.5
46
Pekao S.A.
Waiting for synergies
After the merger with BPH, Pekao still cannot switch to the 2nd gear. Of course,
the bank is one of the most efficient in Polish banking system and it is also safe in
terms funding structure. However a year after the merger we did not see
significant revenues and cost synergies. The bank is still conservative in lending
17 February 2009
HOLD – Low Risk
12M TP PLN 102.7 / (Feb 13th) PLN 93.6
and exposed to corporate segment strongly. In coming years Pekao will have to
deal with loss of the market share in corporate segment and growing competition
pressure. The bank will also have to rethink its strategy in retail segment so as to
utilize benefits from large branches network and high lending capacity.
110
105
Pekao vs. WIG=100
Pekao vs.WIG-Banks=100
100
95
90
85
Lending conservatism supports L/D
80
75
We expect that the bank will remain conservative and it will focus primarily on
70
corporate competences development. Good funding structure (total L/D of 82%
60
Jan- Apr06
06
and low dependence on mother’s company funding) allows Pekao to avoid tough
65
Jul06
Oct- Jan- Apr06
07
07
Jul07
Oct- Jan- Apr07
08
08
Jul08
Oct- Jan08
09
fight for deposits. Pekao will be still out of mortgage market and has a small
exposure to consumer lending.
The major threat for Pekao SA in the coming years will be provisioning level. The
bank was involved in FX options deals and it will also suffer from deterioration of
corporate portfolio quality. In our opinion the bank will report provisions of PLN
508m in 09E and PLN 550m in 10E.
According to our expectations Pekao will report banking revenues decline in 09E
Ke y Ratios
2009E
-3.4%
-16.1%
2009E ROE
16.3%
2009E DPS
0.00
(on adjusted basis) driven by very little growth in corporate business, and strong
negative pressure on NF&C (lower mutual funds revenues will hit Pekao strongly)
Share data
and FX revenues. In 10-11E we expect the recovery due to the improvement in
261.9
corporate lending. In our view the bank will be able to keep relatively high NIM as
Market Cap (€m)
5265
it has strong funding but the slight decrease may come from interest rates cut.
393
29.1
Traditionally trades with a premium
52 W High / Low
209.5 / 93.0
Pekao SA trades at P/E 9.5 in 09E, and 9.4 in 10E. It implies premium to other
WIG Weight (%)
Reuters
BA PE.WA
Polish banks. Although Pekao is more expensive and offers lower business
development opportunities we recommend to HOLD the stock within 12M time,
due to its safe position, cost discipline, high ROE and CAR ratio. However net profit
should stay below PLN 3 bn by 2010E. In short term perspective we believe Pekao
to perform better than smaller banks but we are pessimistic on the long term
growth potential.
Year
2006
Bloomberg
2007
2008E
2009E
2010E
PEO PW
Pe rform ance
Abs .
vs . WIG
3M
-16%
-5%
Y TD
-59%
-3%
12M
-53%
0%
Share holde rs
10.34
Stak e
UniCredito Italiano
59.3%
Other
40.7%
Total Revenues
4 658
8 314
8 296
7 518
7 749
EBIT
2 089
4 189
4 260
3 106
3 128
Net Profit
1 768
3 547
3 498
2 588
2 607
EPS(adj)
10.6
13.0
11.8
9.9
10.0
DPS
7.4
9.0
9.6
0.0
4.9
Analys ts
P/E
P/BV
21.4
4.3
16.8
4.1
7.0
1.6
9.5
1.5
9.4
1.3
Tomasz Bursa
+ 48 22 236 92 31
47
Pekao S.A.
Table 41 Pekao – Financials
Pe k ao SA - P&L (PLN m )
2005
2006
2007
2008E
2009E
2010E
2 350
2 379
4 323
4 592
4 638
4 858
NF&C
1 587
1 856
2 932
2 326
2 142
2 218
405
380
867
677
556
550
Other income/loss
71
43
193
701
182
123
Total Re ve nue s
4 413
4 658
8 314
8 296
7 518
7 749
Net Provisioning
Operating Expenses
-237
-2 346
-222
-2 347
-320
-3 805
-232
-3 804
-708
-3 705
-944
-3 677
2 067
2 311
4 510
4 492
3 813
4 072
EBIT
1 829
2 089
4 189
4 260
3 106
3 128
Pre-Tax prof it
1 874
2 179
4 360
4 373
3 188
3 211
-339
-409
-800
-861
-590
-594
Ne t Profit
1 538
1 768
3 547
3 498
2 588
2 607
Net A ttributable Prof it
1 538
1 768
3 402
3 085
2 588
2 607
Tax
Pe k ao SA - Balance She e t (PLN m )
2005
2006
2007
2008E
2009E
2010E
Net Loans
35 190
42 291
83 618
86 669
88 878
96 745
Total As s e ts
61 972
67 704
124 096
128 235
125 744
132 199
Customer Deposits
48 845
53 804
98 400
104 326
100 030
101 837
25 081
38 265
90 872
94 282
92 643
97 933
8 423
8 893
14 747
15 895
15 970
18 591
2005
2006
2007
2008E
2009E
2010E
ROE
18.7%
20.5%
30.1%
23.0%
16.3%
15.2%
ROE(adjusted)
15.2%
18.7%
20.5%
30.1%
23.0%
16.3%
Net Interest Margin
4.3%
4.1%
5.0%
4.0%
4.0%
4.1%
Cost/Income Ratio
53.2%
50.4%
45.8%
45.3%
47.7%
46.6%
NPLs Ratio
16.2%
11.8%
7.8%
7.7%
8.4%
8.7%
Loans/Deposit Ratio
72.0%
78.6%
85.0%
83.1%
88.9%
95.0%
Total Capital Ratio
11.1%
10.4%
10.2%
13.0%
15.3%
18.0%
Valuation Ratios
2005
2006
2007
2008E
2009E
2010E
P/E
18.9
21.4
16.8
7.0
9.5
9.4
P/E adjusted
18.9
21.4
17.5
7.9
9.5
9.4
3.5
4.3
4.1
1.6
1.5
1.3
P/BV
P/BV adjusted
3.5
4.3
4.1
1.6
1.5
1.3
Dividend Y ield
3.7%
3.3%
4.0%
10.3%
0.0%
5.3%
Pe r s hare Data
2005
2006
2007
2008E
2009E
2010E
EPS
9.24
10.60
13.55
13.36
9.88
9.95
EPS adjusted
9.24
10.60
12.99
11.78
9.88
9.95
BV PS
50.5
53.2
56.0
60.4
60.7
70.6
BV PS adjusted
DPS
50.5
6.4
53.2
7.4
56.0
9.0
59.1
9.6
60.7
0.0
70.6
4.9
We expect total assets to increase from PLN 128bn last year to PLN 132bn bn in 2010E
The bank will be focused mainly on existing clients base and will keep L/D ratio at 9095%. We expect net loans to increase 5.7% annually, while deposits are expected to
decline.
According to our estimates Pekao ROE will reach the level of 23% in 2008E
decreasing to 16.7% in 2010E. Cost/Income ratio should come 47.7% in 2009E and
46.6% in 2010E.
Table 42 Pekao – 4Q08E Results Preview
P&L (PLN m )
4Q07
1Q08
2Q08
3Q08
4Q08E
YoY
QoQ
1 502
1 841
2 006
1 861
1 886
26%
1%
12M 07 12M 08E
5 299
7 594
43%
Operating Costs
-862
-929
-964
-945
-965
12%
2%
-2 747
-3 804
38%
Net Provisioning
-45
-50
-72
-38
-73
63%
93%
-177
-232
31%
Net Prof it
565
1 138
830
841
690
22%
-18%
2 161
3 498
62%
Source: Company, IPOPEMA estimate, 12M07 does not include acquired part of BPH
48
YoY
Pekao S.A.
Table 43 Pekao – Valuation
Pe k ao - Re s idual Incom e V aluation
Cost of Equity
Equity charge
Discount Factor
2009E
2 588
15 808
11.2%
1 771
818
0.99
810
2010E
2 607
15 882
11.2%
1 776
831
0.89
741
2011E
3 070
18 489
11.2%
2 063
1 007
0.80
807
2012E
3 593
20 265
11.1%
2 258
1 336
0.72
963
2013E
3 480
22 294
11.1%
2 479
1 001
0.65
650
2014E
3 828
23 625
11.1%
2 622
1 206
0.58
705
2015E
4 292
24 758
11.1%
2 743
1 549
0.53
815
2016E
4 762
26 441
11.1%
2 924
1 837
0.47
870
2017E
4 546
28 331
11.0%
3 128
1 418
0.43
605
2018E Te rm inal
4 918
4 682
29 658
11.0%
3 268
1 649
0.38
634
16.1%
28 191
0.1102
0.03
19 648
8 380
Pe k ao - Re s idual Incom e Sum m ary
2008 Y E Book value
15 808
7 599
8 380
Total Equity V alue
31 787
No of Shares
262
121.4
12M Tar ge t Price
135.0
Pe k ao SA - Fundam e ntal P/BV
ROE
Cost of Equity
BV PS (Zl)
Months to Discount
DPS (Zl)
Cost of Equity
2009E
16.3%
11.2%
3.0%
1.6
60.7
98.6
11
89.48
0.00
9.60
99.08
2010E
15.2%
11.2%
3.0%
1.5
70.6
105.0
23
85.72
4.94
13.63
99.36
2011E
15.8%
11.2%
3.0%
1.6
77.4
121.8
35
89.47
5.97
18.02
107.49
12.0%
111.3
Pe k ao - DDM V aluation
EPS
Pay-out Ratio
Cost of Equity
Months to discount
Terminal V alue
Cost of equity
9.9
10.0
11.7
13.7
13.3
14.6
16.4
18.2
17.4
18.8
17.9
0.5 60.0% 70.0% 75.0% 75.0% 75.0% 75.0% 75.0% 75.0% 75.0%
75.0%
5
6.0
8.2
10.3
10.0
11.0
12.3
13.6
13.0
14.1
13.4
11.2% 11.2% 11.2% 11.1% 11.1% 11.1% 11.1% 11.1% 11.0% 11.0%
11.0%
11
23
35
47
59
71
83
95
107
119
0.03
4.9
5.97
8.21 10.29
9.97 10.96 12.29 13.64 13.02 14.08
166.80
4.5
4.87
6.03
6.80
5.93
5.88
5.94
5.94
5.12
5.00
65.57
121.6
0.112
135.2
49
PKO BP S.A.
The bigger the stronger
We expect PKO BP to be a “safe heaven” during recent turmoil in the banking
sector. The bank is exposed mostly to retail business, which in our view looks
much safer and gives some additional capacity for cross-sale actions. Of course we
see some potential threats of the bank’s exposure to mortgage segment (the bank
17 February 2009
BUY – Medium Risk
12M TP PLN 32 / (Feb 13th) PLN 25.1
is the market leader, with 30% share in volumes). However we still believe in
PKO’s “brand power” and the bank should be the most successful in attracting
clients to PLN mortgages. PKO should also show a strong actions in consumer
170
PKO BP vs. WIG=100
160
PKO BP vs.WIG-Banks=100
150
finance coming from 6m clients’ base and the largest branch network in Poland.
140
130
Cost reduction to be a strong catalyst
120
110
In the next 3 years the bank will continue the employment reduction program
(1.7ths in 09E, according to our estimates the bank will reduce the employment to
25ths in 11-12E). That should give significant annual savings of PLN 120-140m in
100
90
Jan- Apr06
06
Jul06
Oct- Jan- Apr06
07
07
Jul07
Oct- Jan- Apr07
08
08
Jul08
Oct- Jan08
09
09E. Employment reduction of 5 ths employees gives PLN 400m of annual savings.
It means that PKO BP can absorb the administrative costs growth. We expect
costs to decrease by 0.5% in 09E and to stay flat in 09-11E period.
The winner on the deposits war
PKO BP continues to show its power in deposits collection. The bank was very
successful during the “deposits war” and acquired PLN 13.1bn deposits (of which
Ke y Ratios
65% came from external sources). That shows that PKO has still the strongest
2009E
position in the deposits segment and managed to improve the lending capacity
(L/D ratio is expected to stay at 93% level). In our view the bank will not have
2009E ROE
18.5%
funding problems to keep the lending action growth at the level of 10% annually.
2009E DPS
0.00
Margin pressure may come from decreasing interest rates. As the bank offers
Share data
relatively lower interests it has limited space to keep deposits spread. We expect
1000
NIM of decrease to 4.7% in 09E and 4.5% in 10E so the bank needs to increase
Market Cap (€m)
5389
volumes to maintain NII growth.
1724
-3.9%
-17.5%
28.3
Consumer lending hits provisioning
52 W High / Low
52.5 / 22.8
The provisioning increase will surely hit PKO BP in 09-10E. We estimate NPLs ratio
WIG Weight (%)
Reuters
PKOB.WA
to increase slightly in 09E and 10E, which gives net provisioning of PLN 1.2bn and
9.22
Bloomberg
PKO PW
PLN 1.4bn, respectively (on the back of provisions on consumer portfolio risk).
We recommend to BUY the stock. According to our estimates PKO BP trades with a
Pe rform ance
slight premium to Polish peers, however it offers safety, good costs discipline,
3M
-15%
-4%
ability to attract deposits. It also offers an option for further growth, especially in
Y TD
-52%
13%
12M
-46%
15%
retail segment. We set the 12M TP of 32, which implies 27 % growth potential.
Year
2006
2007
2008E
2009E
2010E
Stak e
Ministry of State Treasury
51.5%
Other
48.5%
6 518
7 744
9 458
9 095
9 597
EBIT
2 705
3 605
4 374
3 548
3 847
Net Profit
2 149
2 904
3 500
2 886
3 130
EPS(adj)
2.1
2.9
3.5
2.9
3.1
DPS
0.8
1.0
1.1
0.0
0.6
Analys ts
P/E
P/BV
21.9
4.7
18.1
4.4
7.2
1.7
8.7
1.5
8.0
1.3
Tomasz Bursa
50
vs . WIG
Share holde rs
Total Revenues
Abs .
+ 48 22 236 92 31
PKO BP S.A.
Table 45 PKO BP – Financials
PKO BP - P&L (PLN m )
2005
2006
2007
2008E
2009E
2010E
3 544
3 832
4 644
6 190
6 217
6 424
NF&C
1 218
1 866
2 335
2 341
2 043
2 298
937
508
468
675
591
662
Other income/loss
767
312
297
253
244
213
6 466
-161
-4 161
6 518
-1
-3 812
7 744
-57
-4 083
9 458
-800
-4 284
9 095
-1 284
-4 263
9 597
-1 475
-4 274
Total Re ve nue s
Net Provisioning
Operating Expenses
2 305
2 706
3 662
5 175
4 832
5 323
EBIT
2 144
2 705
3 605
4 374
3 548
3 847
Pre-Tax profit
2 167
2 701
3 609
4 397
3 566
3 867
-411
-494
-668
-872
-660
-715
1 735
2 149
2 904
3 500
2 886
3 130
Tax
PKO - BP Balance She e t (PLN m )
2005
2006
2007
2008E
2009E
2010E
Net Loans
59 538
72 337
81 709
106 731
113 379
124 597
Total As s e ts
91 613
102 026
108 569
135 562
143 564
154 028
Customer Deposits
78 831
87 859
91 314
111 953
120 695
123 892
Risk Weighted Assets
42 695
56 390
75 799
96 990
104 089
113 271
8 775
10 181
11 979
14 524
16 818
19 376
2005
2006
2007
2008E
2009E
2010E
ROE
20.7%
22.9%
26.4%
26.5%
18.5%
17.4%
ROE(adjusted)
17.4%
20.7%
22.9%
26.4%
26.5%
18.5%
Net Interest Margin
4.1%
4.1%
4.6%
5.3%
4.7%
4.5%
Cost/Income Ratio
64.4%
58.5%
52.7%
43.1%
44.8%
42.6%
NPLs Ratio
6.3%
4.4%
3.7%
4.1%
5.1%
5.6%
Loans/Deposit Ratio
75.5%
82.3%
89.5%
95.3%
93.9%
100.6%
Total Capital Ratio
13.9%
12.0%
11.8%
11.3%
13.3%
14.3%
Valuation Ratios
2005
2006
2007
2008E
2009E
2010E
P/E
16.7
21.9
18.1
7.2
8.7
8.0
P/E adjusted
16.7
21.9
18.1
7.2
8.7
8.0
P/BV
3.3
4.7
4.4
1.7
1.5
1.3
P/BV adjusted
3.3
4.7
4.4
1.7
1.5
1.3
Dividend Y ield
3.4%
1.7%
1.9%
4.3%
0.0%
2.3%
Pe r s har e Data
2005
2006
2007
2008E
2009E
2010E
EPS
1.73
2.15
2.90
3.50
2.89
3.13
EPS adjusted
1.73
2.15
2.90
3.50
2.89
3.13
BV PS
8.7
10.1
11.9
14.5
16.7
19.3
BV PS adjusted
DPS
8.7
1.0
10.1
0.8
11.9
1.0
14.5
1.1
16.7
0.0
19.3
0.6
We expect total assets to increase from PLN 135bn last year to PLN 154bn bn in 2010E
(CAGR of +6.6% annually). The bank will be strong in deposits action growth and should
be able to keep L/D ratio below 100%. We expect net loans to increase 7.8% annually,
while deposits should grow at the rate of 4.8%. According to our estimates PKO BP ROE
will reach the level of 26.5% in 2008E decreasing to 18.9% in 2010E. Cost/Income ratio
should come to 44.8% in 2009E and 42.6% in 2010E.
Table 46 PKO BP – 4Q08E Results Preview
P&L (PLN m )
4Q07
1Q08
2Q08
3Q08
4Q08E
YoY
QoQ
2 054
2 098
2 306
2 345
2 457
5%
20%
7 419
9 206
Operating Costs
-1 191
-948
-1 062
-1 047
-1 227
17%
3%
-3 989
-4 284
7%
Net Provisioning
81
-27
-150
-251
-372
48%
-562%
-57
-800
1313%
875
951
897
904
747
-17%
-15%
2 904
3 500
21%
Net Prof it
12M 07 12M 08E
YoY
24%
51
PKO BP S.A.
Table 47 PKO BP – Valuation
PKO BP - Re s idual Incom e V aluation
Cost of Equity
Equity charge
Discount Factor
2009E
2 886
16 736
11.2%
1 874
1 011
0.99
1 002
2011E
4 297
22 901
11.2%
2 556
1 742
0.80
1 396
2012E
5 056
27 859
11.1%
3 103
1 953
0.72
1 408
2013E
5 381
31 789
11.1%
3 535
1 846
0.65
1 199
2014E
5 876
35 586
11.1%
3 950
1 925
0.58
1 125
2015E
6 357
39 047
11.1%
4 326
2 030
0.53
1 068
2016E
6 943
43 207
11.1%
4 779
2 164
0.47
1 025
2017E
7 273
47 261
11.0%
5 218
2 055
0.43
877
2018E Te rm inal
7 724
7 491
51 491
11.0%
5 674
2 050
0.38
788
17.7%
42 250
0.11
0.03
35 544
15 160
PKO BP - Re s idual Incom e Sum m ar y
2008 Y E Book value
Total Equity V alue
No of Shares
12M Tar ge t Price
14 453
11 748
15 160
41 362
1 000
41.4
46.0
PKO BP - Fundam e ntal P/BV
ROE
Cost of Equity
BV PS (Zl)
Months to Discount
DPS (Zl)
Cost of Equity
2009E
18.5%
11.2%
3.0%
1.9
16.7
31.6
11
28.71
0.00
1.09
29.80
PKO BP - DDM V aluation
EPS (current year)
Pay-out Ratio
Cost of Equity
Months to discount
Terminal V alue
Cost of equity
2.9
3.1
4.3
5.1
5.4
5.9
6.4
6.9
7.3
7.7
8.0
20.0% 20.0% 30.0% 40.0% 50.0% 50.0% 50.0% 50.0% 50.0% 50.0%
50.0%
0.6
0.6
1.3
2.0
2.7
2.9
3.2
3.5
3.6
3.9
4.0
11.2% 11.2% 11.2% 11.1% 11.1% 11.1% 11.1% 11.1% 11.0% 11.0%
11.0%
11
23
35
47
59
71
83
95
107
119
0.03
0.58
0.63
1.29
2.02
2.69
2.94
3.18
3.47
3.64
3.86
49.48
0.52
0.51
0.95
1.34
1.60
1.58
1.54
1.51
1.43
1.37
19.4
32
0.112
35.4
52
2010E
3 130
19 282
11.2%
2 156
974
0.89
868
2010E
17.4%
11.2%
3.0%
1.8
19.3
33.9
23
27.66
0.58
1.56
29.22
2011E
20.4%
11.2%
3.0%
2.1
22.9
48.8
35
35.82
0.63
2.02
37.84
11.2%
32.5
Chemicals
Chemicals
We recommend staying with cash
Out of our chemicals coverage for 2009 we would recommend staying with cash
companies, ZA Pulawy and ZA Tarnow, which trade at 40% and 20% premium over cash.
In our opinion it is worth to hold both Police and Ciech. As from the business perspective,
it looks that the expected drop in volumes, margins is already reflected in price.
However, we advise caution due to the relatively high currency options exposure in both
companies, as well as high indebtedness in Ciech. As far as Synthos is concerned, we
recommend selling the stock, due to the Company’s exposure to autos and construction
industry, as well as high EUR denominated debt.
From the business perspective, based on the 1Q05-3Q08 data, the greater stability of the
margins is presented by Ciech and it relates to gross margin as well as profit on sales
margins. Then, there are fertilizers and at the end rubbers. However, historically, Police
underperformed other Polish chemicals and only thanks to fertilizers boom in 07/08
managed to increased its margins significantly.
Chart 29 Margins
Gross profit margin history
Profit on sales margin
30%
36%
27%
30%
24%
21%
24%
18%
15%
18%
12%
9%
12%
6%
6%
3%
0%
0%
-3%
-6%
-9%
Ciech
Synthos
ZA Tarnow
ZA Pulawy
Ciech
ZCh Police
Synthos
ZA Tarnow
ZA Pulawy
ZCh Police
Below we present the summary of the average margins for the analysed companies
(Pulawy 3Q05-3Q08 data; Police, Synthos, Ciech – 1Q05-3Q08 and ZAT – 1Q07-3Q08)
Chart 30 Margins comparison
25%
23%
20%
18%
15%
13%
10%
8%
5%
3%
0%
23.0%
21.6%
18.3%
15.3%
13.8%
11.3%
8.0%
Ciech
7.3%
Pulawy
ZA Tarnow
Gross margin
6.6%
Synthos
6.7%
Police
Profit on sales margin
Chemicals coverage summary
The median P/E for 2009 is ca.7.8 (we assumed Pulawy data for 2009E according to our
forecasts for 2008/09 period) and slight decrease for 2010 to 8.3x. Our two BUY
53
Chemicals
recommendations are at and slightly below the median, whereas Synthos (SELL
recommendation) is clearly the most expensive from the Polish chemicals. On the
EV/EBITDA ratios, high cash balance in Pulawy and ZA Tarnow bring this ratio below 1.
Last Price
Market Cap
(EUR m )
P/E
2009E
2010E
EV/EBITDA
2009E 2010E
Pulaw y
PLN 48.5
199.6
5.3
8.3
1.0
1.0
Ciech
PLN 22.7
136.9
5.4
6.0
4.1
4.1
Synthos
PLN 0.46
131.1
11.0
11.4
3.7
3.8
Police
PLN 5.2
84.0
8.7
8.3
2.3
2.3
Tarnow
PLN 7.9
66.5
7.8
7.8
7.4
8.3
0.2
2.3
-0.1
2.3
Median
Chemicals multiples – in general cheaper than foreign ones
Below we present the multiples analysis for our chemicals coverage. We took into
account P/E, EV/EBITDA and EV/Sales for 2009 and 2010. Although there are some
minor divergences, we could say that in general the Polish chemicals are traded with a
discount to its foreign peers at the EV/EBITDA ratios, whereas P/E gives mixed results.
P/E
2009E
EV/EBITDA
EV/SALES
2010E
2009E
2010E
2009E
2010E
Pulaw y - prem ium /(discount) to
- median to domestic chemicals
-32%
0%
-57%
-54%
-66%
-117%
- median to foreign peers
-29%
27%
-82%
-80%
-93%
-104%
-31%
-28%
74%
81%
122%
80%
-44%
-29%
-31%
-20%
-54%
-59%
41%
38%
59%
66%
37%
22%
14%
29%
-19%
-9%
-30%
-30%
Ciech - prem ium /(discount) to
Synthos - prem ium /(discount) to
Police - prem ium /(discount) to
12%
0%
0%
0%
-16%
-12%
16%
27%
-58%
-57%
-83%
-79%
0%
4%
-11%
13%
-93%
-97%
-104%
-102%
0%
-79%
0%
-77%
Tarnow - prem ium /(discount) to
Source: Companies, Bloomberg, IPOPEMA estimates
54
Chemicals
Table 48 Multiples based implied share price
P/E
2009E
2010E
EV/EBITDA
2009E
2010E
EV/SALES
2009E
2010E
ZA Pulaw y - im plied share price
- at median to domestic chemicals
71.5
48.5
77.2
63.9
50.0
63.3
- at median to foreign peers
68.7
38.2
147.2
101.2
137.5
154.5
32.7
31.4
na
na
na
na
40.8
32.0
54.4
40.3
85.6
88.4
0.33
0.33
0.22
0.20
0.15
0.17
0.40
0.36
0.61
0.53
0.48
0.44
Ciech - im plied share price
Synthos - im plied share price
ZCh Police - im plied share price
4.7
5.2
5.7
5.6
8.4
8.5
ZA Tarnow - im plied share price
4.5
4.1
10.2
9.8
30.8
28.7
7.9
7.6
8.9
7.0
14.8
25.2
15.7
25.5
13.2
35.9
14.3
34.3
Source: Companies, Bloomberg, IPOPEMA estimates
Chemicals privatization strategy – long way to go
State Treasury is the key shareholder in the chemicals sector holding majority stake in
Police, Pulawy, ZA Tarnow, ZA Kedzierzyn (“ZAK”) – to be listed this year and through
PKN Orlen, Anwil. The State Treasury strategy presented in the September 08’, assumes
chemicals privatization in two groups:
1.
State wants to sell its stake in ZA Tarnow, Ciech, ZA Kedzierzyn to one strategic
investor and demands the premium over the Companies value, because it would
sell its stake in all three companies. However, given the current global economic
situation as well as huge diversity of business: ZAT (PA6, POM, Caprolactam,
fertilizers), ZAK (fertilizers, OXO alcohols), Ciech (soda, TDI, EPI, resins,
fertilizers etc.) it would be hard to find the investor interested in the acquisitions
of all three companies. State has already appointed the privatization advisor and
the privatization is to be finished in 3Q09.
2.
The second group comprises PGNiG (still the State controlled), Police and
Pulawy. PGNiG has time until 3Q09 to decide whether it is interested in fertilizers
producers acquisition. After the PGNiG decision State will decide whether to
consolidate both companies or sell them separately to strategic investor.
55
Ciech S.A.
Lifting acquisitions burdens
Ciech is the largest chemicals company in Poland with business ranging from soda
ash, through resins, fertilizers, plant protection chemicals, to TDI and foams. After
the recent acquisitions – SWS, Govora - Ciech became 2nd player on the European
soda ash market. Ciech trades now on the relatively attractive multiples,
17 February 2009
HOLD - Medium Risk
12M TP PLN 26.0 / (Feb13th) PLN 22.7
compared to its European peers, and its soda based business shows relatively high
gross margins among chemicals. However, the high indebtedness as well as
350
Ciech vs. WIG=100
expected decrease in sales volumes pose a risk for this and next year
300
performance, hence HOLD recommendation with target price of PLN 26.
250
Valuation – attractive relative to its peers
Ciech vs.WIG-Chemia=100
200
150
In order to cross check our DCF findings, we provide multiples based valuation.
We use the P/E, EV/EBITDA for 2009 and 2010. Currently Ciech trades at discount
100
50
of ca.30% to its domestic peers as well as even higher discount to foreign ones
based on 2009-2010 P/E ratio. On the EV/EBITDA multiples, Ciech trades with
significant premium of ca.80% to domestic peers – due to low leverage used by
domestic peers, and discount of 31% on 09’ and 20% on 10’ to foreign peers.
Business drivers – capacity and restructuring
The key driver for Ciech in the next years, is the increased capacity of soda ash
(+20% in 08/10 period), polyester and epoxy resins (+10% in 08/10 period) and
TDI (+25% 08/09 period). The full new capacity utilization would result in the
sales increase in 10’ compared to 08’ period by PLN 280m. Other driver is the
Key Ratios
2008E
2009E
EBITDA Margin
13.7%
12.2%
6.4%
EBIT Margin
8.0%
restructuring potential of German Sodawerk and Romanian Govora. Both
ROE
6.0%
8.6%
companies posted net loss of PLN 9m and PLN 83m respectively in 2007, and still
Bank Debt / Assets
35.9%
32.3%
in 2008 were loss making units. However the management claims, after capacity
expansion and restructuring in 08’ – in 09’ they should at least break even.
Share data
Indebtedness – not much room left
28.0
Market Cap (€m)
136.9
11.2
In order to acquire Sodawerk, Govora as well as 6.7% stake in ZA Tarnow, Ciech
had significantly increased its debt level, from PLN 650m in 2006 up to 1.6bn in
52 W High / Low
98.6 / 20.6
2008YE. Effectively worsening its debt/EBITDA ratio, from 2.3 in 2006 up to 3 in
WIG Weight (%)
Reuters
CECH.WA
2008E. Another risky factor is Ciech’s options hedging, which will heavily distort
Bloomberg
0.1
0.48
CIE PW
the P&L especially in the 4Q08 (negative valuation of ca. PLN 170m) and 1Q09.
However, the weak zloty should support the operating level, as company exports
ca.45% of its sales.
Perform ance
YTD
14%
3M
-11%
3%
12M
-77%
-52%
2006
2007
2 174
3 415
3 923
4 076
4 200
Shareholders
EBITDA (PLN m)
280.9
478.3
537.7
495.4
487.6
State Treasury
36.7%
EBIT (PLN m)
192.0
313.6
315.6
262.6
248.5
Pioneer Pekao TFI
18.8%
Net profit (PLN m)
195.7
240.2
80.8
117.6
106.0
EPS (PLN)
7.0
8.6
2.9
4.2
3.8
DPS (PLN)
0.8
2.1
2.1
0.0
0.0
EV / EBITDA (x)
8.2
9.4
4.0
4.1
4.1
P/E (x)
9.2
14.1
8.1
5.4
6.0
56
2009E
vs. WIG
-5%
Revenues (PLN m)
2008E
Abs.
2010E
PZU OFE
Other
Stake
6.1%
38.4%
Analyst
Konrad Anuszkiew icz
konrad.anuszkiew icz@ipopema.pl
+ 48 22 236 92 30
Ciech S.A.
Table 50 Ciech – Financials
P&L (PLN m)
2005
2006
2007
2008E
2009E
2010E
Revenues
2 210
2 174
3 415
3 923
4 076
4 200
-2%
57%
15%
4%
3%
497
809
831
772
803
4%
- yoy change
Gross Profit
500
- yoy change
0%
63%
3%
-7%
-1
12
4
27
43
-1
EBIT
- yoy change
144
192
34%
314
63%
316
1%
263
-17%
248
-5%
EBITDA
- yoy change
207
281
36%
478
70%
538
12%
495
-8%
488
-2%
-114
Other Operating Income/(Cost)
Financial Income/(Cost)
-4
4
-29
-175
-113
Other and Extraordinary
3
2
5
3
3
3
Pretax Profit
143
197
290
144
153
138
Income Tax
-25
-28
-48
-49
-29
-26
-6
0
-2
-14
-6
-6
Net Incom e
112
196
240
81
118
106
EPS (PLN)
4.0
7.0
8.6
2.9
4.2
3.8
74%
23%
-66%
46%
-10%
Minority (Profits)/Losses
- yoy change
Profitability Ratios
Gross Margin
22.6%
22.9%
23.7%
21.2%
18.9%
19.1%
EBIT Margin
6.5%
8.8%
9.2%
8.0%
6.4%
5.9%
Net Margin
5.1%
9.0%
7.0%
2.1%
2.9%
2.5%
ROE
17.0%
20.2%
21.1%
6.0%
8.6%
7.2%
Balance Sheet (PLN m)
2005
2006
2007
2008E
2009E
2010E
Total Current Assets
817
1 104
1 583
1 667
1 680
1 729
Cash and Equivalents
101
146
124
98
94
97
Other Current Assets
716
958
1458
1569
1586
1632
Total Fixed Assets
726
1 582
2 059
2 186
2 256
2 318
Tangible Assets
704
1 518
1 932
2 073
2 154
2 227
Other Fixed Assets
113
237
720
746
735
724
Total Assets
1 635
2 859
4 234
4 486
4 569
4 680
Stockholders` Equity
1 657
1 019
1 187
1 384
1 421
1 545
Including Minority Interest
49
50
45
59
65
71
Long Term Liabilities
110
705
1 297
1 251
1 238
1 214
Long -Term Debt
49
317
766
805
738
731
Other Long - Term liabilities
61
388
530
447
501
482
Short Term Liabilities
506
967
1 554
1 814
1 786
1 810
Short -Term Debt
137
331
482
805
738
731
Other Current Liabilities
369
636
1 071
1 010
1 048
1 079
1 635
2 859
4 234
4 486
4 569
4 680
36.4
42.4
49.4
50.8
55.2
59.2
Current Ratio
1.8
1.3
1.2
1.0
1.1
1.1
Quick Ratio
1.5
1.0
1.0
0.8
0.8
0.8
11%
23%
29%
36%
32%
31%
18%
55%
90%
113%
96%
88%
2005
2006
2007
2008E
2009E
2010E
112
196
240
81
118
106
92
96
179
222
233
239
Other (incl. WC change)
-77
-106
-148
-122
181
73
Operating Cash Flow s
127
185
271
181
531
418
Capital Expenditures (Net)
-120
-362
-244
-402
-302
-302
3
-122
-332
-13
5
5
Cash Flow s from Investing Activities
-117
-483
-576
-415
-297
-297
Change in Debt
-13
Total Equity & Liabilities
BVPS (PLN)
Balance Sheet Ratios
Bank Debt/Assets
Bank Debt/Equity
Cash Flow (PLN m)
Net Profit
Depreciation and Amortisation
Other
-110
367
343
361
-134
Issuance of Shares
193
0
0
0
0
0
Other
-29
-30
-74
-153
-105
-105
Cash Flow s from Financing Activities
54
337
269
208
-238
-118
Beginning Cash
29
94
131
124
98
94
Increase/(Decrease) in Cash
73
52
-7
-26
-4
3
Ending Cash
101
146
124
98
94
97
DPS (PLN)
0.3
0.8
2.1
2.1
0.0
0.0
57
Ciech S.A.
According to our estimates the 4Q08E, was already tougher for the company than
previous quarters of 2008. We are estimating the sales level at 941m, with main driver
being soda and main laggers being TDI and fertilizers. The operating results will be
increased by ca.PLN 24m (sales of Jasna real estate), and should amount to ca.PLN 50m.
On the bottom line, Ciech should post net loss of ca. 22m. This results from the part of
the negative options valuation which will be carried through P&L (we estimate that at
ca.PLN 40m) as well as interests costs at ca. PLN 28m. Ciech, after 3Q08, said that the
PLN 0.01 increase in the EUR/PLN rate, will result in ca. PLN 2.2m negative options
valuation, so we expect the options negative valuation of ca. PLN 170m in 4Q08.
However, the company claims that it will apply the hedging accounting in these
transactions (i.e. one call and one put will be treated as hedging – will go through equity
and the rest – another call and knock out barrier – will be carried through P&L).
Table 51 Ciech – 4Q08E Results Preview
P & L (PLN m )
4Q07
1Q08
2Q08
3Q08
4Q08E
YoY
QoQ
12M07
12M08E
YoY
Revenues
784.9
1 032.1
1 025.2
923.8
941.4
19.9%
1.9%
3 415.0
3 922.6
14.9%
Operating profit
37.1
158.0
61.8
46.1
49.6
33.8%
7.6%
313.6
315.4
0.6%
Net profit
48.7
104.5
27.0
-28.5
-22.3
na
na
240.2
80.8
-66.4%
Table 52 Ciech – DCF
2009E
2010E
2011E
2012E
2013E
2014E
Terminal
Year
Revenue Grow th Rate
3.9%
3.1%
4.8%
0.2%
0.3%
0.4%
0.5%
Revenues
4 076
4 200
4 402
4 410
4 425
4 443
4 465
EBIT Margin
6.4%
5.9%
6.7%
6.5%
6.3%
6.2%
6.0%
EBIT
263
248
294
285
278
277
268
19.0%
19.0%
19.0%
19.0%
19.0%
19.0%
19.0%
NOPAT
213
201
238
231
225
225
217
+ Depreciation
233
239
245
251
258
264
231
-302
-302
-310
-316
-323
-330
-231
19
-23
-37
-2
-3
-7
-4
163
116
136
164
157
151
Effective Tax Rate
- Capex
- Change in Working Capital
FCF
Terminal Value
213
2 325
WACC
8.2%
8.5%
8.7%
9.0%
9.3%
9.6%
Present Value of FCF
163
107
116
128
112
98
NPV of f ree cash flow s
9.6%
723
+ Present value of terminal value
1 508
Value of Operating Assets of the firm =
2 231
+ Value of Cash & Non-operating assets
99
Value of Firm =
2 330
- Value of Outstanding Debt =
Key Assumptions
Revenue CAGR 2009E-2014E
2.1%
Average operating margin in 2009E-2014E
6.6%
721
Market Risk Premium
5.5%
Value of Equity per share at 2009 end (PLN) =
25.8
Beta
12 Month Target Price (PLN)
26.0
Average WACC in 2010E-2014E
1 609
Value of Equity =
1
8.6%
DCF Sensitivity (PLN)
Operating Margin in Perpetuity
Real Growth Rate in Perpetuity
Nominal Growth
8.0%
7.0%
6.0%
5.0%
-3.5%
-0.5%
38.7
30.4
22.2
13.9
5.7
-2.5%
0.5%
44.5
35.2
26.0
16.7
7.5
-1.5%
1.5%
51.7
41.2
30.7
20.2
9.8
Nominal Growth
7.6%
8.6%
9.6%
10.6%
11.6%
-3.5%
-0.5%
34.6
27.7
22.2
17.6
13.9
-2.5%
0.5%
41.2
32.7
26.0
20.6
16.2
-1.5%
1.5%
50.0
39.0
30.7
24.3
19.1
4.0%
WACC in Perpetuity
58
Synthos S.A.
Rubbers too expensive
Synthos is the dominant player on the polish synthetic rubbers market and
styrenics market. Company acquired in mid 2007 its main regional competitor –
Kaucuk, effectively increasing its SBRs and styrenics capacity by 40% and 50%
respectively. The Company recently underperformed WIG as well as WIG-
17 February 2009
SELL - Medium Risk
12M TP PLN 0.41 / (Feb 13th) PLN 0.46
Chemicals index, due to weak expected demand from rubbers industry as well as
the construction one (the key final consumer of styrenics). This is also our main
350
concern for this year. Additionally, company trades with the highest premium to
300
its domestic peers, hence we initiate the coverage with SELL recommendation and
250
target price of PLN 0.41.
200
Valuation
150
100
Our DCF based valuation, implies 12m target price of PLN 0.41, what implies 8.7%
Synthos vs. WIG=100
Synthos vs. WIG-Chemia=100
50
downside considering current price. Based on multiples Synthos is also the most
expensive, with P/E 09’-10’ premium of 40% and 34% to its domestic peers and
over 12% and 27% based on foreign ones. Due to significant leverage, Synthos
has highest EV/EBITDA ratios among domestic chemicals, of ca.4.5.
Business and drivers
Synthos operating results relied in 08’ mostly on rubbers, while styrenics were
already performing poorly in 3Q08. Given the current economic downturn, we
expect deterioration of Synthos results in the rubbers segment (because of the
already weak situation of tyres sales) as well as in the styrenics one (due to
further expected weakening of the demand from the construction sector). The
Key Ratios
2008E
EBITDA Margin
11.2%
9.7%
6.8%
4.3%
EBIT Margin
main future driver for Synthos results is the PBR installation, which is to be
ROE
finished in 2011 with partly secured off-take from Michelin Group. Synthos also
Bank Debt / Assets
2009E
1.5%
4.3%
31.8%
28.4%
started its 200ths m3 XPS installations in Dwory, and is to finish the similar one in
Kralupy, however with the construction segment as main consumer, we don’t think
Share data
that this will be value accretive in 2009.
Feedstock secured
Synthos after Kaucuk acquisition and signed long term agreements with PKN is
1 323.3
Market Cap (€m)
almost fully secured as far as key feedstock is concerned. The Unipetrol’s Litvinov
supplies C4 as well as ethylene and benzene for Kralupy, which has own
ethylbenzene, butadiene and styrene units. On the other hand the Polish
131.1
3 018.7
0.6
52 W High / Low
1.4 / 0.3
WIG Weight (%)
Reuters
DWOR.WA
0.32
Bloomberg
SNS PW
production plant is supplied with the ethylbenzene by Kralupy, as well as other
suppliers (mainly Slovnaft). Synthos also builds new butadiene unit in Kralupy,
Perform ance
which will meet most of the feedstock needs connected with the future PBR
YTD
installation.
3M
-21%
-9%
12M
-63%
-22%
Abs.
vs. WIG
5%
26%
Revenues (PLN m)
EBITDA (PLN m)
2006
2007
2008E
2009E
2010E
1 172.2
1 841.0
2 877.9
2 384.5
2 366.1
148.9
152.0
322.8
232.0
233.5
EBIT (PLN m)
91.7
57.2
196.8
103.1
98.1
Net profit (PLN m)*
65.2
116.1
19.7
55.5
53.2
EPS (PLN)*
0.05
0.09
0.01
0.04
0.04
DPS (PLN)
0.0
0.0
0.0
0.0
0.0
EV / EBITDA (x)
6.7
12.5
2.9
3.7
3.8
23.7
14.8
29.5
11.0
11.4
P/E (x)
Shareholders
Stake
Michal Solow ow (directly)
41.6%
Michal Solow ow (indirectly)
15.4%
ING TFI
Other
5.0%
38.1%
Analyst
+ 48 22 236 92 30
Source: Company, IPOPEMA estimates, 2007 adjusted for profit on Kaucuk acquisition
59
Elektrobudowa S.A.
Table 54 Synthos – Financials
Synthos - P&L (PLN m)
2005
2006
2007
2008E
2009E
2010E
Revenues
1 039
1 172
1 841
2 878
2 384
2 366
13%
57%
56%
-17%
-1%
202
225
382
246
240
12%
12%
70%
-36%
-3%
-30
-1
-24
0
0
0
32
92
57
197
103
98
183%
-38%
244%
-48%
-5%
149
152
323
232
233
120%
2%
112%
-28%
1%
-32
- yoy change
Gross Profit
180
- yoy change
EBIT
- yoy change
EBITDA
68
- yoy change
-6
-11
-2
-154
-34
0
0
370
0
0
0
Pretax Profit
26
81
426
42
69
66
Income Tax
-5
-15
61
-22
-13
-13
0
-1
0
-1
-1
-1
Net Incom e
20
65
486
20
56
53
EPS (PLN)
1.6
0.0
0.4
0.0
0.0
0.0
-97%
646%
-96%
182%
-4%
- yoy change
2005
2006
2007
2008E
2009E
2010E
17.3%
17.2%
12.2%
13.3%
10.3%
10.1%
EBIT Margin
3.1%
7.8%
3.1%
6.8%
4.3%
4.1%
Net Margin
1.9%
5.6%
26.4%
0.7%
2.3%
2.2%
ROE
4.6%
15.0%
62.1%
1.5%
4.3%
3.9%
Synthos - Balance Sheet (PLN m)
2005
2006
2007
2008E
2009E
2010E
261
591
1 161
1 452
1 226
1 217
4
25
476
417
368
365
257
565
685
1034
858
852
Total Fixed Assets
467
442
1 346
1 247
1 318
1 389
Tangible Assets
457
425
1 092
1 110
1 192
1 272
10
18
254
137
126
117
Total Assets
728
1 033
2 507
2 699
2 544
2 607
1427
Gross Margin
Other Fixed Assets
451
798
1300
1320
1375
15
15
15
15
14
14
62
33
83
893
764
776
699
Long -Term Debt
31
4
0
815
685
31
29
83
79
79
77
215
202
1123
486
406
404
Short -Term Debt
52
9
706
43
36
37
163
193
418
443
370
367
728
1 033
2 507
2 699
2 544
2 607
BVPS (PLN)
35.3
0.9
1.0
1.0
1.0
1.1
2005
2006
2007
2008E
2009E
2010E
Current Ratio
1.2
2.9
1.0
3.0
3.0
3.0
Quick Ratio
0.8
2.4
0.8
2.3
2.3
2.3
11%
1%
28%
32%
28%
28%
18%
2%
54%
65%
52%
52%
2010E
Bank Debt/Assets
Bank Debt/Equity
Synthos - Cash Flow (PLN m)
2005
2006
2007
2008E
2009E
Net Profit
20
65
486
20
56
53
47
57
95
126
129
135
16
19
-310
-135
135
31
83
141
271
10
320
219
-40
-30
-125
-130
-200
-207
9
-16
-668
-40
25
26
-31
-46
-793
-170
-175
-180
Change in Debt
-17
-36
712
152
-136
14
0
0
282
0
0
0
Other
-56
-7
-17
-51
-57
-56
-73
-43
977
101
-194
-42
Beginning Cash
-13
-33
20
475
416
367
-20
53
455
-58
-49
-3
4
25
476
417
368
365
1.5
0.0
0.0
0.0
0.0
0.0
Other
Issuance of Shares
Ending Cash
DPS (PLN)
60
Elektrobudowa S.A.
In the 4Q08, we expect further deterioration of the styrenics segment and slightly
weaker performance of rubbers, as probably the company already experienced weaker
volumes in November, December. On the operating level, we expect ca. PLN 38m
(including ca.PLN 4.6m profit on K-Protos subsidiary sale). The bottom line should be in
the red, with negative influence of EUR 195m resulting from debt revaluation, hence ca.
108m loss.
Table 55 Synthos – 4Q08E Results Preview
P & L (PLN m )
4Q07
1Q08
2Q08
3Q08
4Q08E
YoY
QoQ
12M07
12M08E
YoY
Revenues
556.0
725.7
729.9
731.1
691.1
24.3%
-5.5%
1 841.0
2 877.9
56.3%
Operating profit
-23.0
43.4
59.5
56.0
37.8
na
-32.5%
57.2
196.8
244.2%
33.1
33.0
52.5
41.7
-107.5
na
na
486.3
19.7
-95.9%
Net profit
Table 56 Synthos – DCF
Synthos - DCF Model (PLN m)
2009E
2010E
2011E
2012E
2013E
2014E
Terminal
Year
-17.1%
-0.8%
13.6%
-0.9%
0.4%
0.3%
0.5%
Revenues
2 384
2 366
2 687
2 663
2 674
2 682
2 695
EBIT Margin
4.3%
4.1%
4.2%
4.1%
4.0%
4.0%
3.9%
EBIT
Effective Tax Rate
NOPAT
+ Depreciation
- Capex
103
98
113
109
107
108
105
19.0%
19.0%
19.0%
19.0%
19.0%
19.0%
19.0%
84
79
92
88
87
87
85
129
135
139
139
138
139
123
-200
-207
-144
-143
-143
-143
-123
156
6
-112
8
-4
-1
-3
FCFF
169
15
-26
92
79
82
Terminal value
82
859
WACC
9.3%
9.4%
9.6%
9.8%
9.9%
10.1%
Present Value of FCFF
169
13
-21
70
54
51
336
539
875
517
Value of Firm =
1 392
10.1%
Key Assumptions
2.4%
858
4.1%
Value of Equity =
535
Market Risk Premium
5.5%
0.40
Beta
0.41
1
9.7%
Nominal Growth
5.9%
4.9%
3.9%
2.9%
-3.5%
-0.5%
0.58
0.49
0.39
0.29
0.19
-2.5%
0.5%
0.63
0.52
0.41
0.30
0.19
-1.5%
1.5%
0.68
0.55
0.43
0.31
0.19
Nominal Growth
8.1%
9.1%
10.1%
11.1%
12.1%
-3.5%
-0.5%
0.48
0.43
0.39
0.36
0.33
-2.5%
0.5%
0.52
0.46
0.41
0.37
0.34
-1.5%
1.5%
0.56
0.49
0.43
0.39
0.35
1.9%
WACC in Perpetuity
61
Zakłady Azotowe Puławy S.A.
Most cash rich chemical
ZA Pulawy (“ZAP”) is the largest nitrogen fertilizers producer in Poland, which
constitute ca. 50% of its sales. The other half of Company is chemicals business
(caprolactam and melamine – ZAP is the 3rd world producer). After very good last
year performance, ZAP has quite healthy balance sheet, with PLN 34.7 cash per
17 February 2009
BUY - Low Risk
12M TP PLN 62.4 / (Feb 13th) PLN 48.5
share. In our opinion the current price is an attractive level for accumulating the
stock, hence BUY recommendation with PLN 62.4 per share target price.
250
Valuation
200
Pulawy vs. WIG=100
We use DCF for valuing ZAP shares, in order to include the future expansion of the
urea capacity. In order to cross check our findings we present the multiples
Pulawy vs. WIG-Chemia=100
150
100
valuation for the Company. However, ZAP has its reporting period in 1H/1H, hence
some lack of data comparability with other companies. This said, based on the P/E
50
10’ multiples, company trades at a median to its domestic peers and premium of
ca.30% in 10’ compared to foreign peers. On the EV/EBITDA 09’-10’ multiples,
company trades at a significant discount of ca.75% to its domestic peers and close
to 90% discount to its foreign competitors. That high discount results from the
high cash balance on ZAP books. ZAP also participates in the NOx reduction
program, however we do not include it into valuation as there is still some
uncertainty over its utilization (they might be used in the jv power project realised
with Vatenfall). The separate valuation of ERU units indicates additional value of
Key Ratios
2008/09E
2009/10E
PLN 5.2 per share, assuming 1ERU at EUR 6 per t.
EBITDA Margin
18.0%
9.3%
EBIT Margin
13.6%
5.2%
Business – caprolactam will be lagger
ROE
8.9%
5.4%
Bank Debt / Assets
0.4%
0.6%
After the freeze on the fertilizers market in 4Q08, some positive signs are already
visible. ZAP has already started preparing for increasing its capacity to 100%
utilization, what is to take place in the next few weeks. So we are fairly confident
Share data
19.1
about the fertilizers. However, there might be some difficulties in the chemicals
Market Cap (€m)
business and caprolactam in particular. The weak demand on caprolactam resulted
from decreased demand from auto and textiles industry, as well as high
inventories build-up last year. We assume the caprolactam capacity utilization at
60%, and respectively decrease the AS capacity.
199.6
16.4
0.3
52 W High / Low
151.0 / 38.0
WIG Weight (%)
Reuters
PULW.WA
0.38
Bloomberg
ZAP PW
Risks – ideas on spending cash
ZAP with PLN 660m in cash, has very ambitious/risky plans for spending cash
Abs.
vs. WIG
YTD
-8%
10%
8bn) however in our opinion these ideas will not materialise in the 1-2Y period.
3M
-7%
7%
Additional risk is the acquisition of minority stocks of other companies (our best
12M
-60%
-17%
(coal gasification project - ca. PLN 3bn - the power plant construction - ca. PLN
Perform ance
bet is what might be pushed by the State Treasury).
Revenues (PLN m)
2006/07
2007/08
2008/09E
2009/10E
2010/11E
2 205.3
2 503.5
2 263.4
2 572.1
2 810.3
EBITDA (PLN m)
241.2
432.7
408.1
240.1
256.7
EBIT (PLN m)
151.4
358.7
307.8
133.3
134.2
Net profit (PLN m)
130.0
330.8
175.4
111.8
111.8
EPS (PLN)
6.80
17.31
9.18
5.85
5.85
DPS (PLN)
2.00
1.70
4.30
0.00
0.00
8.2
4.2
1.0
1.0
1.1
17.9
6.5
5.3
8.3
8.3
EV / EBITDA (x)
P/E (x)
Stake
State Treasury
50.7%
Kompania Weglow a
9.9%
Zbigniew Jakubas and related
5.2%
ING OFE
5.0%
Other
29.2%
Analyst
62
Shareholders
+ 48 22 236 92 30
Table 58 Zakłady Azotowe Puławy – Financials
ZA Pulawy - P&L (PLN m)
Revenues
2005/06
2006/07
2 030
2 205
2 504
2 263
2 572
9%
14%
-10%
14%
9%
384
636
563
378
391
4%
- yoy change
Gross Profit
396
- yoy change
2007/08 2008/09E 2009/10E 2010/11E
2 810
-3%
66%
-12%
-33%
-12
-8
-26
-4
-4
-4
EBIT
157
151
359
308
133
134
- yoy change
-4%
137%
-14%
-57%
1%
270
241
-11%
433
79%
408
-6%
240
-41%
257
7%
5
7
43
-88
5
4
0
0
0
0
0
0
Pretax Profit
162
158
401
219
138
138
Income Tax
-31
-28
-71
-44
-26
-26
0
0
0
0
0
0
Net Incom e
126
130
331
175
112
112
EPS (PLN)
7.3
6.8
-7%
17.3
154%
9.2
-47%
5.8
-36%
5.8
0%
2005/06
2006/07
2007/08
2008/09E
2009/10E
2010/11E
19.5%
17.4%
25.4%
24.9%
14.7%
13.9%
EBIT Margin
7.7%
6.9%
14.3%
13.6%
5.2%
4.8%
Net Margin
6.2%
5.9%
13.2%
7.7%
4.3%
4.0%
ROE
9.5%
8.0%
19.7%
8.9%
5.4%
5.1%
EBITDA
- yoy change
- yoy change
Gross Margin
ZA Pulawy - Balance Sheet (PLN m)
2005/06
2006/07
916
969
2007/08 2008/09E 2009/10E 2010/11E
1 209
1 277
1 255
178
335
575
625
583
642
Other Current assets
738
634
634
652
672
707
1 349
Total Fixed Assets
719
711
759
809
954
1 037
Tangible Assets
640
635
662
755
902
983
78
76
96
54
52
54
Total Assets
1 635
1 680
1 968
2 086
2 209
2 386
1174
1255
1540
1633
1745
1857
0
0
0
0
0
0
-72
-152
-177
-296
-283
-294
Other Fixed Assets
Long -Term Debt
111
60
0
4
7
22
-184
-212
-177
-300
-289
-316
534
576
605
749
746
823
51
48
60
4
6
18
241
264
273
373
370
402
1 635
1 680
1 968
2 086
2 209
2 386
61.4
65.7
80.6
85.5
91.3
97.2
2005/06
2006/07
2007/08
2008/09E
2009/10E
2010/11E
Current Ratio
1.7
1.7
2.0
1.7
1.7
1.6
Quick Ratio
1.4
1.4
1.7
1.4
1.4
1.3
10%
6%
3%
0%
1%
2%
14%
9%
4%
0%
1%
2%
Short -Term Debt
BVPS (PLN)
Bank Debt/Assets
Bank Debt/Equity
ZA Pulawy - Cash Flow (PLN m)
2005/06
2006/07
Net Profit
126
130
2007/08 2008/09E 2009/10E 2010/11E
331
175
112
112
117
101
74
100
107
122
-46
-75
-69
159
9
-18
198
156
336
435
227
216
-203
-82
-87
-107
-253
-253
Other
-280
190
104
5
-20
20
-361
103
-4
-248
-273
-183
Change in Debt
-53
-49
-45
-52
5
28
Issuance of Shares
292
0
0
0
0
0
Other
-45
-53
-46
-85
-1
-2
193
-103
-91
-137
4
26
Beginning Cash
148
178
335
575
625
583
30
157
241
49
-42
60
Ending Cash
178
335
575
625
583
642
DPS (PLN)
1.8
2.0
1.7
4.3
0.0
0.0
63
Company already posted its 4Q08 results, which we find fairly ok, given the fact that the
company recognized ca. PLN 124m negative valuation on its hedging transactions –
conversely to e.g. Police this was, pure hedging without writing any options. Although the
results were partly tuned by PLN 19m profit on land revaluation and also increased
production for stocks, we view them positively. Cash was preserved and the operating
cash flow remained strong at PLN 135m.
Table 59 Zakłady Azotowe Puławy – 4Q08 Results Review
P & L (PLN m )
2Q07/08
3Q7/08 4Q07/08 1Q08/09 2Q08/09A
Revenues
634.8
Operating profit
100.7
148.3
83.4
94.7
125.1
75.5
Net profit
718.3
662.3
YoY
QoQ
514.9
-18.9%
-25.0%
2 379.8
2 581.8
8.5%
185.1
72.9
-27.6%
-60.6%
246.0
489.7
99.1%
157.0
-10.2
na
na
226.4
347.5
53.5%
686.3
12M06/08 12M07/09
YoY
Table 60 Zakłady Azotowe Puławy – DCF
ZA Pulawy - DCF Model
2008/09E 2009/10E 2010/11E 2011/12E 2012/13E 2013/14E
Terminal
Year
-9.6%
13.6%
9.3%
-2.6%
0.4%
0.5%
0.5%
Revenues
2 263
2 572
2 810
2 738
2 750
2 762
2 776
13.6%
5.2%
4.8%
4.5%
4.5%
4.3%
3.0%
EBIT Margin
EBIT
308
133
134
124
124
119
83
19.0%
19.0%
19.0%
19.0%
19.0%
19.0%
19.0%
NOPAT
249
108
109
100
101
97
67
+ Depreciation
100
107
122
133
143
153
161
-161
Effective Tax Rate
- Capex
-253
-253
-203
-208
-213
-217
-67
29
-93
28
-4
-5
-2
FCFF
30
-9
-65
53
27
27
65
11.0%
11.0%
10.9%
10.9%
10.8%
10.7%
10.4%
30
-8
-53
39
18
16
42
Terminal Value
659
WACC
394
436
685
Value of Firm =
1 121
8
Value of Equity =
1 113
Key Assumptions
4.1%
6.2%
Market Risk Premium
5.5%
Value of Equity per share at 1H09 end (PLN) =
58.2
Beta
62.4
1
10.9%
Nominal Growth
5.0%
4.0%
3.0%
2.0%
-3.5%
-0.5%
75.1
68.3
61.5
54.7
47.8
-2.5%
0.5%
77.6
70.0
62.4
54.8
47.3
-1.5%
1.5%
80.7
72.1
63.6
55.1
46.6
Nominal Growth
8.4%
9.4%
10.4%
11.4%
12.4%
-3.5%
-0.5%
66.2
63.6
61.5
59.7
58.2
-2.5%
0.5%
68.0
64.9
62.4
60.4
58.7
-1.5%
1.5%
70.3
66.5
63.6
61.3
59.4
1.0%
WACC in Perpetuity
64
Zakłady Azotowe Tarnów S.A.
Still cash rich
ZA Tarnow (“ZAT”) is the fertilizer and chemicals producer (Caprolactam, PA6,
POM). The Company after the last year IPO has ca. PLN 242m in cash and no
debt, this implies PLN 6.2 cash per share. In our opinion the planned investment
program announced during IPO will be postponed due to economic global
17 February 2009
BUY - Medium Risk
12M TP PLN 11.1 / (Feb 13th) PLN 7.9
slowdown. So given the current price/cash ratio, having in mind this year ERU
150
units sales, as well as ca. 1PLN EPS in 09’, we initiate the coverage with BUY
130
Medium risk recommendation and target price of PLN 11.1.
110
140
120
100
90
Valuation
80
70
We value ZAT using sum of the DCF (ca. PLN 9.8) and ERU project (ca. PLN 1.3),
60
ZA Tarnow vs. WIG=100
ZA Tarnow vs. Wig-Chemia=100
50
and arrive at PLN 11.1 target price. Additionally, ZAT trades at the median
multiple at P/E 09’ as well as over 80% discount to its foreign peers at EV/EBITDA
multiples, due to high cash balance.
Fertilizers should assure stability, while chemicals will struggle in 09’
ZAT operates in the nitrogen fertilizers industry and chemicals. Key feedstock for
the fertilizers is natural gas (company purchases ca.30% from the local gas
deposits and the rest from gas incumbent - PGNiG). In 2009, the company plans
to
implement
few
fertilizers
production
efficiency
investments
(logistics,
Key Ratios
2008E
2009E
EBITDA Margin
12.2%
10.4%
granulation). We assume that in 2009 the capacity utilization will be at ca.85%
EBIT Margin
6.0%
3.3%
level, as AN is in more than 90% sold on the domestic market. Additionally we
ROE
5.8%
3.2%
Bank Debt / Assets
2.1%
2.0%
also assume ca.40% drop in AS sales, which is the by-product of the caprolactam
production. The chemicals segment migh be severely hurt by weak auto industry
performance and global economic slowdown. We assume that the caprolactam
Share data
39.1
Market Cap (€m)
the auto industry) will be utilized in ca.60%. We also expect lower volumes for
66.5
25.5
PA6 utilization as well as POM.
(used mainly in the textiles industry, and partly as feedstock for fibres applied in
CAPEX plans
During the IPO company announced extensive investment program, PA6 and POM
0.1
52 W High / Low
19.5 / 6.0
WIG Weight (%)
Reuters
ATTP.WA
0.11
Bloomberg
ATT PW
capacity increase projects (PLN 480m value), constituting ca.70% of planned
investment until 2011. In our valuation we did not assumed these investments
Perform ance
Abs.
vs. WIG
takes place, as the uncertainty over its realization is too high now, given current
YTD
14%
37%
weak situation on the auto market.
3M
-17%
-4%
-59%
-15%
12M*
*since debut
Revenues (PLN m)
EBITDA (PLN m)
EBIT (PLN m)
2006
2007
2008E
2009E
2010E
1 217.5
1 294.7
1 316.1
1 199.9
1 156.4
123.6
140.5
160.5
124.6
129.3
46.2
83.8
79.1
40.0
42.8
Net profit (PLN m)
27.8
63.5
70.2
39.7
42.0
EPS (PLN)*
0.71
1.62
1.80
1.01
1.07
DPS (PLN)
0.97
0.38
0.00
0.00
0.00
EV / EBITDA (x)
na
na
0.5
0.2
-0.1
P/E (x)
na
na
3.9
7.8
7.4
Shareholders
Stake
Nafta Polska
49.1%
PGNiG
10.2%
Ciech
6.5%
Other
34.1%
Analyst
+ 48 22 236 92 30
65
Table 62 Zakłady Azotowe Tarnów – Financials
ZA Tarnow - P&L (PLN m)
2005
2006
2007
2008E
2009E
2010E
Revenues
1 189
1 217
1 295
1 316
1 200
1 156
2%
6%
2%
-9%
-4%
221
233
237
177
174
-22%
6%
1%
-25%
-2%
- yoy change
Gross Profit
284
- yoy change
-23
-39
-10
-5
8
14
EBIT
128
46
84
79
40
43
-64%
81%
-6%
-50%
7%
124
141
161
125
129
- yoy change
EBITDA
202
-39%
14%
14%
-22%
4%
- yoy change
-5
1
2
3
9
9
0
0
0
0
0
0
Pretax Profit
123
48
86
82
49
52
Income Tax
-43
-20
-22
-11
-9
-10
0
0
0
0
0
0
Net Incom e
80
28
64
70
40
42
EPS (PLN)
2.1
0.7
1.6
1.8
1.0
1.1
-65%
129%
11%
-44%
6%
- yoy change
2005
2006
2007
2008E
2009E
2010E
Gross Margin
23.9%
18.1%
18.0%
18.0%
14.8%
15.0%
EBIT Margin
10.8%
3.8%
6.5%
6.0%
3.3%
3.7%
Net Margin
6.7%
2.3%
4.9%
5.3%
3.3%
3.6%
ROE
10.2%
3.5%
7.3%
5.8%
3.2%
3.2%
ZA Tarnow - Balance Sheet (PLN m)
2005
2006
2007
2008E
2009E
2010E
305
315
329
561
591
619
51
45
55
265
320
358
254
270
274
296
271
261
Total Fixed Assets
986
989
1 002
1 052
1 071
1 091
Tangible Assets
940
928
942
992
1 012
1 032
Other Fixed Assets
Total Assets
Long -Term Debt
61
60
60
60
60
1 304
1 331
1 612
1 662
1 710
787
796
866
1 219
1 259
1 301
1
1
1
2
2
3
308
288
239
211
202
204
4
13
29
33
23
27
305
274
210
178
179
177
196
221
225
183
201
205
3
2
6
2
10
12
193
219
219
181
191
193
1 710
Short -Term Debt
1 291
1 304
1 331
1 612
1 662
BVPS (PLN)
20.1
20.4
22.1
31.2
32.2
33.3
2005
2006
2007
2008E
2009E
2010E
Current Ratio
1.6
1.4
1.5
3.1
2.9
3.0
Quick Ratio
1.0
0.9
0.9
2.3
2.3
2.5
Bank Debt/Assets
Bank Debt/Equity
1%
1%
3%
2%
2%
2%
1%
2%
4%
3%
3%
3%
ZA Tarnow - Cash Flow (PLN m)
2005
2006
2007
2008E
2009E
2010E
Net Profit
80
28
64
70
40
42
74
77
79
81
85
87
-44
-21
-41
-92
21
-6
110
84
102
60
146
123
-57
-65
-100
-131
-104
-106
9
6
3
-216
-22
-22
-49
-60
-97
-348
-126
-128
Change in Debt
-32
9
19
-1
-2
6
0
0
0
282
0
0
-3
Other
Issuance of Shares
Other
-10
-38
-16
-3
-3
-42
-30
4
278
-4
3
31
50
45
54
45
60
Beginning Cash
19
-5
9
-10
15
-2
Ending Cash
50
45
54
45
60
58
DPS (PLN)
0.0
0.0
0.0
0.0
0.0
0.0
66
46
1 291
Due to freeze on the fertilizers as well as already weak situation in the auto industry, we
expect lower sales volumes, however according to the latest Company statements, 08’
forecasts (net income of PLN 73m) should be realized. In 4Q08 ZAT will recognize the
sales of the POM license to China, as well as create the provision for employees
reductions. On the bottom line, we expect ca. PLN 2.2m profit.
Table 63 Zakłady Azotowe Tarnów – 4Q08E Results Preview
P & L (PLN m )
4Q07
1Q08
2Q08
3Q08
4Q08E
YoY
QoQ
12M07
12M08E
YoY
Revenues
336.9
360.2
320.1
379.0
256.9
-23.7%
-32.2%
1 294.7
1 316.1
1.7%
Operating profit
15.9
39.5
12.4
25.0
2.2
-86.5%
-91.4%
83.8
79.1
-5.6%
Net profit
14.6
26.7
15.0
26.3
2.1
-92.2%
-92.2%
63.5
70.2
10.4%
ZA Tarnow – valuation
In determining the final price for ZAT, we use DCF for ZAT business and separately value
the ERU units which ZAT will receive in the 2009-13 period in exchange for reduction of
NOx emission. Combining these two parts, we arrive at PLN 11.1 per share.
Final valuation (PLN per share)
DCF method
9.8
ERU valuation
1.3
Final target price
11.1
Table 64 Zakłady Azotowe Tarnów – DCF
ZA Tarnow - DCF Model
2014E Terminal Year
2009E
2010E
2011E
2012E
2013E
-8.8%
-3.6%
3.6%
1.2%
0.5%
1.0%
0.5%
Revenues
1 200
1 156
1 198
1 213
1 219
1 230
1 237
EBIT Margin
2.7%
2.5%
3.5%
3.4%
3.5%
4.0%
3.3%
32
29
41
41
43
49
41
19.0%
19.0%
19.0%
19.0%
19.0%
19.0%
19.0%
NOPAT
26
23
34
33
35
40
33
+ Depreciation
85
87
88
90
92
94
81
-104
-106
-108
-110
-112
-114
-94
EBIT
Effective Tax Rate
- Capex
21
14
-5
-2
-1
-1
-1
FCFF
28
17
9
12
14
18
19
11.6%
11.5%
11.5%
11.5%
11.4%
11.4%
11.4%
28
15
7
8
9
11
NPV of free cash flow s
78
Terminal value
173
WACC
101
179
265
Key Assum ptions
Value of Firm =
444
0.5%
3.3%
Market Risk Premium
5.5%
64
Value of Equity =
379
9.7
Beta
9.8
1
11.5%
Nominal Growth
5.3%
4.3%
3.3%
2.3%
-3.5%
-0.5%
12.4
11.2
9.9
8.7
7.4
-2.5%
0.5%
12.5
11.2
9.8
8.4
7.0
-1.5%
1.5%
12.7
11.2
9.7
8.1
6.6
Nominal Growth
9.4%
10.4%
11.4%
12.4%
-3.5%
-0.5%
10.4
10.1
9.9
9.7
9.5
-2.5%
0.5%
10.4
10.1
9.8
9.6
9.4
-1.5%
1.5%
10.3
9.9
9.7
9.4
9.2
1.3%
WACC in Perpetuity
13.4%
67
ZA Tarnow – ERU valuation
We assume the average price for 1 ERU at EUR 6 per 1t and assume 19% tax rate for
calculating the profit from ERU sales. We calculate the PV of the ERU sales cash flows at
EURIBOR of 2.8% plus 70bps for additional risk, as the cash flows will be through the
intermediary – Mitsubishi. We translate the PV of ERU income at exchange rate of
EUR/PLN 4.4.
Table 65 Zakłady Azotowe Tarnów – ERU units valuation
ZA Tarnow - ERU units valuation
2009E
2010E
2011E
2012E
2013E
287.5
575.0
575.0
575.0
575.0
ERU unit price (EUR per ERU)
6.0
6.0
6.0
6.0
6.0
ERU income (EURm)
1.7
3.5
3.5
3.5
3.45
1.4
2.8
2.8
2.8
2.8
ERU volume sold (kt)
ERU income after 19% tax rate (EURm)
Sum of ERU PV @ 3.5% (EURm)
11.3
Sum of ERU PV at EUR/PLN=4.4
49.6
ERU value (PLN per share)
1.3
68
Zakłady Chemiczne Police S.A.
Fertilizers & many options
ZCh Police (“Police”) is the largest NP,NPK fertilizers producer in Poland and the
sole producer of titanium dioxide. During the last year fertilizers boom, Company
accumulated huge inventories of feedstock and finished products and right after
17 February 2009
HOLD - High Risk
12M TP PLN 5.7 / (Feb 13th) PLN 5.2
drop in prices, was left with highly priced goods. It will result in the PLN 150m
inventories
write-down in
4Q08. Additionally
Company
entered
into
non-
symmetrical options hedging in 2008, which negative valuation was PLN 125m at
2008YE and will also weigh on 4Q08 and 1Q09 results. Taking into account the
250
Police vs. WIG=100
Police vs. WIG-Chemia=100
200
recent EUR/PLN of 4.6, we can expect negative valuation to reach ca. PLN 150m in
1Q09. The actual cash settlement for 1Q09 is ca.18% of the notional, hence
ca.PLN 25m cash outflow in that quarter. However, in our opinion all the negative
news are already reflected in price, hence we initiate the coverage with
150
100
50
HOLD/High risk and target price PLN 5.7.
Valuation
Using DCF method we arrive at the 12 month target price for Police of PLN 5.7.
The company trades currently with a premium of 18% and 9% to its domestic
peers as well as 22% and 41% to its foreign peers on the P/E 09’-10’ multiples.
On the EV/EBITDA 09’-10’ ratios, Police trade at a domestic peers median, and
discount of 57% and 55% to its foreign peers.
Businesses – fertilizers ok, with TiO2 still loss making
Key Ratios
2008E
EBITDA Margin
11.3%
4.5%
9.3%
2.1%
EBIT Margin
Police core business are NP and NPK fertilizers produced from natural gas, potash
ROE
salt and phosphate rock. Additionally, company sells urea as well as ammonia.
Bank Debt / Assets
2009E
8.5%
3.2%
-4.1%
-4.1%
Apart from the fertilizers business, police also owns the titanium dioxide (white
pigment used in dyes among others) plant, however this business in 2008 was
Share data
loss making (in 1-3Q08 reported EBIT loss was PLN 26m), mainly because of the
75.0
strong zloty (as most of the production is exported). We are fairly optimistic about
Market Cap (€m)
84.0
the domestic demand for the NP,NPK fertilizers (still it should be slightly lower,
73.1
compared to nitrogen fertilizers, which must be applied annually, whereas
multicomponent fertilizers can be postponed for the short period of time), however
the margin might be influenced by high feedstock costs.
0.2
52 W High / Low
26.3 / 4.0
WIG Weight (%)
Reuters
PICE.WA
0.15
Bloomberg
PCE PW
Feedstock costs
After the drop in the end of 2008 year of food and fertilizers prices, the decline in
potash salt and phosphate rock, was lower than that of fertilizers. This is reverse
situation which was in 2007/08 period, when the prices of feedstock were fixed for
half of the year, up to a year, whereas the fertilizers producers benefited from
Perform ance
Abs.
YTD
vs. WIG
3%
24%
3M
-27%
-16%
12M
-73%
-43%
rising prices. That is why, in our opinion this situation may also hurt Police in the
whole 2009 period.
2006
Revenues (PLN m)
2007
2008E
2009E
2010E
1 676.2
1 824.2
2 668.1
2 273.0
2 226.8
EBITDA (PLN m)
-219.2
245.3
300.7
101.9
106.3
EBIT (PLN m)
-298.0
197.6
247.6
47.2
50.6
Net profit (PLN m)*
-20.3
204.0
64.7
44.9
46.9
EPS (PLN)
-0.27
2.72
0.86
0.60
0.63
DPS (PLN)
0.43
0.00
0.00
0.00
0.00
EV / EBITDA (x)
na
4.6
0.7
2.3
2.3
P/E (x)
na
6.2
5.6
8.7
8.3
Shareholders
Stake
State Treasury
59.4%
Industrial Development Agency
8.8%
PZU OFE
5.6%
ING TFI
Other
5.2%
21.0%
Analyst
+ 48 22 236 92 30
Source: Company, IPOPEMA estimates, data for 2006 adjusted for asset impairment
69
Table 67 Zakłady Chemiczne Police – Financials
ZCh Police - P&L (PLN m)
2005
2006
2007
2008E
2009E
2010E
Revenues
1 668
1 676
1 824
2 668
2 273
2 227
1%
9%
46%
-15%
-2%
103
298
574
202
201
-43%
188%
93%
-65%
0%
-14
-278
48
-160
0
1
47
-298
198
248
47
51
-732%
-166%
25%
-81%
7%
-219
245
301
102
106
- yoy change
Gross Profit
180
- yoy change
EBIT
- yoy change
EBITDA
126
-274%
-212%
23%
-66%
4%
- yoy change
22
5
7
-116
6
5
-1
4
4
3
3
3
Pretax Profit
69
-289
208
135
56
59
Income Tax
20
-16
-4
-70
-11
-11
0
0
-1
-1
-1
-1
Net Incom e
77
-304
204
65
45
47
EPS (PLN)
1.2
-4.1
2.7
0.9
0.6
0.6
-447%
-167%
-68%
-31%
5%
- yoy change
2005
2006
2007
2008E
2009E
2010E
10.8%
6.2%
16.3%
21.5%
8.9%
9.0%
EBIT Margin
2.8%
-17.8%
10.8%
9.3%
2.1%
2.3%
Net Margin
4.6%
-18.2%
11.2%
2.4%
2.0%
2.1%
ROE
5.8%
-21.2%
15.1%
4.0%
2.8%
2.9%
ZCh Police - Balance Sheet (PLN m)
2010E
Gross Margin
2005
2006
2007
2008E
2009E
592
582
559
724
654
667
187
182
156
122
125
122
Other Current assets
405
400
403
602
529
545
Total Fixed Assets
845
631
800
899
936
976
Tangible Assets
761
576
727
824
859
897
Other Fixed Assets
83
55
74
75
77
78
Total Assets
1 437
1 213
1 359
1 623
1 590
1 643
1091
1049
728
933
998
1044
0
4
6
6
7
7
91
110
116
107
85
84
Long -Term Debt
Short -Term Debt
1
0
0
1
1
109
116
106
84
82
591
694
620
1028
910
909
1
55
0
7
13
27
295
319
310
510
449
441
1 643
1 437
1 213
1 359
1 623
1 590
BVPS (PLN)
14.0
9.7
12.4
13.3
13.9
14.5
2005
2006
2007
2008E
2009E
2010E
Current Ratio
1.0
0.8
0.9
0.7
0.7
0.7
Quick Ratio
0.6
0.6
0.6
0.4
0.4
0.5
Bank Debt/Assets
Bank Debt/Equity
0%
5%
0%
0%
1%
2%
0%
8%
0%
1%
1%
3%
2010E
ZCh Police - Cash Flow (PLN m)
2005
2006
2007
2008E
2009E
Net Profit
77
-304
204
65
45
47
79
62
48
53
55
56
-151
276
-78
43
-34
-12
4
34
174
161
66
90
-87
-59
-173
-152
-92
-95
Other
Change in Debt
16
-1
14
-50
24
-11
-72
-60
-158
-202
-68
-106
15
-8
56
-56
8
6
Issuance of Shares
150
0
0
0
0
0
Other
-35
-34
13
0
-1
-2
107
21
-43
7
5
13
Beginning Cash
147
187
182
155
121
124
40
-5
-28
-34
3
-3
Ending Cash
187
182
156
122
125
122
DPS (PLN)
0.3
0.4
0.0
0.0
0.0
0.0
70
0
91
The 4Q08 results will probably the worst in the Company history. Company already
announced that it is going to make the PLN 150m write off of its inventories (potash salt,
phosphate rock, final fertilizers bought/produced during the period of high prices). On top
of it, the Company has non symmetrical options position, with the final negative
valuation will amount to PLN 125m. So we expect, ca.256m losses on the bottom line.
Table 68 Zakłady Chemiczne Police – 4Q08E Results Preview
P & L (PLN m )
4Q07
1Q08
2Q08
3Q08
4Q08E
YoY
QoQ
12M07
12M08E
YoY
Revenues
480.6
707.0
779.2
698.8
483.0
0.5%
-30.9%
1 824.2
2 668.1
46.3%
Operating profit
Net profit
82.4
150.0
138.2
111.6
-152.2
na
na
197.6
247.6
25.3%
108.8
130.6
122.2
89.0
-277.1
na
na
204.0
64.7
-68.3%
Table 69 Zakłady Chemiczne Police – DCF
ZCh Police - DCF Model
2009E
2010E
2011E
2012E
2013E
2014E
Terminal
Year
-14.8%
-2.0%
-2.6%
2.3%
0.5%
0.5%
0.5%
Revenues
2 273
2 227
2 169
2 219
2 231
2 243
2 254
EBIT Margin
2.1%
2.3%
2.4%
2.4%
2.3%
2.3%
2.4%
EBIT
47
51
53
52
51
51
54
19.0%
19.0%
19.0%
19.0%
19.0%
19.0%
19.0%
NOPAT
38
41
43
42
41
41
44
+ Depreciation
55
56
57
58
58
59
51
-92
-95
-94
-94
-94
-94
-51
Effective Tax Rate
- Capex
-2
-8
5
-4
-1
-1
-3
FCFF
-1
-6
10
2
5
6
41
11.0%
11.0%
11.0%
10.9%
10.9%
10.8%
10.8%
-1
-5
8
1
3
3
Terminal Value
400
WACC
9
238
247
182
Key Assum ptions
Value of Firm =
429
8
Value of Equity =
422
-0.3%
2.3%
Market Risk Premium
5.5%
5.6
Beta
5.7
1
10.9%
Nominal Growth
4.4%
3.4%
2.4%
1.4%
0.4%
-3.5%
-0.5%
8.3
7.0
5.8
4.5
3.2
-2.5%
0.5%
8.5
7.1
5.7
4.2
2.8
-1.5%
1.5%
8.8
7.2
5.6
4.0
2.4
8.8%
9.8%
WACC in Perpetuity
Nominal Growth
10.8%
11.8%
12.8%
-3.5%
-0.5%
6.5
6.1
5.8
5.5
5.3
-2.5%
0.5%
6.4
6.0
5.7
5.4
5.1
-1.5%
1.5%
6.4
5.9
5.6
5.3
5.0
71
Construction
Construction
Construction market – 2009 challenges vs. good long term
outlook
2009 construction
market highlights:
Infrastructure and price
war
Construction market in 2009 is expected to be marked by contraction in residential and
commercial segment, while public spending on infrastructure should be the main driver.
Such situation is likely to result in severe price competition by construction companies.
We focus on these two main attributes of 2009 construction market presenting detailed
information about prospective growth of transport and energy infrastructure and insight
into profitability outlook.
Construction market
grew 70% over last 4
years thanks to 20042006 EU financing...
Infrastructure projects are going to be finance in large part by EU money what is major
source of our optimism about the feasibility of the plans. Out of € 67 bn granted to
Poland c. 69% is going to be spent on construction purposes, though the amount is likely
to be higher as national cofinancing is likely to bring the amount to c. € 82 bn.
Comparing it with 2004-2006 financing period (absorption level reached 92%) the annual
amount of money grew by 135% while the amounts allocated to construction grew by
… and new financing
perspective increases
the amount to 19.8% of
construction market size
(from 14.8%)
128%. Accordingly we believe that if more than two times smaller amounts managed to
revive Polish construction market in 2004, much more significant amounts should make it
at least resilient to contraction. In 2005 annual EU money for construction equaled
14.8% of Polish construction market, while new financing program brings this amount to
19.8% of 2008 construction market.
Transportation – both main and local roads as well as railroads – is the main beneficiary
of the EU money, where c. 45% of EU money is allocated, followed by environment
protection infrastructre with allocation of c. 20%.
Table 70 Annual growth rates of main segment of construction market
Segments
Residential buildings
Non-residential buildings
Civil engineering w orks
Other (1-9 employees)
Building installation
Building completion
Construction sector
2004
5.9%
15.8%
1.5%
25.5%
5.3%
-1.3%
7.6%
2005
3.2%
-10.1%
7.3%
46.3%
3.2%
22.2%
8.1%
2006
11.5%
20.6%
22.0%
11.3%
20.9%
30.6%
19.8%
2007
39.6%
21.9%
23.6%
13.0%
14.4%
16.8%
20.4%
2008E
27.4%
14.4%
25.1%
9.6%
18.8%
16.6%
19.2%
Source: Statistical Office and IPOPEMA estimates
Chart 31 ROADS - Comparison of the main roads infrastructure network in early 2009 and 2012E
Source: GDDKiA, Ministry of Infrastructure and IPOPEMA estimates
72
2009E
-22.6%
-3.0%
34.8%
3.2%
-7.1%
-5.2%
6.6%
2010E
-15.0%
-15.8%
21.0%
4.7%
-12.5%
-9.1%
2.3%
Construction
Roads - Spending spree starts now
Governmental program of roads construction aims to
Breakdown of current and targeted length of main
roads infrastructure in Poland
improve underdeveloped network of Polish main roads,
which at the beginning of 2009 amounted to c. 760 km of
2500
motorways and c. 350 km of expressways. The 2012
2000
target of 1605 km of motorways and 2418 km of
1500
expressways is supported by the governemental financing
1000
Motorways
of PLN 100 bn in 2009-2012 period with 65% of it to be
spent in 2009/2010. Regarding motorways construction -
Expressroads
500
0
25% of targeted length is currently under construction
with further 27.5% still waiting to be distributed to
contractors. In case of expressways only 7.5% of
targeted length is under construction with c. 78% still to
be distributed. Thus the focus is expected to be shifted to
expressways next year with large number of ring roads
Source: GDKKiA & IPOPEMA estimates
on top of the indicated figures.
The alloacated amounts of money equal to PLN 34.4m per
km of high speed road, which we find realistic figure
bearing
in
mind
that
71%
of
roads’
length
are
expressways. We see two major risks that could obstruct
execution of the plans. Firstly, the bureaucracy might
ROADS. Annual allocations on roads construction
between 2002 and 2012E in PLN billion
35
30
impact negatively mainly the timeline of the program and
25
the impact of new environmental law passed at the end of
20
2008, aimed to halve the time of environmental decision,
15
is still to be determined. Secondly, there is uncertainty
10
about government’s strategy to deal with the crisis and
the risk of curtailing the infrastructure spending to limit
the budget deficit. On the other hand the fact that
5
0
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
majoirty of the financing is based on EU money makes
National financing of Polish roads
EU financed roads construction
these investments priority. On top of governmental
program, investments in local roads are expected as well
to be supported by EU money as communities proved
Source: GDDKiA, Ministry of Infrastructure and IPOPEMA
Research
during last financing perspective to be eager to grab such
chances.
Railroads – More an issue of future,
though improvement is significant
National program for
investment in
RAILROADS. Annual amounts allocated to national
program of investment in railroads
Polish railways
envisages spending PLN 113 bn on railway infrastructure
7,000
2007-2013
until 2030. 2007-2013 perspective says of investments of
6,000
PLN 33.5 bn out of which 78% is to be spent on
5,000
renovation of existing tracks. New tracks construction is
4,000
enviaged no sooner than in 2014-2020 when the High
3,000
Speed Railways project is planned to be implemented. We
2,000
see annual amount of PLN 4.8 bn as a significant
1,000
improvement to much smaller amount of c. 2 bn in 2007.
Financing structure of these project is similar to roads
investment with EU money being the primary driver.
2014-2020
2021-2030
0
New
railroads
construction
Railroads
renovation
Maintenance
Total
Source: Ministry of Infrastructure and IPOPEMA Research
73
Construction
Chart 32 RAILROADS – Map of new railroads to be built by 2030 (LHS) and map of Polish network of railroads
indicating the targeted speed capacity of tracks by 2030E (RHS)
Source: Ministry of Infrastructure and IPOPEMA Research
Construction for energy – prospective, though unlikely to happen
soon
Construction segement could benefit largely on the expected investments in Polish power
sector, which however might still be delayed due to delays in market liberalization and
latest tariff decisions.
Official governmental program says of 2.5% annual increase of demand for electricity,
what would imply adding some 22GW of new installed capacity. But even an increase of
demand of 1.5% would imply significant investments of adding 10GW of new capcity
costing some € 22 bn. On top of that generous renovation and modernization
investments are likely to be grabbed by construction companies worth some € 15 bn until
2030.
Other segment of energy market envisage large investments as well with PLN 12.6 bn of
PKN Orlen capex and PLN 5.6 bn of Lotos capex. PGNiG’s investment in storage capacity
expansion, construction of LNG terminal and adjustment of Polish transmission system
are expected to offer PLN 3.5-4 bn for construction companies.
Price war – profitability outlook
Construction companies managed to take advantage of the recent construction market
boom by building large backlog levels, many of which were signed at time of peaking
material and labour prices. With current construction prices, deflation the contracts
signed at fixed margin should offer additional upside to already healthy margins
incorporated into contracts. However, we expect only few contracts – mainly signed by
governmental agencies to be fixed, while all other contracts are likely to be indexed or
renegotiated by the clients in the midst of falling prices. Accrodingly we recommend to
buy companies with backlogs composed of contracts signed with public authorities and
sell the ones involved in construction for private sector.
74
Construction
Peers Valuation
Table 71 Western peers comparables valuation
Com pany
Last Price
Balfour Beatty
Bauer AG
FCC
Heijmans NV
Hochtief
GBp 363.5
EUR 24.3
EUR 22.11
EUR 5.22
EUR 26.46
GBp 550
EUR9.65
EUR 6.44
SEK 74.25
EUR 11.81
Morgan Sindall PLC
OHL
Sacyr Vallehermoso
Skanska
Strabag
MEDIAN
2009E 2010E
P/E
9.5
9.5
5.9
6.5
7.7
7.1
6.6
3.6
10.2
9.6
7.4
6.4
5.7
5.1
4.3
4.3
12.6
11.7
6.3
6.8
7.0
6.7
2009E 2010E
EV/EBITDA
7.5
7.6
5.2
5.6
8.2
7.9
10.1
8.1
5.2
5.1
3.9
3.6
5.6
5.2
22.6
22.5
5.7
5.7
6.0
6.0
5.9
5.9
Source: Bloomberg, companies’ websites, IPOPEMA estimates
Table 72 Domestic peers comparables valuation
Com pany
Last Price
2009E
2010E
P/E
Budimex
Elektrobudow a
Erbud
PBG
Polimex
MEDIAN
PLN
PLN
PLN
PLN
PLN
54.45
138
23
190
2.25
2009E
2010E
EV/EBITDA
12.0
10.8
8.7
12.7
8.0
10.8
10.3
9.9
9.4
9.9
7.9
9.9
6.8
7.5
7.4
8.7
5.0
7.4
5.8
6.6
7.8
6.9
4.6
6.6
2009E
2010E
2009E
2010E
Table 73 Valuation premiums/discounts
Com pany
Prem ium /Discounts to Western Peers
Budimex
Elektrobudow a
Erbud
PBG
Polimex
MEDIAN
Prem ium /Discounts to Dom estic Peers
Budimex
Elektrobudow a
Erbud
PBG
Polimex
P/E
73%
55%
55%
49%
25%
42%
82%
48%
14%
18%
62%
48%
P/E
11%
4%
0%
1%
-20%
-4%
17%
0%
-27%
-20%
EV/EBITDA
16%
-1%
28%
13%
26%
33%
48%
18%
-14%
-21%
11%
-1%
EV/EBITDA
-8%
-12%
2%
0%
0%
18%
18%
4%
-32%
-30%
Table 74 Valuation implied by multiple
Com pany
Im plied value by Western peer m ultiple
at 30% prem ium
Budimex
Elektrobudow a
Erbud
PBG
Polimex
Im plied value by Dom estic peer m ultiple
Budimex
Elektrobudow a
Erbud
PBG
Polimex
2009E
2010E
P/E
40.9
115.4
24.0
135.6
2.56
P/E
48.9
138.0
28.7
162.2
3.06
2009E
2010E
EV/EBITDA
45.8
120.1
21.1
166.7
2.48
52.2
136.9
24.0
190.0
2.82
67.4
78.7
143.5
162.4
26.1
28.6
149.0
202.5
3.67
5.27
EV/EBITDA
62.0
66.1
136.1
138.0
26.4
24.8
155.6
180.3
3.88
3.63
75
Budimex S.A.
Infrastructure Play
We like Budimex because we believe it is one of the very few companies that are
immune to economic contraction and should deliver above average profit growth
in next 2-3 years. Moreover, the company has a very strong balance sheet, which
substantially limits investment risk. We recommend Budimex share BUY – Low
17 February 2009
BUY – Low Risk
12M TP PLN 74/ (Feb 13th) PLN 54.45
Risk with a target price of PLN 74 (36% upside from current level) – despite the
fact that on 2009E P/E basis it is trading with 11% premium to domestic peers.
350
The premium shrinks in 2010E. The important thing in Budimex valuation is
300
accounting for valuable assets (land + under construction property projects) that
250
were purchased at low prices in the past (mostly “Inflandzka” project that if sold,
200
should deliver PLN 150m-200m operating profit).
150
Budimex vs. WIG=100
Budimex vs. WIG-Construction=100
100
Construction market weakens but Infrastructure is a different story
Budimex is market leader in the road construction segment that we assume
50
Jan- Apr06
06
Jul06
Oct- Jan- Apr06
07
07
Jul07
Oct- Jan- Apr07
08
08
Jul08
Oct- Jan08
09
should be one of the fastest growing part of Polish economy in the next few years.
We assume that road constructing spending in Poland may reach PLN 130bn in
2009E-13E (PLN 26 bn a year). What make the forecasts probable (even during
the crisis) is fact that large portion of these investments would be supported by EU
funds. Additional factor is EURO 2012 tournament that should work like a
“acceleration factor” for some of these investments.
Profitability could benefit from the crisis
Key Ratios
2008E
2009E
EBITDA Margin
4.0%
4.9%
Budimex could paradoxically report much higher margins during the crisis thanks
EBIT Margin
3.5%
4.3%
to lower material costs and falling subcontracting prices. The only risk are prices
ROE
17.9%
18.3%
that could go down due to sharpening competition. However, giving the fact that
Bank Debt / Assets
11.9%
7.5%
majority of construction companies operating in Poland do not have enough
competences / financial capacity to do large road/motorway contracts (which
Share data
number should grow) we think Budimex should be able to keep existing margins.
25.5
Market Cap (€m)
Motorway story – it is potentially not the end of good news yet
306.0
49.7
“Autostrada Południe” (consortium of Cintra (90%)/Ferrovial (5%)/Budimex (5%))
won the concession for 180km A1 motorway. At the same time Budimex gets
construction contract worth at least PLN 3.4bn that moves its backlog figure above
1.17
52 W High / Low
93.5 / 50.0
WIG Weight (%)
Reuters
BMEX.WA
0.68
Bloomberg
BDX PW
PLN 7 bn – the level that should enable the company to selectively look for other
contracts at the competitive market.
The only risk is financing for the project,
which if not secured within 12 months time results in cancellation of the
concession agreement. “Autostrada Południe” is still in the negotiation process on
concession on 90km A2 motorway. In case it wins the tender Budimex is
Perform ance
Abs.
vs. WIG
3M
-19%
-10%
YTD
4%
20%
12M
-34%
32%
guaranteed to get at least 50% from the construction contract worth c. PLN 2bn.
2006
2007
2008E
2009E
2010E
3 043
3 076
3 300
3 454
4 056
EBITDA (PLN m)
31
52
132
168
192
EBIT (PLN m)
10
28
116
148
169
4
15
96
115
135
EPS (PLN)
0.2
0.6
3.8
4.5
5.3
DPS (PLN)
0.0
0.0
0.0
0.0
0.0
53.3
491.7
41.0
155.9
8.1
13.6
6.8
12.0
5.8
10.3
Revenues (PLN m)
Net profit (PLN m)
EV / EBITDA (x)
P/E (x)
Stake
Valivala Holdings (Ferrovial Group)
59.1%
BZ WBK AIB AM
Other
14.2%
26.7%
Analysts
76
Shareholders
+ 48 22 236 92 44
Tomasz Duda
+ 48 22 236 92 32
Budimex S.A.
Table 76 Budimex – Financials
P&L (PLN m)
2005
2006
2007
2008E
2009E
2010E
Revenues
2 703
3 043
3 076
3 300
3 454
4 056
13%
1%
7%
5%
17%
125
148
199
287
345
18%
19%
34%
44%
20%
- yoy change
Gross Profit
106
- yoy change
Hedging gain/(loss)
52
23
42
85
0
0
-21
-2
-21
-20
9
-6
EBIT
- yoy change
2
10
406%
28
182%
116
314%
148
27%
169
14%
EBITDA
- yoy change
23
31
34%
52
66%
132
156%
168
27%
192
14%
-3
4
0
-16
8
-7
1
2
2
2
2
3
Pretax Profit
7
12
14
126
144
168
-6
-8
1
-30
-28
-33
1
0
1
0
0
0
Income Tax
Net Incom e
EPS (PLN)
2
4
15
96
115
135
0.08
0.15
0.59
3.76
4.52
5.29
92%
287%
538%
20%
17%
- yoy change
Gross Margin
3.9%
4.1%
4.8%
6.0%
8.3%
8.5%
EBIT Margin
0.1%
0.3%
0.9%
3.5%
4.3%
4.2%
Net Margin
0.1%
0.1%
0.5%
2.9%
3.3%
3.3%
ROE
0.4%
0.7%
2.9%
17.9%
18.3%
18.1%
2005
2006
2007
2008E
2009E
2010E
1 591
1 887
1 838
1 982
2 024
2 403
457
489
509
525
448
492
1134
1398
1329
1457
1576
1912
Total Fixed Assets
343
425
506
508
550
613
97
103
97
114
131
149
Tangible Assets
Other Fixed Assets
Total Assets
Long -Term Debt
Short -Term Debt
247
322
409
394
419
463
1 935
2 312
2 344
2 490
2 575
3 016
520
523
536
632
748
883
3
1
0
0
0
0
135
216
313
335
278
319
132
23
96
171
183
119
112
120
142
152
159
187
1281
1573
1495
1522
1549
1814
102
138
106
113
74
82
1178
1435
1389
1409
1475
1732
1 935
2 312
2 344
2 490
2 575
3 016
20.2
20.5
21.0
24.8
29.3
34.6
Current Ratio
1.2
1.2
1.2
1.3
1.3
1.3
Quick Ratio
1.0
1.0
0.9
0.9
0.9
0.9
Bank Debt/Assets
6%
10%
12%
12%
7%
7%
Bank Debt/Equity
24%
45%
52%
47%
26%
24%
2005
2006
2007
2008E
2009E
2010E
2
4
15
96
115
135
21
21
24
16
20
23
-73
-103
-54
-118
-6
-34
125
BVPS (PLN)
Cash Flow (PLN m)
Net Profit
-50
-78
-15
-6
129
-14
-21
-11
-38
-41
-45
Other
136
37
30
62
-48
-45
123
17
19
24
-89
-91
58
100
22
19
-103
22
0
0
0
0
0
0
-5
-7
-6
-21
-14
-12
Change in Debt
Issuance of Shares
Other
Beginning Cash
53
93
16
-2
-118
10
332
457
489
509
525
448
126
32
20
17
-77
44
Ending Cash
457
489
509
525
448
492
DPS (PLN)
0.0
0.0
0.0
0.0
0.0
0.0
77
Budimex S.A.
Positive one-offs could
be expected in 4Q08.
We expect some negative impact of currency hedging could be visible in the 4Q08
results. On the other hand the company should report positive impact of released
provisioning. Housing division should continue to deliver good results (despite gloomy
market) as the company is still recognizing sales of old projects.
Table 77 Budimex – 4Q08E Results Preview
P & L (PLN m)
4Q07
1Q08
2Q08
3Q08
4Q08E
YoY
QoQ
12M07
12M08E
YoY
Revenues
753.5
653.2
836.2
964.9
846.0
12.3%
-12.3%
3 075.9
3 300.2
42.1%
16.3
17.9
11.7
15.5
40.7
30.4
34.4
27.2
29.3
22.4
79.3%
25.1%
-14.9%
-17.6%
28.0
15.1
116.1
95.5
890.0%
na
Operating profit
Net profit
Our DCF model returns a target price of PLN 74, which a 34% upside to the current price.
Our revenues forecast is based on current backlog (PLN 3.7bn), assumption that
Budimex will do A1 contract and that it will be able to sign new contracts of total value of
some PLN 3bn a year (comparable with 2007-08E results), which we do not find very
demanding giving the number of new orders in the road construction segment.
Our
assumption could become too conservative if the company wins contract on A2 motorway
or another very big construction contract in the near future. We remain conservative in
our profitability expectations – we are looking for 4% operating margin in 2011E-14E. If
the company is successfully selling housing projects again (as it was the case in 200607E when, however it suffered from losses on other activities) the profitability of the
group could be 0.2% - 0.5% higher vs. our current expectations.
Table 78 Budimex – DCF
We assume no growth in
operating margin
2010E
2011E
2012E
4.7%
17.4%
11.3%
13.1%
9.0%
5.5%
2.0%
Revenues
3 454
4 056
4 516
5 107
5 567
5 873
5 990
EBIT Margin
4.3%
4.2%
4.0%
4.0%
4.0%
4.0%
4.0%
EBIT
2013E
2014E
Terminal
Year
2009E
148
169
180
203
222
235
240
19.0%
19.0%
19.0%
19.0%
19.0%
19.0%
19.0%
120
137
146
165
180
190
194
20
23
27
31
33
34
35
- Capex
-33
-36
-40
-44
-49
-45
-39
-21
-101
-19
-51
-46
-31
-20
FCF
86
22
114
100
118
149
Effective Tax Rate
NOPAT
+ Depreciation
Terminal Value
170
2 095
WACC
86
445
10.3%
10.3%
10.3%
10.2%
20
93
75
80
91
1 284
418
2 147
Value of Equity =
10.1%
1 729
Value of Firm =
10.4%
-296
1 851
Key Assum ptions
10%
4.0%
Market Risk Premium
5.5%
73
Beta
74
1
10.3%
3.5%
4.0%
4.5%
-2.0%
1.0%
55
62
68
74
81
-1.0%
2.0%
59
66
74
81
88
0.0%
3.0%
64
73
81
89
98
11.1%
10.6%
9.1%
Nominal Growth
3.0%
5.0%
WACC in Perpetuity
Nominal Growth
10.1%
9.6%
-2.0%
1.0%
64
66
68
71
74
-1.0%
2.0%
68
71
74
77
81
0.0%
3.0%
74
77
81
85
91
78
Elektrobudowa S.A.
Energized investment
We find Elektrobudowa’s stock an attractive vehicle to capture the expected boom
in Polish energy market. Elektrobudowa is highly specialized, second tier
17 February 2009
construction company, with expected flat results on poor construction market,
BUY – Medium Risk
strong balance sheet position, stable dividend policy and dividend yield 2009 of
12M TP PLN 180/ (Feb 13th) PLN 138
2.1%. Elektrobudowa trades currently at P/E09 of 10.8 and EV/EBITDA09 of 7.5,
what makes it an attractive investment in our view, given the immunization of the
results to poor market and growth prospects. Accordingly we recommend BUY
650
Medium Risk with 12M TP of PLN 180.
550
Elektrobudowa vs. WIG=100
Elektrobudowa vs. WIG-Construction=100
450
Elektrobudowa – Strong position on construction for power sector market
Elektrobudowa provides its services for power generation segment in regard of
350
250
150
construction of complex electrical power engineering installations of low and
medium voltages, for industrial companies in regard of power engineering
50
Jan- Apr06
06
Jul06
Oct- Jan- Apr06
07
07
Jul07
Oct- Jan- Apr07
08
08
Jul08
Oct- Jan08
09
installations and with distribution segment focused on production and service of
specialized power equipment. 69% of 2009E top line is expected to come from
public sector (vs. 64% in 2008), though Elektrobudowa has diversified its activities
lately by launching its subsidiaries in Russia, by capturing large nuclear power
plant contract with follow-up contracts expected and by successful M&A activity.
Growth prospects tempered, margins retained
Key Ratios
2008E
2009E
EBITDA Margin
9.1%
9.2%
EBIT Margin
8.5%
8.2%
54.2%
24.1%
0.0%
0.0%
ROE
Given relatively short duration of contracts and poor outlook for construction
Bank Debt / Assets
companies in private sector we expect 11% drop of revenues in the industrial
segment and 5% decrease of distribution segment. These gaps are expected to be
Share data
filled by sales generated by automation segment launched last year on the back of
two acquired subsidiaries. We expect the acquisition to be successful in both
4.7
Market Cap (€m)
141.2
1.8
growth and profitability as the acquisition allowed to secure the employment of
highly skilled engineers, what allows to generate high margins. Accordingly, we
52 W High / Low
208.9 / 136.0
expect EBIT margin attrition of a mere 0.3% in 2009 as lower margins on core
WIG Weight (%)
Reuters
business are expected to be offset by higher margins of automation segment.
LBUD.WA
Bloomberg
0.12
0.69
ELB PW
Investment in energy sector
Elektrobudowa’s stock is the best way of capturing expected boom of investments
Perform ance
Abs.
vs. WIG
in energy sector. However, given recent abandonment of liberalization of power
3M
-18%
-10%
YTD
-12%
2%
12M
-31%
39%
market, latest tariff decisions and current cost structure of the power companies,
we do expect the boom to be further delayed. Accordingly, we expect top line
CAGR08-10 of 5% as the investments are not likely to happen before 2011E.
Revenues (PLN m)
2006
2007
2008E
2009E
2010E
Shareholders
Stake
ING NN Pension Fund
13.7%
CU Pension Fund
ING Investment Fund
10.1%
10.0%
AIG Pension Fund
7.4%
PZU Pension Fund
6.7%
Legg Mason AM
AXA Pension Fund
6.7%
6.3%
474.3
679.6
852.4
865.2
941.9
EBITDA (PLN m)
28.2
49.6
77.8
79.4
84.3
EBIT (PLN m)
23.5
44.2
72.6
71.3
75.4
Net profit (PLN m)
15.4
34.7
60.6
60.5
65.9
EPS (PLN)
3.76
8.22
13.51
12.75
13.89
DPS (PLN)
1.5
2.0
2.4
3.0
3.5
EV/EBITDA
16.0
17.0
8.9
7.5
6.6
P/E (x)
28.5
24.3
11.6
10.8
9.9
Tomasz Duda
Other
39.1%
Analysts
+ 48 22 236 92 44
+ 48 22 236 92 32
79
Elektrobudowa S.A.
Table 80 Elektrobudowa – Financials
P&L (PLN m)
Revenues
2005
2006
2007
2008E
2009E
345
474
680
852
865
942
38%
43%
25%
2%
9%
- yoy change
Gross Profit
25
- yoy change
2010E
37
58
91
90
95
44%
58%
57%
-1%
5%
-2
-2
-2
-1
-1
-1
EBIT
13
24
44
73
71
75
81%
88%
64%
-2%
6%
28
50
78
79
84
56%
76%
57%
2%
6%
- yoy change
EBITDA
18
- yoy change
0
-1
-1
3
0
0
0
0
2
1
4
6
Pretax Profit
13
- yoy change
22
45
76
75
81
74%
101%
71%
-2%
8%
-15
Income Tax
-3
-5
-9
-16
-14
-1
-2
-1
0
0
0
9
15
35
61
61
66
Net Income
EPS (PLN)
2.34
- yoy change
3.76
8.22
13.51
12.75
13.89
61%
119%
64%
-6%
9%
Gross Margin
7.4%
7.8%
8.6%
10.7%
10.5%
10.1%
EBIT Margin
3.8%
5.0%
6.5%
8.5%
8.2%
8.0%
Net Margin
2.7%
3.2%
5.1%
7.1%
7.0%
7.0%
ROE
14.3%
21.9%
41.1%
54.2%
24.1%
22.2%
2005
2006
2007
2008E
2009E
2010E
132
224
279
362
376
444
10
22
22
48
59
99
121
202
257
313
318
346
Total Fixed Assets
44
50
60
127
156
157
Tangible Assets
30
34
38
100
130
133
Other Fixed Assets
14
16
22
27
25
25
175
274
339
489
532
602
347
Total Assets
72
88
112
251
298
2
3
0
0
0
0
7
10
11
16
16
18
Long -Term Debt
0
0
0
0
0
0
7
10
11
16
16
18
97
176
216
222
218
237
Short -Term Debt
16
22
22
0
0
0
80
153
193
222
218
237
175
274
339
489
532
602
BVPS (PLN)
18.0
20.8
26.5
52.9
62.7
73.1
Current Ratio
1.4
1.3
1.3
1.6
1.7
1.9
Quick Ratio
0.1
0.1
0.1
0.2
0.3
0.4
Bank Debt/Assets
9%
8%
7%
0%
0%
0%
Bank Debt/Equity
23%
25%
20%
0%
0%
0%
Cash Flow (PLN m)
2005
2006
2007
2008E
2009E
2010E
Net Profit
9
15
35
61
61
66
5
5
5
5
8
9
Other (incl. WC)
3
-4
-17
-24
-7
-8
17
16
23
42
61
67
-6
-8
-11
-72
-37
-10
Other
1
1
-4
0
0
0
-6
-7
-15
-72
-37
-10
Change in Debt
-5
6
-3
-22
0
0
0
5
0
90
0
0
Issuance of Shares
Other
-6
-7
-10
-11
-14
-17
-11
4
-13
57
-14
-17
Beginning Cash
9
10
26
22
48
59
1
12
-4
27
10
40
Ending Cash
DPS (PLN)
80
10
22
22
48
59
99
1.00
1.45
2.00
2.35
3.00
3.50
Elektrobudowa S.A.
Table 81 Elektrobudowa – 4Q08E Results Preview
P & L (PLN m )
4Q07
1Q08
2Q08
3Q08
4Q08E
YoY
QoQ
Revenues
243.7
169.6
204.8
208.2
268.6
10.2%
29.0%
679.6
852.4
25.4%
11.3
12.7
17.0
26.1
16.4
44.8%
-37.2%
44.2
72.6
64.1%
9.7
11.0
14.4
22.0
13.1
35.6%
-40.3%
34.7
60.6
74.7%
Operating profit
Net profit
12M07 12M08E
YoY
The slowdown of industrial segment is expected to translate into slowdown of
Elektrobudowa’s top line to 10% yoy (vs. 39% in 3Q08). We expect to see first pressures
on margins in segmental breakdown, which however are likely to be offset by automation
segment that is consolidated for the second quarter. This should translate into EBIT
margin of 6.1% (vs. 4.6% in 4Q07), though the impact of new subsidiaries is expected
to be seen in SG&A line as well. Usually lean line of P&L is expected to increase its share
in revenues to 2.5% (vs. 1.7% in 4Q07) due to contribution of new subsidiaries and
payment of annual bonuses.
Elektrobudowa has no debt and majority of its contracts are denominated in PLN, thus its
exposition to current volatility in FX market is limited. We expect the negative valuation
of FX forwards not to exceed PLN 2m.
Net profit of PLN 13.1m (+35%yoy) in 4Q08 brings 2008 bottom line to PLN 60.6m i.e.
5% above Management guidance.
4Q08 results are going to bring important information regarding the backlog. After 9M08
the figure stood at PLN 573.6m and given Elektrobudowa’s seasonality of contracts
acquisition the backlog below PLN 450 would be negative indication about 2009 growth
prospects. If, the backlog comes out above PLN 450m we expect our 2009 flat top line
forecast to be accurate.
Table 82 Elektrobudowa – DCF
Revenues
EBIT Margin
2010E
2011E
2012E
2013E
1.5%
8.9%
19.2%
10.8%
10.4%
7.2%
2.0%
865
942
1 123
1 244
1 373
1 472
1 501
8.7%
8.7%
8.7%
8.9%
8.2%
8.2%
6.5%
76
82
98
111
112
121
98
19.0%
19.0%
19.0%
19.0%
19.0%
19.0%
19.0%
61
67
79
90
91
98
79
8
9
9
9
9
9
9
-37
-10
-12
-12
-12
-12
-10
EBIT
Effective Tax Rate
NOPAT
+ Depreciation
- Capex
2014E
Terminal
Year
2009E
-8
-8
-20
-13
-14
-11
-4
FCF
24
57
56
73
73
84
74
11.0%
10.9%
10.9%
10.8%
10.8%
10.6%
51
45
53
48
50
Terminal Value
854
WACC
24
272
509
781
Value of Firm =
57
838
0
Key Assum ptions
11%
8.6%
5.5%
Value of Equity =
838
Market Risk Premium
177
Beta
180
1
10.9%
Nominal Growth
8.5%
7.5%
6.5%
5.5%
-1.0%
1.0%
203
187
171
155
139
0.0%
2.0%
216
198
180
162
144
1.0%
3.0%
232
211
191
170
150
Nominal Growth
11.6%
11.1%
10.6%
10.1%
9.6%
-1.0%
1.0%
162
166
171
177
183
0.0%
2.0%
168
174
180
187
194
1.0%
3.0%
177
183
191
199
209
4.5%
WACC in Perpetuity
81
Erbud S.A.
Strong in weak segments
Erbud’s business models, diversification into new segments and lean costs
structure allows it to leverage growing construction market in its favour. However,
17 February 2009
given poor outlook for Erbud’s core segmets, we expect flat top line, attrition of
HOLD – High Risk
EBIT margin by 130 bps and 34% decrease of EPS08-10. These assumptions
make us recommend Erbud’s stock HOLD High Risk with 12M TP of PLN 30 as still
it’s flexible business model offers the chance to come out of the recession
200
unharmed and profitable.
180
Diversification unlikely to alleviate Erbud’s results
160
Erbud is heavily exposed to industrial and commercial segments of the market
120
Erbud vs. WIG=100
Erbud vs. WIG-Construction=100
140
with their poor 2009 outlook. The latest diversification into developing activity and
roads segment was below expectations. Roads companies did not manage to
repeat 2007 results and poor residential market hampered the prospects of
100
80
60
40
Jan- Apr06
06
Jul06
Oct- Jan- Apr06
07
07
Jul07
Oct- Jan- Apr07
08
08
Jul08
Oct- Jan08
09
Budlex. On the other hand, both segments are not expected to deteriorate in 2009
as Erbud’s developer possesses significant amount of land acquired in early 2000s
that allows it to leverage its already strong position of local leader and roads
subsidiaries are starting to acquire more contracts. The export becomes more
important as Erbud has significant experience in the field and current FX levels
make such strategy noteworthy.
Core business under pressure
Key Ratios
2008E
2009E
EBITDA Margin
6.4%
5.6%
EBIT Margin
5.9%
5.1%
ROE
5.0%
15.1%
14.3%
14.9%
Bank Debt / Assets
Core domestic business is expected to generate 78% of sales and 75% of gross
margin in 2009. With poor outlook for the main segments, the probability of
Share data
negative newsflow (more contracts suspension/cancellation) is still high. Moreover,
12.6
majority of current backlog is going to be executed this year, while the size and
Market Cap (€m)
66.4
quality of new acquired contracts might be lower putting pressure on 2010 results.
3.6
0.03
Pressures on margins
52 W High / Low
91.5 / 18.5
We expect EBIT margin attrition of 0.85 pp in 2009 and another 0.5 pp in 2010 as
WIG Weight (%)
Reuters
ERBA.WA
the effects of price war should be visible already this year. On the other hand,
0.12
Bloomberg
ERB PW
Erbud still has large backlog (PLN 816m after 9M08) that should allow it to enter
2009 with contracts signed at good margins.
2009 growth prospects
Management guidance says of outperforming the construction market growth in
Perform ance
Abs.
vs. WIG
3M
-34%
-28%
YTD
3%
18%
12M
-73%
-45%
2009 by a single digit number. Our assumptions are more cautious as we expect
slight underperformance, which in case Erbud managed to keep up with the
Shareholders
Stake
market, would constitute an additional upside to our valuation.
Wolff&Müller Baubeteiligungen GmbH&Co.
32.0%
Juladal Investments Limited
Grzeszczak Dariusz
26.4%
6.0%
Revenues (PLN m)
EBITDA (PLN m)
EBIT (PLN m)
Net profit (PLN m)
EPS (PLN)
DPS (PLN)
EV/EBITDA
P/E (x)
2007
2008E
2009E
2010E
426.2
27.2
25.4
20.2
663.1
36.0
32.8
31.8
1 033.8
65.8
61.1
10.4
923.1
51.5
46.8
33.3
922.9
47.4
42.4
30.7
2.02
0.0
2.82
0.0
0.83
0.0
2.65
0.0
2.44
1.3
N/A
N/A
82
CU Pension Fund
2006
32.8
32.2
5.9
28.9
7.4
8.7
7.8
9.4
Other
5.1%
30.6%
Analysts
+ 48 22 236 92 44
Tomasz Duda
+ 48 22 236 92 32
Erbud S.A.
Table 84 Erbud – Financials
P&L (PLN m)
2005
2006
2007
2008E
2009E
2010E
224
426
90%
37
183%
2
25
309%
27
264%
0
0
25
450%
663
56%
56
52%
-1
33
29%
36
32%
6
0
39
55%
1 034
56%
96
70%
-1
61
87%
66
83%
-48
0
13
-67%
923
-11%
78
-19%
-1
47
-23%
51
-22%
-5
0
42
219%
923
0%
71
-8%
-1
42
-9%
47
-8%
-5
0
38
-9%
-1
0
-5
0
-7
0
-3
0
-8
0
-7
0
3
0.34
20
2.02
502%
32
2.82
39%
10
0.83
-71%
33
2.65
219%
31
2.44
-8%
Gross Margin
EBIT Margin
Net Margin
ROE
5.9%
2.8%
1.5%
8.7%
5.9%
4.7%
100.6%
8.5%
4.9%
4.8%
77.4%
9.3%
5.9%
1.0%
5.0%
8.4%
5.1%
3.6%
15.1%
7.7%
4.6%
3.3%
12.1%
Revenues
- yoy change
Gross Profit
- yoy change
EBIT
- yoy change
EBITDA
- yoy change
Pretax Profit
- yoy change
Income Tax
Net Incom e
EPS (PLN)
- yoy change
13
-1
6
7
-2
0
5
2005
2006
2007
2008E
2009E
2010E
Total Fixed Assets
Tangible Assets
Other Fixed Assets
Total Assets
83
20
62
8
2
6
91
140
29
110
14
5
9
153
445
128
317
46
17
29
491
501
27
474
95
44
50
596
504
41
463
99
54
45
603
503
79
425
104
58
45
607
Long -Term Debt
Short -Term Debt
BVPS (PLN)
20
0
3
0
3
68
2
66
91
2.0
41
0
7
0
7
105
1
104
153
4.1
210
17
45
21
24
237
20
217
491
16.7
220
17
47
17
30
329
68
261
596
17.5
254
17
47
18
29
303
72
231
603
20.2
268
17
45
16
29
295
64
231
607
21.3
1.4
0.3
2%
10%
1.4
0.3
1%
3%
2.4
0.5
8%
19%
1.7
0.1
14%
39%
1.9
0.1
15%
35%
2.0
0.3
13%
30%
2005
2006
2007
2008E
2009E
2010E
3
1
-6
-1
-2
3
2
0
0
0
-1
21
-1
20
20
1
-8
14
-3
-3
-6
1
1
0
2
20
9
29
32
2
3
36
-3
-72
-75
19
121
-2
138
29
99
129
10
3
-108
-95
-51
0
-51
44
0
0
44
129
-102
27
33
5
-15
23
-14
0
-14
5
0
0
5
27
14
41
31
5
38
73
-9
0
-9
-10
0
-17
-27
41
38
79
0.00
0.01
0.00
0.00
0.00
1.33
Current Ratio
Quick Ratio
Bank Debt/Assets
Bank Debt/Equity
Cash Flow (PLN m)
Net Profit
Other (incl. WC)
Other
Change in Debt
Issuance of Shares
Other
Beginning Cash
Ending Cash
DPS (PLN)
83
Erbud S.A.
Table 85 Erbud – 4Q08E Results Preview
P & L (PLN m )
Revenues
Operating profit
Net profit
4Q07
179.4
9.4
6.3
1Q08
234.4
12.9
9.7
2Q08
266.1
9.7
6.3
3Q08
284.2
26.2
20.6
4Q08E
252.0
12.9
-24.6
YoY
40.5%
37.8%
na
QoQ
-11.3%
-50.6%
na
12M07 12M08E
664.7 1 033.8
40.3
61.1
32.1
10.4
YoY
55.5%
51.5%
-67.6%
We expect Management’s top line guidance of PLN 950m to be exceeded by 9%
supported by housing segment that is expected to meet the 2008 target of 388 units
sold. Roads segment is assumed to kick off as well as majority of the local roads
contracts are executed at the year end. Still both roads subsidiaries are expected to
come short of expectations recording lower sales than in 2007.
We do not expect any delays in contracts execution that could hamper the results due to
conservative accounting policy. That should allow Erbud to beat Management’s guidance
on EBIT line as well, though by a mere c. 3%.
The cost of FX options loss of PLN 47.5m is going to translate good operational result in
4Q08 net loss of PLN 24.6m, meaning 2008 bottom line is going down to PLN 10.4m (vs.
32m in 2007). The hedging instruments were closed at EURPLN of 3.8. Erbud is going to
recognize the entire loss this quarter while the actual cash payments are going to be
made until August 2010, which impacts negatively Erbud’s growth prospects in our view.
Table 86 Erbud – DCF
2009E
2010E
2011E
2012E
2013E
2014E
Terminal
Year
-10.7%
923
5.1%
0.0%
923
4.6%
6.8%
985
4.8%
8.7%
1 071
5.3%
5.0%
1 124
5.3%
5.0%
1 181
5.3%
2.0%
1 204
4.5%
47
20.0%
42
19.0%
47
19.0%
56
19.0%
59
19.0%
62
19.0%
54
19.0%
37
5
-14
-14
34
5
-9
38
38
5
-9
4
46
5
-9
-9
48
6
-9
-6
50
6
-9
0
44
7
-10
-4
FCF
Terminal Value
WACC
14
68
38
33
38
47
10.0%
9.9%
9.9%
9.9%
10.0%
37
439
10.5%
14
62
32
25
26
29
188
Revenues
EBIT Margin
EBIT
Effective Tax Rate
NOPAT
+ Depreciation
- Capex
273
461
27
Value of Firm =
488
Value of Equity =
-85
403
Key Assumptions
Market Risk Premium
30
Beta
30
5%
5.0%
5.5%
1
9.9%
-2.0%
-1.0%
0.0%
Nominal Growth
1.0%
2.0%
3.0%
6.5%
39
42
45
5.5%
34
36
39
11.5%
27
28
29
11.0%
28
29
31
4.5%
29
30
32
3.5%
23
24
26
2.5%
18
19
19
10.0%
30
32
34
9.5%
31
33
36
WACC in Perpetuity
-2.0%
-1.0%
0.0%
Nominal Growth
1.0%
2.0%
3.0%
84
10.5%
29
30
32
PBG S.A.
Hot infrastructure world
Large backlog, majority of which infrastructure related, good margins prospects
and still significant amount of contracts in play, make us recommend HOLD Low
17 February 2009
Risk with 12M TP of PLN 220, as PBG is currently trading with 17% and 83%
HOLD – Low Risk
premium vs. domestic peers on P/E09 and EV/EBITDA ratios, respectively. We find
the premium only partially justified by EPS08-10 growth, as PBG’s business model
implies large working capital needs and is operating on high financial leverage.
400
Leader of hot infrastructure market
PBG vs. WIG=100
PBG vs. WIG-Construction=100
350
Through the successful M&A strategy PBG managed to became the leader of
construction for environment protection segment. Such position allowed PBG not
300
250
200
only for rapid expansion on booming market, but to grab healthy margins. The
150
prospects for the market is very good given Poland’s commitment to meet EU
standard of each town above 100,000 population possessing own waste water
100
Jan- Apr06
06
Jul06
Oct- Jan- Apr06
07
07
Jul07
Oct- Jan- Apr07
08
08
Jul08
Oct- Jan08
09
treatment plant until 2010. Several large contracts in large Polish cities are still to
be distributed with estimated PLN 3.5 bn in 2009 alone. According to estimated of
Ministry of Environment the investment needs in the segment amount to PLN 70
bn until 2015, an impressive number of PLN 10 bn annually.
Growth prospects look impressive
Key Ratios
2008E
2009E
PBG already possesses large backlog of c. PLN 6 bn implying one of the greatest
EBITDA Margin
12.3%
13.7%
backlog to sales ratio in the industry. Given the prospective environmental
EBIT Margin
10.5%
12.3%
ROE
19.6%
15.7%
Bank Debt / Assets
25.9%
25.2%
protection segment, possibility to be a beneficiary of large roads contracts
distribution, participation in tenders for stadiums and Warsaw Underground, the
outlook for the growth remains good, even if PBG managed to acquire only a
Share data
fraction of them.
13.4
Market Cap (€m)
Margins improvement would not be a surprise
578.7
25.0
PBG aims to record 10% net profit margin (vs. an average of 7.5% in 2006-08).
We apply cautious assumption of gradual improvement of approaching 8% in
52 W High / Low
338.6 / 170.3
2010. However, given the fact that majority of contracts were signed at fixed
WIG Weight (%)
Reuters
PBGG.WA
margins,
Bloomberg
current
material
subcontractors, these factors
prices
deflation
and
lower
expectations
of
2.02
PBG PW
might offer an upside to our valuation, if
Management guidance is met. We expect 4Q08 results to be good first indication
Perform ance
of 2009 outlook. Moreover, PBG pointed to its plans to implement cost saving
3M
policy aiming to slash administrative costs. We expect the savings not to exceed
PLN 2m annually.
Revenues (PLN m)
2.17
2006
2007
2008E
2009E
2010E
674.3
1 376.8
2 098.1
2 618.4
3 291.5
EBITDA (PLN m)
88.4
138.2
257.7
358.0
446.8
EBIT (PLN m)
70.6
137.6
219.5
321.0
403.4
Net profit (PLN m)
52.2
102.1
153.6
201.2
258.8
EPS (PLN)
4.63
8.02
11.44
14.98
19.27
DPS (PLN)
0.0
0.0
0.0
0.0
0.0
Abs.
vs. WIG
5%
15%
YTD
-2%
12%
12M
-37%
26%
Shareholders
Stake
Wiśniew ski Jerzy
50.1%
BZ WBK AIB Investment Fund
Other
6.7%
43.2%
Analysts
+ 48 22 236 92 44
EV/EBITDA
35.3
29.1
12.1
8.7
6.9
Tomasz Duda
P/E (x)
55.5
38.3
17.1
12.7
9.9
+ 48 22 236 92 32
85
PBG S.A.
Table 88 PBG – Financials
P&L (PLN m)
Revenues
2005
2006
2007
2008E
2009E
2010E
409
674
1 377
2 098
2 618
3 292
65%
104%
52%
25%
26%
116
185
324
432
551
63%
59%
75%
34%
27%
- yoy change
Gross Profit
71
- yoy change
EBIT
4
10
4
11
12
1
49
71
138
220
321
403
45%
95%
60%
46%
26%
88
138
258
358
447
76%
56%
86%
39%
25%
-1
7
-12
-18
-14
390
- yoy change
EBITDA
50
- yoy change
-4
Pretax Profit
45
70
144
208
303
Income Tax
-8
-15
-27
-26
-51
-74
-1
-3
-15
-28
-50
-57
Net Incom e
EPS (PLN)
36
52
102
154
201
259
3.72
4.63
8.02
11.44
14.98
19.27
24%
73%
43%
31%
29%
- yoy change
Gross Margin
17.4%
17.2%
13.4%
15.4%
16.5%
16.7%
EBIT Margin
12.0%
10.5%
10.0%
10.5%
12.3%
12.3%
Net Margin
8.8%
7.7%
7.4%
7.3%
7.7%
7.9%
ROE
25.2%
28.3%
26.9%
19.6%
15.7%
17.5%
2005
2006
2007
2008E
2009E
2010E
436
592
1 414
1 748
2 043
2 337
82
51
410
273
288
296
354
541
1003
1475
1755
2041
Total Fixed Assets
193
343
588
757
851
923
Tangible Assets
183
266
307
434
528
601
Other Fixed Assets
10
77
281
323
322
322
Total Assets
666
1 045
2 289
2 930
3 362
3 782
184
379
783
1278
1480
1739
7
12
35
135
135
135
202
213
330
423
418
407
80
70
50
172
164
148
122
142
280
251
254
259
280
453
1177
1228
1464
1637
Short -Term Debt
138
205
467
587
684
678
142
248
710
641
780
959
666
1 045
2 289
2 930
3 362
3 782
BVPS (PLN)
16.9
30.5
55.7
85.2
100.2
119.4
Current Ratio
1.7
1.6
1.7
1.8
1.7
1.7
Quick Ratio
0.3
0.1
0.3
0.2
0.2
0.2
Bank Debt/Assets
33%
26%
23%
26%
25%
22%
Bank Debt/Equity
118%
73%
66%
59%
57%
47%
Cash Flow (PLN m)
2005
2006
2007
2008E
2009E
2010E
36
52
102
154
201
259
9
16
29
28
37
43
-100
-203
-248
-757
-181
-156
-55
-134
-118
-575
58
146
-104
-153
-188
-197
-131
-115
Long -Term Debt
Net Profit
Other (incl. WC)
Other
6
41
9
0
0
0
-97
-112
-179
-197
-131
-115
Change in Debt
131
46
342
293
89
-22
Issuance of Shares
67
187
333
342
0
0
Other
-8
-16
-20
0
0
0
190
217
655
635
89
-22
288
Beginning Cash
44
82
51
410
273
38
-30
359
-138
15
8
Ending Cash
82
51
410
273
288
296
0.00
0.00
0.00
0.00
0.00
0.00
DPS (PLN)
86
PBG S.A.
Table 89 PBG – 4Q08E Results Preview
P & L (PLN m )
4Q07
1Q08
2Q08
3Q08
4Q08E
YoY
QoQ
Revenues
577.3
320.5
506.3
543.2
728.0
26.1%
34.0%
12M07 12M08E
YoY
1 376.8
2 098.1
52.4%
Operating profit
45.0
33.1
51.6
57.7
77.7
95.2%
51.9%
109.4
219.5
100.7%
Net profit
39.5
15.6
34.2
34.5
69.7
76.6%
101.9%
102.1
153.6
50.5%
PBG is expected to continue translating its rapid expansion policy into the posted results.
Top line growth of 26% is expected to be driven by execution of water segment
contracts.
Gross margins are expected to be record high approaching 16.5%, as lower material
prices and pressure on subcontractors might translate into decent quarterly showing. We
assume SG&A line to perform well, too due to strict cost management.
Net profit is expected to be boosted by lower minorities as Hydrobudowa Polska’s results
are expected to be marked by negative valuation of open forward contracts.
Table 90 PBG – DCF
2010E
2011E
24.8%
25.7%
10.0%
7.0%
6.0%
4.5%
2.0%
2 618
3 292
3 621
3 874
4 107
4 291
4 377
12.3%
12.3%
11.0%
10.3%
10.9%
10.9%
11.5%
321
403
398
398
447
467
503
17.0%
19.0%
19.0%
19.0%
19.0%
19.0%
19.0%
266
327
322
322
362
378
408
37
43
47
48
49
50
50
- Capex
-131
-115
-72
-58
-56
-55
-52
-190
-166
-79
-131
-58
-46
-21
-17
89
218
181
297
327
384
10.0%
10.0%
9.9%
9.9%
9.9%
81
180
136
203
203
Revenues
EBIT Margin
EBIT
Effective Tax Rate
NOPAT
+ Depreciation
FCF
2012E
2013E
2014E
Terminal
Year
2009E
Terminal Value
4 909
WACC
-17
9.8%
786
3 055
3 841
273
Value of Firm =
4 113
-693
Value of Equity =
3 420
Key Assumptions
10%
11.3%
Market Risk Premium
5.5%
216
Beta
220
1
10.0%
Nominal Growth
13.5%
12.5%
11.5%
10.5%
9.5%
-1.0%
1.0%
236
216
196
176
155
0.0%
2.0%
266
243
220
197
173
1.0%
3.0%
303
277
250
223
197
10.8%
10.3%
WACC in Perpetuity
Nominal Growth
9.8%
9.3%
8.8%
-1.0%
1.0%
175
185
196
208
222
0.0%
2.0%
193
206
220
235
253
1.0%
3.0%
217
232
250
271
295
87
Polimex – Mostostal S.A.
Risky but very cheap
We recommend Polimex shares BUY-High Risk with a target price of PLN 3.8 that
17 February 2009
represents 69% potential from current levels. The company is one of the biggest
BUY – High Risk
and most diversified construction groups in Poland. Some of Polimex operations
12M TP PLN 3.8/ (Feb 13th) PLN 2.25
are strongly exposed to the economic slowdown i.e. construction for chemical
business, production of steel elements (mostly export) and galvanizing services. It
is also one of the most indebted construction companies. On the other hand
350
Polimex group has substantial railway construction division, strong energetic
300
construction arm and road construction division that should all do relatively well.
250
We are aware that Polimex could report lower profit growth comparing with
200
Budiemx or PBG. However, giving the pricing difference (Polimex is trading at a
P/E of 8 for 2009E while both PBG and Budimex are trading above 12 times P/E)
we say that the risks are already priced in. We also think that the market
Polimex vs. WIG=100
Polimex vs. WIG-Construction=100
150
100
50
Jan- Apr06
06
Jul06
Oct- Jan- Apr06
07
07
Jul07
Oct- Jan- Apr07
08
08
Jul08
Oct- Jan08
09
overestimates two other risks: 1) potential losses on the old contract portfolio
(write offs) and 2) potential necessity to report loss on revaluation of
Energomontaz Pn (Polimex subsidiary) – that are both non-cash factors and
should not impact valuation.
Strong backlog should help to survive weak time
2008E
2009E
Polimex managed to build impressive backlog of around PLN 7bn as of now that
Key Ratios
EBITDA Margin
7.0%
7.2%
represents 75% of our 2009E-10E revenues forecast.
EBIT Margin
5.4%
5.2%
ROE
11.2%
10.7%
Bank Debt / Assets
23.4%
21.2%
We expect flat EBIT in 2008E-10E
We assume that falling demand for steel structure and galvanizing services will
have negative impact on profitability of production division and whole group. On
Share data
the other hand in 2009E Polimex construction division could benefit from falling
material prices. The currency factor could also work positive – as of end of Jan 09
464.4
Market Cap (€m)
248.2
1 720.9
the group has hedged only 40% of its currency exposure, which creates
opportunities to hedge the remaining portion at far more attractive levels.
52 W High / Low
8.4 / 2.0
Consequently we assumes flat margins in 2009E (falling margins in production
WIG Weight (%)
Reuters
MOSD.WA
offset by higher profitability in construction) and decline in margins in 2010E. Our
Bloomberg
1.96
1.09
PXM PW
EBIT forecasts assumes only slight differences between 2008E and 2010E. The Net
profit is slightly growing supported by lower interest cost and lower effective tax
Perform ance
Abs.
vs. WIG
rate (tax shield resulting from investments in economic zone.)
3M
-26%
-18%
YTD
-19%
-7%
12M
-87%
-74%
Investment in production capacity is a “recovery bet”
In 2010E/11E the company should gradually complete investments in production
capacity (+70%-80% current capacity). If the new production plant meets market
Shareholders
demand in 2011E-13E the company could substantially improve its results.
CU Pension Fund
8.9%
PZU Pension Fund
Gloria s.a.r.l.
7.0%
6.2%
2006
Revenues (PLN m)
2007
2008E
2009E
2010E
2 483
3 720
4 188
4 460
4 562
130
205
292
319
322
EBIT (PLN m)
98
160
226
232
226
Net profit (PLN m)
63
100
121
131
134
0.16
0.23
0.26
0.28
0.29
DPS (PLN)
0.02
0.02
0.01
0.00
0.01
EV / EBITDA (x)
18.5
36.9
20.4
37.9
6.9
11.7
5.0
8.0
4.6
7.9
EBITDA (PLN m)
EPS (PLN)
P/E (x)
88
Stake
Sices International B.V.
6.2%
ING NN Pension Fund
5.1%
Polimex-Development
Other
2.8%
63.8%
Analysts
+ 48 22 236 92 44
Tomasz Duda
+ 48 22 236 92 32
Table 92 Polimex – Financials
P&L (PLN m)
2005
2006
2007
2008E
2009E
2010E
Revenues
1 850
2 483
3 720
4 188
4 460
4 562
34%
50%
13%
7%
2%
244
322
437
463
455
-2%
- yoy change
Gross Profit
200
22%
32%
36%
6%
- yoy change
-3
-11
4
-12
-16
-6
EBIT
73
98
160
226
232
226
35%
63%
41%
3%
-2%
130
205
292
319
322
28%
58%
43%
10%
1%
- yoy change
EBITDA
101
- yoy change
-8
-5
-15
-56
-52
-44
Pretax Profit
0
65
-2
91
4
149
-3
167
0
179
0
182
-16
-17
-33
-24
-22
-21
-6
-11
-17
-22
-26
-27
Income Tax
Net Incom e
EPS (PLN)
43
63
100
121
131
134
0.11
0.16
0.23
0.26
0.28
0.29
46%
37%
16%
8%
1%
- yoy change
2005
2006
2007
2008E
2009E
2010E
10.8%
9.8%
8.7%
10.4%
10.4%
10.0%
EBIT Margin
4.0%
4.0%
4.3%
5.4%
5.2%
5.0%
Net Margin
2.3%
2.5%
2.7%
2.9%
2.9%
2.9%
ROE
12.9%
17.2%
22.3%
11.2%
10.7%
9.7%
2005
2006
2007
2008E
2009E
2010E
784
1 214
1 818
1 904
2 005
2 051
84
148
143
155
165
169
700
1066
1675
1749
1840
1883
Gross Margin
Total Fixed Assets
322
418
983
1 291
1 418
1 420
Tangible Assets
214
262
426
673
792
789
109
1 106
156
1 632
557
2 801
618
3 195
626
3 423
631
3 471
Other Fixed Assets
Total Assets
365
449
1086
1224
1382
1536
72
94
103
125
151
178
166
353
628
709
731
652
36
171
330
440
428
357
Long -Term Debt
131
181
298
269
303
296
575
830
1088
1262
1311
1283
389
502
1 106
631
747
1 632
680
858
2 801
796
954
3 195
847
1011
3 423
867
1033
3 471
0.8
0.9
2.1
2.4
2.7
2.9
Accounts Payable
BVPS (PLN)
2005
2006
2007
2008E
2009E
2010E
Current Ratio
1.4
1.5
1.7
1.5
1.5
1.6
Quick Ratio
1.2
1.3
1.4
1.2
1.2
1.3
10%
16%
20%
23%
21%
17%
30%
57%
52%
61%
53%
39%
Bank Debt/Assets
Bank Debt/Equity
Cash Flow (PLN m)
2005
2006
2007
2008E
2009E
2010E
Net Profit
43
63
100
121
131
134
28
28
45
66
88
96
-5
-47
-329
23
67
33
66
44
-184
210
286
263
-96
-46
-68
-149
-318
-211
Other
64
-52
52
38
4
4
18
-120
-97
-280
-207
-92
-34
145
280
188
-20
-121
0
11
0
0
0
0
-7
-15
-22
-107
-48
-46
Change in Debt
Issuance of Shares
Other
-42
140
258
81
-68
-167
Beginning Cash
22
78
142
143
155
165
42
64
-24
12
10
4
Ending Cash
84
148
143
155
165
169
0.00
0.02
0.02
0.01
0.00
0.01
DPS (PLN)
89
We expect relatively weak 4Q08 (flat net income). Before the year end, Polimex may
write off all the questionable receivables/claims. In some cases companies from the
4Q08 would not bring
impressive results
group may be forced to report losses on FX hedging (most of the them do hedge
accounting but not all), which however should not have material impact. The company
may start to account for tax-shield (investments in economic zone) that should positively
impact effective tax rate.
Table 93 Polimex – 4Q08E Results Preview
P & L (PLN m)
Revenues
4Q07
1Q08
2Q08
3Q08
4Q08E
YoY
QoQ
12M07
12M08E
YoY
1 253.5
920.7
1 111.4
1 086.0
1 100.0
-12.2%
1.3%
3 720.5
4 182.7
12.4%
51.4
28.7
59.7
29.8
54.5
27.9
65.0
33.3
53.0
29.1
3.2%
1.5%
-18.4%
-12.7%
160.4
100.1
225.8
121.1
40.8%
21.0%
Operating profit
Net profit
In our DCF model we assume the company will be able to utilize around 70-80% of the
new production capacity by the end of 2013E. Consequently we get production divisoion
sales CAGR of 9.8% in 2008E-13E. At the same time the profitability of production
division never goes above 19% during our forecast period, which we find conservative
giving average profitability of 20.8% in 2004-08E.
We are quite optimistic on general construction (including road & railways) where we
expect sales CAGR of 10.5% in 2008E-13E. On the other had we expect 4.5% CAGR in
chemistry division and 7.5% CAGR in construction for energetic sector (which we find
quite conservative).
The operating margin for the group goes slightly up during the forecast period as it
benefits from higher share of production division. The effective tax rate should be much
lower than official by at least 2012E.
Table 94 Polimex – DCF
2009E
DCF benefits from
expected increase in
production capacity
though…
…we took conservative
assumptions on its
performance/utilisation
2010E
2011E
2012E
2013E
2014E
Terminal
Year
Revenue Growth Rate
6.5%
2.3%
14.0%
10.8%
10.7%
6.0%
2.0%
Revenues
4 460
4 562
5 203
5 765
6 380
6 762
6 898
EBIT Margin
5.2%
5.0%
5.3%
5.5%
5.6%
5.6%
5.5%
232
226
273
318
358
379
379
12.0%
11.5%
11.5%
11.5%
19.5%
19.0%
19.0%
204
200
242
282
288
307
307
88
96
97
98
100
101
102
EBITDA
292
296
338
380
389
409
409
- Capex
-106
EBIT
Effective Tax Rate
NOPAT
+ Depreciation
-211
-96
-100
-111
-121
-113
-44
-24
-154
-135
-147
-77
-55
FCF
36
175
85
134
120
219
248
10.0%
9.9%
10.0%
10.0%
10.2%
10.0%
159
70
101
82
136
3 097
Terminal Value
WACC
36
NPV of free cash flows
584
1 921
2 506
253
Value of Firm =
2 758
-747
Value of Equity =
2 011
Key Assumptions
8%
5.4%
Market Risk Premium
5.5%
3.7
Beta
3.8
1
10.0%
5.0%
5.5%
6.0%
6.5%
-2.0%
1.0%
2.5
2.9
3.7
4.1
-1.0%
2.0%
2.9
3.4
3.3
3.8
4.3
4.7
0.0%
3.0%
3.3
3.9
4.4
4.9
5.4
11.0%
10.5%
Nominal Growth
4.5%
WACC in Perpetuity
Nominal Growth
10.0%
9.5%
9.0%
-2.0%
1.0%
3.0
3.2
3.3
3.6
3.8
-1.0%
0.0%
2.0%
3.0%
3.4
3.6
3.8
4.1
4.4
3.8
4.1
4.4
4.8
5.2
90
Construction
Media
After very good 2008…
2008 was very successful for the advertising industry. We estimate that the total ad
Boom is behind
spend rose by 11.4% to PLN 8.1 bn. The major beneficiary of the boom were internet
and TV, which according to Starlink rose by 35% and 13% respectively. On the other
hand the first signs of a sharp ad spend slow-down appeared in the 3Q2008, when
newspaper segment showed -3% yoy dynamics. By the end of the year, the decline was
probably faced by magazines and outdoor segments.
…we expect -7.7% dynamics in 2009E
The advertising sector is one of the most vulnerable to changes in GDP level, as ad spend
is a corporate cost item, which is probably one of the easiest and quickest savings to
And hard times are
ahead
achieve. Based on our regression analysis (see Chart 33 on the next page) we estimate
that 1pp change of nominal GDP growth rate corresponds to 3.9pp change of the growth
in total ad spend in Polish economy, which is slightly higher than 2-2.5x estimate for
developed markets. Assuming 1.3% real GDP growth in 2009E and 1.9% in 2010E and
nominal of 3.6% and 4.9% respectively, we arrive at ad spend change of -7.7% and -3%
respectively. Many industry experts from media houses expect the 2009E dynamics
around 0%, although their market view may be slightly biased towards optimism. The
latest forecast by CR Media assumes 2009E dynamics at -5%.
Internet and TV should be the top performers…
Internet should remain the top performing medium (we expect +8% in 2009), due to its
Only internet and cinema
should exhibit positive
dynamics
relatively low cost of reach (CPT) and measurability. The television should fall slightly
slower than the market yoy due to its low CPT. Moreover, television has a relatively safe
industry mix of advertisers – during the 1H2008 54% of revenues came from food,
cosmetics, telecoms and healthcare sectors. Due to low base effect and cinema chains
expansion, cinema advertising should also show positive growth.
… while newspapers should be hit the most
All other media should exhibit negative growth rates, with daily newspapers being the top
Whereas newspapers
will underperform
underperformer with 15% decrease. The dire situation of the segment is a result of 3
factors: 1) falling readership (the reach of Gazeta Wyborcza fell by 15% yoy in Sep –
Nov 2008, other opinion making dailies fell by 10-29%) due to substitution by internet,
2) relatively high CPT and 3) vulnerable industry mix of advertisers - during the 1H2008
44% of revenues came from job search, auto, real estate and financial sectors.
Lessons from 2001-2002 are not optimistic
During the crisis in 2001 and 2002, the ad market fell by 6% and 10%, whereas the GDP
As they did during 20012002 crisis
growth was 1.0% and 1.4% (real) and 5.1% and 2.6% (nominal). The ad spend in daily
newspapers fell by -11% and -22% (two times the market’s dynamics), whereas TV fell
by -3% and -5% respectively (half of the market’s dynamics).
91
Media
Table 95 Ad spend forecasts
yoy dynamics
2006
2007
2008E
2009E
2010E
GDP real
6.1%
6.5%
4.8%
1.3%
1.9%
GDP nominal
7.8%
9.7%
8.5%
3.6%
4.9%
Total ad spend
11.5%
14.9%
11.4%
-7.7%
-3.0%
Television
11.7%
17.4%
15.7%
-6.0%
-2.0%
2.6%
4.6%
1.0%
-15.0%
-12.0%
Dailies
Magazines
4.7%
5.0%
6.0%
-13.0%
-8.0%
Internet
59.3%
40.7%
35.0%
8.0%
10.0%
Outdoor
12.1%
19.4%
6.9%
-13.0%
-5.0%
9.5%
8.8%
11.0%
-10.0%
-3.0%
n/a
n/a
32.0%
5.0%
7.0%
Radio
Cinema
Source: Agora, IAB, Starlink, ZenithOptimedia, IPOPEMA estimates
Chart 33 Regression of ad spend vs. GDP yoy in Poland
Chart 34 Ad spend growth in 2001 across countries
60%
0%
50%
y = 3.918x - 0.229
R² = 0.841
-2%
Ad spend growth
40%
-4%
30%
-6%
20%
-8%
10%
-10%
0%
-12%
TV
Dailies
0%
2%
4%
6%
8%
10%
12%
14%
16%
Total
18%
-14%
-10%
-20%
GDP nominal growth
Source: Agora, IPOPEMA estimates
Chart 35 Ad spend in Poland 1Q2008-4Q2008E
Chart 36 Ad spend in Poland by segments in 2001-02
30%
0%
25%
-5%
20%
dailies
15%
-10%
magazines
10%
TV
2001
-15%
radio
5%
outdoor
0%
2002
-20%
TOTAL
-25%
-5%
-10%
1Q2008
2Q2008
3Q2008
4Q2008
Source: Agora, IPOPEMA estimates, excl.Internet
92
Agora S.A.
Biggest victim of ad crisis
Highly vulnerable to ad spend declines...
17 February 2009
Agora will be hit badly by the crisis due to the following factors: 1) vulnerable
segment mix– newspapers, outdoor and magazines, 2) overweight in job search
SELL – Medium Risk
12M TP PLN 14.4 / (Feb 13th) PLN 14.0
sector (more than PLN 100m of Agora’s annual revenues), which posted yoy
decline already in the 3Q2009.
... and to more structural trends...
Agora is also subject to other, more structural negative trends: 1) outflow of ad
120
budgets to internet due to lower cost and higher measurability, 2) falling
100
readership of newspapers (reach of Agora fell by 16% yoy in Sep-Nov 2008, copy
80
sales have fallen by more than 10% for last 6 months), 3) growing tabloidization
of media (tabloids “Fakt” and “SuperExpress” were the best performing dailies in
Agora vs. WIG=100
Agora vs. WIG-Media=100
60
40
20
2008).
0
Jan- Apr06
06
Jul06
Oct06
Jan- Apr07
07
Jul07
Oct- Jan- Apr07
08
08
Jul08
Oct- Jan08
09
...and also faced by other challenges
Moreover, the Company suffers from an increase in the unit production cost,
related to: 1) EURPLN rate increase, as paper cost is mostly denominated in EUR,
2) expected increase in the paper cost in European markets (“Gazeta Wyborcza”
cost of paper is ca. PLN 120m annually), 3) higher share of other forms of paid
distribution (strategy consisted in selling copies at a high discount or giving it
away for free to increase reach, first used by Axel Springer’s “Dziennik”, which
finally forced Agora to do the same).
The expected increase in the unit production cost was used as a justification for
Key Ratios
2008E
2009E
EBITDA Margin
11.0%
10.1%
EBIT Margin
4.5%
2.5%
cover price hike of “Gazeta Wyborcza”, effective 1 January 2009. In spite of the
ROE
3.9%
1.9%
fact that also other competitors increased the cover price, this may trigger further
Net Debt / EBITDA
-0.6
-0.6
decrease in readership.
Share data
Poor performance of competition is not a consolation
Agora’s competitors face the same, or even worse problems, but at different
52.4
Market Cap (€m)
152.5
112.3
stages of development. “Dziennik” by Axel Springer experiences over 50%
declines, but is still during its start up phase. Start-up “Polska” by Edipresse also
52 W High / Low
49.8 / 11.7
failed to attract sufficient readership. “Rzeczpospolita” is being privatized (49%)
WIG Weight (%)
Reuters
AGOD.WA
and other 51% (owned by Mecom) may be put for sale as well. The closing,
Bloomberg
0.7
0.8
AGO PW
merger or profile change of the 2 first titles are highly probable during this year,
although due to eroded market shares of these titles, the impact on Agora, should
Performance
Abs.
vs. WIG
not be very high. Due to the gloomy prospects of the advertising sector, we
3M
-22%
-12%
YTD
-17%
0%
12M
-70%
-38%
recommend to SELL the stock.
2006
Revenues (PLN m)
2007
2008E
2009E
2010E
Shareholders
Stake
BZ WBK AIB TFI
26.3%
1,133.7
1,272.3
1,274.9
1,139.3
1,060.9
116.6
198.6
140.3
115.2
98.6
Agora Holding
Artio Global Mgmt
12.8%
7.0%
EBIT (PLN m)
39.6
120.3
57.2
28.3
16.2
Other
53.9%
Net profit (PLN m)
32.6
100.3
44.9
22.1
12.2
EPS (PLN)
0.6
1.8
0.8
0.4
0.2
DPS (PLN)
0.5
1.5
0.5
0.5
0.5
14.7
59.4
14.1
29.9
5.4
19.4
5.6
32.8
6.4
58.6
EBITDA (PLN m)
Analyst
EV / EBITDA (x)
P/E (x)
Waldemar Stachowiak
+ 48 22 236 92 33
93
Agora S.A.
Negative dynamics in all segments, but internet
We expect all segments of Agora (except for internet) to show negative dynamics in
2009E. The details of our forecasts are as follows.
Table 97 Operational forecast
(PLN m, unless otherwise stated)
“Gazeta Wyborcza” will
remain Agora’s flagship
2005
2006
2007
2008E
2009E
2010E
GW copies sold (thous. daily)
GW copy sales revenues
- yoy change
428
188.9
GW advertising revenues
- yoy change
465.4
434
122.5
-35%
472.6
2%
448
164.0
34%
499.2
6%
410
153.0
-7%
501.7
0%
363
141.1
-8%
422.5
-16%
345
136.7
-3%
372.3
-12%
Internet revenues
- yoy change
10.3
14.1
36%
31.0
120%
54.6
76%
64.1
17%
70.2
10%
Other revenues (Metro)
Magazines copies sold (thous. monthly)
Magazines ad revenues
- yoy change
16.6
985
47.2
22.0
1,079
51.2
8%
149.8
5%
62.8
15.0%
31.1
1,116
58.3
14%
168.7
13%
69.4
10.5%
39.4
1,176
63.9
10%
182.1
8%
82.9
19.5%
36.2
1,152
56.3
-12%
158.0
-13%
74.3
-10.4%
35.2
1,141
53.2
-6%
146.9
-7%
72.1
-3.0%
Outdoor ad revenues
- yoy change
143.1
Radio ad revenues
- yoy change
54.6
Readership keeps falling
The readership fall very
fast in opinion-making
dailies, whereas much
slower at tabloids
All big opinion-making daily papers have lost reach in the recent quarters. The top
underperformer was “Dziennik” by Axel Springer, but the situation for Agora’s “Gazeta
Wyborcza” looks not very optimistic either. The newspapers protect themselves from
falling reach, by other forms of paid circulation (OFPD, at reduced price or gratis). The
best performers are tabloids (“Fakt” and “Superexpress”). The charts below show the
increase of other forms of paid distribution (OFPD) during last months.
Chart 37 Sales vs. OFPD (“Gazeta Wyborcza”)
Chart 38 Sales vs. OFPD (“Dziennik”)
600,000
250,000
500,000
200,000
400,000
150,000
300,000
OFPD
OFPD
100,000
Sales
200,000
Sales
50,000
100,000
0
0
Source: ZKDP
Source: ZKDP
Table 98 Agora Peers Valuation
P/E
Median Western Peers
Premium/(discount)
Implied 12M TP (PLN per share)
EV/EBITDA
EV/SALES
2009E
2010E
2009E
2010E
2009E
9.7
7.2
8.5
7.9
1.2
2010E
1.0
238%
713%
-34%
-18%
-55%
-43%
4.6
1.9
23.5
18.9
34.0
26.9
Source: Bloomberg, IPOPEMA estimates. Peers include (Axel Springer, Hurriyet, Daily Mail, Fairfax
Media,Independent News& Media, New York Times, RCS Media Group, Schibsted, Alma Media Corp,
APN News & Media, Grupo Editoriale, Mecom, Next Media, Star Publications, Tamedia, Telegraaf
Media,Il Sole 24 Ore, HT Media, Caltagirone Editore)
94
Agora S.A.
Table 99 Agora – Financials
The top line is not
optimistic
P&L (PLN m)
2005
2006
2007
2008E
2009E
2010E
Revenues
1,202
1,134
1,272
1,275
1,139
1,061
-6%
12%
0%
-11%
-7%
465
550
495
418
379
-11%
18%
-10%
-16%
-9%
- yoy change
Gross Profit
525
- yoy change
Marketing should be the
main source of savings
during hard times
Which however will not
prevent net profit from
plummeting
-4
-7
-1
-4
-2
-2
EBIT
- yoy change
151
40
-74%
120
204%
57
-52%
28
-51%
16
-43%
EBITDA
- yoy change
247
117
-53%
199
70%
140
-29%
115
-18%
99
-14%
3
7
9
5
2
1
0
0
0
0
0
0
Pretax Profit
154
46
129
62
30
18
Income Tax
-28
-14
-29
-17
-8
-5
1
1
0
0
0
0
Net Income
127
33
100
45
22
12
EPS (PLN)
2.2
- yoy change
The Company will
continue to be overliquid
0.8
0.4
0.2
-54%
-49%
-44%
2005
2006
2007
2008E
2009E
2010E
20.6%
10.3%
15.6%
11.0%
10.1%
9.3%
Net Margin
10.5%
2.9%
7.9%
3.5%
1.9%
1.1%
ROE
11.4%
2.8%
8.3%
3.9%
1.9%
1.1%
ROA
8.4%
2.1%
6.2%
2.9%
1.4%
0.8%
2005
2006
2007
2008E
2009E
2010E
503
557
670
489
471
460
190
335
338
229
239
244
313
223
332
260
232
216
1,001
975
953
1,082
1,067
1,038
Tangible Assets
680
645
616
614
594
570
Other Fixed Assets
321
331
337
468
472
469
Total Assets
1,504
1,533
1,623
1,571
1,538
1,499
1107
1165
1216
1163
1141
1127
0
0
0
0
0
0
159
105
104
104
130
128
Long -Term Debt
159
105
104
104
130
128
238
263
303
304
267
243
0
36
35
35
35
35
238
227
268
269
232
209
1,499
Total Fixed Assets
Short -Term Debt
And should continue
generating at least ca.
PLN 100m annually of
CFO
1.8
213%
EBITDA Margin
And will rather not use
leverage
0.6
-74%
1,504
1,533
1,623
1,571
1,538
BVPS (PLN)
19.5
21.2
22.1
22.2
22.3
22.1
Ratios
2005
2006
2007
2008E
2009E
2010E
Current Ratio
2.1
2.1
2.2
1.6
1.8
1.9
Quick Ratio
2.0
2.0
2.2
1.6
1.7
1.8
Bank Debt/Assets
11%
9%
9%
9%
11%
11%
Bank Debt/Equity
14.4%
12.1%
11.5%
11.9%
14.5%
14.4%
2005
2006
2007
2008E
2009E
2010E
127
33
100
45
22
12
96
77
78
83
87
82
7
37
25
-5
-13
-3
Operating Cash Flows
230
147
203
122
96
91
-44
-48
-52
-203
-70
-60
Other
-67
82
-58
80
11
12
-111
34
-110
-123
-59
-48
-3
Cash Flow (PLN m)
Net Profit
Cash Flows from Investing Activities
Change in Debt
Issuance of Shares
Other
Cash Flows from Financing Activities
1
-2
1
0
26
-120
0
0
-71
-19
0
-38
-34
-91
-37
-35
-36
-157
-36
-90
-108
-28
-38
227
190
335
338
229
239
-38
145
3
-108
10
5
Ending Cash
189
335
338
229
239
244
DPS (PLN)
0.5
0.5
1.5
0.5
0.5
0.5
Beginning Cash
95
Agora S.A.
Table 100 Agora – 4Q08E Results Preview
P & L (PLN m)
4Q07
1Q08
2Q08
3Q08
4Q08E
YoY
QoQ
12M07
12M08E
YoY
Revenues
352.4
313.4
343.7
284.7
333.1
-5.5%
17.0%
1,272.3
1,274.9
0.2%
30.7
26.5
22.6
18.5
30.2
21.6
17.2
13.8
-12.8
-9.1
-141.8%
-174.6%
-134.2%
-165.6%
120.3
100.3
57.2
44.9
-52.5%
-55.3%
Operating profit
Net profit
The 4Q brought
continuation of negative
tendencies in
advertising (especially in
dailies)
We expect a strong decline in the 4Q2008 revenues, mostly due to -10% yoy
performance of Gazeta Wyborcza (vs. dailies ad market dynamics of -7%). All other
sectors should exhibit still positive yoy dynamics. The BAU EBIT in the 4Q2008,
suppressed by operational leverage, will be additionally distorted by PLN -8.5m of
restructuring provision and PLN -27.2m impairment of Trader.com acquired in May 2008.
The additional negative factor for the Company is weak PLN as paper cost is denominated
And PLN 37.4m of oneoffs (impairment of
Trader.com and
restructuring provision)
in EUR (expected impact PLN -4m). The only positive factor is decrease in the cost of the
stock option plan to PLN -5m, from PLN -12m a year ago).
Table 101 Agora – DCF
Revenue Growth Rate
In terminal phase, we
expect below inflation
growth and low EBIT
margin of 5% to account
for overweight in print
segment
2009E
2010E
2011E
2012E
2013E
2014E
Terminal
Year
-10.6%
-6.9%
9.9%
8.2%
2.5%
2.2%
2.0%
Revenues
1,139
1,061
1,166
1,261
1,293
1,321
1,348
Operating Margin
3.4%
2.6%
5.3%
5.9%
5.6%
5.3%
5.0%
39
27
62
74
72
70
67
19.0%
19.0%
19.0%
19.0%
19.0%
19.0%
19.0%
NOPAT
32
22
50
60
58
57
55
+ Depreciation
- Capex
87
-70
6
82
-60
4
80
-90
-5
80
-80
-5
72
-72
-4
63
-65
-4
56
-58
-3
FCF
55
49
34
55
54
51
48
590
10.2%
EBIT*
Effective Tax Rate
Terminal Value
WACC
10.2%
10.1%
10.1%
10.1%
10.1%
10.2%
55
44
28
41
37
31
236
364
600
268
Value of Firm =
868
145
Value of Equity =
723
14.1
14.4
Key Assumptions
Market Risk Premium
0.6%
5.0%
5.5%
Beta
1
10.2%
* adjusted for non-cash share based payments
-2.0%
-1.0%
0.0%
Nominal Growth
1.0%
2.0%
3.0%
3.0%
10.4
10.8
11.5
4.0%
12.0
12.6
13.5
8.2%
15.3
16.7
18.7
9.2%
14.3
15.4
16.8
5.0%
13.5
14.4
15.5
6.0%
15.1
16.2
17.5
7.0%
16.7
17.9
19.5
11.2%
12.9
13.6
14.5
12.2%
12.4
13.0
13.7
WACC in Perpetuity
-2.0%
-1.0%
0.0%
Nominal Growth
1.0%
2.0%
3.0%
96
10.2%
13.5
14.4
15.5
Cinema City International NV
Real Estate is the Key
17 February 2009
Growth depends on external factors
CCI growth relies on 2 factors, on which the Company has little or no influence:
SELL – Medium Risk
timing of opening of new cinemas and the supply of attractive, new movies. In
12M TP PLN 17.0 / (Feb 13th) PLN 17.0
case of the first factor, the Company may be subject to losses in potential
revenues, if developers delay or put on hold the shopping mall projects, e.g. due
to the financing problems. The latter factor is unpredictable: it may bring very
190
positive surprises, like in the 4Q2008, when number of admissions per screen rose
170
by 21%, or surprise negatively, as for example in the 2Q2008, when CCI hardly
150
Cinema City vs. WIG=100
Cinema City vs. WIG-Media=100
130
broke even on EBIT level in the theatre operations segment.
110
Limited impact of crisis
90
We do not think that the crisis will significantly impact the ongoing business of the
70
Jan- Apr06
06
Jul06
Oct06
Jan- Apr07
07
Jul07
Oct- Jan- Apr07
08
08
Jul08
Oct- Jan08
09
Company, as cinema-going remains a relatively cheap form of out-of-home
entertainment. We only expect that the Company may have problems with
pushing through an increase in the ticket prices, due to the macroeconomic
conditions in all countries of Cinema City operations. This, coupled with weaker
local currencies, may put a pressure on operational margin in 2009E, as real
estate costs denominated mostly in EUR exceed 15% of revenues in the theatre
segment.
Real estate will contribute positively in 2009E, but what next?
The major risk for the Company is relatively high involvement in the real estate
Key Ratios
2008E
EBITDA Margin
21.7%
25.4%
EBIT Margin
11.9%
13.4%
probably in the 2Q2009. As the sales agreement with its jv partners was
ROE
10.6%
9.6%
concluded at the inception in 2007, we assume the revenues on this transaction
Net Debt / EBITDA
2.2
1.5
sector in Bulgaria. In 2009E the Company will realize the sales of 30% of Plovdiv
mall, which is expected to happen at the time of opening of the mall, i.e. most
2009E
depend on the percentage of leased space and rent. The Company expects
revenues of at least EUR 15m and EBITDA of at least EUR 10m. The previous 15%
stake in Plovdiv mall was sold at EUR 8.2m in the 2Q2007. The situation in the
Share data
50.8
Market Cap (€m)
186.1
other 2 shopping malls is totally different, as the Company is at the initial stage of
development and needs intensive external financing.
52 W High / Low
30.3 / 12.0
Growth story not too exciting
WIG Weight (%)
Reuters
CCIY.WA
We appreciate the leading position of the Company in the region, but in our view
11.9
0.1
0.4
Bloomberg
CCI PW
the growth is very capex intensive as the revenue growth relies on screens
network expansions (admissions per capita are already at Western average in
Performance
Abs.
cities densely covered by the cinema network). The Company trades at a premium
3M
10%
24%
YTD
8%
29%
12M
-43%
19%
to Western peers on 2010E (in 2009E it will sell Plovdiv mall), but bears additional
vs. WIG
risk of real estate development. Therefore we recommend to SELL the stock.
Shareholders
Stake
I. T. International Theatres Ltd.
64.4%
CU OFE
ING NN OFE
10.3%
5.3%
2006
2007
2008E
2009E
2010E
143.8
161.3
188.1
182.2
190.9
EBITDA (EUR m)
31.2
34.6
40.7
46.3
39.5
BZ WBK AIB Asset Management S.A.
EBIT (EUR m)
17.3
19.2
22.3
24.5
17.1
Other
Net profit (EUR m)
Revenues (EUR m)
11.7
16.6
18.3
18.4
11.0
EPS (EUR)
0.3
0.3
0.4
0.4
0.2
DPS (EUR)
0.0
0.0
0.0
0.0
0.0
10.1
19.2
15.7
29.8
6.8
10.2
5.7
10.7
7.0
19.2
EV / EBITDA (x)
P/E (x)
5.2%
14.8%
Analyst
Waldemar Stachowiak
+ 48 22 236 92 33
97
Cinema chain keeps expanding
We expect that the Company will be able to increase the number of screens from 579 at
By 2012 we assume 23
screens less than the
management…
the end of 2008 to 663 at the end of 2009 and 801 at the end of 2010. At the end of
2012, we expect CCI to operate 1009 screens, whereas the Company wants to have
1032 screens at the end of 2011. Our estimates are more conservative than the
Company’s as we expect more delays and cancellations of projects. The main country of
expansion will be Romania with 260 screens to be completed until 2012.
We assume large discounts on CCI real estate assets
After Ocif Development withdrew from joint investments with CCI, the SPV constructing
the mall in Rousse belongs in 100% to the Company. The mall is expected to be
completed in the 1H2010 and is 50% rented (incl. 10% by CCI), but the Company needs
And put 50% discount
on CCI’s real estate
assets (land + recently
started construction)
additional financing, which may be hard to find and the Company may be forced to
finance it with cash generated from theatre operations. For the valuation purpose we
discounted the cost of land by 50% from original land purchase cost of EUR 25m (EUR
417/sqm) and in our valuation we included the amount of EUR 12.5m.
Cinema City has also 55% shares of the SPV that owns a 9.2k sqm plot of land in Stara
Zagora. We also discounted the value of the land by 50% (from original EUR 5.4m for
55% share, i.e. from EUR 1067/sqm) and we included EUR 2.7m in our valuation).
Other issues
Cinema City as a pioneer of cinema advertising should benefit from the dynamic increase
in this segment, which should outperform the total advertising markets in respective
countries, but mainly due to low base effect. The advertising revenues contributed 10.9%
of total revenues in 9M2008 and we expect this ratio to reach 12.3% in 2009E. The
Cinema advertising
should grow in
importance for CCI’s
results
cinema ad market grew by 32% in 2008 – an estimation based on rate card value prices,
from the level of PLN 70m estimated by the Cinema City in 2007. The growth in the
advertising markets should be supported by the digitalization of the cinemas, which
lowers the cost of advertising spots production.
The Company decided to spin off its DVD rental business in Israel, which contributed EUR
2.3m of revenues during 9M2008 (1.6% of total revenues) and brought EUR 0.6m of loss
on EBIT level in the same period. The accounting result on this transaction should be ca.
EUR 0.6m. We find the decision to sell the unprofitable business positive.
As a long term risk we see popularization of digital TV (both via cable and DTH), video on
demand and high speed internet which to some extent may be an obstacle in the long
term growth of the cinema-going.
Table 103 Cinema City Peers Valuation
P/E
EV/EBITDA
EV/SALES
2009E
2010E
2009E
2010E
2009E
9.6
9.1
6.7
6.5
1.5
1.5
Premium/(discount)
11%
112%
-14%
8%
-5%
-1%
16.8
8.8
21.8
17.2
19.6
18.8
2010E
Source: Bloomberg, IPOPEMA estimates. Peers include (Village Roadshow, Cinemark, Kinepolis,
Major Cineplex, Regal Cinemas, CJ Entertainment, Carmike Cinemas)
98
Table 104 Cinema City – Financials
Solid growth in the top
line is blurred by strong
EUR…
P&L (EUR m)
Revenues
2005
2006
2007
2008E
2009E
2010E
108
144
161
188
182
191
33%
12%
17%
-3%
5%
24
28
32
34
27
36%
19%
14%
5%
-21%
- yoy change
Gross Profit
17
- yoy change
…but EBIT should fall as
we assume no inflows
from real estate
business in 2010 (In
2009E we assumed EUR
10m from Plovdiv)…
0
0
0
0
0
0
EBIT
- yoy change
12
17
45%
19
10%
22
16%
24
10%
17
-30%
EBITDA
- yoy change
24
31
30%
35
11%
41
18%
46
14%
40
-15%
-3
-5
-4
-2
-5
-4
0
0
0
0
0
0
Pretax Profit
9
13
15
20
20
13
-2
Income Tax
-1
-1
1
-2
-2
0
0
1
0
1
1
Net Income
8
12
17
18
18
11
EPS (PLN)
0.2
- yoy change
0.3
0.4
0.4
0.2
16%
10%
0%
-40%
2005
2006
2007
2008E
2009E
2010E
22.2%
21.7%
21.4%
21.7%
25.4%
20.7%
7.0%
8.2%
10.3%
9.7%
10.1%
5.8%
ROE
10.1%
8.9%
10.8%
10.6%
9.6%
5.4%
ROA
3.6%
4.6%
6.8%
5.9%
6.0%
3.4%
Balance Sheet (EUR m)
EBITDA Margin
Net Margin
2005
2006
2007
2008E
2009E
2010E
32
85
58
67
61
63
5
53
8
9
9
10
27
32
50
58
52
53
Total Fixed Assets
170
172
185
244
247
257
Tangible Assets
167
171
183
217
220
230
4
2
2
27
27
27
202
257
243
312
308
320
73
131
154
173
191
202
0
0
0
0
0
0
74
66
35
60
60
55
Long -Term Debt
74
66
35
60
60
55
55
60
54
79
57
63
Short -Term Debt
18
26
19
38
17
21
37
35
35
42
40
41
202
257
243
312
308
320
Other Fixed Assets
Total Assets
Leverage should not
increase further
0.3
53%
BVPS (PLN)
1.8
2.6
3.0
3.4
3.7
4.0
2005
2006
2007
2008E
2009E
2010E
Current Ratio
0.6
1.4
1.1
0.9
1.1
1.0
Quick Ratio
0.5
1.3
1.0
0.8
1.0
0.9
Bank Debt/Assets
46%
35%
22%
31%
25%
24%
Bank Debt/Equity
126.8%
69.6%
34.6%
56.5%
40.1%
37.8%
2005
2006
2007
2008E
2009E
2010E
Ratios
Cash Flow (EUR m)
Net Profit
7
12
17
18
18
11
12
14
15
18
22
22
-5
4
-3
0
9
4
14
30
29
37
49
38
-34
-28
-21
-78
-24
-33
20
1
-14
3
0
0
-13
-27
-35
-75
-24
-32
0
Other
Change in Debt
0
-1
-39
44
-21
Issuance of Shares
0
47
0
0
0
0
Other
0
0
0
-6
-5
-5
-5
-1
45
-39
39
-26
Beginning Cash
4
5
53
9
10
9
0
48
-45
1
0
0
Ending Cash
DPS (PLN)
4
53
9
10
9
10
0.0
0.0
0.0
0.0
0.0
0.0
99
Table 105 Cinema City – 4Q08E Results Preview
P & L (EUR m)
Revenues
4Q07
1Q08
2Q08
3Q08
4Q08E
YoY
QoQ
12M07
12M08E
YoY
39.6
44.9
47.1
48.1
48.1
21.6%
0.1%
161.3
188.1
16.6%
3.6
3.6
4.6
4.0
7.9
6.6
5.1
4.0
4.8
3.6
33.7%
-5.6%
0.6%
-9.6%
19.2
16.6
22.3
18.3
16.4%
10.0%
Operating profit
Net profit
The Company achieved strong sales growth in local currencies in the 4Q, which was due
Very good 4Q2008
results, but optically
eaten by the weaker
local currencies
to 4Q ticket sales (admissions per screen +21% yoy) and new screens built (average
number of screens +11% yoy). The impressive growth was eaten by PLN (and other local
currencies) depreciation (by 3%). As the level of admissions per screen was slightly
better than in the 3Q, we assume profitability on EBITDA level similar to 3Q08 level. EBIT
and net profit line should be slightly lower due to assumed higher depreciation by EUR
0.3m vs. 3Q2008. The Company hedged against weaker local currencies, but this will be
not visible in P&L (hedge accounting).
Table 106 Cinema City – DCF
EUR m
We assume long term
EBIT margin of 10%,
slightly higher than the
level achieved by CCI
during 2005-2008
excluding real estate
Tax rate and risk
premium reflect regional
mix of CCI activity
Revenue Growth Rate
Revenues
Operating Margin
2009E
2010E
2011E
2012E
2013E
2014E
Terminal
Year
-3.1%
4.7%
21.5%
14.7%
10.6%
6.6%
2.5%
182
191
232
266
294
314
322
16.5%
8.9%
8.6%
9.5%
9.7%
9.8%
10.0%
EBIT*
30
17
20
25
29
31
32
20.6%
20.3%
19.8%
19.4%
19.4%
19.4%
19.4%
NOPAT
29
14
16
20
23
25
26
+ Depreciation
- Capex
22
-24
5
22
-33
0
23
-32
0
24
-25
0
22
-22
0
19
-19
0
16
-16
0
FCF
32
3
7
19
23
25
26
311
10.7%
Effective Tax Rate
Terminal Value
WACC
9.8%
9.8%
9.8%
9.8%
9.9%
10.1%
32
3
6
15
16
16
87
195
282
24
Value of Firm =
Cash& Non-op. Assets
include EUR 15.2m of
real estate assets
(Rousse & Stara
Zagora); Plovdiv
included in FCF 2009E
306
98
Value of Equity =
208
4.1
12 Month Target Price (EUR)
4.2
17.0
Key Assumptions
Market Risk Premium
8.9%
10.7%
5.8%
Beta
1
9.9%
* adjusted for sales of Plovdiv in 2009E
-1.5%
-0.5%
0.5%
Nominal Growth
1.5%
2.5%
3.5%
8.0%
11.9
13.5
15.6
9.0%
13.5
15.3
17.6
8.7%
18.9
22.2
26.7
9.7%
16.7
19.2
22.6
10.0%
15.0
17.0
19.6
11.0%
16.5
18.8
21.6
12.0%
18.1
20.5
23.6
11.7%
13.6
15.3
17.3
12.7%
12.5
13.9
15.6
WACC in Perpetuity
-1.5%
-0.5%
0.5%
Nominal Growth
1.5%
2.5%
3.5%
100
10.7%
15.0
17.0
19.6
TVN S.A.
TVN = TV – “n”
The boom in TV ad spend is behind...
17 February 2009
TVN was the media company that benefited the most from the advertising boom in
2007 and 2008. The Company took full advantage of the demand/supply
imbalance in the market and managed to push through sharp price increases and
SELL – High Risk
12M TP PLN 9.75 / (Feb 13th) PLN 9.62
promote rate card sales rather than GRP system. TVN seems relatively well
positioned for the ad market crisis due to: 1) segment mix - TV represented 89%
190
of 9M2008 revenues, whereas internet – 11%, 2) target market (people aged 16-
170
49 living in large cities), 3) crisis in the public TVP which is torn by political wars,
150
TVN vs. WIG=100
TVN vs. WIG-Media=100
130
4) relatively low operational leverage and cost cutting opportunities (most costs
variable, switch from new editions to repetitions, less expensive live shows).
110
90
70
The negative performance on “n” platform...
The platform “n” (25% owned by TVN, 75% by TVN’s parent ITI) is the 3rd DTH
50
Jan- Apr06
06
Jul06
Oct06
Jan- Apr07
07
Jul07
Oct- Jan- Apr07
08
08
Jul08
Oct- Jan08
09
platform in Poland. In order to break even it needs to increase the customer base,
which was very costly and will continue to dilute the results of TVN. TVN’s
guidance for the share in the loss of the platform was PLN 45m in 2008, but due
to weaker PLN, it was revised to PLN 95m.
...increases risk of TVN’s dilution
2009 will be another year of struggle for break-even of “n”, which we expect in
2010 on EBITDA level, due to aggressive competition from 2 other players
(Cyfrowy Polsat and Cyfra+) and PLN depreciation. TVN still has an “option” to
increase its stake in the “n” platform from current 25% to 50% within 3 to 4
Key Ratios
2008E
years. In our view, the word “option” is not justified, as none of the terms and
EBITDA Margin
37.0%
34.5%
conditions are fixed and binding to any of the parties (so the price of another 25%
EBIT Margin
32.9%
29.4%
ROE
23.6%
19.9%
1.6
1.9
stake may be much higher and the transaction may happen sooner than in 3-4
Net Debt / EBITDA
2009E
years). Other ways to support the liquidity of “n” are loans (EUR 38.4m at the end
of the 3Q2008, which was probably increased by at least EUR 10m in the 4Q2008)
Share data
and buy-back (currently running PLN 500m program) or dividend.
349.9
Market Cap (€m)
723.8
628.4
The risk is too high
We appreciate the market strategy and leading position of TVN in the Polish ad
market. However, taking into account pessimistic outlook for the ad spend in 2009
and 2010 and risk of dilution by “n”, we recommend to SELL the stock. Due to
3.4
52 W High / Low
24.9 / 9.2
WIG Weight (%)
Reuters
TVNN.WA
1.7
Bloomberg
TVN PW
high cash needs of ITI Group, delayed capex of PLN 400m, possibility of “n”
acquisition we think that the probability of cash distribution to shareholders, other
than currently running buy-back, will be very limited within next years.
Revenues (PLN m)
2006
2007
2008E
2009E
2010E
Performance
Abs.
vs. WIG
3M
-26%
-16%
YTD
-31%
-17%
12M
-51%
3%
1,165.0
1,554.7
1,933.8
1,929.1
1,974.0
Shareholders
Stake
EBITDA (PLN m)
400.0
554.1
715.1
666.2
658.2
ITI Group
61.6%
EBIT (PLN m)
348.5
482.0
635.5
567.7
518.6
Other
38.4%
Net profit (PLN m)
258.8
243.3
377.4
313.1
317.9
EPS (PLN)
0.8
0.7
1.1
0.9
1.0
DPS (PLN)
0.0
0.4
0.5
0.0
0.0
22.5
30.9
16.7
35.3
8.2
12.6
6.5
10.3
6.6
9.6
EV / EBITDA (x)
P/E (x)
Analyst
Waldemar Stachowiak
+ 48 22 236 92 33
101
TVN S.A.
The liquidity squeeze at ITI
TVN is owned in 62% by ITI Holdings. Apart from TV business, the group is involved in
High cash needs of
“n”…
DTH platform “n” (owned in 25% by TVN), cinema exhibition, publishing and football
club. The basic results of the group are presented below. The highest contributor of
results is obviously TVN, whereas “n” platform needs large amount of cash, which at this
level of the group’s indebtedness may be hard to find outside. We estimate the cash
needs of “n” in the 4Q2008 at at least PLN 120m, which was financed partly by at least
EUR 10m loan from TVN.
...which are difficult to
finance them by higher
leverage of ITI Holdings
Table 108 ITI Holdings Financial Data
EUR (m)
4Q2007
1Q2008
2Q2008
3Q2008
Revenues
166.2
148.8
191.8
142.3
TVN
144.6
113.2
162.2
108.1
13.8
21.2
13.9
17.5
Pascal
1.7
1.6
3.7
2.2
Legia
1.2
1.2
1.9
2.0
10.8
16.0
15.0
18.3
Multikino
ITI Neovision
other
-5.8
-4.4
-4.9
-5.8
EBITDA
79.8
26.2
60.4
13.3
TVN
58.2
36.6
72.0
27.8
1.7
4.3
1.9
3.0
22.1
0.1
0.3
0.0
Multikino
Pascal
Legia
ITI Neovision
0.1
-1.7
-1.3
-2.2
-19.0
-10.2
-8.8
-11.2
other
28.7
-1.7
33.7
-4.3
Cash&other
66.9
115.8
192.0
192.0
of which TVN
30.8
53.3
102.5
107.5
of which the rest
36.1
62.5
89.5
84.5
622.4
683.7
786.6
803.5
of which TVN
221.6
217.7
360.8
368.0
of which the rest
Net debt
400.8
555.5
466.0
567.9
425.8
594.6
435.5
611.5
17.2
13.8
14.8
17.7
Debt
Interest exp
Source:Company, ITI, IPOPEMA estimates
We based our calculation on the following assumptions: 1) the platform produced
negative EBITDA of EUR -9m in the 2Q2008, when only 6k subscribers were added, 2)
average EURPLN in the 4Q was 11% higher than in the 2Q and the material costs are in
EUR (programming, transponders), 3) adding 1 new subscriber costs 150 EUR (STB
cost= EUR 150, distribution fee PLN 100, less activation fee PLN 100), 4) most of the
customers were acquired in the 4Q in the 3-months gratis promotion.
Revenue forecasts
TVN should outperform
the TV market
We expect TVN to outperform the TV ad market, which should outperform the total ad
market.
Table 109 Revenue forecast
2006
2007
2008E
2009E
2010E
Total ad market value (PLN m)
- yoy change
6,299
7,237
8,058
7,434
7,213
11%
15%
11%
-8%
-3%
TV ad market value (PLN m)
- yoy change
2,770
12%
3,252
17%
3,762
16%
3,536
-6%
3,465
-2%
TVN ad revenues on TV (PLN m)
- yoy change
889
25%
1,078
21%
1,337
24%
1,318
-1%
1,318
0%
TVN share in TV ad market
32%
33%
36%
37%
38%
Source: Company, Agora, Starlink, IPOPEMA estimates
Table 110 TVN Peers Valuation
P/E
2009E
2010E
EV/EBITDA
2009E
2010E
EV/SALES
2009E
2010E
10.6
10.9
9.3
8.7
1.7
1.6
Premium/(discount)
-4%
-12%
-30%
-25%
35%
35%
10.9
12.0
15.1
14.0
7.8
7.8
Source: Bloomberg, IPOPEMA estimates. Peers include (ITV, Prosieben, Prime Media
Group,TVF1,MTG, Antenna 3,CTC Media, Mediaset, M6, Telecinco, RTL)
102
TVN S.A.
Table 111 TVN – Financials
P&L (PLN m)
We expect almost flat
revenues…
Revenues
2005
2006
2007
2008E
2009E
2010E
860
1,165
1,555
1,934
1,929
1,974
35%
33%
24%
0%
2%
533
737
948
882
838
-5%
- yoy change
Gross Profit
362
- yoy change
…and very good EBIT
levels, due to effective
cost management
The dilution comes from
“n” comes below EBIT
47%
38%
29%
-7%
-2
-1
-2
-3
-3
-2
EBIT
- yoy change
255
349
36%
482
38%
636
32%
568
-11%
519
-9%
EBITDA
- yoy change
291
400
38%
554
39%
715
29%
666
-7%
658
-1%
8
-14
-185
-111
-91
-96
0
0
0
-59
-90
-30
Pretax Profit
264
334
297
466
387
392
Income Tax
-54
-75
-54
-89
-73
-75
0
0
0
0
0
0
Net Income
209
259
243
377
313
318
EPS (PLN)
0.6
- yoy change
We expect only slight
deterioration of EBITDA
margin
1.1
0.9
1.0
55%
-12%
7%
2005
2006
2007
2008E
2009E
2010E
33.8%
34.3%
35.6%
37.0%
34.5%
33.3%
Net Margin
24.3%
22.2%
15.6%
19.5%
16.2%
16.1%
ROE
52.7%
20.9%
17.0%
23.6%
19.9%
16.8%
ROA
14.5%
10.0%
8.9%
10.2%
8.5%
8.1%
2005
2006
2007
2008E
2009E
2010E
470
576
614
949
831
771
81
105
110
367
231
158
389
472
503
581
599
613
Total Fixed Assets
971
2,002
2,131
2,769
2,850
3,166
140
831.69
196
250
352
434
746
1,806
1,881
2,417
2,416
2,420
1,441
2,579
2,745
3,718
3,681
3,937
397
1237
1430
1597
1574
1892
0
0
0
0
0
0
843
842
790
1438
1490
1422
Long -Term Debt
843
842
790
1438
1490
1423
201
500
525
683
617
623
Short -Term Debt
4
4
3
74
9
1
0
0
0
0
0
0
1,441
2,579
2,745
3,718
3,681
3,937
Other Fixed Assets
Total Assets
BVPS (PLN)
1.2
3.6
4.1
4.6
5.0
6.0
2005
2006
2007
2008E
2009E
2010E
Current Ratio
2.3
1.2
1.2
1.4
1.3
1.2
Quick Ratio
1.6
0.8
0.8
1.1
1.0
0.9
Bank Debt/Assets
59%
33%
29%
41%
41%
Bank Debt/Equity
214%
68%
56%
95%
95%
36%
75%
Cash Flow (PLN m)
2005
2006
2007
2008E
2009E
2010E
209
259
243
377
313
318
35
51
72
80
99
140
-39
-12
-128
-68
-18
-9
17
139
233
132
91
100
Ratios
Net Profit
Net Working Capital Change
Other
222
437
420
521
484
548
-51
-1378
-178
-661
-180
-450
Other
Change in Debt
6
616
4
19
37
38
-44
-762
-175
-642
-143
-412
-76
0
0
-1
718
-13
-55
440
33
-39
-336
0
Other
-163
349
-111
-168
-464
-134
Issuance of Shares
We expect PLN 400m of
capex in 2010E (project
delayed from 2009)
0.7
-11%
EBITDA Margin
Tangible Assets
The leverage should stay
at around 3x EBITDA
0.8
20%
-163
349
-240
378
-477
-210
Beginning Cash
66
81
105
110
367
231
15
24
5
257
-136
-74
Ending Cash
81
105
110
367
231
158
DPS (PLN)
0.0
0.0
0.4
0.5
0.0
0.0
103
TVN S.A.
Table 112 TVN – 4Q08E Results Preview
P & L (PLN m)
4Q07
1Q08
2Q08
3Q08
4Q08E
YoY
QoQ
12M07
12M08E
YoY
Revenues
521.6
401.6
549.6
353.8
628.8
20.5%
77.7%
1,554.7
1,933.8
24.4%
Operating profit
Net profit
193.4
135.8
108.2
63.4
227.4
207.6
74.1
5.1
225.8
101.2
16.7%
204.5%
482.0
243.3
635.5
377.4
31.9%
55.1%
-25.5% 1873.0%
Strong 4Q results
especially at the top line
are offset partly by
higher losses of “n” and
partly be write-off of
option embedded in the
bonds
We expect very strong 4Q2008 ad sales. TVN should beat its guidance of FY2008 revenue
growth of 20-22%, due to exceptional performance and very strong audience results in
October and November. The guidance implies 13% yoy revenue growth in 4Q, whereas
we expect 20%. We expect EBITDA to be in line with the guidance of 37%. The net profit
should be suppressed by: 1) loss on embedded option valuation of PLN -26m (full writeoff of the option’s value), 2) higher share in loss of associate "n" due to intercompany
loan
revaluation
(PLN
-14m
impact),
3)
slightly
negative
result
on
FX
differences/hedging.
We expect terminal
growth at CPI level and
operating margin at long
term industry average of
17%
Table 113 TVN – DCF
2009E
2011E
2012E
2013E
2014E
Terminal
Year
-0.2%
2.3%
10.9%
11.6%
8.7%
5.9%
3.0%
Revenues
1,929
1,974
2,189
2,443
2,656
2,812
2,896
29.4%
26.3%
25.6%
26.6%
23.4%
20.2%
17.0%
Operating Margin
EBIT
568
519
560
650
621
568
492
19.0%
19.0%
19.0%
19.0%
19.0%
19.0%
19.0%
NOPAT
460
420
454
526
503
460
399
+ Depreciation
- Capex
99
-270
-18
140
-480
-9
179
-820
-43
193
-250
-43
214
-255
-36
234
-260
-26
255
-265
-14
FCF
270
71
-230
426
426
408
374
5,533
9.8%
Effective Tax Rate
We assumed PLN 566m
outflow for additional
25% stake in “n” in 2011
2010E
Terminal Value
WACC
9.6%
9.5%
9.5%
9.5%
9.5%
9.6%
270
65
-192
324
296
259
1,022
3,511
4,533
+ Value of Cash & Non-operating assets*
31
Value of Firm =
4,564
1,512
Value of Equity =
3,052
9.6
9.8
Key Assum ptions
Market Risk Premium
Beta
6.4%
26.3%
5.5%
1
9.6%
* - adjusted for buy-back program in 2009E
-1.0%
0.0%
1.0%
Nominal Growth
2.0%
3.0%
4.0%
15.0%
6.9
8.3
10.0
16.0%
7.6
9.0
10.9
7.8%
11.6
14.5
18.8
8.8%
9.7
11.7
14.6
17.0%
8.2
9.8
11.8
18.0%
8.9
10.5
12.7
19.0%
9.5
11.3
13.6
WACC in Perpetuity
-1.0%
0.0%
1.0%
Nominal Growth
2.0%
3.0%
4.0%
9.8%
8.2
9.8
11.8
10.8%
7.1
8.3
9.8
11.8%
6.2
7.2
8.4
In our valuation we included PLN -566m for purchase of additional 25% stake in “n”. The
calculations are based on the current valuation of Cyfrowy Polsat (EV/subscriber of PLN
1470) and applied a multiple of 2.45 (applied during the purchase of the first stake).
Thus we arrived at PLN 450m in current prices which multiplied by WACC gives PLN
566m in 2011E (not adjusted for the control premium). However, the acquisition may
take place sooner than in 2011.
104
Oil and Gas
Oil and Gas
European fuels market overview
Polish fuels market
The Polish market, similarly to European one, has been for a long time gasoline driven,
however in the recent 15 years significant changes occurred as the shift towards the
diesel consumption is visible. For the EU-15 countries, the diesel usage for new
registered cars increased from ca.22% in 97’ up to ca.54% in 07’. The increasing diesel
usage is accompanied by cars per inhabitants grow. The whole EU-27 can be viewed as a
developed market in terms of cars usage, with the average 465 cars per 1000
inhabitants. This level is similar to North America as well as OECD countries and it is well
above Latin America (ca.100 cars per 1000 inhabitants), China (well below 50 cars per
1000 inhabitants). Poland with ca.351 cars per 1000 inhabitants can be still viewed as a
market with some potential.
Chart 39 Fuel market share for new car registration
(data for 2007) for EU-15
Chart 40 Passenger cars per 1000 inhabitants in EU-27
Luxemburg
Italy
Germany
Malta
Austria
France
Slovenia
Cyprus
Finland
United Kingdom
Lithuania
Belgium
EU
Spain
Sweden
The Netherlands
Ireland
Estonia
Greece
Czech Republic
Denmark
Latvia
Poland
Portugal
Hungary
Slovakia
Bulgaria
Romania
661
597
566
535
507
504
488
479
475
471
470
470
465
464
461
442
418
413
407
399
371
360
351
351
293
247
230
167
0
Source: European Commission, IPOPEMA,
*DE-Germany, DK-Denmark, EL-Greece, IE-Ireland
100
200
300
400
500
600
700
Source: ACEA, IPOPEMA
Currently we can estimate the fuels consumption in Poland at ca. 17mln t. The market
growth is quite healthy, with CAGR 03-07 at 6.2%. However at the same time the diesel
consumption increased at a CAGR 03-07 of 13%. Although the final data are not
available yet, using 1-3Q data, we had another 13% growth y-o-y in diesel. The high
dynamics of diesel consumption in Poland results primarily from its increasing usage in
new passenger cars segment (it is estimated that ca.60% of newly purchased passenger
cars are for diesel)
due to much better efficiency than gasoline engines. Additional
demand is created from the trucks segment, as the Polish Organization of Oil industry
and Trade estimates that close to 100% of newly purchased trucks are using diesel fuel.
The demand growth in other market segments (gasoline and LPG) was much lower.
Gasoline consumption in the 2003-2007 period was flat, whereas demand for LPG grew in
last years at 3.5%.
Poland in its fuels structure is heavily dependant on imports, especially in the diesel as
well as LPG segment. Currently Polish net imports of diesel fuels is ca.2.6mln tones (and
grew in the 03-07’ period at 21% CAGR) and the consumption growth in the recent years
was mostly met by higher imports.
105
Oil and Gas
Table 114 Consumption of fuels
Consumption (kt)
Gasoline
ON
LHO
LPG
Total
2003
2004
2005
2006
4 139
5 824
2 445
1 988
14 395
4 229
6 431
2 511
1 982
15 154
4 004
7 249
2 234
2 268
15 755
4 179
8 489
1 779
2 305
16 752
2003
2004
2005
2006
-119
-1 200
-116
-1 767
-3 202
-175
-1 287
-35
-1 756
-3 253
94
-1 985
-94
-2 037
-4 022
35
-2 032
-42
-2 075
-4 114
2007 CAGR 03-07
4 098
9 490
1 438
2 278
17 304
-0.2%
13.0%
-12.4%
3.5%
4.7%
Source: ARE, IPOPEMA estimates.
Table 115 Net exports of fuels
Net Export in kt
Gasoline
Diesel
LHO
LPG
Total
2007 CAGR 03-07
-330
-2 593
-14
-2 088
-5 026
28.9%
21.3%
-40.6%
4.3%
11.9%
*Exports (+), Imports (-)
Source: ARE, IPOPEMA estimates.
Summing it up, in our opinion the fundamentals for further growth of the fuels
consumption in Poland are quite solid, additionally the diesel will be probably the main
fuel consumed in the future. Hence, we view the 10+ Program implemented by Lotos
positively and in particular with its emphasis towards diesel.
106
Grupa Lotos S.A.
Buying the cheap refinery
Lotos Group is the Polish refinery with 6mtpa capacity and small upstream and
retail
activity.
The
Company
operates
solely
in
Poland
and
is
currently
implementing the capacity increase program (“10+”), which will result in the
17 February 2009
BUY - High Risk
12M TP PLN 18.9 / (Feb 13th) PLN 10.2
10.5mtpa capacity in 2011. Along with the higher capacity, Lotos will also improve
its products slate – share of light products and middle distillates will increase from
67% up to 81%. Given increasing fuel demand on the Polish market, perspective
250
of increased capacity/profitability, as well as sharp drop in the Company share
200
price,
150
we
initiate
the
coverage
with
BUY
recommendation
and
target
Lotos vs. WIG=100
Lotos vs. WIG-Paliwa=100
100
price of PLN 18.9.
50
Valuation
We value the Company using DCF method, as in our opinion it best captures the
0
10+ Program expansion i.e. it does not penalize the Company for large capex for
the Program, without any economical effects. Hence, we arrive at 12m target price
of PLN 18.9. We also present the multiples analysis based on P/E P/BV, EV/EBITDA
and currently Lotos trades at a discount of 50-70% to PKN and foreign peers at
P/BV multiple, whereas the P/E and EV/EBITDA give mixed results. Finally, for the
reference we present SOTP analysis arriving at value of PLN 37.1 per share.
10+ update – main driver of future results
The completion rate of the Program is already at 60% level. In the March/April
period Lotos scheduled refinery shutdown for overhaul, building of the HDS
installation as well as make all the necessary pipe connections for 10+
installations. We assume that decreased volumes resulting from overhaul will be
Key Ratios
2008E
2009E
0.9%
6.7%
EBIT Margin
-1.2%
2.7%
decrease. The increased capacity as well as change in the refinery slate will enable
ROE
-15%
4%
the company to increase it model refining margin from USD 4.6$/bbl in 2009 up to
Bank Debt / Assets
34%
39%
partly offset by new CDU installation, hence we assume ca.3% throughput
EBITDA Margin
8.7$/bbl in 2011.
Share data
Upstream
113.7
Market Cap (€m)
248.5
tones. We assume that this was the last acquisition on the NCS, and the upstream
384.3
CAPEX of PLN 3.6bn in 08’-12’ time period will be solely on the Baltic shelf (B23
field in particular). This should enable to increase crude production from 190kt in
52 W High / Low
39.6 / 7.2
WIG Weight (%)
Reuters
LTOS.WA
After recent purchases on NCS, Lotos has built 2p crude oil reserves of 6.2m
2009 up to 940kt in 2012.
1.8
0.57
Bloomberg
Retail
LTS PW
Lotos has currently ca.5.5% share in retail. Company has 137 own fuel stations
and over 200 operated on a franchise basis. Retail was underperforming for the
Perform ance
Abs.
last quarters, however it picked up in 3Q08 results, with EBIT of PLN 5m. We
YTD
-18%
-2%
3M
-34%
-24%
12M
-73%
-42%
assume that increase volumes will allow for small profit in this segment.
vs. WIG
Revenues (PLN m)
EBITDA (PLN m)
2006
2007
2008E
2009E
2010E
12 798.1
13 125.1
16 194.0
9 721.5
15 429.1
1 081.9
1 000.8
139.4
646.7
1 386.0
EBIT (PLN m)
798.3
713.7
-190.4
266.7
840.5
Net profit (PLN m)
679.9
777.2
-768.9
200.4
564.1
EPS (PLN)
6.0
6.8
-6.8
1.8
5.0
DPS (PLN)
0.0
0.4
0.0
0.0
0.0
EV / EBITDA (x)
4.7
5.4
31.6
8.9
4.6
8.2
6.5
na
5.8
2.0
P/E (x)
Shareholders
Stake
Nafta Polska
51.9%
State Treasury
Other
6.9%
41.2%
Analyst
+ 48 22 236 92 30
107
Grupa Lotos S.A.
Table 117 Lotos - Financials
Lotos - P&L (PLN m)
2005
2006
2007
2008E
2009E
2010E
Revenues
9 646
12 798
13 125
16 194
9 722
15 429
33%
3%
23%
-40%
59%
1 820
1 778
914
1 351
2 033
51%
- yoy change
Gross Profit
1 592
14%
-2%
-49%
48%
- yoy change
-13
-42
-32
-31
0
0
EBIT
803
798
714
-190
267
840
- yoy change
-1%
-11%
-127%
-240%
215%
E&P
na
201
134
135
54
134
Ref ining
na
627
622
-341
191
682
na
760
229
269
237
505
Retail
na
-37
-50
-6
9
11
Other
na
7
8
22
13
14
LIFO effect gain/(loss)
na
-133
393
-610
-46
177
EBIT LIFO
na
931
320
420
313
663
-66%
31%
-25%
112%
Refining LIFO
- yoy change
EBITDA
1 063
- yoy change
1 001
139
647
1 386
2%
-7%
-86%
364%
114%
-103
23
92
269
-409
-3
311
26
22
0
0
0
1 138
916
1 004
-599
264
738
Pretax Profit
- yoy change
-19%
10%
-160%
-144%
180%
-169
-181
-190
-113
-50
-140
-54
-55
-37
-57
-13
-34
Net Incom e
915
680
777
-769
200
564
EPS (PLN)
9.5
Income Tax
- yoy change
6.0
6.8
-6.8
1.8
5.0
-37%
14%
-199%
-126%
182%
2005
2006
2007
2008E
2009E
2010E
16.5%
14.2%
13.5%
5.6%
13.9%
13.2%
EBIT Margin
8.3%
6.2%
5.4%
-1.2%
2.7%
5.4%
Net Margin
9.5%
5.3%
5.9%
-4.7%
2.1%
3.7%
20.1%
13.3%
13.4%
-15.2%
3.8%
9.7%
2005
2006
2007
2008E
2009E
2010E
3 408
3 974
5 208
6 143
4 186
5 166
768
772
925
972
146
231
2 640
3 202
4 283
5 171
4 040
4 934
Gross Margin
ROE
Total Fixed Assets
3 581
3 790
4 512
6 622
8 192
9 449
Tangible assets
3 312
3 485
4 253
6 370
7 946
9 209
Other Fixed assets
270
305
259
252
245
240
Total Assets
6 990
7 764
9 720
12 765
12 377
14 615
6 250
4 808
5 402
6 151
5 438
5 652
254
306
335
391
405
438
716
720
1 216
3 058
3 744
4 298
Long -Term Debt
294
331
843
2 601
3 405
3 855
422
389
373
456
340
443
1 466
1 642
2 354
4 269
2 981
4 067
111
174
517
1 734
1 459
1 652
81
83
79
105
63
100
6 990
7 764
9 720
12 765
12 377
14 615
Short -Term Debt
BVPS (PLN)
42.3
47.5
54.1
47.8
49.7
55.0
Ratios
2005
2006
2007
2008E
2009E
2010E
Current Ratio
2.3
2.4
2.2
1.4
1.4
1.3
Quick Ratio
1.3
1.4
1.1
0.7
0.5
0.5
Bank Debt/Assets
Bank Debt/Equity
6%
6%
14%
34%
39%
38%
Cash Flow (PLN m)
8%
9%
22%
80%
86%
88%
2005
2006
2007
2008E
2009E
2010E
Net Profit
915
680
777
-769
200
564
264
297
306
330
380
546
-581
-323
-894
-71
15
235
598
654
189
-510
595
1 344
-799
-525
-369
-2439
-1950
-1803
Other
-117
-197
-448
40
23
8
-916
-722
-816
-2 399
-1 927
-1 795
644
Change in Debt
-45
-50
557
2975
528
1015
0
0
0
0
0
Other
-40
-28
-75
-20
-23
-107
930
-78
482
2 955
505
537
Beginning Cash
155
768
772
925
972
146
612
-145
-145
47
-826
86
Ending Cash
768
772
925
972
146
231
DPS (PLN)
0.2
0.0
0.4
0.0
0.0
0.0
Issuance of Shares
108
1 082
Grupa Lotos S.A.
Lotos has already submitted its trading statement and the operating loss in 4Q08
amounted to PLN 706m. However, on the LIFO basis, the company posted ca. PLN 185m
gain in that quarter, hence the loss on inventories amounted to PLN 880m. On the full
year results in 2008, we expect loos of ca. PLN 769m.
Table 118 Lotos – 4Q08E Results Preview
P & L (PLN m )
Revenues
4Q07
1Q08
2Q08
3Q08
4Q08E
YoY
QoQ
12M07
12M08E
YoY
3 987.9
3 561.5
4 217.9
4 764.2
3 650.4
-8.5%
-23.4%
13 125.1
16 194.0
23.4%
Operating profit
158.6
94.7
381.8
39.2
-706.1
na
na
713.7
-190.4 -126.7%
Net profit
231.2
267.9
396.5
-237.9
-1 195.4
na
na
777.2
-768.9
na
Valuation summary
We use DCF method as a basis for setting the target price for Lotos. As a cross check to
our findings we present the SOTP valuation and multiples.
Valuation summary Targe price (PLN)
DCF method
SOTP
Multiples
- 2009E-10E P/E
- 2009E-10E P/BV
18.9
37.1
10.2 - 24.5
30.4 - 34.4
Table 119 Lotos - DCF
2014E Terminal Year
Lotos - DCF Model
2009E
2010E
2011E
2012E
2013E
-40.0%
58.7%
48.8%
0.2%
0.2%
0.2%
0.5%
Revenues
9 722
15 429
22 963
23 000
23 037
23 075
23 191
EBIT Margin
3.2%
4.3%
5.2%
5.8%
5.8%
5.8%
5.8%
EBIT
313
663
1 199
1 338
1 333
1 328
1 345
19.0%
19.0%
19.0%
19.0%
19.0%
19.0%
19.0%
NOPAT
253
537
971
1 084
1 080
1 076
1 089
+ Depreciation
380
546
663
743
798
819
824
-1 950
-1 803
-1 730
-1 779
-917
-1 047
-824
983
-121
-1 200
-6
-6
-6
-23
-333
-841
-1 296
41
955
842
Effective Tax Rate
- Capex
FCFF
Terminal value
1 066
12 147
WACC
5.8%
6.5%
7.2%
7.9%
8.6%
9.3%
-333
-790
-1 136
33
715
577
9.3%
-2 964
8 321
Value of Operating Assets of the firm = 5 357
Value of Firm =
Value of Equity =
1 091
6 448
4 335
2 112
Key Assum ptions
18.9%
5.0%
Market Risk Premium
5.5%
Value of Equity per share at 2009 end (PLN) = 18.6
Beta
18.9
1
7.9%
Nominal Growth
7.8%
6.8%
5.8%
4.8%
-3.5%
-0.5%
36.8
25.2
13.5
1.8
-9.8
-2.5%
0.5%
45.1
32.0
18.9
5.8
-7.3
-1.5%
1.5%
55.6
40.6
25.7
10.7
-4.2
11.3%
10.3%
3.8%
WACC in Perpetuity
Nominal Growth
9.3%
8.3%
-3.5%
-0.5%
1.8
7.1
13.5
21.4
7.3%
31.3
-2.5%
0.5%
5.1
11.3
18.9
28.5
40.9
-1.5%
1.5%
9.1
16.4
25.7
37.7
53.8
109
Grupa Lotos S.A.
Valuation assumptions
General assumptions
2006
2007
2008E
2009E
2010E
2011E
2012E
65.4
5.2
3.1
72.6
3.8
2.8
97.7
2.8
2.4
45.0
1.5
3.4
55.0
1.5
3.2
80.0
1.5
2.9
80.0
1.5
2.9
6,000
6,099
102%
5.4
6,000
6,157
103%
4.4
6,000
6,195
103%
5.3
6,000
6,023
100%
4.6
10,500
9,000
86%
4.4
10,500
10,500
100%
8.7
10,500
10,500.0
100%
8.7
Crude production (kt)
264
*Based on the Lotos refinery slate
Source: Company, Bloomberg, IPOPEMA estimates
187
250
189
489
491
946
Brent ($/bbl)
Brent - Ural differential ($/bbl)
USD/PLN
Refinery&Wholesale
Nameplate capacity (kt)
Crude throughput (kt)
Capacity utilization (%)
Lotos model refining margin*
E&P
Lotos – SOTP valuation
For the reference purpose, below we present the SOTP valuation of Lotos assets. Using
the below presented data we arrive at PLN 23 per share rough estimate of the Lotos
value.
Retail. Lotos currently owns 137 fuel stations in Poland. In 2005 Lotos purchased 53
fuel stations from ExxonMobil for PLN 5.3m per site (assuming that 14 land plots
were ready fuel sites) and 14 fuel stations from Slovnaft for PLN 4.2m per site
(assuming that 2 land plots were ready fuel sites), so let’s say for average 4.7m per
site. So, assuming that Lotos overpaid for these assets, with 35% discount we arrive
at PLN 3m per site, or PLN 411m of the retail value. This would be ca. PLN 3 per
Lotos share.
Upstream. Lotos 69% owned subsidiary – Petrobaltic - has currently 6.2mln 2P
crude oil reserves. In 2006/2007, when crude oil trade at 55-60 $/bbl range, the
Statoil bought NorskHydro for ca. 14$/bbl of proved reserves. Assuming ca.30%
discount in order to reflect current crude price, we arrive at 9.8$/bbl estimate of
Lotos reserves, or USD 444m value of Petrobaltic. At current USD/PLN rate this
would be PLN 1050m value for Lotos, or PLN 9.1 per share.
Refining. The upgraded Lotos refinery will have the capacity of 210 kbbl/d. The
latest available refinery study, is October 2008 refinery study for North Dakota
grass-root 100kbbl/d capacity refinery, which implies the average cost of the refinery
capacity at ca. 13200$/bbl/d. Taking this amount to Lotos after 10+ program
capacity, we would arrive at USD 2.8bn. At current USD/PLN rate, this would be PLN
9.4bn, or PLN 83 per share. For comparison, relatively simple refinery in Mazeikiu
Nafta in Lithuania was acquired by PKN for ca.13900$/bbl/d.
Summary. Summing it up we arrive at PLN 95.1 per share. Net debt in the peak
of the investment process is ca.PLN 6bn. Assuming that working capital will cover
other liabilities, we arrive at net debt per share of PLN 53 per share. This would
imply Lotos value of ca. PLN 42.1 per share as of the end of 2011 or ca.PLN 37.1
per share as of 2009YE.
110
Grupa Lotos S.A.
Lotos – multiples valuation
As a reference, below we present the peers group for Lotos, as well as multiples based
valuation. We indicate that this does not capture companies different growth profile,
capacity expansion, asset mix etc. We take into account P/E, EV/EBITDA as well as P/BV
ratios.
Last Price
PLN
PKN Orlen
PLN 21.4
CZK
Unipetrol
CZK 129.5
RON
Petrom
RON 0.1
Market Cap
(EUR m )
P/E
EV/EBITDA
P/BV
2009E
2010E
2009E
2010E
2009E
1 971
5.1
4.5
5.4
5.4
0.43
2010E
0.41
811
9.4
8.7
5.1
4.7
0.55
0.63
2 123
3.6
2.6
7.1
6.1
0.47
0.48
EUR
Hellenic Petroleum EUR 5.7
1 773
7.9
7.2
7.5
6.3
0.66
0.63
HUF
MOL
HUF 9270.0
3 637
5.8
4.9
6.3
5.8
0.76
0.70
EUR
OMV
EUR 21.9
6 690
5.2
4.3
4.4
3.9
0.61
0.55
HRK
INA Industrija
HRK 1168.8
1 664
7.7
5.8
10.7
8.3
0.74
0.66
5.8
4.9
6.3
5.8
0.61
0.63
5.8
2.0
8.9
4.6
0.20
0.18
Median
PLN
Lotos
PLN 10.2
248.5
Source: Bloomberg, IPOPEMA estimates
Below we present the premium/(discount) analysis as well as implied Lotos share price.
The negative EV/EBITDA for 09’ results from the Lotos high indebtedness compared to its
market cap.
Lotos – premium/(discount) and implied share price
Table 120 Lotos – premium/(discount) and implied share price
P/E
2009E
2010E
EV/EBITDA
2009E
2010E
P/BV
2009E
2010E
Lotos - prem ium /(discount) to
- median peers
- PKN Orlen
-1%
12%
-59%
-55%
41%
64%
-22%
-15%
-67%
-52%
-70%
-55%
Lotos - im plied price
- at median to peers
- at PKN Orlen ratios
10.2
9.0
24.5
22.4
na
na
25.7
19.9
30.4
21.3
34.4
22.4
111
PGNiG S.A.
Not Only Defensive Play
PGNiG share has been strong out-performer since the bear market begun in 2007.
With its strong balance sheet, stable dividend paying policy and relatively low
dependence on economic activity it is definitely a good defensive play. On the
other hand we believe the stock still offers significant nominal upside potential.
17 February 2009
BUY – Medium Risk
Our target price, derived from DCF model is PLN 4.6 implying 34% to the current
price. Trading at 2009E-10E EV/EBITDA of 3.6-3.7 shows some 35%-38%
250
PGNiG vs. WIG=100
undervaluation vs. international peers. We think that the market do not fully
recognize the magnitude of recovery of PGNiG`s results that should be driven by
falling gas import prices. Another trigger for the PGNiG share price performance
could be increase of PGNiG weight in market indices that should happen when the
200
PGNiG vs. WIG-Paliwa=100
150
100
employees shares are classified as a free float (could happen already this year).
On the other hand the recent huge volatility of PLN/US$ provides risk for short
50
term results.
It is a Cash Cow now. The risk appears if the owner gets wired ideas.
PGNiG has virtually no debt, big cash potion of almost PLN 2bn (at the 2008E end)
and should deliver substantial EBITDA of even PLN 4.9bn in 2009E. We assume
that the company continues to pay reach divided (2009E DPS of PLN 0.20) and will
have big capex of PLN 3bn (mostly on E&P), which however would not be enough
to lower its financial capacity – especially as the major part of dividend will be in a
form of contribution in kind. We appreciate strong cash generation but we also see
the risk that the State Treasure (major shareholder) may try to force the company
to acquire other entities controlled by the State (as chemical companies).
Key Ratios
2008E
2009E
Problems with mid-term gas supply could have paradoxically good impact
EBITDA Margin
15.6%
23.9%
EBIT Margin
8.2%
16.4%
PGNiG is currently not receiving gas from RosUkrEnergo (2.3 bn cm a year/ c.
ROE
6.3%
13.2%
Bank Debt / Assets
0.2%
0.7%
20% of gas consumption in Poland) and is struggling to sign a new mid-term
contract with Gazprom. These negotiations bears risk of price increase in the old
or/and new contract. This could be one of the reasons why the Regulator should
Share data
5900.0
allow PGNiG not to decrease tariffs starting from April 1st – the other reason is of
Market Cap (€m)
4198.2
course weak Zloty that hampers import price fall. Please note that due to the fact
5084.6
7.5
that PGNiG is still losing money on imported gas the potential shortages would
52 W High / Low
5.1 / 2.9
mostly hit PGNiG`s clients (mostly industrial). The price risk is also limited as
WIG Weight (%)
Reuters
PGNI.WA
Bloomberg
PGN PW
potential hike should be transferred to tariff (although the delay may happen).
3.8
Zloty – major risk for short term-result. Note this is also upside risk.
Just 0.01 change in US$/PLN rate (yearly average) results in PLN 27-29m (0.8%)
change in operating profit. Weak Zloty now helps to keep tariff unchanged but
further weakening/strengthening in 2-4Q09 may have material impact on results.
Performance
3M
Abs.
vs. WIG
5%
15%
YTD
-7%
12%
12M
-22%
65%
Revenues (PLN m)
2006
2007
2008E
2009E
2010E
20 386
15 198
16 652
19 105
20 649
EBITDA (PLN m)
2766
2282
2974
4928
4622
EBIT (PLN m)
1470
852
1570
3381
2949
Net profit (PLN m)
1327
915
1320
2798
2515
EPS (PLN)
0.22
0.16
0.22
0.47
0.43
DPS (PLN)
0.15
0.17
0.19
0.20
0.25
EV / EBITDA (x)
6.9
14.6
12.0
31.1
6.7
16.1
3.6
7.3
3.7
8.1
P/E (x)
112
Shareholders
Stake
State Treasury
Other
84.7%
15.3%
Analysts
+ 48 22 236 92 44
Tomasz Duda
+ 48 22 236 92 32
PGNiG S.A.
Table 122 PGNiG – Financials
P&L (PLN m)
Revenues
2005
2006
2007
2008E
2009E
2010E
12 560
15 198
16 652
19 105
20 649
20 386
21%
10%
15%
8%
-1%
- yoy change
Materials costs
-5 940
-8 047
-7 645
-11 063
-9 823
-9 477
Employment costs
-1 646
-1 822
-2 014
-2 225
-2 371
-2 490
Other operating costs
-3 576
-4 084
-4 665
-4 151
-4 868
-5 368
EBIT before extraordinary
Revalaution gain/(loss), Extraordinary
1 398
1 245
2 328
1 666
3 587
3 051
0
225
-1 476
-96
-206
-102
EBIT
- yoy change
1 398
1 470
5%
852
-42%
1 570
84%
3 381
115%
2 949
-13%
EBITDA
2 800
2 766
2 282
2 974
4 928
4 622
-1%
-17%
30%
66%
-6%
117
- yoy change
-193
25
167
94
38
-117
77
-16
-10
81
81
1 088
1 572
1 003
1 654
3 500
3 147
-207
-244
-87
-333
-700
-629
0
-1
-1
-2
-2
-2
Net Incom e
881
1 327
915
1 320
2 798
2 515
EPS (PLN)
0.17
0.22
0.16
0.22
0.47
0.43
33%
-31%
44%
112%
-10%
Pretax Profit
Income Tax
- yoy change
EBIT Margin before extraordinary
11.1%
8.2%
14.0%
8.7%
17.4%
15.0%
EBIT Margin
11.1%
9.7%
5.1%
8.2%
16.4%
14.5%
Net Margin
7.0%
8.7%
5.5%
6.9%
13.5%
12.3%
ROE
5.0%
6.4%
4.3%
6.3%
13.2%
11.0%
2005
2006
2007
2008E
2009E
2010E
6 815
7 410
6 188
7 155
9 138
9 737
3 200
3 539
1 584
1 719
2 065
2 039
3 615
3 871
4 604
5 436
7 074
7 699
Total Fixed Assets
23 549
23 267
22 214
21 761
22 094
22 523
Tangible Assets
17 524
18 762
18 716
19 638
20 239
20 545
6 025
4 505
3 498
2 123
1 856
1 978
Total Assets
30 364
30 677
28 402
28 916
31 233
32 261
20 769
21 153
21 022
21 221
22 839
23 879
7
8
9
9
9
9
7 275
6 877
4 402
4 626
4 920
4 981
Other Fixed Assets
Long -Term Debt
2 369
2 343
31
59
199
193
4 906
4 534
4 371
4 567
4 722
4 788
2 320
2 647
2 978
3 069
3 474
3 401
89
114
107
3
10
10
2 231
2 533
2 871
3 066
3 463
3 391
30 364
30 677
28 402
28 916
31 233
32 261
3.52
3.58
3.56
3.60
3.87
4.05
Current Ratio
2.9
2.8
2.1
2.3
2.6
2.9
Quick Ratio
2.6
2.3
1.7
1.8
2.1
2.3
Bank Debt/Assets
Bank Debt/Equity
8%
8%
0%
0%
1%
1%
12%
12%
1%
0%
1%
1%
2005
2006
2007
2008E
2009E
2010E
881
1327
915
1320
2798
2515
1 402
1 296
1 430
1 404
1 547
1 673
Short -Term Debt
BVPS
Cash Flow (PLN m)
Net Profit
116
-1088
684
-320
24
-22
2 399
1 535
3 029
2 404
4 369
4 167
-1 301
-1 563
-2 946
-2 552
-2 400
-2 100
569
696
490
553
-1401
-612
-732
-867
-2 456
-1 999
-3 801
-2 712
-1 659
8
-2 335
-76
147
-6
2 640
0
0
0
0
0
-354
-303
-212
-171
-370
-1 475
-1 481
Other
Change in Debt
Issuance of Shares
Other
627
-295
-2 547
-247
-223
FX Differences
0
-16
19
-24
0
0
Beginning Cash
911
3 186
3 559
1 585
1 719
2 064
2 294
373
-1 974
157
345
-26
Ending Cash
3 200
3 539
1 584
1 719
2 065
2 039
0.10
0.15
0.17
0.19
0.20
0.25
DPS (PLN)
113
PGNiG S.A.
Please note that in 4Q07 the company reported PLN 1.3bn provisions on revaluation of its
distribution assets. Therefore on a net level basis 4Q07 (2007) looks weak while in fact it
was one of the best quarters in PGNiG`s history (on a cash basis). The 4Q08 should be
relatively weak due to the fact that the gas import prices has only slightly started to fall
(the trend will be sharply continued in 1Q09-3Q09). The major uncertainty is US$/PLN
hedging that we assume should add around PLN 250-300m to the operating result – the
same question will appear in regard to 1Q09 results where PLN depreciation has been
even stronger so far.
Table 123 PGNiG – 4Q08E Results Preview
P & L (PLN m)
Revenues
4Q07
1Q08
2Q08
3Q08
4Q08E
YoY
QoQ
12M07
12M08E
YoY
5 054.7
5 330.4
3 929.2
3 653.5
6 191.6
22.5%
69.5%
16 652.1
19 104.7
14.7%
Operating profit before one-off
Operating profit
Net profit
933.6
987.4
293.6
192.7
75.6
-91.9%
-60.8%
2 168.9
1 570.0
-27.6%
-450.6
-164.6
987.4
779.0
293.6
279.8
192.7
178.8
75.6
80.5
na
na
-60.8%
-55.0%
851.6
915.0
1 570.0
1 319.8
84.4%
44.2%
th
Table 124 PGNiG vs. Western Peers (Prices as of February 13 )
P/E
Country
PGNIG is trading at high
discount to its Western
peers
Com pany
GDF Suez
FRA NCE
Enagas
SPA IN
Snam Rete Gas SpA
ITALY
Gas Natural SDG SA
SPA IN
M e dian
PGNiG
Premium/(Discount) to median Western
Las t Price
EUR
EUR
EUR
EUR
27.79
13.68
4.01
16.79
M ark e t Cap
(EUR m )
63
3
7
7
496
271
963
621
PLN 3.44
peers
EV /EBITDA
P/BV
2009E
2010E
2009E
2010E
2009E
2010E
10.0
10.2
14.5
6.8
10.1
7.3
-28%
9.1
9.2
12.6
6.1
9.2
8.1
-12%
2.8
7.4
8.3
4.2
5.8
3.6
-38%
2.5
6.6
8.0
4.6
5.6
3.7
-35%
1.0
1.9
1.9
1.0
1.5
0.89
-39%
1.0
1.7
1.9
1.0
1.4
0.85
-38%
Table 125 PGNiG – DCF
2009E
Our DCF do not account
for potential margin
improvement that may
result from planned
higher oil/gas
production in the future
2010E
2011E
2012E
2013E
2014E
Terminal
Year
8.1%
-1.3%
3.4%
2.4%
2.0%
1.7%
1.5%
Revenues
20 649
20 386
21 072
21 585
22 009
22 391
22 727
EBIT Margin
16.4%
14.5%
16.4%
14.2%
13.1%
12.6%
12.0%
EBIT
3 381
2 949
3 464
3 069
2 885
2 811
2 727
Effective Tax Rate
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
NOPAT
2 681
2 319
2 722
2 455
2 308
2 249
2 182
1 547
1 673
1 734
1 798
1 860
1 920
1 979
-2 450
-1 800
-1 865
-2 135
-2 130
-2 158
-2 183
+ Depreciation
- Capex
FCF
-257
44
-114
-62
-51
-46
-40
1 521
2 237
2 476
2 058
1 987
1 965
1 938
11.0%
10.9%
10.8%
10.7%
10.4%
2 015
2 012
1 508
1 315
1 178
Terminal Value
21 723
WACC
+ Other operational assets
Value of Firm =
1 521
9 550
13 024
2 553
25 127
1 817
26 944
Value of Equity =
10.4%
61.6
Key Assum ptions
3%
14.5%
Market Risk Premium
5.5%
Beta
1
10.8%
26 882
4.6
4.6
Nominal Growth
10.0%
11.0%
12.0%
13.0%
14.0%
-2.0%
0.5%
4.21
4.39
4.58
4.76
4.95
-1.0%
1.5%
4.22
4.43
4.64
4.85
5.06
0.0%
2.5%
4.23
4.47
4.72
4.96
5.21
11.4%
10.9%
WACC in Perpetuity
Nominal Growth
10.4%
9.9%
9.4%
-2.0%
0.5%
4.38
4.47
4.58
4.69
4.82
-1.0%
1.5%
4.41
4.52
4.64
4.77
4.92
0.0%
2.5%
4.45
4.58
4.72
4.88
5.06
114
TV market still growing in spite of high saturation
Fast growth of pay-TV in
spite of relatively high
saturation was a big
surprise in 2008
The inevitable saturation of the market is close, as the number of pay-TV users at the
end of 2008 increased to ca. 9.2 million, which corresponds to 65% of households
penetration. The ratio is above European average, but due to limited choice (7 channels)
and coverage of free-to-air channels (only 3 of them have reach close or above 90% of
population, some of them have 40-75%). Taking into account very slow process of
launch of DTT and the increase in the number of households (by 4.3% until 2012E as
forecasted by Central Statistical Office) we still estimate there is room for another ca. 2.1
m subscribers by end of 2012E, which implies 76% of pay-TV penetration. DTH should be
the major beneficiary of the increase due to low capex intensity. Cable operators, in our
view, will rather focus on overbuilding its networks (especially in Warsaw), improvement
of network quality, offering new services and acquisition of smaller players.
We expect the ARPU on pay-TV services to increase slightly due to popularization of
digital TV with its HD quality, personal video recorders and video on demand possibilities.
On the other hand it will be slightly diluted by the increasing share of low-cost package
subscribers.
Digital terrestrial TV not a threat
The digital terrestrial TV should not be a major threat to pay-TV market. The
Government regulated
DTT process is slow,
private digitalization is
much faster
implementation schedule was presented in January 2009, as last couple of months
brought resolution of the jurisdiction conflict between regulators – UKE (telecom
watchdog) and KRRiTv (television watchdog) – who had different concepts of the project.
Finally UKE stepped off and KRRiTv’s concept was chosen.
The first multiplex hosting current 7 nationwide broadcasters will be launched first. The
digitalization launch will start in September 2009 (in 4 cities) and end in July 2011. The
analogue switch off is planned to take place between October 2010 and July 2013. The
contest to choose the operator of the 2nd multiplex is scheduled for February 2009. It
will host 3 channels chosen by KRRiTv in a contest, 1 local channel and 3 channels
chosen by the operator of the multiplex. The 3rd multiplex will have little population
coverage (ca. 20%), which may be increased when the analogue frequencies are
switched off. The schedule puts little focus on the 2nd and 3rd multiplex, which are
essential for the DTT project, as they should encourage people to buy the set-top boxes.
Moreover, the process seems very lengthy and it will be fully implemented when the
market is already saturated by DTH and cable.
Broadband market still has high potential
As far as broadband market is concerned, the potential is much higher. Based on data
Broadband has still
great potential
from TPSA and Netia, there should be 5.4m subscribers of fixed line broadband internet
at the end of 2008, which gives household penetration of 37%, whereas the average for
the Western Europe is ca. 55%. We estimate that the penetration will reach 47% in
2012E.
The internet ARPU should stabilize after years of declines, which is due to: 1) less
aggressive strategy of new entrants (especially Netia, which built its customer base by
offering inexpensive
internet via BSA during last quarters), 2) focus on increase of
bandwidth.
Crisis should not hurt
As pay-TV and internet remain the cheapest form of entertainment and they account for
Pay-TV and broadband
should do well during
the crisis
relatively low share of household budgets, we think that the crisis will have a very limited
impact on new services sales, increased churn or receivables write-offs. The other risk is
115
a slow-down in net adds and network expansion in cable networks, due to the credit
crunch related financing problems.
Table 126 Pay-TV and Broadband Market Forecasts
2006
2007
2008E
2009E
2010E
Population
thous. (unless otherwise stated)
38,125
38,118
38,139
38,101
38,092
Households
14,223
14,392
14,574
14,728
14,884
Households with TV set
13,938
14,104
14,283
14,434
14,602
cable TV & IPTV households
4,400
4,500
4,635
4,751
4,870
DTH households
2,217
3,440
4,607
5,298
5,722
Total pay-TV households
6,617
7,940
9,242
10,049
10,592
Pay-TV households penetration (%)
Broadband households
Broadband households penetration (%)
47%
56%
65%
70%
73%
3,906
4,774
5,411
5,931
6,344
27%
33%
37%
40%
43%
Chart 41 DTH subscribers by operators
Chart 42 Cable TV subscribers by main operators
5,000
3,000
4,500
2,500
4,000
3,500
2,000
3,000
2,500
n
2,000
Cyfra+
1,500
CPS
MMP
1,500
Aster
Vectra
1,000
UPC
1,000
500
500
0
0
Source: Operators, IPOPEMA estimates
Chart 43 Broadband penetration of pop. by countries
Chart 44 Broadband subscribers by operators
3,500
40%
35%
30%
3,000
2,500
25%
MMP
2,000
Aster
20%
15%
10%
Vectra
1,500
UPC
1,000
Netia
5%
0%
TPSA
500
0
Source: ECTA July 2008
116
Cyfrowy Polsat S.A.
Buy the Cash Cow
DTH market – still room for growth
17 February 2009
In spite of growing competition in the pay-TV market, Cyfrowy Polsat managed to
add 659k of new subscribers in 2008 vs. 795k in 2007 and 617k in 2006. Other
BUY– Low Risk
12M TP PLN 18.1 / (Feb 13th) PLN 15.4
DTH players were also very active – Vivendi’s Cyfra+ added 280k and TVN’s “n”
added 230k of new subscribers during the 2008. At the end of 2008, TPSA – the
telecom incumbent entered the market with its DTH project, in cooperation with
Cyfra+. We believe there is still some room for growth in the DTH market of ca.
250
230
Cyfrowy Polsat vs. WIG=100
Cyfrowy Polsat vs. WIG-Telecom=100
210
1.6m until 2012E, of which ca. 50% should be grabbed by CPS. January 2009 was
another very good month, with more customers acquired by CPS than in Jan 2008.
190
170
150
Very defensive play
130
110
Even if the economic slow-down impacts negatively the demand for multichannel
television (the scenario in which we don’t believe), the Company will benefit in the
90
Jan- Apr06
06
Jul06
Oct06
Jan- Apr07
07
Jul07
Oct- Jan- Apr07
08
08
Jul08
Oct- Jan08
09
short term, as it will spend less money for acquiring new customers (average cost
of STB subsidies is ca. 60 PLN per piece and fee for distributors ca. PLN 100 in
2008E). Without such cost, the net income would be PLN 108m higher than PLN
281m expected by us for FY2008. This feature makes CPS an extremely defensive
player, to an extent not comparable to other pay-TV or telecom players, which
usually have their own, in-house sales force (which means fixed cost) and who
usually amortize the equipment used by subscribers. As much as 76% of total
operational costs are variable. We think that the crisis is not a threat due to low
cost of TV services (PLN 38 i.e. 1.2% of average salary) provided by CPS.
Cash from DTH diluted by MVNO
It is still too early, in our view, to expect some positive information on the MVNO
project
(prepaid services started in June 2008, supported only by modest BTL
Key Ratios
2008E
EBITDA Margin
32.4%
32.2%
EBIT Margin
30.2%
29.9%
ROE
92.3%
73.8%
-0.2
-0.4
Net Debt / EBITDA
2009E
marketing, postpaid services were launched in September 2008). Therefore, we do
not expect the total number of subscribers, to exceed 50k at the end of the
Share data
4Q2008. As a consequence, the financial impact of MVNO service should be very
268.3
limited (ca. PLN 2m of revenues in the 4Q2008). Another distant risk lies in the
Market Cap (€m)
889.9
potential acquisition of other telecom assets, as CPS ultimate goal is to become a
181.4
triple play provider. Moreover, the majority owner of the Company, Mr. Solorz –
52 W High / Low
16.0 / 11.5
śak is a shareholder of Sferia and expressed his interest in increasing presence in
WIG Weight (%)
Reuters
CPSM.WA
the telecom sector.
Bloomberg
1.1
1.5
CPS PW
Outperformed the market, but still worth buying
Performance
Abs.
CPS since its IPO gained more than 18%, whereas WIG fell by 50%. The Company
3M
11%
25%
is cheaper than Western peers by 11-16% on 2009-10 P/E. In our view, it is worth
YTD
9%
32%
to BUY the stock with high FCF and leading position in the still prospective sector.
12M
na
na
vs. WIG
Shareholders
Stake
2006
2007
2008E
2009E
2010E
Polaris Finance B.V.
60.7%
478.5
787.3
1,110.2
1,370.4
1,602.1
EBITDA (PLN m)
74.4
165.9
359.6
441.9
528.7
Zygmunt Solorz-śak
Other
11.4%
27.9%
EBIT (PLN m)
41.8
145.1
335.3
409.4
492.0
Net profit (PLN m)
55.8
113.4
281.3
335.5
410.0
EPS (PLN)
0.2
0.4
1.0
1.3
1.5
DPS (PLN)
0.0
0.0
0.1
0.7
0.8
EV / EBITDA (x)
na
na
na
na
9.9
12.9
8.9
12.3
7.1
10.1
Revenues (PLN m)
P/E (x)
Analyst
Waldemar Stachowiak
+ 48 22 236 92 33
117
Cyfrowy Polsat S.A.
Operational review
Over 2008, the Company proved successful not only in the field of new customers
Very good ARPU in spite
of intensive net adds
acquisitions (customer base increased by 32% yoy), but also in terms of other
operational factors. The most important was an increase in ARPU on the main channel
package (“Family Package”) from average PLN 37.5 in 2007 to PLN 39.3 in the 2Q2008
and PLN 40.3 in the 3Q2008, which was mostly owed to an increased interest in the extra
payable packages including HD channels. Churn stood at 8.7% in the 3Q2008 vs. 8.8%
on cable TV in Multimedia Polska. The ratio of newly acquired (net) customers choosing
the higher ARPU “Family Package” fell from 83% in 2007 to 73% in 2008E. Our, rather
conservative, assumptions are presented below.
Table 128 Operational forecasts
2006
2007
2008E
2009E
2010E
2011E
2012E
DTH subscribers eop (thous.)
1,273.6
2,068.3
2,727.0
3,138.8
3,358.5
3,492.8
3,562.7
of which Family Package (thous.)
1,168.9
1,827.0
2,309.7
2,629.2
2,783.0
2,877.0
2,925.9
CPS share in DTH net adds (%)
77%
64%
45%
55%
52%
52%
33%
ARPU (PLN/month)
30.3
33.0
33.8
34.9
35.7
36.2
37.2
Subscription revenues (PLN m)
351.1
662.5
972.3
1,227.2
1,393.1
1,489.1
1,574.3
STB sales revenues (PLN m)
100.6
107.2
111.2
87.5
69.4
65.9
SAC (PLN)
Churn on Family Package (%)
105.9
124.2
122.6
126.1
120.0
123.6
5%
5%
8%
10%
11%
12%
64.5
127.3
13%
On the cost side, the Company benefits further from the economies of scale on the cost
of labour, transmission and marketing cost. The operational costs (programming,
On the cost side CPS
benefits from economies
of scale and hedged
positions
transmission and part of STB subsidies) will increase due to the PLN depreciation. The
programming cost accounts for 29% of the opex and it is denominated mostly in EUR
(44%) and USD (55%), but most of it planned for the 4Q2008 and 1H2009 was hedged.
We estimate that the Company will show ca. PLN 16m of profit on the hedging
transactions in plain-vanilla forwards in EUR and USD. After the 1H2009 the
programming cost is not hedged and the operational margin may be squeezed, or which
we find more probable, the Company will increase the fee slightly.
MVNO update
The next quarters will show, whether the Company will be able to attract a mass
customer to its mobile services. The competition of the 4 MNOs is very strong, but the
MVNO still a question
mark, but…
telecom watchdog is very determined to increase the revenue share of alternative mobile
operators to 5-10%. Another positive factor for Cyfrowy Polsat is the asymmetry of MTRs
(Company pays PLN 0.21 per outgoing minute and receives PLN 0.40 per incoming
minute). Even if the MVNO project fails and the Company is not able to reach the breakeven point, the capex has been paid already and the majority of operational cost in the
segment is variable (marketing, distribution, phone subsidies and traffic) and will not
…even in case of failure
the dilution will not be
high
materially dilute the results of the Company in the future.
Table 129 Cyfrowy Polsat Peers Valuation
P/E
2009E
Premium/(discount)
2010E
EV/EBITDA
2009E
2010E
EV/SALES
2009E
2010E
13.9
12.0
5.1
4.9
1.3
1.2
-11%
-16%
73%
45%
183%
168%
19.2
20.2
9.8
11.7
6.0
6.4
Source: Bloomberg, IPOPEMA estimates. Peers include (DISH Network, Premiere AG, Austar, Sky
Perfect Jsat, BSky)
118
Cyfrowy Polsat S.A.
Table 130 Cyfrowy Polsat – Financials
Strong growth in the top
line, driven by further
increases in net adds…
P&L (PLN m)
Revenues
2005
2006
2007
2008E
2009E
2010E
278
478
787
1,110
1,370
1,602
72%
65%
41%
23%
17%
76
189
389
446
536
246%
150%
105%
15%
20%
- yoy change
Gross Profit
22
- yoy change
…should be
accompanied by
relatively stable EBITDA
margin
-26
-34
-44
-54
-37
-44
EBIT
- yoy change
-4
42
n/a
145
247%
335
131%
409
22%
492
20%
EBITDA
- yoy change
46
74
60%
166
123%
360
117%
442
23%
529
20%
-12
-11
-7
-4
3
13
0
0
0
0
0
0
-37
71
140
349
414
506
Income Tax
2
-15
-27
-67
-79
-96
0
0
0
0
0
0
410
Interest Income/(Cost)
Pretax Profit
Net Income
-35
56
113
281
335
EPS (PLN)
-0.1
0.2
0.4
1.0
1.3
1.5
-260%
102%
144%
19%
22%
- yoy change
2005
2006
2007
2008E
2009E
2010E
16.7%
15.5%
21.1%
32.4%
32.2%
33.0%
-12.6%
11.7%
14.4%
25.3%
24.5%
25.6%
ROE
29.7%
-89.1%
185.5%
92.3%
73.8%
63.7%
ROA
-14.5%
15.8%
19.1%
35.0%
33.1%
35.0%
EBITDA Margin
Net Margin
2005
2006
2007
2008E
2009E
2010E
154
250
432
599
781
913
64
110
151
222
315
368
90
141
281
377
466
545
Total Fixed Assets
88
103
163
203
231
258
Tangible Assets
58
54
98
135
157
181
Other Fixed Assets
The Company should
have net cash, in spite of
66% dividend payout
ratio assumed in 2009E
and 2010E
Total Assets
49
65
69
74
77
353
595
803
1,012
1,171
643
-118
-63
61
305
455
0
0
0
0
0
0
0
30
134
60
30
0
Long -Term Debt
0
30
134
60
30
0
360
386
400
438
527
528
Short -Term Debt
247
208
89
82
88
15
113
178
312
356
439
513
1,171
242
353
595
803
1,012
BVPS (PLN)
-0.5
-0.2
0.2
1.1
1.7
2.4
2005
2006
2007
2008E
2009E
2010E
Current Ratio
0.4
0.6
1.1
1.4
1.5
1.7
Quick Ratio
0.3
0.5
0.8
1.0
1.1
1.3
Bank Debt/Assets
102%
67%
37%
18%
12%
Bank Debt/Equity
-209%
-380%
364%
47%
26%
1%
2%
2005
2006
2007
2008E
2009E
2010E
-35
56
113
281
335
410
50
33
21
24
33
37
47
-7
-23
-54
-16
-23
Ratios
Cash Flow (PLN m)
Net Profit
62
81
111
251
352
424
-13
-28
-55
-63
-55
-60
Other
12
-11
1
11
13
19
-2
-39
-54
-52
-42
-41
-103
Change in Debt
Issuance of Shares
Other
The capex should
remain at very limited
level (3-4% of sales)
30
242
0
17
-1
-80
-24
10
0
0
0
0
0
-19
-14
-14
-50
-193
-226
-9
3
-16
-130
-217
-329
Beginning Cash
12
64
110
151
220
313
52
46
41
69
93
53
Ending Cash
64
110
151
220
313
366
DPS (PLN)
0.0
0.0
0.0
0.1
0.7
0.8
119
Cyfrowy Polsat S.A.
Table 131 Cyfrowy Polsat – 4Q08E Results Preview
P & L (PLN m)
4Q07
1Q08
2Q08
3Q08
4Q08E
YoY
QoQ
12M07
12M08E
YoY
Revenues
239.0
242.4
266.1
280.3
321.3
34.4%
14.6%
787.3
1,110.2
41.0%
Operating profit
Net profit
-10.2
-8.9
83.5
64.0
99.4
79.8
102.1
84.2
50.2
53.3
-592.2%
-50.8%
-697.4%
-36.7%
145.1
113.4
335.3
281.3
131.0%
148.1%
The 4Q2008 showed no
signs of pay-TV market
saturation…
The Company informed that it had 2.73m subscribers at the end of the year - 659k more
than at the end of 2007 and 324k since the end of the 3Q2008. The dynamics was only
slightly lower than in 2007 (795k in FY and 393k in the 4Q). We find the result very good
as the competition was aggressive and the market is closer to saturation than a year
ago. We expect continuously good mix of subscribers (75% of net adds in Family
Package vs. the rest in Mini and newly introduced MiniMax packages). ARPU in the
4Q2008 may be slightly diluted (we expect PLN 39.5 vs. PLN 40.5 in 3Q2008), due to 612 month free subscription promotion. The EBIT level is low typically for 4Q, when the
company adds most subscribers and books total STB subsidy and distribution cost. We
expect that the cost of STB in the 4Q was PLN 71m, whereas the revenue on STB sales
was PLN 46m. The Company hedged part of the 4Q2008 and 1H2009 EUR and USD
programming expenses at lower FX levels (we expect +PLN 16m in 4Q2008 P&L).
Table 132 Cyfrowy Polsat – DCF
…therefore we have
reasons to believe the
growth will continue in
the years to come
Revenue Growth Rate
Revenues
Operating Margin
EBIT
Effective Tax Rate
NOPAT
+ Depreciation
- Capex
FCF
Terminal Value
WACC
2012E
2013E
2014E
Terminal
Year
2009E
2010E
2011E
23.4%
16.9%
10.2%
6.8%
5.4%
3.9%
2.5%
1,370
1,602
1,766
1,886
2,004
2,118
2,214
29.9%
30.7%
32.4%
31.8%
27.2%
22.6%
18.0%
409
492
573
600
616
632
398
19.0%
19.0%
19.0%
19.0%
19.0%
19.0%
19.0%
332
399
464
486
499
512
323
33
-55
-5
37
-60
-5
39
-62
-3
40
-61
-2
37
-50
-2
33
-38
-1
30
-27
-1
304
370
437
462
484
505
325
4,446
9.8%
10.7%
10.6%
10.6%
10.6%
10.5%
10.3%
304
335
357
342
324
306
1,968
2,697
4,665
242
Value of Firm =
4,907
142
Value of Equity =
4,765
17.8
18.1
Key Assumptions
Market Risk Premium
11.4%
29.3%
5.5%
Beta
1
10.6%
-1.5%
-0.5%
0.5%
Nominal Growth
1.5%
2.5%
3.5%
16.0%
15.8
16.9
18.4
17.0%
16.3
17.5
19.0
7.8%
19.7
21.9
25.2
8.8%
18.1
19.7
21.9
18.0%
16.8
18.1
19.7
19.0%
17.3
18.6
20.4
20.0%
17.8
19.2
21.0
10.8%
15.9
16.8
18.1
11.8%
15.1
15.9
16.8
WACC in Perpetuity
-1.5%
-0.5%
0.5%
Nominal Growth
1.5%
2.5%
3.5%
120
9.8%
16.8
18.1
19.7
Multimedia Polska S.A.
The Safety Is Not Cheap
17 February 2009
Defensive stock
93% of 9M2008 Multimedia revenues came from monthly fees which are a part of
BUY – Low Risk
12 or 24-month agreement. The possible churn should not increase dramatically
12M TP PLN 8.4 / (Feb 13th) PLN 7.2
as TV and internet will remain the cheapest entertainment, especially in times of
rising unemployment. This, coupled with relatively low bank debt (1.3x EBITDA)
140
and scalable capex make Multimedia a safe bet.
130
Multimedia Polska vs. WIG=100
Multimedia Polska vs. WIG-Telecom=100
120
Dynamic growth so far…
110
100
Over the last 5 quarters Multimedia’s revenues yoy growth rate stayed well above
90
10%. During 9M2008 the revenues grew by 13.8% yoy, driven mainly by the
70
increase of number of RGUs per subscriber from 1.45 to 1.62 (+11.8%) and also
50
increase in the number of subscribers.
40
Jan- Apr06
06
80
60
Jul06
Oct06
Jan- Apr07
07
Jul07
Oct- Jan- Apr07
08
08
Jul08
Oct- Jan08
09
… may be slightly constrained by “the credit crunch”
At the end of 3Q2008, Multimedia had only PLN 20m of cash vs. PLN 105m earlier.
Between Dec 2007 and Oct 2008, the Company spent PLN 39m on buy back of
2.86% of its shares and PLN 35m on dividend. The Company based on the
assumption of refinancing of old debt and increasing the leverage, which turned
out impossible due to the credit crunch.
Therefore the Company may be
constrained in its capex to ca. PLN 160m in 2009E (cash generated from
operations of ca. PLN 260m annually less repayment of debt of PLN 80m annually,
less interest and taxes) vs. capex of PLN 250m in 2007 and PLN 177m after
Key Ratios
2008E
9M2008. This may result in slower additions of homes passed, but MMP should be
EBITDA Margin
49.0%
49.2%
able to grow dynamically by intensifying the cross sell (higher RGU/subscriber).
EBIT Margin
19.7%
20.7%
9.9%
10.9%
1.4
0.9
ROE
Long term prospects remain positive
Net Debt / EBITDA
2009E
The Company operates in 2 prospective markets: pay-TV and broadband. Pay-TV
is relatively well penetrated compared to Western European countries, but due to
Share data
153.2
limited number of quality FTA channels, there is still room for growth. Broadband
Market Cap (€m)
244.5
market is still largely undeveloped. The current technology allows Multimedia (
which owns wide backbone network) and other cable operators to provide high
quality triple-play services, which could be offered by other large players (like
TPSA) only after high investments in the new generation network. The Company
94.5
0.3
52 W High / Low
9.9 / 5.7
WIG Weight (%)
Reuters
MMPA.WA
0.6
Bloomberg
MMP PW
trades at a 5-6% premium on P/E, but at significant discount on EV/EBITDA to
Western European peers. We find the premium justified taking into account the
Performance
Abs.
vs. WIG
potential of the Polish market and the technological advantages of the Company.
3M
18%
33%
Therefore BUY.
YTD
-2%
18%
12M
-26%
56%
2006
2007
2008E
2009E
2010E
Shareholders
Stake
Revenues (PLN m)
377.3
419.5
475.3
531.2
581.4
Emeging Ventures Limited (indirectly)
53.2%
EBITDA (PLN m)
189.6
206.9
233.1
261.6
279.1
EBIT (PLN m)
102.4
95.0
93.4
109.8
126.4
Other
10.0%
36.8%
98.6
72.4
57.1
70.8
88.6
EPS (PLN)
0.8
0.5
0.4
0.5
0.6
DPS (PLN)
0.0
0.0
0.2
0.0
0.0
10.7
15.7
8.7
21.9
5.9
18.5
5.1
15.6
4.5
12.4
Net profit (PLN m)
EV / EBITDA (x)
P/E (x)
Analyst
Waldemar Stachowiak
+ 48 22 236 92 33
121
Operational review – stable growth story
Solid organic growth
during 2008, both in TV
and internet segments
MMP was one of the most active cable providers among top 4 players. During the
9M2008, the Company added almost as many new cable subscribers (49k) as 3 other top
players altogether. The largest player UPC oscillates around 1m subscribers and there
was no progress during the period. The 2nd largest player Vectra added 43k (from 643k
to 687k) and Aster added only 10k (from 370k to 380k) subscribers. Multimedia
increased the number of digital TV services from 20k at the end of 2007 to 55k at the
end of the 3Q2008 and thus crossed 10% ratio of TV subscribers using DTV.
The cable operators were very active in the internet area – Multimedia added 48k of
subscribers during 9M2008 (+23% vs. end of 2007). The other operators showed similar
dynamics. In the voice segment, the Company added 13k new subscribers, a result
beaten only by UPC.
Table 134 Multimedia Polska – Operational Forecast
CATV subscribers eop
CATV ARPU (PLN/month)
2006
2007
2008E
2009E
2010E
474.8
530.2
546.3
556.7
562.2
30.3
33.2
34.0
34.6
34.9
1.7
23.1
76.5
122.8
188.5
DTV subscribers eop
DTV ARPU (PLN/month)
n/a
10.0
20.0
24.0
24.5
TV revenues (PLN m)
168.1
199.1
227.5
253.7
280.0
BB subscribers eop
395.4
145.3
211.7
276.0
338.0
BB ARPU (PLN/month)
48.3
40.1
39.0
39.4
40.4
BB revenues (PLN m)
74.2
87.8
115.9
143.6
177.7
200.5
Voice subscribers
154.0
165.0
186.4
202.5
Voice ARPU (PLN/month)
54.6
51.4
45.5
42.0
38.6
Voice revenues (PLN/m)
99.6
99.2
98.9
100.8
93.3
Total RGU sold
807
964
1,126
1,261
1,388
Number of subscribers
575
636
658
696
719
Homes passed
872
995
1,069
1,141
1,184
RGU/subscriber
Penetration of homes passed
1.35
1.46
1.65
1.75
1.87
66%
64%
62%
61%
61%
Due to increased competition, we do not expect any TV fee hikes in 2009, although some
We expect ARPUs to rise
in TV (due to DTV),
internet to stabilize and
voice to fall
operators have increased the price due to weak PLN (e.g. UPC), therefore the ARPU
should stay flat over the course of the year. We expect the ARPU on DTV to slightly cross
the 20 PLN threshold level in the 2H2009E due to increasing popularization of VoD.
The ARPU on the internet services after years of declines from PLN 48 at the end of 2006
to PLN 40 at the end of 2007 and PLN 38.6 at the end of the 3Q2008, should stabilize
around PLN 38 PLN in 2009, due to more obstructive stance of TPSA to use BSA and as a
result of softer competition strategy from Netia (lowest internet price in Netia starts now
from PLN 59).
The ARPU on voice services should continue falling, due to persistently fast fixed to
mobile substitution, which may be even stronger in the times of crisis. We expect
declines of PLN 1 per quarter from PLN 46.4 in the 3Q2008. Due to new customer adds,
the Company should be able to slightly increase the voice revenues (+3% in 2009E).
Table 135 Multimedia Polska Peers Valuation
P/E
2009E
2010E
EV/EBITDA
2009E
2010E
EV/SALES
2009E
2010E
14.9
11.7
6.3
5.8
2.5
2.3
Premium/(discount)
5%
6%
-18%
-21%
2%
-7%
7.6
7.5
9.7
10.0
7.8
8.5
Source: Bloomberg, IPOPEMA estimates. Peers include (Cablevision,Comcast, Liberty Global,NET
Servicos de Com.,Jupiter Telecom,Mediacom Comm,Time Warner Cable,Zon Multimedia)
122
Table 136 Multimedia Polska – Financials
We expect a slightly
slower growth in 20092010E due to financing
problems...
...and rather proportional
increases in EBITDA
P&L (PLN m)
Revenues
2005
2006
2007
2008E
2009E
2010E
245
377
419
475
531
581
54%
11%
13%
12%
9%
95
96
96
113
130
15%
- yoy change
Gross Profit
46
- yoy change
108%
1%
0%
17%
-2
7
-1
-3
-3
-3
EBIT
- yoy change
44
102
134%
95
-7%
93
-2%
110
18%
126
15%
EBITDA
- yoy change
94
190
102%
207
9%
233
13%
262
12%
279
7%
-18
-19
-16
-22
-22
-17
0
0
0
0
0
0
Pretax Profit
25
83
79
71
87
109
Income Tax
-3
15
-7
-14
-17
-21
0
0
0
0
0
0
Net Income
22
99
72
57
71
89
EPS (PLN)
0.2
- yoy change
0.5
0.6
26%
25%
2010E
2006
2007
2008E
2009E
50.3%
49.3%
49.0%
49.2%
48.0%
9.1%
26.1%
17.3%
12.0%
13.3%
15.2%
ROE
10.9%
18.9%
12.2%
9.9%
10.9%
12.0%
ROA
3.3%
8.9%
6.5%
5.4%
6.7%
8.2%
2005
2006
2007
2008E
2009E
2010E
46
403
267
114
128
139
12
347
184
21
24
26
33
56
83
93
104
113
Total Fixed Assets
633
705
849
947
932
945
Tangible Assets
602
651
712
810
810
824
31
54
136
137
122
122
Total Assets
679
1,108
1,116
1,061
1,059
1,085
204
523
591
579
649
738
0
0
0
0
0
0
390
496
307
225
145
65
Long -Term Debt
Other Fixed Assets
390
496
307
225
145
65
86
89
218
258
265
282
Accounts Payable
48
49
70
78
87
95
Short -Term Debt
11
9
100
125
119
125
75
80
118
133
146
157
27
31
48
55
58
61
679
1,108
1,116
1,061
1,059
1,085
BVPS (PLN)
2.0
3.3
3.7
3.8
4.2
4.8
2005
2006
2007
2008E
2009E
2010E
Current Ratio
0.5
4.5
1.2
0.4
0.5
0.5
Quick Ratio
0.5
4.5
1.2
0.4
0.5
0.5
Bank Debt/Assets
59%
46%
36%
33%
25%
18%
Bank Debt/Equity
197.0%
96.7%
68.9%
60.5%
40.7%
25.8%
2005
2006
2007
2008E
2009E
2010E
Net Profit
22
99
72
57
71
89
50
87
112
140
152
153
18
-27
26
24
36
15
90
159
211
221
259
256
-185
-133
-245
-236
-150
-166
0
5
0
4
1
1
-185
-128
-245
-233
-149
-164
160
110
-99
-57
-86
-74
0
220
-4
-35
0
0
Other
-48
-26
-24
-59
-21
-16
Ratios
Cash Flow (PLN m)
Other
Change in Debt
Issuance of Shares
Capex constrained by
EBITDA
0.4
-20%
2005
Net Margin
The leverage will
decrease
0.5
-39%
38.3%
EBITDA Margin
The cash will be the
main problem
0.8
252%
112
304
-127
-151
-107
-90
Beginning Cash
-7
10
345
184
21
24
17
335
-161
-163
3
2
Ending Cash
10
345
184
21
24
26
DPS (PLN)
0.3
0.0
0.0
0.2
0.0
0.0
123
Table 137 Multimedia Polska – 4Q08E Results Preview
P & L (PLN m)
4Q07
1Q08
2Q08
3Q08
4Q08E
YoY
QoQ
12M07
12M08E
YoY
Revenues
111.9
115.0
116.0
119.2
125.1
11.8%
4.9%
419.5
475.3
13.3%
26.5
29.0
23.5
15.8
21.8
10.9
24.9
16.6
23.3
13.8
-12.1%
-6.7%
-52.3%
-17.0%
95.0
72.4
93.4
57.1
-1.6%
-21.0%
Operating profit
Net profit
We expect slower yoy dynamics in 4Q2008 vs. previous quarters due to problems with
4Q was another quarter
with growth above 11%
financing of capex (net adds). The cash at the end of the 3Q2008 was only PLN 20m and
we expect that the Company did not finance externally. We expect that the Company
increased the number of RGUs by: 17k in DTV, 3k in CATV, 16k in internet and 8k in
voice.
The ARPU on analogue TV stayed flat over 2008 and on average was 3% higher than in
the 2007, due to a fee increase in the 4Q2007. The ARPU on DTV rose steadily to PLN
17.3 in the 3Q2008 from PLN 9.1 a year ago, which was a result of promotional offers at
the launch of the services. We expect that ARPU on voice services declined by PLN 1 qoq
from PLN 46.4 in the 3Q2008, whereas for internet it probably stayed flat.
The EBIT margin should be a tick lower than in previous quarters due to unhedged
programming cost in EUR and USD. The bottom line should exhibit negative dynamics in
the 4Q2008, due to tax refund a year ago.
Table 138 Multimedia Polska – DCF
Revenue Growth Rate
Revenues
Operating Margin
EBIT
Effective Tax Rate
2009E
2010E
2011E
2012E
2013E
2014E
Terminal
Year
11.8%
9.4%
8.7%
7.7%
5.9%
4.2%
2.5%
531
581
632
680
721
751
860
20.7%
21.7%
23.0%
24.3%
22.8%
21.4%
20.0%
110
126
145
165
178
168
172
19.0%
19.0%
19.0%
19.0%
19.0%
19.0%
19.0%
NOPAT
+ Depreciation
- Capex
89
102
118
134
144
136
139
152
-150
0
153
-166
0
151
-171
0
145
-171
0
151
-172
0
158
-173
0
164
-174
0
91
90
98
108
123
121
129
1,740
9.9%
FCF
Terminal Value
WACC
9.9%
9.8%
9.8%
9.8%
9.8%
9.8%
91
82
81
81
85
76
496
1,090
1,586
26
Value of Firm =
1,612
350
Value of Equity =
1,262
8.2
8.4
Key Assumptions
Market Risk Premium
7.9%
21.9%
5.5%
Beta
1
9.8%
-1.5%
-0.5%
0.5%
Nominal Growth
1.5%
2.5%
3.5%
18.0%
6.8
7.6
8.6
19.0%
7.2
8.0
9.0
7.9%
9.5
6.3
13.3
8.9%
8.4
6.3
11.0
20.0%
7.5
8.4
9.5
21.0%
7.9
8.8
9.9
22.0%
8.2
9.2
10.4
10.9%
6.8
7.5
8.4
11.9%
6.3
6.8
7.5
WACC in Perpetuity
-1.5%
-0.5%
0.5%
Nominal Growth
1.5%
2.5%
3.5%
124
9.9%
7.5
8.4
9.5
Downside is limited, but there
are no short term triggers yet
Recent property market developments
The credit squeeze and increased risk aversion translated into falling number of
transactions and the value of property market as a whole. The mismatch between
buyers’ offers and sellers’ asking prices translated into the bringing back the property
investment market into 2005 in terms of value of transactions reached. The market
yields have already decompressed by more than 120 bps during 2008 and currently the
mismatch between asking and bid prices makes market yield hard to determine. The
determined actions of central banks have slashed the base rates to lowest levels in years
alleviating the pressure on yields decompression as market risk premium is currently at
record high levels.
Chart 45 Property investment deal volume and number of deals in CEE between 2003
and 2008
Source: CB Richard Ellis
Chart 46 EU-15 Index Rolling 12 month yield shift between 1999 and 2008
Source: CB Richard Ellis
125
A Glimpse at historical valuation of property companies in crises
Yields determine the bottom, fall in rents is a time to buy
To track down the historical valuation of property stocks in property crises and the
property market business cycle we looked at the developments on the property market in
20 years spectrum (1989-2008). The changes in the capital values were primarily
determined by the changes in yields and rents’ levels. We used the median P/BV of the
main property stocks to compare investors’ reactions to changes in capital values. The
average P/BV of the sector over the last 20 years equaled 0.9.
Our major conclusion is that investors focus in most cases on yields on the declining
market and are much more immune to notice the neagative impact of rents’ fall. The
lowest P/BV (avg P/BV of 0.82 in 1990-1992 and avg P/BV of 0.72 in 2000-2002) were
shown at the time of greatest yield decompression – in the middle of falling property
market. Second phases of falling market were marked by falling rents, but investors
seemed focused on yield changes as second phase of falling market
have seen on
average 35% higher P/BV ratios (P/BV of 1.13 and 0.98, respectively) compared to the
first phase of falling market.
Current valuation at P/BV of 0.42 is the lowest in years as the magnitude of the crisis is
acknowledged. However, it worth noticing that yields have been decompressing since late
2007 by more than 120 bps now and current lack of transactions means the gap between
asks and bids does not allow for further decompression. Accordingly, we expect yields of
8-9% not to decompress any further, which if history lesson was to repeat would be a
time offering the best buying opportunities.
Our recommendation is therefore to focus on yields movements as the main indicator of
the property stock valuation changes, while the fall in rents should be ignored and
consired as an opportunity to buy. Please note, that our glimpse of the crises
encompasses only limited number of such events. Thus the length and magnitude of
implications of current crisis is hard to determine and our conclusions based on history
should be considered as indicative, not precisely accurate.
126
PEERS VALUATION
Table 139 Western peers comparables valuation
Com pany
Last Price
2009E
2010E
2009E
2010E
P/BV
0.52
EV/EBITDA
29.9
40.4
0.62
4.50
0.33
0.32
17.1
16.8
Metrovacesa SA
Conw ert Im m obilien
Invest SE
Beni Stabili SpA
32.99
0.62
0.60
0.61
19.7
19.4
Brixton PLC
69.25
0.38
0.37
19.9
19.7
Fonciere des Regions
Land Securities Group
PLC
Ham m erson PLC
43.70
0.85
0.83
24.9
23.2
643.00
0.63
0.66
19.3
18.5
400.00
0.80
0.56
17.6
16.6
SEGRO PLC
138.50
0.40
0.47
17.7
16.7
Unibail
111.60
0.84
0.81
16.4
15.2
33.91
0.74
0.76
17.8
16.7
22.00
0.78
0.73
17.0
16.6
18.05
0.77
0.65
13.1
12.3
461.00
0.89
0.89
21.2
20.9
0.74
0.65
17.8
16.8
Corio NV
Eurocom m ercial
Properties NV
Klepierre
British Land Co Plc
MEDIAN
Median
Source: Bloomberg, IPOPEMA Research estimates
Table 140 Domestic peers comparables valuation
Com pany
Last Price
Plaza Centres
Echo Investment
GTC
MEDIAN
3.46
2009E
2010E
P/BV
0.38
0.37
2009E
2010E
EV/EBITDA
-111.5
17.2
2.17
0.52
0.49
28.2
12.90
0.60
0.56
18.0
20.3
9.4
0.52
0.49
18.0
17.2
2010E
2009E
2010E
Com pany
2009E
Prem ium /Discounts to Western
Peers
P/BV
EV/EBITDA
Plaza Centres
-49%
-43%
-725%
3%
Echo Investment
-30%
-24%
58%
21%
GTC
MEDIAN
Prem ium /Discounts to Dom estic
Peers
Plaza Centres
-19%
-14%
-43%
-43%
-29.6%
-24.0%
-8.3%
-8.3%
P/BV
EV/EBITDA
-27%
-25%
-720%
0%
0%
0%
57%
18%
15%
14%
0%
-46%
2009E
2010E
2009E
2010E
Echo Investment
GTC
Com pany
Im plied Value by Western peer
m ultiple
P/BV
EV/EBITDA
Plaza Centres
6.73
6.07
na
Echo Investment
3.08
2.85
na
0.9
15.97
14.94
12.7
39.1
GTC
Im plied Value by Dom estic peer
m ultiple
P/BV
14.97
EV/EBITDA
Plaza Centres
4.74
4.62
na
Echo Investment
GTC
2.17
2.17
na
3.46
1.1
11.24
11.36
12.9
40.8
127
Echo S.A.
Bargain stock
Echo trades currently at P/BV09 of 0.52 i.e with 30% discount to its Western
peers. Given conservative yield applied by the Company of c. 8-8.5%, we find the
17 February 2009
premium unjustified. Accordingly, we recommend BUY High Risk with 12M TP of
BUY – High Risk
PLN 3.4. We find our recommendation supported by the fact that even assuming
Echo does not deliver any more projects and excluding the value of pipeline’s land,
the value of its existing portfolio exceeds PLN 3.2 per share, under our strict
400
valuation assumptions making it a bargain offer. Risk rating acknowledges the
Echo vs. WIG=100
350
Echo vs. WIG-Developers=100
latest and expected losses on FX contracts, that might hamper Echo’s growth
300
prospects. Although we do not find short term triggers for the stock under current
250
property market, the unreasonably huge discount to both Western peers and its
200
150
operational value make it a noteworthy stock.
100
50
Jan06
Cautious valuation assumptions convince us of current bargain price
Apr06
Jul06
Oct06
Jan- Apr07
07
Jul07
Oct- Jan07
08
Apr08
Jul08
Oct- Jan08
09
We apply average yield of 8.5% to both Echo’s existing portfolio and projects due
beyond 2010E. Additionally, we apply 10% discounts in rents and do not
incorporate any construction cost savings. Such assumptions make us arrive at
Key Ratios
2008E
the value of sq m of EUR 2,100 – a figure approaching construction costs and
BVPS (PLN)
3.86
4.15
EBIT Margin
38.7%
28.8%
implying huge squeeze of developers margin. We delayed the delivery of majority
of Echo’s projects to 2012-2013E period and assume no residential value of
ROE
Bank Debt / Assets
2009E
7.2%
7.4%
56.1%
54.9%
residential segment. Such strict assumptions make us arrive at Echo’s operational
value of PLN 4.2. Due to current market environment and negative newsflow
Share data
regarding FX contracts we apply 20% discount. Still, 55% premium to current
420.0
market price convince us of bargain opportunity on the stock.
Market Cap (€m)
209.1
465.9
Increased risk of rents fall & vacancies is priced in
Echo enjoyed high occupancy rates and rising rents over the last quarters.
However, as Echo portfolio of assets is composed of projects in local, second tier
towns, the probability of lower rents is more significant than in other property
0.44
52 W High / Low
7.3 / 1.6
WIG Weight (%)
Reuters
EPRS.WA
0.66
Bloomberg
ECH PW
companies from our coverage spectrum. However, current price implies 28% fall
in rents, which we find unjustified given the prospects of Polish retail sector.
Perform ance
Abs.
No property market hampers growth prospects
3M
13%
24%
YTD
5%
22%
Echo planned to diversify its activities entering new CEE markets and relying more
12M
-65%
-30%
vs. WIG
on office part of the business. However, tighter credit markets, no possibility to
sale existing projects to acquire financing for the pipeline implementation places
Shareholders
Stake
significant
Michal Solow ow
CU OFE
39.2%
9.0%
risk
of
delays.
Please
note
however
that
we
assume
their
implementation no sooner than in 2012-2013E period.
PZU OFE
ING OFE
Other
2006
2007
2008E
2009E
2010E
333.2
133.7
381.0
278.1
382.4
119.5
399.4
319.0
379.2
146.6
604.3
109.2
326.9
94.2
261.5
121.9
483.8
145.3
161.0
159.7
DPS (PLN)
0.66
0.0
0.76
0.0
0.26
0.0
0.29
0.0
0.38
0.0
P/BV (x)
P/E (x)
3.1
13.4
2.2
10.5
0.6
8.3
0.5
7.5
0.5
5.7
Revenues (PLN m)
EBIT excl. Revaluation
EBIT (PLN m)
Net profit (PLN m)
EPS (PLN)
128
8.4%
8.4%
34.9%
Analysts
+ 48 22 236 92 44
Tomasz Duda
+ 48 22 236 92 32
Echo S.A.
Table 144 Echo - Financials
P&L (PLN m)
Revenues
2005
2006
2007
2008E
2009E
258
333
382
379
327
484
29%
15%
-1%
-14%
48%
189
193
207
161
243
26%
2%
7%
-22%
51%
- yoy change
Gross Profit
150
- yoy change
EBIT
14
-2
-3
15
-2
-2
127
134
119
147
94
145
5%
-11%
23%
-36%
54%
138
165
139
247
126
280
148
458
95
167
146
16
292
381
399
604
261
161
-19
-35
0
-456
-104
-23
6
0
0
0
0
0
280
346
400
148
158
138
- yoy change
EBITDA
Revalaution gain/(loss)
Operating Profit incl. Revaluation
& Assets' sale
Financial Income/Cost
Other & Extraordinary Items
Pretax Profit
2010E
24%
15%
-63%
7%
-13%
Income Tax
- yoy change
-56
-67
-75
-34
-30
26
-17
-1
-5
-5
-6
-4
Net Incom e
207
278
319
109
122
160
EPS (PLN)
0.49
- yoy change
Gross Margin
Operating margin (incl. Revaluation)
ROE
0.66
0.76
0.26
0.29
0.38
34%
15%
-66%
12%
31%
2005
2006
2007
2008E
2009E
2010E
58.1%
56.7%
50.4%
54.5%
49.2%
50.3%
113.2%
114.3%
104.4%
159.4%
80.0%
33.3%
28.6%
29.7%
26.5%
7.2%
7.4%
9.0%
2010E
2005
2006
2007
2008E
2009E
486
603
989
934
616
898
242
298
395
455
131
145
244
305
594
479
486
752
Total Fixed Assets
1 663
2 136
2 550
3 199
3 656
3 864
Investment property
1 400
1 670
2 035
2 469
2 709
3 507
Other Fixed Assets
Total Assets
263
466
515
730
946
357
2 150
2 740
3 539
4 132
4 272
4 762
1 880
935
1 206
1 526
1 641
1 769
18
11
16
21
27
31
871
1 155
1 639
2 241
2 296
2 592
2 177
Long -Term Debt
685
903
1 296
1 853
1 889
186
252
343
388
407
415
343
379
374
250
208
290
Short -Term Debt
153
158
38
54
55
64
190
221
336
196
153
226
2 150
2 740
3 539
4 132
4 272
4 762
2.2
2.8
3.6
3.9
4.1
4.4
2005
2006
2007
2008E
2009E
2010E
Current Ratio
1.4
1.6
2.6
3.7
3.0
3.1
Quick Ratio
0.9
1.0
1.4
2.4
1.2
1.1
39%
39%
38%
46%
46%
47%
90%
88%
87%
116%
110%
119%
BVPS (PLN)
Bank Debt/Assets
Bank Debt/Equity
Cash Flow (PLN m)
2005
2006
2007
2008E
2009E
2010E
Net Profit
207
278
319
109
122
160
-11
-5
-6
-1
-1
-1
35
-229
-258
-376
-87
-150
Other (incl. WC)
231
44
55
-267
34
9
-252
-199
-422
-159
-291
-194
349
97
86
-113
249
-173
0
-159
0
-291
0
-194
Change in Debt
-93
204
296
574
37
296
0
0
0
0
0
0
-55
-148
-71
133
-75
221
-87
487
-105
-68
-97
199
131
Other
Issuance of Shares
Other
Beginning Cash
74
242
298
395
455
169
55
97
60
-324
14
Ending Cash
242
298
395
455
131
145
DPS (PLN)
0.00
0.00
0.00
0.00
0.00
0.00
129
Echo S.A.
Table 145 Echo – 4Q08E Results Review
P & L (PLN m)
4Q07
1Q08
2Q08
3Q08
4Q08E
YoY
QoQ
12M07
12M08E
YoY
95.6
91.6
91.2
96.1
100.3
4.9%
4.4%
382.4
379.2
-0.8%
31.1
35.9
22.2
40.4
33.0
6.0%
-18.4%
146.5
131.4
-10.3%
52.4
53.7
42.8
26.2
10.7
27.9
70.8
17.7
480.0
37.5
815.1%
577.7%
-30.2%
112.0%
399.4
319.0
604.3
109.3
51.3%
-65.7%
Revenues
Operating profit before revaluation
and one offs
Operating profit
Net profit
Losses on FX forwards
will materially impact
4Q08 results
The company is going to revalue up its existing property portfolio as of the end of 4Q08.
The revaluation results from significant weakening of the PLN vs. EUR. As the company
has most of its rental contracts denominated in EUR the valuation of properties is also
expressed in EUR. Consequently weak PLN means higher PLN denominated value of
properties. On the other hand the company would post significant loss of revaluation of
Upward revaluation of
property portfolio
(currency driven) will
support earnings
its EUR denominated debts as well as on its FX forwards portfolio. The total effect of
these operations should be slightly positive.
We expect that at the operating level
(before revaluation) the company should post some PLN 33m (+6% yoy, -18% qoq) –
the company should benefit from weaker PLN in the form of higher rent revenues.
Residential revenues could be slightly weaker than in 3Q08. We expect higher SG&A cost
than in 3Q08, which is the major reason for expected qoq fall in the reported result.
Due to uncertain situation on financial and property market we applied conservative
assumption in valuating Echo portfolio. We expect only 68 thousand sq m of new projects
by the end of 2010E – as we assumed majority of the projects to be delayed until 2012E2013E. We applied yields 8.5% for valuation of all projects that either are already
completed or should be completed by 2010E. Additionally we implemented 10% discount
in rents to all Echo’s projects as some of initial Echo assumptions might be too optimistic.
Regarding future projects (beyond 2010E) we put 50% discount on calculated positive
impact resulting from completion of these projects – to account for uncertainties related
to timing of their delivery and market conditions (rent/construction costs) at their
delivery. We point out that under applied assumptions Echo’s sq m of leasable area is
valued at EUR 2,100 – the amount close to construction costs and implying squeeze of
developers’ margin to 30%.
Table 146 ECHO – SOTP Valuation Summary
(EUR m )
Total Rental Operations (end of 2010E) including:
projects completed by 2010E
projects already in pipeline to be completed beyond 2010E
Housing (end of 2010E) including:
projects already in pipeline
Total ECHO business operations (end of 2010E)
Debt & net impact of other assets/liabilities (end of 2010E)
ECHO shareholder’s value (end of 2010E)
Discount factor
ECHO shareholder’s value (Feb 2010E)
Property market premium/discount
ECHO 12M Target Price
130
802.0
704.1
97.9
48.8
48.8
850.8
-383.4
467.4
0.92
429.7
-20%
EUR per
PLN/Share Share in total value of ECHO
share (EUR/PLN of 4.1)
business operations
1.9
1.7
0.2
0.1
0.1
2.0
-0.9
1.1
7.8
6.87
1.0
0.5
0.5
8.3
-3.74
4.6
1.0
4.19
0.82
3.36
94%
83%
12%
6%
6%
100%
80.0%
Globe Trade Centre S.A.
Future Projects Insecurity
We rate GTC shares HOLD - High Risk with a target price of PLN 15.3. We think
that problems with financing and weaker demand for new project will make GTC
substantially revise down its expansion plans. Lower number of new projects is
particularly harmful for GTC as expected expansion has been always constituted
17 February 2009
HOLD – High Risk
12M TP PLN 15.3/ (Feb 13th) PLN 12.9
large part of the company value. Moreover GTC shares trade with premium to
similar companies operating in the region. On the other hand we have to admit
that nominal valuation of GTC is attractive now. Additionally we appreciate GTC
550
GTC vs. WIG=100
500
GTC vs. WIG-Developers=100
450
strong track record and unique properties (usually better than competitors have).
We recommend it Hold as we think it is too cheap for Sale recommendation but at
400
350
300
the same time the reward is to small giving all the risks and uncertainty related to
250
the sector and GTC activity.
150
200
100
50
Jan- Apr06
06
Financing and Demand – the main questions will stay without an answer
Jul06
Oct06
Jan- Apr07
07
Jul07
Oct- Jan- Apr07
08
08
Jul08
Oct- Jan08
09
GTC has significant cash position (it managed to raise bonds before the financial
crisis had begun) but it is not enough to finance all projects that it had in the
pipeline by the end of 2010E. Analyzing total pipeline (including project beyond
Key Ratios
2008E
2010E) the company would have to raise at least EUR 1.5-2bn additional debt to
BVPS (EUR)
5.04
5.24
EBIT Margin
33.0%
42.7%
complete them, which now sounds impossible.
Adding to that problems with
demand for new space that hampers quite quickly in current environment we
2009E
ROE
14.9%
3.6%
Bank Debt / Assets
39.1%
43.7%
should assume significant downward regions in GTC pipeline completion (both in
years 2009E-10E and beyond).
Share data
Assets Valuation – Rather theoretical as the market is frozen
219.4
Market Cap (€m)
617.1
We make our valuation at yields level of 7%-8.5% (far more conservative than
577.6
GTC had been applying) but this can’t be said a market level due to very limited
number of transactions. GTC is going to revalue its property portfolio as of end of
2008E (which should have negative impact on the revaluation line in 4Q08) to
adjust yields to the market level. At the same time it is going to include properties
3.6
52 W High / Low
42.0 / 10.6
WIG Weight (%)
Reuters
GTCE.WA
1.81
Bloomberg
GTC PW
under construction (and its revaluation) in the investment property line. We do not
appreciate this move (though it will have positive impact on 2008E profits) as it
Perform ance
increases uncertainty over conservativeness of Investment property valuation.
3M
Rents fall / Vacancies – It is not a big problem now but the risk increases
Abs.
vs. WIG
6%
17%
YTD
-17%
-5%
12M
-66%
-32%
GTC properties are usually have high quality tenants and we don not assume that
vacancies in the existing projects would become important factor in the near
Shareholders
Stake
future. However, in regard to new projects finding the tenant would become much
GTC Real Estate N.V.
CU pension fund
46.1%
6.8%
more demanding task. We see similar situation in case of rents: in the existing
ING pension fund
portfolio it should have small impact (although end of term renegotiations would
Other
5.7%
41.4%
pull the average slightly down) but the new ones could experience lower rents.
2006
2007
2008E
2009E
2010E
Revenues (EUR m)
81
74
114
155
223
EBIT excl. Revaluation
34
31
38
67
102
EBIT (EUR m)
233
323
235
107
143
Net profit (EUR m)
195
234
143
40
78
EPS (EUR)
0.91
1.07
0.65
0.18
0.35
DPS (EUR)
0.00
0.00
0.00
0.00
0.00
P/BV (x)
3.13
11.5
2.84
11.6
0.72
5.6
0.60
17.1
0.56
8.9
P/E (x)
Analysts
+ 48 22 236 92 44
Tomasz Duda
+ 48 22 236 92 32
131
Table 148 GTC – Financials
P&L (EUR m)
Revenues
2005
2006
2007
2008E
2009E
77
81
74
114
155
223
5%
-9%
55%
36%
44%
- yoy change
Gross Profit
46
49
50
65
93
137
6%
2%
30%
43%
48%
-10
-18
-21
-25
-25
-31
0
2
2
-2
-2
-5
36
33
31
38
66
101
- yoy change
SG&A cost
EBIT
2010E
- yoy change
-7%
-8%
23%
75%
53%
36
34
31
38
67
102
Operating Profit incl. Revaluation
121
157
199
233
292
323
198
235
41
107
42
143
-15
1
-29
-49
-37
-54
0
4
5
-1
-1
20
143
238
299
185
69
109
59%
EBITDA
Revalaution gain/(loss)
Pretax Profit
- yoy change
Income Tax
66%
26%
-38%
-63%
-27
-40
-38
-31
-11
-18
-3
-3
-27
-11
-17
-14
Net Income
113
195
234
143
40
78
EPS (EUR)
0.57
0.91
1.07
0.65
0.18
0.35
61%
17%
-39%
-72%
93%
- yoy change
Gross Margin
Operating profit margin (incl. Revaluation)
ROE
59.7%
60.3%
67.9%
56.9%
60.0%
61.6%
204.7%
287.6%
439.0%
206.1%
68.9%
64.4%
37.0%
42.3%
32.1%
14.9%
3.6%
6.8%
2010E
2005
2006
2007
2008E
2009E
148
435
641
569
608
604
62
278
346
194
188
152
86
157
296
375
420
452
Total Fixed Assets
746
776
1 220
1 850
2 175
2 529
Investment property
579
542
861
1 383
1 676
1 976
Other Fixed Assets
168
234
359
467
499
553
Total Assets
894
1 211
1 861
2 419
2 783
3 133
462
731
988
1 147
1 207
1 305
1
0
29
41
58
72
378
326
698
945
1 180
1 380
Long -Term Debt
340
258
578
790
1 016
1 206
37
55
68
153
119
175
155
328
164
395
174
448
Short -Term Debt
17
51
32
156
201
238
38
102
144
171
194
210
894
1 211
1 861
2 419
2 783
3 133
BVPS (EUR)
2.3
3.4
4.5
5.2
5.5
5.9
Current Ratio
2.7
2.8
3.7
1.7
1.5
1.3
Quick Ratio
2.1
2.1
2.4
0.8
0.7
0.6
40%
26%
33%
39%
44%
46%
Bank Debt/Assets
Bank Debt/Equity
Cash Flow (EUR m)
Net Profit
Net Working Capital Change
Other
42%
62%
82%
101%
111%
2006
2007
2008E
2009E
2010E
113
195
234
143
40
78
-3
-28
-37
-48
-10
-1
-98
-183
-202
-140
-27
-52
12
-16
-5
-46
3
24
-110
-103
-209
-361
-280
-287
Other
-21
-132
230
127
17
-192
-54
-414
-2
-282
-4
-291
227
Change in Debt
91
-7
278
335
271
Issuance of Shares
0
125
0
0
0
0
Other
0
-4
-1
2
2
3
230
91
115
277
338
274
FX Differences
5
-10
-12
-29
0
0
Beginning Cash
85
62
278
346
194
188
Ending Cash
DPS (EUR)
132
77%
2005
-28
226
80
-122
-6
-37
62
278
346
194
188
152
0.0
0.0
0.0
0.0
0.0
0.0
The company is going to revalue down its existing property portfolio as of end of 4Q08 –
Revaluation of
“properties under
construction” would
disturb 4Q08
in order to adjust its value to current market value. We think that this operation could
result in some EUR 150m – EUR 220m loss. At the same time GTC will start to include
revaluation of projects under construction – we assume the potential impact here at
positive EUR 150 – EUR 200m. In our 4Q08E forecast we take the most positive scenario
for GTC net profit: EUR 150m loss on the old portfolio and EUR 200m profit on the under
construction portfolio – consequently we get c. EUR 50m profit in revaluation line in 4Q08
(or almost EUR 200m in 2008E). Please note that we assumed that revaluation of under
construction portfolio in 2008E will result in much lower upward revaluation in 2009E-10E
comparing with 2005-2008E. We didn’t assume any downward revaluation of the
completed portfolio in 2009E – we assume yields remain flat at current level.
GTC is also going to revalue its financial and tax liabilities – we estimate negative impact
Valuation of liabilities
will also matter – it could
be much more painful in
PLN denominated report
of financial liabilities revaluation at EUR 20-30m, however in the PLN denominated report
this number could be much higher (due to weakening of the PLN) and may reach even
few hundreds million PLN. We are unable to estimate impact of revaluation of the
company’s tax liabilities as of end of year.
P & L (EUR m)
4Q07
1Q08
2Q08
3Q08
4Q09E
YoY
QoQ
12M07
12M08E
YoY
Revenues
Operating profit before revaluation
and one offs
15.8
16.0
19.2
35.8
43.3
174.8%
21.0%
73.6
114.2
55.1%
7.8
7.3
6.3
10.9
12.6
62.0%
15.0%
28.5
37.7
32.5%
Operating profit
77.0
60.4
59.9
34.8
35.4
43.1
82.2
55.5
57.7
9.3
-25.1%
-84.7%
-29.9%
-83.3%
323.2
234.3
235.2
142.6
-27.2%
-39.2%
Net profit
Due to uncertain situation on financial and property market we applied conservative
assumption in valuating GTC portfolio. We assume GTC will be able to deliver 250
thousand sq m of new projects by the end of 2010E – we focused only on these projects
that GTC already treats as under construction. We applied yields of between 7% and
8.5% for valuation of all projects that either are already completed or should be
completed by 2010E (the weighted average yield is 7.5%).
In case of future projects (beyond 2010E) we applied average delivery time of 2 years
and yields of 8%-10% (average of 8.7%). Additionally we put 50% discount on
calculated positive impact resulting from completion of these projects – to account for
uncertainties related to timing of their delivery and market conditions (rent/construction
costs) at their delivery.
Table 149 GTC – SOTP Valuation Summary
We conservatively value
projects delivered
beyond 2010E
(EUR m) EUR per share
Total Rental Operations (end of
2010E) including:
Projects completed by 2010E
Share in total value of GTC
business operations
2 046.6
9.3
38.3
84%
1 793.6
8.2
33.5
73%
253.0
1.2
4.7
10%
397.4
332.8
64.6
1.8
1.5
0.3
7.4
6.2
1.2
16%
14%
3%
2 444.0
11.1
45.7
100%
-1 556.2
-7.1
-29.1
887.9
0.92
4.0
16.6
820.9
3.7
15.3
Projects already in pipeline to be
completed beyond 2010E
Housing (end of 2010E) including:
Projects already in pipeline
Residual value
Total GTC business operations
(end of 2010E)
Debt & net impact of other
assets/liabilities (end of 2010E)
GTC shareholders' value (end of
2010E)
PLN per Share
(EUR/PLN 4.10)
Discount factor
GTC shareholders' value (Feb
2010E)
133
Plaza Centres NV
Safe play on P/NAV09 of 0.4 and
strong balance sheet
Current market valuation of Plaza Centers at P/NAV09 of 0.40 i.e. below both
current valuation of the sector (P/BV 0.74) and historical valuation of property
companies during crises (P/BV 0.6-0.8) makes us believe that the gloomy outlook
for the sector have been more than priced in, especially given Plaza’s strong
17 February 2009
HOLD – High Risk
12M TP EUR 1.18 (PLN 4.85)/
(Feb 13th) EUR 0.75 (PLN 3.46)
balance sheet. We value Plaza’s operational business, under strict and catious
assumptions, at EUR 1.97. However, given the outlook for Plaza’s business over
next two years and lack of short term price triggers we recommend to HOLD High
200
180
Plaza Center vs. WIG=100
Plaza Center vs. WIG-Developers=100
160
Risk with 12M TP of EUR 1.18 (PLN 4.85 @ EURPLN of 4.1).
140
120
Cautious assumptions drive valuation downward offering upside potential
100
80
60
We apply cautious assumptions of sales of all European projects at threshold yield
40
20
of 7.5% and discounts in rents of 10% in Europe and 20% in India. We do not
expect Plaza to reach the sale transaction before 4Q10 due to current outlook for
0
Jan- Apr06
06
Jul06
Oct06
Jan- Apr07
07
Jul07
Oct- Jan- Apr07
08
08
Jul08
Oct- Jan08
09
market bids. Moreover, we do not apply any construction cost discounts, which
might actually happen at current construction market and FX rates.
Strong balance sheet – a cushion for poor times...
Plaza has virtually no net debt, with its debt composed of Izraeli debentures
maturing between 2010 and 2017, with 75% of it maturing between 2011 and
2015 on top of c. EUR 200m of cash. We believe that such balance sheet position
creates not only the crisisproof cushion, but opens hunting season for bargains
with the latest acquisition of Sofia project at EUR 187k/sq m as the first example.
...allows for the troubleless strategy adjustment when selling is difficult
Plaza’s strategy is to sell all its projects upon completion aiming below the
Key Ratios
2008E
BVPS (EUR)
2.10
2009E
2.21
EBIT Margin
19.8%
-21.7%
ROE
10.8%
0.1%
Bank Debt / Assets
29.0%
29.4%
threshold yield of 7.5%. Current bids, much above threshold number, make Plaza
to hold completed assets and obtain rents income until market situation improves.
Share data
Our model assumes that only 7, small projects are delivered during 2009-2010 (3
292.3
in 2009 and 4 in 2010), the ones that are under construction or for which
Market Cap (€m)
226.8
117.8
financing has been already secured.
0.13
Large projects, due in no sooner than 2011, will determine Plaza’s value
52 W High / Low
10.9 / 2.1
Projects delivered in 2009/10 are of little importance from Plaza’s valuation point
WIG Weight (%)
Reuters
PLAZ.WA
of view as two largest European projects account for 50% of European pipeline’s
Bloomberg
0.05
PLZ PW
budget. Such concentration of Plaza’s business operations makes its valuation
highly sensitive to their sales parameters and timing of delivery. If poor property
Perform ance
Abs.
vs. WIG
market endures, Plaza is going to curtail investment in new projects delaying their
3M
46%
61%
delivery and driving the valuation down. Please note, however that we have
YTD
31%
51%
12M
-65%
-29%
already applied the delay to majority of the projects.
Revenues (EUR m)
EBITDA (EUR m)
EBIT (EUR m)
Net profit (EUR m)
2006
60.2
2.6
15.8
2007
507.8
216.6
217.7
2008E
93.5
19.4
18.5
2009E
19.8
-3.3
-4.3
2010E
397.3
76.3
75.2
14.7
227.0
64.9
0.7
21.5
EPS (EUR)
DPS (EUR)
0.27
0.00
0.78
0.00
0.22
0.19
0.00
0.00
0.08
0.00
P/BV (x)
N/A
N/A
2.5
4.0
0.3
2.9
0.40
335.9
0.4
10.9
P/E (x)
134
Shareholders
Stake
Elbit Ultrasound B.V.
Other
73.6%
26.4%
Analysts
+ 48 22 236 92 44
Tomasz Duda
+ 48 22 236 92 32
Plaza Centres NV
Table 151 Plaza Centres - Financials
P&L (EUR m)
2005
2006
2007
2008E
2009E
2010E
Revenues
- yoy change
Gross Profit
- yoy change
EBIT
- yoy change
EBITDA
- yoy change
Pretax Profit
- yoy change
15
60
303%
10
22%
14
16
-63%
3
-7%
1
0
16
-54%
508
743%
239
2248%
2
218
1277%
217
8182%
9
0
227
1291%
93
-82%
37
-84%
0
19
-92%
19
-91%
46
0
65
-71%
20
-79%
9
-77%
0
-4
-123%
-3
-117%
5
0
1
-99%
397
1907%
88
921%
0
75
-1848%
76
-2392%
-54
0
22
2603%
Income Tax
-6
0
-2
0
0
0
0
0
0
0
0
0
Net Incom e
- yoy change
EPS (EUR)
- yoy change
29
15
-50%
0.27
-98%
227
1442%
0.78
183%
65
-71%
0.22
-71%
1
-99%
0.00
-99%
21
2976%
0.08
2976%
55.8%
285.8%
196.2%
44.6%
16.9%
26.3%
24.4%
15.3%
47.1%
42.9%
44.7%
62.2%
40.1%
19.8%
69.4%
10.8%
43.5%
-21.7%
3.5%
0.1%
22.1%
18.9%
5.4%
3.5%
Gross Margin
EBIT Margin
Net Margin
ROE
8
41
43
3
-8
0
35
16.17
2005
2006
2007
2008E
2009E
2010E
Total Fixed Assets
Tangible Assets
Other Fixed Assets
Total Assets
168
47
121
43
8
35
211
414
213
201
61
8
53
475
721
66
655
40
16
24
761
752
236
515
136
17
120
888
741
121
620
136
17
120
878
1 638
70
1568
211
17
194
1 849
Long -Term Debt
Short -Term Debt
BVPS (EUR)
96
0
31
17
13
84
53
31
211
52.9
365
0
20
6
14
90
51
39
475
1.2
603
0
62
59
3
96
0
95
761
2.1
613
0
260
258
3
15
0
15
888
2.1
613
0
260
258
3
4
0
4
878
2.2
635
0
1154
1151
3
60
0
60
1 849
2.3
Current Ratio
Quick Ratio
Bank Debt/Assets
Bank Debt/Equity
2.2
0.6
33%
74%
6.0
2.4
12%
16%
35.0
0.7
8%
10%
166.2
16.0
29%
42%
469.8
32.3
29%
42%
98.2
1.2
62%
181%
2005
2006
2007
2008E
2009E
2010E
29
1
-56
-26
-24
67
43
21
0
0
21
10
37
47
15
1
-114
-99
-1
18
17
13
235
0
248
47
166
213
227
1
-531
-303
-10
1
-9
165
0
0
165
213
-146
66
65
1
-27
39
-1
0
-1
198
-10
-56
132
66
170
236
1
1
-116
-114
-1
0
-1
0
0
0
0
236
-115
121
21
1
-965
-943
-1
0
-1
893
0
0
893
121
-51
70
0.00
0.00
0.00
0.19
0.00
0.00
Cash Flow (EUR m)
Net Profit
Other (incl. WC)
Other
Change in Debt
Issuance of Shares
Other
Beginning Cash
Ending Cash
DPS (EUR)
135
Plaza Centres NV
Table 152 Summary of Plaza Centers’ valuation
PLN/share
(EUR/PLN
at 4.1)
share of
total value
1.78
1.30
0.04
0.45
0.24
2.07
-0.09
1.97
7.30
5.32
0.15
1.84
0.99
8.47
-0.38
8.09
90%
66%
2%
23%
12%
105%
-5%
100%
1.18
4.85
60.0%
EUR per
EUR m
share
PLAZA CENTERS
Total rental operations
Value of European projects
Value of European projects put on hold
Value of Indian projects
Other (entertainm ent & residential)
Total Plaza business operation
Net debt
PLAZA shareholders` value
Property market premium/discount
PLAZA 12M Target Price
495
360
10
125
79
574
-26
548
-40%
Table 153 Summary of Plaza Centers’ European portfolio of projects
Sqm completed & sold (`000)
Sqm price in Eur
Yield applied
Revenues from project sale (Eur m)
Investment Outlays (Eur m)
Operating Cash Flow
Discount Factor
Discounted Operating Cash Flow
2009E
58
2.83
7.50%
2010E
82
2.40
7.50%
2011E
251
2.68
7.50%
2012E
625
2.84
7.50%
2013E
105
5.62
7.50%
Total
1 120
3.03
7.50%
163
-153
10
1.00
10
198
-839
-642
0.91
-581
671
-1 079
-408
0.82
-334
1 773
-510
1 263
0.74
936
590
-72
518
0.67
348
3 395
-2 653
741
Per Plaza share EUR
379
1.30
Table 154 Summary of Plaza Centers’ Indian portfolio of projects
Sqm completed (`000)
Sqm price Eur
Yield applied
Potential Project Value (Eur m)
Investment Outlays (Eur m)
Value Added
Discount Factor
Discounted Operating Cash Flow
2009E
0
2010E
0
2011E
184
0.93
12.0%
0
0
0
-75
172
-75
1.00
0
0.91
-67
0.82
80
2012E
0
2013E
0
2014E
0
12.0%
11.5%
11.5%
0
0
0.0
0.74
0
7
-43
7.5
0.67
-19
8
-18
8.2
0.61
-1
Per Plaza share EUR
Monthly net rents in
EUR/sq m
Table 155 Sensitivity analysis to average yield and average monthly rent
8.1
19.0
18.0
17.0
16.0
15.0
7.0%
23.7
19.9
16.1
12.4
8.6
136
Average Yield
7.5%
8.0%
18.9
14.7
15.4
11.4
11.8
8.1
8.3
4.8
4.8
1.5
8.5%
11.0
7.9
4.8
1.6
-1.5
9.0%
7.7
4.8
1.8
-1.1
-4.1
2015E
196
1.25
11.5%
Total
380.5
1.14
245
-5
433.4
-215.4
15.7
0.55
132
124.9
0.45
Retail
Retail
Macro factors decide
Value of retail market is estimates at PLN 600 bn at the end of 2008. Last year, the
market grew 8% yoy and is expected to grow 3-5% this year, according to POHiD
estimates. Several factors drive retail sales growth with employment being the prime one
with highest correlation. As activity ratio does not change in short term, unemployment
is the best indicator for the sector future. Currently, under our base scenario, retail sales
are expected to grow 5% as we expect unemployment of 11.5-12% at the year end. If
unemployment soared to 14% then retail would approach negative growth territory.
Polish legal ramifications curbed the market with one of the lowest exit age from
employment at 60 (vs. 61 in EU-27 and 64 in Ireland, Sweden and Norway) and one of
the lowest labour force activity rate at 63% (vs. 71% in EU-27 and 80% in Ireland,
Sweden and Norway). Moreover, Poland has one of the lowest share of young (18-24
years) and old (55-65 years) populations active in employment. These negative factors
were offset by Poland being one of the leaders in weekly number of hours worked at 43
(vs. EU-15 of 41.5). The recent government decision to cut the number of employees
entitled to early retirement benefits should be a positive driver for the sector in the long
run.
Clothing and footwear sales – low correlation with wealth
Sales of footwear and clothing depend on the value of disposable income. The share of
the disposable income allocated for clothing and footwear is relatively stable in the long
run (according to Polish Statistical Office ranged between 5.2% and 5.7% in the 20002007 period). Our research shows no correlation between clothing and footwear sales
and wealth, finding other factors like culture, habits, burden of fixed expenditures,
households’ saving ratio and impact of in-work poverty ratio as more important than the
wealth itself. Thus, we conclude that share of disposable income allocated to clothing and
footwear is a country specific feature and any suggestions of Poland approaching mature
markets rates are unjustified. To change allocation of income to clothing and footwear we
would expect major changes in a country’s system (in regard of taxes, cost of nondiscretionary expenditures). Such conclusion indicates that clothing and footwear is one
of the most exposed sectors to employment changes.
Restaurants market
Restaurants market is expected to approach PLN 20 bn in 2009 (+3.4% yoy) and PLN
20.8 bn in 2010 (+4% yoy), after 6.6% increase in 2008, according to PMR estimates.
The slowdown is primarily driven by rising unemployment expectations.
Expenditure on eating out is just slightly correlated with wealth, with some of the richest
countries like Luxembourg, Netherlands, Sweden and Germany being far below EU
average. In Poland the share of spending on restaurants in personal consumption
increased over the last eight years by 0.5 pp. Real average annual growth of catering
market amounted to 1.2% in the period driven by more frequent restaurants visits.
We find other, more correlated than wealth factors that drive eating out, which are
culture and weather. These factors are difficult to measure, but we find that southern
European states’ citizens spent on average 10.6% of their expenditure on restaurants
while northern part of the continent just 6.8%. The even stronger differentiation exists if
British Isles are excluded from the northern states’ group as then northerns’ average
comes down to 5.8%. The correlation with weather in Europe, excluding the impact of
British Isles, exceeds 0.7 and is almost two times stronger than in case of wealth.
137
Retail
Apart from an increase in wealth, we attribute the 0.5% increase of share of income
spent on restaurants to cultural changes (more frequent restaurants visits). As wealth
and cultural habits do not change in the short term, we would expect Poland to approach
mature markets levels in tens of years.
Recreation and culture
Expenditure on recreation and culture shows the strongest dependence with wealth Still,
correlation is rather weak and do not exceed 0.5. Several other factors like households’
savings ratio and national habits of free time spending impact on the allocation of income
to recreation and culture. Apart from income, expenditure on recreation and culture
depends on the education and occupation. Interestingly, the correlation of higher
education works better with folks above 40 year old.
Thus the conclusion is that the segment is likely to see some boost by the increase in
wealth, though several other factors that are stable in the long run impact on customers’
decision similarly strong.
Looking at the subsegments of newspapers, books and games, toys, hobbies in which
companies from our coverage are involved, their expenditure is driven by several noncorrelated factors with wealth being one of the least correlated in case of the latters.
Peers valuation
Table 156 Western peers - restaurants comparables valuation
Com pany
BUFFALO WILD WINGS INC
PEETS COFFEE & TEA INC
DOMINO'S PIZZA UK & IRL PLC
WETHERSPOON (J.D.) PLC
WHITBREAD PLC
BURGER KING HOLDINGS INC
DARDEN RESTAURANTS INC
MCDONALD'S CORP
STARBUCKS CORP
WENDY'S/ARBY'S GROUP INC-A
YUM! BRANDS INC
DINEEQUITY INC
MEDIAN
Last Price
30.14
22.33
225.00
391.25
819.00
20.81
29.32
56.81
10.13
5.30
29.14
7.62
2009E
P/E
14.8
20.1
17.2
15.9
10.0
12.6
10.8
13.5
12.2
21.2
12.2
6.1
13.1
2010E
EPS Grow th
2008E-10E
11.5
na
na
13.5
10.3
10.5
9.4
12.0
9.5
14.7
10.9
na
10.9
25.4%
na
na
12.1%
5.7%
18.1%
12.2%
11.2%
30.3%
80.9%
12.6%
na
12.6%
2009E
EV/EBITDA
4.4
6.9
9.0
5.6
7.7
7.9
4.4
9.4
4.9
6.8
7.5
8.3
7.2
2010E
4.1
na
8.2
5.5
7.3
7.3
4.2
8.8
4.6
5.9
7.1
na
6.5
Table 157 Western peers - clothing & footwear comparables valuation
Com pany
Last Price
2009E
2010E
P/E
UNDER ARMOUR INC-CLASS A
GERRY WEBER INTL AG
KAPPAHL HOLDING AB
RNB RETAIL AND BRANDS AB
INDITEX
HENNES & MAURITZ AB-B SHS
GEOX SPA
GAP INC/THE
NEXT PLC
MARKS & SPENCER GROUP PLC
MEDIAN
15.82
17.90
32.00
5.20
31.70
329.00
4.97
11.62
1 223.00
266.25
15.2
9.1
6.4
8.2
14.9
15.2
12.6
9.6
9.5
12.4
11.0
2008E-10E
na
8.4
5.7
5.4
13.3
13.4
11.7
8.9
9.0
10.9
9.0
138
EPS Grow th
na
11.3%
9.5%
195.9%
7.6%
12.3%
-4.3%
-0.8%
-7.3%
-6.1%
7.6%
2009E
2010E
EV/EBITDA
9.0
6.1
5.0
21.3
6.8
8.3
8.8
4.3
5.1
6.0
6.5
6.5
5.5
4.6
17.0
6.2
7.4
7.9
4.1
5.1
5.7
5.9
Retail
Table 158 Western peers - diversified retailers comparables valuation
Com pany
Last Price
BUILD-A-BEAR WORKSHOP INC
CLINTON CARDS PLC
INDIGO BOOKS & MUSIC INC
DOUGLAS HOLDING AG
HMV GROUP PLC
WH SMITH PLC
HUGO BOSS AG -ORD
LVMH MOET HENNESSY LOUIS VUI
MEDIAN
4.44
10.50
11.38
30.02
138.50
355.00
12.01
48.59
RETAIL SEGMENT AS A WHOLE
2009E
2010E
EPS Grow th
2008E-10E
2009E
na
na
na
11.7
10.3
8.3
7.4
10.8
11.2
10.3
8.3%
5.0
5.9
12.2
10.5
11.2%
6.8
6.1
EPS Grow th
2009E
2010E
na
na
na
8.8%
14.5%
4.9%
-4.0%
8.3%
EV/EBITDA
2.8
13.2
1.8
5.0
3.6
4.9
6.9
9.1
2010E
P/E
12.7
na
9.3
14.2
11.2
8.5
8.2
11.7
na
12.8
na
4.9
3.5
4.8
6.9
8.5
Table 159 Retail Poland comparables valuation
Com pany
Amrest
LPP
NFI EMF
NG2
MEDIAN
Last Price
PLN
PLN
PLN
PLN
46.6
1 110
7.35
37.05
2009E
2010E
2008E-10E
P/E
11.0
13.5
7.5
12.2
11.6
8.9
11.2
7.7
10.5
9.7
21.9%
1.7%
-18.4%
11.4%
6.6%
EV/EBITDA
6.2
7.6
4.9
9.7
6.9
5.4
6.7
4.8
8.4
6.0
Com pany
Prem ium /Discounts to Western
Peers
Amrest
LPP
NFI EMF
NG2
MEDIAN
Prem ium /Discounts to
Dom estic Peers
Amrest
LPP
NFI EMF
NG2
2009E
2010E
P/E
-16%
23%
-33%
10%
-5%
2008E-10E
-18%
24%
-28%
16%
-8%
P/E
-5%
17%
-35%
5%
EPS Grow th
74%
-77%
-321%
49%
-41%
2008E-10E
-8%
15%
-21%
8%
233%
-73%
na
73%
2009E
2010E
EV/EBITDA
-14%
18%
-1%
49%
2%
-17%
12%
-19%
42%
-1%
EV/EBITDA
-10%
10%
-29%
40%
-10%
10%
-20%
40%
Com pany
Im plied value by Western peer
m ultiple
Amrest
LPP
NFI EMF
NG2
Im plied value by Dom estic peer
m ultiple
Amrest
LPP
NFI EMF
NG2
2009E
2010E
P/E
55.3
904.2
13.1
33.6
2010E
EV/EBITDA
56.7
898.1
10.2
32.0
P/E
49.0
950.7
13.6
35.3
2008E
44.8
848.1
9.9
25.4
61.9
969.5
10.1
24.5
EV/EBITDA
50.6
964.4
9.3
34.3
50.0
1 052.1
18.1
30.4
54.6
987.8
10.3
24.9
139
Amrest Holdings SE
Leveraging leadership position
Amrest allows to capture the growth of restaurants market in CEE with additional
17 February 2009
exposure to USA market. The stock trades currently at P/E09 of 11 and
EV/EBITDA of 6.2 i.e. with 16% and 14% discount vs. Western peers. Given low
BUY – Medium Risk
saturation of CEE markets with modern restaurants, diversified portfolio of brands,
leadership position, cash generating business model we find the discounts
unjustified and recommend BUY Medium Risk with 12M TP of PLN 60.
300
Growth prospects vs. 2009 challenges
Amrest vs. WIG=100
250
50% of 2009 business is expected by us to come from QSR segment, but its share
200
is likely to increase to 60% in 2011, as we expect KFC, Burger King and Starbucks
150
to be the most aggressively developed concepts. Diversified portfolio of brands
100
allows Amrest to go through recessions relatively smoothly relying then on QSR
segment and benefit from market revival through CDR arm. Poorer 2009 macro
50
Jan- Apr06
06
Jul06
Oct06
Jan- Apr07
07
Jul07
Oct- Jan- Apr07
08
08
Jul08
Oct- Jan08
09
outlook should be of low importance for Amrest as 81% of European business
(that actually generates more than 90% of EBIT margin) is produced by QSR
segment. American arm, both at the time of acquisition and in 2009, is not
expected to add to Amrest’s EBIT margin, but due to restaurants cash-generating
business model, it still adds to the value of the Company.
M&A activity ... value additive (?)... rather in the long run
Amrest pursued aggressive M&A policy acquiring restaurants in Russia, Applebee’s
Key Ratios
2008E
2009E
franchisee in USA and lately minority stake in Sfinks. Our valuation implies no
EBITDA Margin
9.4%
7.9%
EBIT Margin
5.5%
4.6%
ROE
16.9%
17.6%
Bank Debt / Assets
46.4%
43.3%
changes in minority stake in Sfinks and no further acquisitions in USA. The outlook
for American arm is gloomy in 2009.
For 2009 we assume 3% decline in
Appleebee’s SSS followed by another 1% drop in 2010. If Amrest managed to
meet its M&A targets regarding both companies, that would drive our valuation up
Share data
by 12% up on a back of reviving American market in 2011 and cost restructuring
effective from 2010. We find investment in Sfinks as a long term investment due
Market Cap (€m)
to its current cost structure and expected slowdown of CDR segment in CEE.
14.3
144.5
22.2
0.38
Poor American results are priced in
52 W High / Low
129.0 / 41.1
Applebee’s franchisee is going to depress Amrest margins due its poor sales
WIG Weight (%)
Reuters
AMMR.WA
efficiency outlook and current costs structure. A minimum wage bill hike of 10.7%
0.71
Bloomberg
EAT PW
is scheduled at the end of July in USA and with up to 30% of American
restaurants’ employees working on minimum wage, the increase is going to hurt
Perform ance
Applebee’s directly and through the roll-over effect on salaries. On the other hand,
3M
European arm should improve its margins on the back of SSS increases and 2008
Abs.
vs. WIG
-1%
10%
YTD
4%
20%
12M
-63%
-26%
Shareholders
Stake
20.2%
ING Pension Fund
17.5%
openings breaking even offsetting weak American results. We believe that current
Amrest market valuation with discounts to Western peers is unjustified bearing in
mind similar outlook for American business and better CEE prospects.
2006
2007
2008E
2009E
2010E
629.3
84.5
44.4
38.5
853.4
116.5
67.1
48.4
1 424.8
133.9
78.0
49.4
2 242.4
177.0
103.0
60.1
2 374.6
207.6
123.1
74.7
DPS (PLN)
2.84
0.0
3.47
0.0
3.51
0.0
4.24
0.0
5.21
0.0
EV/EBITDA
P/E (x)
12.5
26.1
17.1
38.6
8.1
13.7
6.2
11.0
5.4
8.9
Revenues (PLN m)
EBITDA (PLN m)
EBIT (PLN m)
Net profit (PLN m)
McGovern Henry
9.5%
CU Pension Fund
7.0%
Others
45.7%
Analysts
EPS (PLN)
140
+ 48 22 236 92 44
Tomasz Duda
+ 48 22 236 92 32
Amrest Holding SE.
Table 163 Amrest – Financials
P&L (PLN m)
Revenues
2005
2006
2007
2008E
2009E
2010E
500
629
853
1 425
2 242
2 375
26%
36%
67%
57%
6%
85
119
159
214
247
16%
- yoy change
Gross Profit
65
32%
39%
33%
35%
- yoy change
-3
4
6
9
23
24
EBIT
23
44
67
78
103
123
90%
51%
16%
32%
20%
85
116
134
177
208
54%
38%
15%
32%
17%
-29
- yoy change
EBITDA
55
- yoy change
-8
4
-4
-14
-28
0
1
1
1
1
1
15
49
64
64
76
95
Pretax Profit
218%
31%
1%
19%
24%
Income Tax
- yoy change
7
-10
-15
-15
-16
-20
0
0
0
0
0
0
Net Incom e
22
38
48
49
60
75
EPS (PLN)
1.8
- yoy change
2.8
3.5
3.5
4.2
5.2
57%
22%
1%
21%
23%
Gross Margin
13.0%
13.6%
13.9%
11.1%
9.5%
10.4%
EBIT Margin
4.7%
7.0%
7.9%
5.5%
4.6%
5.2%
Net Margin
4.4%
6.1%
5.7%
3.5%
2.7%
3.1%
125.9%
31.3%
31.1%
16.9%
17.6%
18.7%
ROE
2005
2006
2007
2008E
2009E
2010E
62
65
87
128
209
214
32
25
47
57
90
83
30
39
40
71
119
131
Total Fixed Assets
227
257
495
864
1 003
1 113
Tangible Assets
174
192
263
483
612
712
53
65
232
381
391
401
Total Assets
289
321
583
992
1 212
1 326
474
Other Fixed Assets
123
156
291
341
400
0
0
4
4
4
4
93
84
136
416
449
485
Long -Term Debt
84
75
128
402
429
465
9
9
8
14
20
20
73
81
155
235
363
368
Short -Term Debt
18
1
40
58
95
84
55
80
115
177
268
284
289
321
583
992
1 212
1 326
BVPS (PLN)
9.1
11.5
20.6
24.0
28.0
32.9
Current Ratio
0.8
0.8
0.6
0.6
0.6
0.6
Quick Ratio
0.4
0.3
0.3
0.2
0.3
0.2
35%
24%
29%
46%
43%
41%
83%
49%
58%
135%
131%
116%
2010E
Bank Debt/Assets
Bank Debt/Equity
Cash Flow (PLN m)
2005
2006
2007
2008E
2009E
Net Profit
22
38
48
49
60
75
34
44
52
56
74
85
Other (incl. WC)
-16
18
13
-23
46
2
40
101
114
82
180
161
-57
-77
-177
-284
-206
-187
Other
1
-57
-4
-81
15
-162
-80
-364
-5
-211
-6
-192
Change in Debt
25
-41
-26
70
292
64
Issuance of Shares
78
0
0
0
0
0
Other
0
37
0
-26
0
70
0
292
0
64
0
25
Beginning Cash
11
32
25
47
57
90
20
-6
22
10
33
-7
Ending Cash
32
25
47
57
90
83
DPS (PLN)
0.0
0.0
0.0
0.0
0.0
0.0
141
Amrest Holdings SE
Table 164 Amrest – 4Q08E Results Preview
P & L (PLN m)
4Q07
1Q08
2Q08
3Q08
4Q08E
YoY
QoQ
Revenues
251.6
243.0
264.6
432.8
484.5
92.5%
12.0%
12M07 12M08E
853.4
YoY
1 428.8
67.4%
Operating profit
9.2
18.5
13.9
27.8
17.0
85.7%
-38.8%
63.4
78.0
23.0%
Net profit
7.5
13.6
10.6
17.5
7.6
1.2%
-56.5%
48.1
49.4
2.8%
4Q08 top line is expected to be inspiring in regard of European part of the business that
increases 10.6% qoq and 28% yoy and disappointing in regard of American part.
Applebee’s sales increases 14.7% qoq, a poor result taking into account Applebee’s
seasonality and USDPLN rates. Good European figures support our 2009 optimism about
SSS increases and the burden of new openings weighing down on the results in less
extent as they approach break even.
Profitability is expected to deteriorate as the impact of American part is marginal, while
rents are likely to hurt the margins further. EBIT margin is expected to go down to 3.5%
(vs. 6.4% in 3Q08 and 3.6% in 4Q08 – when it was hit by high SG&A line and food
costs). The financing of debt will burden the pretax margin resulting in net profit margin
of 1.6% (vs. 4% in 3Q08 and 3% in 4Q07).
Table 165 Amrest – DCF
2009E
2010E
2011E
2012E
2013E
2014E
Terminal
Year
57.4%
5.9%
4.0%
3.0%
3.0%
2.5%
2.0%
Revenues
2 242
2 375
2 470
2 545
2 621
2 686
2 740
EBIT Margin
3.6%
4.2%
5.0%
5.2%
4.9%
4.7%
4.5%
103
123
147
161
127
126
123
21.7%
21.5%
22.2%
22.3%
22.3%
22.5%
22.2%
81
97
115
125
99
98
96
74
-206
85
-187
87
-185
96
-160
101
-136
101
-111
90
-59
EBIT
Effective Tax Rate
NOPAT
+ Depreciation
- Capex
FCF
37
2
-1
4
2
-1
1
-14
-4
16
66
65
87
127
9.0%
9.0%
8.9%
8.9%
8.9%
-3
13
51
47
57
Terminal Value
1 663
WACC
-14
8.9%
150
1 086
1 235
57
Value of Firm =
1 292
-460
Value of Equity =
832
Key Assumptions
3.7%
4.6%
Market Risk Premium
5.5%
59
Beta
60
1
8.9%
Nominal Growth
6.5%
5.5%
4.5%
3.5%
2.5%
-2.0%
1.0%
62
49
37
24
11
-1.0%
2.0%
88
74
60
45
31
0.0%
3.0%
123
106
90
73
57
10.6%
10.1%
WACC in Perpetuity
Nominal Growth
9.6%
9.1%
8.6%
-2.0%
1.0%
31
34
37
40
44
-1.0%
2.0%
51
55
60
65
71
0.0%
3.0%
76
82
90
99
109
142
NFI EM&F S.A.
Premium brands seem less
precious now
NFI EMF faces a series of risk factors i.e. losses of its Eastern subsidiaries,
dropping volume of its premium brands, pressure on fixed costs, no improvement
of German subsidiary’s EBIT and supressed growth prospects.
17 February 2009
HOLD – High Risk
Although the
burden of weak PLN, hedged by EMF in 2008, might be inapplicable in 1H2009, the
300
majority of EBIT is produced in 2H09. The poor outlook for EPS growth make us
NFIEMF vs. WIG=100
250
recommend HOLD High Risk with 12M TP of PLN 8.8 as short term triggers for the
200
stock depend largely on the effectiveness of cost saving policy.
150
Growth prospects hit by external factors
100
The expected weak demand in CIS countries might translate into losses of EMF’s
subsidiaries. However, majority of EMF’s business is generated in Poland, where
50
Jan- Apr06
06
Jul06
Oct06
Jan- Apr07
07
Jul07
Oct- Jan- Apr07
08
08
Jul08
Oct- Jan08
09
demand should be stable in 2009, in our view. Still, we find the outlook for
premium brands demanding as tighter wallets might convince customers to switch
to lower class of brands. EMF has little control of timely adjustment to market
changes, because, as a franchisee of premium brands, it is unable to diversify its
Key Ratios
2008E
2009E
products’ mix. The most effective measure to answer recession fears was in
EBITDA Margin
10.8%
7.7%
Western economies through introducing new, cheaper brands/product lines in
EBIT Margin
order to reach broader spectrum of customers. In case of EMF – a franchisee, that
might be difficult to implement, as it is forced to rely on the right decision of
7.7%
4.4%
ROE
36.6%
18.4%
Bank Debt / Assets
20.8%
21.8%
franchisor. The expansion of Empik concepts, which planned to enter local towns,
seems less tempting now when unemployment is rising. We expect Smyk to be
the best performer this year both in stores expansion and LTL growth.
Share data
103.2
Market Cap (€m)
164.8
Macro outlook places additional pressure on margins
EMF is in favourable position regarding current volatile FX market as it hedged
52 W High / Low
21.7 / 7.4
90% of rent costs and 60% of COGS for 1H09 at the time PLN was still strong.
WIG Weight (%)
Reuters
NFIWo.WA
Still, lower volumes sold, low effectiveness of price increases and negative LTL
Bloomberg
62.9
0.25
0.35
EMF PW
prospects might translate into pressure on margins already in 2009. On top of
this, 104 of stores opened in 2008 through organic growth, might take longer than
expected to break even, while Eastern subsidiaries might suppress results further.
Minority stakes are worth more during the crisis
Perform ance
Abs.
3M
-29%
vs. WIG
-21%
YTD
-24%
-12%
12M
-62%
-24%
EMF sold its 20% stake in Zara for PLN 110m at the end of 2008 and still holds
another minority stake in Sephora, which we value at PLN 90-100m. If EMF
Shareholders
Stake
manages to sell close to fair price, cash flow generated on these two transactions
Eastberidge Group
60.7%
could allow EMF to improve its balance sheet position or grab bargain M&A deals
Other
39.3%
fuelling growth prospects.
Analysts
2006
2007
2008E
2009E
2010E
1 130.7
134.0
101.0
80.1
1 585.0
155.7
108.6
84.2
2 418.9
260.5
185.4
148.7
2 991.4
229.4
132.3
101.9
3 431.8
235.9
131.1
100.6
EPS (PLN)
DPS (PLN)
0.78
0.0
0.82
0.0
1.44
0.0
0.98
0.0
0.96
0.0
EV/EBITDA
P/E (x)
10.2
17.1
12.8
23.1
5.0
6.8
4.9
7.5
4.8
7.7
Revenues (PLN m)
EBITDA (PLN m)
EBIT (PLN m)
Net profit (PLN m)
Tomasz Duda
+ 48 22 236 92 44
+ 48 22 236 92 32
143
NFI EM&F S.A.
Table 167 NFI EM&F – Financials
P&L (PLN m)
2005
2006
2007
2008E
2009E
2010E
Revenues
- yoy change
Gross Profit
- yoy change
EBIT
- yoy change
EBITDA
- yoy change
Pretax Profit
- yoy change
978
1 131
16%
128
29%
-27
101
8%
134
0%
-4
2
99
28%
1 585
40%
171
33%
-62
109
8%
156
16%
-9
7
107
8%
2 419
53%
253
48%
-67
185
71%
260
67%
-23
13
175
64%
2 991
24%
271
7%
-139
132
-29%
229
-12%
-19
10
123
-30%
3 432
15%
287
6%
-156
131
-1%
236
3%
-22
11
121
-2%
Income Tax
-16
0
-17
-1
-23
1
-27
1
-22
1
-21
1
61
0.57
80
0.78
38%
84
0.82
5%
149
1.44
75%
102
0.98
-32%
101
0.96
-2%
Gross Margin
EBIT Margin
Net Margin
ROE
10.1%
9.5%
6.2%
25.1%
11.3%
8.9%
7.1%
31.4%
10.8%
6.9%
5.3%
25.8%
10.5%
7.7%
6.1%
36.6%
9.1%
4.4%
3.4%
18.4%
8.4%
3.8%
2.9%
15.3%
Net Incom e
EPS (PLN)
- yoy change
-6
93
135
0
-16
77
2005
2006
2007
2008E
2009E
2010E
Total Fixed Assets
Tangible Assets
Other Fixed Assets
Total Assets
438
129
309
331
205
126
769
474
126
348
433
229
203
906
754
202
553
868
377
491
1 622
1 016
181
835
1 236
734
503
2 252
1 271
239
1032
1 403
868
535
2 674
1 424
240
1184
1 537
973
565
2 961
Long -Term Debt
Short -Term Debt
BVPS (PLN)
255
1
70
59
11
431
48
383
769
2.3
326
11
62
41
21
491
74
418
906
3.2
406
7
284
64
220
855
188
667
1 622
4.0
555
6
499
258
240
1114
211
903
2 252
5.4
657
6
581
320
260
1352
262
1089
2 674
6.3
758
6
605
325
280
1514
266
1248
2 961
7.2
1.0
0.3
14%
42%
1.0
0.3
13%
35%
0.9
0.2
16%
62%
0.9
0.2
21%
85%
0.9
0.2
22%
89%
0.9
0.2
20%
78%
Current Ratio
Quick Ratio
Bank Debt/Assets
Bank Debt/Equity
Cash Flow (PLN m)
2005
2006
2007
2008E
2009E
2010E
Net Profit
Other (incl. WC)
Other
Change in Debt
Issuance of Shares
Other
Beginning Cash
Ending Cash
61
57
-39
79
-85
50
-35
36
8
-44
-1
86
43
130
80
38
-29
89
-106
1
-105
13
0
0
14
129
-3
126
84
47
2
133
-228
49
-179
122
0
0
122
126
75
201
149
75
6
229
-447
0
-447
217
0
-20
197
202
-20
181
102
97
4
203
-236
0
-236
113
0
-23
90
181
58
239
101
105
25
230
-212
0
-212
8
0
-26
-18
239
1
240
DPS (PLN)
0.00
0.00
0.00
0.00
0.00
0.00
144
99
NFI EM&F S.A.
Table 168 NFI EM&F – 4Q08E Results Preview
P & L (PLN m )
Revenues
Operating profit
Net profit
4Q07
631.7
86.6
67.7
1Q08
428.2
12.7
6.8
2Q08
490.5
21.6
17.8
3Q08
525.2
8.6
3.9
4Q08E
975.0
142.3
120.0
YoY
QoQ
54.3%
85.6%
64.4% 1548.4%
78.9% 2968.1%
12M07 12M08E
1 585.0 2 418.9
107.7
185.4
85.4
148.7
YoY
52.6%
72.2%
74.1%
4Q08 top line is expected by us to be driven by consolidation of Spiele Max with its
seasonality and EURPLN rates adding to the growth of Fashion and Beauty segment.
Media and Entertainment segment is likely to be driven by increasing LTL in Smyk stores
while Empik is expected follow 2008 trend of flat sales per sq m.
NFI EMF is hedged against FX fluctuations in regard of 60% of COGS and 90% of rents,
what should allow it to perform untouched by recent increased volatility. The negative
valuation of FX contracts is expected by us not to be included in P&L.
In Janaury NFI EMF finalized the exit from its minority stake in Zara (20%), selling it for
PLN 110m, what would imply the gain on the investment of PLN 43.5m. This amount is
likely to included in 4Q08 report, according to preliminary agreement signing timing.
Excluding the impact of the transaction, we expect EBITDA margin of 12.5% (vs. 16.1%
in 4Q07) as the restructuring of Spiele Max is not likely to show positive results yet.
Net profit margin of 7.9% (excluding Zara sale) (vs. 10.7% in 4Q07) will translate into
2008 net profit of PLN 106m (+24% yoy).
Table 169 NFI EM&F – DCF
2009E
2010E
2011E
2012E
2013E
2014E
Terminal
Year
Revenues
EBIT Margin
23.7%
2 991
4.4%
14.7%
3 432
3.8%
12.4%
3 856
4.4%
7.6%
4 151
5.2%
4.8%
4 359
4.7%
3.4%
4 576
4.4%
2.0%
4 668
4.1%
EBIT
Effective Tax Rate
132
19.0%
131
19.0%
169
19.0%
217
19.0%
203
19.0%
200
19.0%
191
19.0%
107
97
-236
6
106
105
-212
15
137
127
-183
-13
176
141
-183
-9
164
148
-183
-10
162
142
-183
-10
155
136
-145
-27
-26
14
68
124
119
110
9.4%
9.4%
9.4%
9.5%
9.6%
118
1 485
10.0%
13
57
95
83
70
NOPAT
+ Depreciation
- Capex
FCF
Terminal Value
WACC
-26
292
945
1 236
243
Value of Firm =
1 479
Value of Equity =
-470
895
8.7
8.8
Key Assumptions
Market Risk Premium
9%
4.5%
5.5%
Beta
1
9.5%
-2.0%
-1.0%
0.0%
Nominal Growth
1.0%
2.0%
3.0%
6.1%
14.5
15.4
16.5
5.1%
11.5
12.1
12.8
11.0%
7.7
7.8
7.9
10.5%
8.2
8.3
8.4
4.1%
8.6
8.8
9.1
3.1%
5.7
5.5
5.3
2.1%
2.8
2.3
1.6
9.5%
9.2
9.4
9.8
9.0%
9.8
10.2
10.7
WACC in Perpetuity
-2.0%
-1.0%
0.0%
Nominal Growth
1.0%
2.0%
3.0%
10.0%
8.6
8.8
9.1
145
LPP S.A.
High Quality Retailer
We rate LPP shares BUY-High Risk with a target price of PLN 1475 offering 33%
potential from current level. We are aware that LPP is going to face very difficult
market conditions in 2009E (sharp PLN weakening and risk of consumption
slowdown) and potentially in 2010E (consumption). However, we also appreciate
LPP`s strong track record, well build business model and skilled
17 February 2009
BUY – High Risk
12M TP PLN 1475/ (Feb 13th) PLN 1110
management
team. We also tend to believe that the company has still huge growth
300
opportunities that may be digested once the economic situation in the region
LPP vs. WIG=100
250
improves. On the short term basis the share price may look expensive
–
especially in 2009E (although it is still cheaper than Inditex or H&M that has
200
similar position in the region). On the other hand the current share price level
150
looks very attractive from the long term point of view, which together with
100
relatively low liquidity if the stock make us recommend it now – even being aware
that the bed news are still to come.
50
Jan- Apr06
06
Jul06
Oct06
Jan- Apr07
07
Jul07
Oct- Jan- Apr07
08
08
Jul08
Oct- Jan08
09
Difficult time ahead – Weak Zloty hits both: Margins and Costs
There are no miracles – sudden currency depreciation must have negative
implications for 2009E margins. Even though historically LPP used to generate
healthy margins at similar US$/PLN levels it would not be able to raise its prices so
rapidly (especially as the economic environment is weak). We assumed that the
company would be able to negotiate down US$ import prices by 10% and increase
Key Ratios
2008E
2009E
its average selling prices by 15%, which should result in some 4%-5% gross
EBITDA Margin
17.2%
13.5%
margin reduction (2009E vs. 2008E). Adding to that growth in rents (Euro
EBIT Margin
13.4%
9.4%
ROE
24.7%
17.7%
Bank Debt / Assets
39.1%
30.1%
denominated) that constitute 25%-30% of SG&A cost we expect very difficult year
for LPP. We are looking for 13% decrease in net profit in 2009E despite the
company would fully consolidate “Artman” (only 2 months in 2008E)
Share data
Despite good January sales we assume no improvement in LFL
January sales result didn’t show any sign of consumption crisis (LFL growth of c.
1.7
Market Cap (€m)
421.1
0.6
10%). We however, assume that sales results would deteriorate when the crisis
effects become more visible (unemployment growth / pressure on wages).
52 W High / Low
2425.0 / 903.0
Consequently we assume flat LFL sales in both 2009E and 2010E.
WIG Weight (%)
Reuters
LPPP.PW
The leverage works both ways
Bloomberg
0.33
1.06
LPP PW
It should be pointed out that LPP operates at huge operational leverage, which
could imply even much weaker results in 2009E if our assumptions (margins &
sales) are too optimistic. On the other hand the results should quickly recover
when the company is not struggling with sudden weakening of the Zloty (which we
Perform ance
Abs.
vs. WIG
3M
11%
22%
YTD
-10%
4%
12M
-50%
0%
hope should be the case in 2010E) and when consumption growth gets better.
2006
2007
2008E
2009E
2010E
815
1 274
1 621
2 265
2 573
EBITDA (PLN m)
93
225
279
305
341
EBIT (PLN m)
52
175
217
213
245
Net profit (PLN m)
41
135
164
143
173
EPS (PLN)
24.1
79.1
95.9
82.1
99.3
DPS (PLN)
0.0
0.0
0.0
0.0
0.0
Revenues (PLN m)
EV / EBITDA (x)
P/E (x)
14.7
30.7
146
20.3
33.7
8.9
11.9
7.6
13.5
6.7
11.2
Shareholders
Stake
Grangefont Limited
20.0%
Piechocki Marek
18.6%
Lubianiec Jerzy
13.0%
Others
48.4%
Analysts
+ 48 22 236 92 44
Tomasz Duda
+ 48 22 236 92 32
LPP S.A.
Table 171 LPP – Financials
P&L (PLN m)
Revenues
2005
2006
2007
2008E
2009E
2010E
686
815
1 274
1 621
2 265
2 573
19%
56%
27%
40%
14%
449
753
960
1 223
1 397
14%
- yoy change
Gross Profit
374
20%
68%
28%
27%
- yoy change
-2
-6
-10
-3
-7
-7
EBIT
- yoy change
59
52
-12%
175
239%
217
24%
213
-2%
245
15%
EBITDA
- yoy change
90
93
4%
225
142%
279
24%
305
9%
341
12%
-7
-1
-9
-12
-34
-28
0
0
0
0
0
0
52
51
166
205
179
216
-12
-10
-31
-41
-36
-43
0
0
0
0
0
0
Pretax Profit
Income Tax
Net Incom e
EPS (PLN)
40
41
135
164
143
173
23.5
24.1
79.1
95.9
82.1
99.3
2%
228%
21%
-14%
21%
- yoy change
Gross Margin
54.6%
55.1%
59.1%
59.2%
54.0%
54.3%
EBIT Margin
8.6%
6.3%
13.8%
13.4%
9.4%
9.5%
Net Margin
5.8%
5.0%
10.6%
10.1%
6.3%
6.7%
ROE
17.2%
15.0%
33.2%
24.7%
17.7%
17.7%
2005
2006
2007
2008E
2009E
2010E
237
315
406
645
743
874
27
31
53
65
79
90
209
285
352
580
665
784
Total Fixed Assets
198
221
291
768
804
839
Tangible Assets
Other Fixed Assets
175
23
194
27
258
33
457
311
482
322
510
329
Total Assets
435
536
697
1 413
1 548
1 713
980
232
273
406
664
807
0
1
0
0
0
0
19
21
68
421
327
265
Long -Term Debt
11
11
28
387
280
211
8
10
40
34
47
54
183
242
224
328
413
468
Short -Term Debt
128
124
57
166
187
211
54
118
167
162
227
258
435
536
697
1 413
1 548
1 713
BVPS (PLN)
9.1
10.7
15.9
26.0
31.6
38.4
Current Ratio
1.3
1.3
1.8
2.0
1.8
1.9
Quick Ratio
0.4
0.3
0.5
0.7
0.6
0.7
Bank Debt/Assets
32%
25%
12%
39%
30%
25%
Bank Debt/Equity
60%
49%
21%
83%
58%
43%
Cash Flow (PLN m)
2005
2006
2007
2008E
2009E
2010E
Net Profit
40
41
135
164
143
173
31
41
50
63
92
96
-23
-6
-12
-230
4
-72
48
76
173
-4
238
197
-94
-62
-97
-531
-106
-114
Other
0
0
1
1
2
2
-94
-63
-97
-530
-104
-112
64
-4
-48
468
-86
-45
0
0
0
94
0
0
-6
-6
-6
-16
-35
-29
58
-10
-53
546
-121
-74
Beginning Cash
15
27
31
53
65
79
12
3
23
12
14
11
Ending Cash
27
31
53
65
79
90
DPS (PLN)
0.0
0.0
0.0
0.0
0.0
0.0
Change in Debt
Issuance of Shares
Other
147
LPP S.A.
The 4Q08 result should benefit from “Artman” consolidation (2 months) that posts very
good results. We are looking for slightly lower margin on sales vs. last year as: 1) the
demand was not impressive in December, 2) the Zloty has already started to rapidly
weaken (although the whole impact on profitability we should see only in 2Q09 where all
products are paid at weaker PLN). The cost side will be hit by higher rents but should
benefit from effects of restructuring that had been very quickly introduced by the LPP
management.
The 4Q08 net profit is
not comparable with
4Q07 as LPP started to
consolidate “Artman”
this year.
Table 172 LPP – 4Q08E Results Preview
P & L (PLN m)
4Q07
1Q08
2Q08
3Q08
4Q08E
YoY
QoQ
12M07
12M08E
YoY
Revenues
386.8
339.7
358.1
397.9
525.3
35.8%
32.0%
1 274.3
1 621.0
27.2%
72.0
51.8
25.3
18.1
46.9
34.8
50.8
40.8
93.9
70.4
30.4%
35.9%
84.9%
72.4%
175.3
134.7
216.8
164.0
23.7%
21.7%
Operating profit
Net profit
We do not assume critical scenario of 10-15% LFL falls or 10% margin deterioration (as a
result of Zloty weakening), which could push LPP results far below our estimates.
However, we also do not assume rapid margins recover – we are looking for operating
margins of 10.3%-11% in 2010E-14E while the regular margin in the good year accounts
for 13.4%-13.8% (2007E-08E). We are also very conservative in our top-line growth
expectations (in 2009E the growth results to large extent from “Artman” consolidation
effect) – and looking for from 5% to 10% yearly growth vs. 38% Sales CAGR in 200208E. While the actual timing of economic recovery is still a downside risk we believe that
the conservative assumptions we applied provide potentially substantial upside risk to
our valuation.
Table 173 LPP – DCF
Our long-run margin
assumptions as well as
the expected growth
paste are conservative
Revenue Growth Rate
2009E
2010E
2011E
2012E
2013E
2014E
Terminal
Year
39.7%
13.6%
10.0%
8.0%
6.0%
5.0%
2.0%
Revenues
2 265
2 573
2 831
3 057
3 241
3 403
3 471
EBIT Margin
9.4%
9.5%
10.3%
10.6%
10.8%
10.9%
11.0%
EBIT
Effective Tax Rate
NOPAT
213
245
290
325
350
371
382
19.0%
19.0%
19.0%
19.0%
19.0%
19.0%
19.0%
173
198
235
263
284
301
309
92
96
99
101
104
106
108
-106
-114
-104
-106
-107
-109
-108
-33
-99
-64
-57
-46
-41
-17
125
82
165
202
235
257
292
10.0%
10.0%
10.0%
10.1%
10.2%
10.2%
74
137
152
160
160
+ Depreciation
- Capex
FCF
2 209
Terminal Value
WACC
125
808
2 209
3 017
65
Value of Firm =
3 082
-553
Value of Equity =
2 529
1 451
1 475
Key Assumptions
13%
10.3%
Market Risk Premium
5.5%
Beta
1
10.0%
Nominal Growth
9.0%
10.0%
11.0%
12.0%
13.0%
1251
1351
1360
1475
1469
1598
1578
1722
1475
1598
1722
9.2%
-2.0%
1.0%
-1.0%
2.0%
1141
1227
0.0%
3.0%
1227
1351
11.2%
10.7%
10.2%
9.7%
1360
1475
1427
1503
1558
1728
1653
1852
WACC in Perpetuity
Nominal Growth
-2.0%
1.0%
1245
1299
-1.0%
2.0%
0.0%
3.0%
1335
1446
1401
1528
148
1621
NG2 S.A.
Waiving off recession fears
NG2 is the leader in distribution and production of footwear market in Poland
(10% share). NG2 stock offers exposure to all segmets of footwear market,
17 February 2009
dividend yield of 6.5%, growth prospects at relatively low cost due to low capital
HOLD – Medium Risk
intensity of the business and good position to come out of the recession
untouched. On the other hand, the margins are expected to be hurt due to FX
changes. Currently NG2 trades at P/E09 of 12.2 and EV/EBITDA of 9.7 i.e. with
300
10% and 49% premium over Western peers. We find the premium justified by
NG2 growth prospects, its crisisproof and cash generating business model, though
CCC/NG2 vs. WIG=100
250
expected deterioration of margins make us recommend HOLD MEDIUM RISK with
200
12M TP of 44.
150
100
Stores expansion is priced in, efficiency is the key to trigger the price
NG2 targets to operate 300 CCC, 100 Quazi and 600 of Boti stores. We assume
50
Jan- Apr06
06
Jul06
Oct06
Jan- Apr07
07
Jul07
Oct- Jan- Apr07
08
08
Jul08
Oct- Jan08
09
CCC target is achieved by 2012, while Boti and Quazi targets are met in 80% and
70% at the time. This growth would cost c. PLN 150m – a figure amounting to
2008 EBITDA. Thus, we expect solid dividend to be paid to shareholders annually.
All this should already be priced in with P/E09E of 12.2. Thus the main price
trigger is expected by us to be an increase of LTL. We expect to see improvements
of 5%, 9% and 9% in CCC, Quazi and Boti brands, respectively, as 2008 stores
should improve results and on the back of prices increases in 2H09.
CCC – Power of the brand
Key Ratios
2008E
2009E
Opening 290 new stores over the last two years allowed NG2 to improve the brand
EBITDA Margin
19.8%
17.2%
recognition. This is proved by NG2’s ability to maintain average prices of its main
EBIT Margin
18.5%
15.9%
ROE
55.0%
38.0%
Bank Debt / Assets
22.6%
30.2%
product lines, while at the same time the market prices fell 3.6% annually. The
repositioning of CCC to upper brand was succesful as the average price of leather
shoes increased 46% and synthetic ones by 5.5% over the last two years. The
Share data
results of new brands improved in 2008 both on the cost side and in sales per sq
m, but still 76% and 72% of the business is going to be generated by NG2’s
flagship – CCC, in 2009 and 2010, respectively.
2009 Hurdles – Time to accumulate
c. 70% of COGS is going to come from imports in 2009, which is going to hurt
38.4
Market Cap (€m)
317.2
14.1
0.23
52 W High / Low
48.0 / 33.0
WIG Weight (%)
Reuters
CCCC.WA
0.54
Bloomberg
CCC PW
NG2’s margin, especially in 2H09, when fall/winter collection is considered. We
expect EBIT margin attrition of 2.6% in 2009 and another 1% in 2010. We find
Performance
Abs.
NG2 well positioned to weather the situation due to still significant part of
3M
-10%
-1%
YTD
2%
17%
12M
-18%
64%
domestic goods procurement and the fixed franchised margins (as it is unlikely to
vs. WIG
lower margins in favour of franchisees). Moreover, as hinted above NG2 possesses
unique ability to increase prices even against the market.
Shareholders
Stake
Miłek Dariusz
55.9%
Gaczorek Leszek
12.0%
2006
2007
2008E
2009E
2010E
ING TFI
400.9
67.3
62.0
53.2
544.5
82.9
73.9
53.5
763.2
151.2
140.9
108.9
951.8
163.7
151.1
117.1
1 150.7
194.7
179.4
135.7
Other
DPS (PLN)
1.39
1.0
1.39
0.0
2.85
0.0
3.05
2.4
3.53
2.6
EV/EBITDA
P/E (x)
28.7
36.1
21.7
32.3
9.9
12.8
9.7
12.2
8.4
10.5
Revenues (PLN m)
EBITDA (PLN m)
EBIT (PLN m)
Net profit (PLN m)
EPS (PLN)
6.4%
25.7%
Analysts
+ 48 22 236 92 44
Tomasz Duda
+ 48 22 236 92 32
149
NG2 S.A.
Table 175 NG2 – Financials
P&L (PLN m)
Revenues
2005
2006
2007
2008E
2009E
2010E
331
401
544
763
952
1 151
21%
36%
40%
25%
21%
182
279
401
489
583
25%
54%
44%
22%
19%
0
0
-12
-2
-3
-6
55
62
74
141
151
179
13%
19%
91%
7%
19%
67
83
151
164
195
14%
23%
82%
8%
19%
-14
- yoy change
Gross Profit
146
- yoy change
EBIT
- yoy change
EBITDA
59
- yoy change
0
3
-10
-10
-10
0
0
0
0
0
0
55
65
64
131
141
165
Pretax Profit
- yoy change
Income Tax
Net Incom e
EPS (PLN)
19%
-2%
106%
8%
17%
-11
-12
-10
-22
-24
-30
0
0
0
0
0
0
44
53
53
109
117
136
1.14
- yoy change
1.39
1.39
2.85
3.05
3.53
21%
0%
104%
7%
16%
Gross Margin
44.0%
45.3%
51.2%
52.6%
51.4%
50.7%
EBIT Margin
16.6%
15.5%
13.6%
18.5%
15.9%
15.6%
Net Margin
13.2%
13.3%
9.8%
14.3%
12.3%
11.8%
ROE
34.9%
31.5%
29.1%
55.0%
38.0%
40.8%
2005
2006
2007
2008E
2009E
2010E
146
153
201
336
414
501
33
9
11
23
29
35
113
144
190
313
385
466
Total Fixed Assets
59
88
131
166
203
241
Tangible Assets
58
86
127
156
192
228
1
2
4
9
11
13
Total Assets
204
241
332
501
617
741
368
Other Fixed Assets
169
183
199
308
332
0
0
0
0
0
0
0
4
1
1
1
1
Long -Term Debt
0
3
0
0
0
0
0
1
1
1
1
1
33
51
129
182
271
357
0
19
82
113
186
250
33
32
47
69
85
107
204
241
332
501
617
741
BVPS (PLN)
4.4
4.8
5.2
8.0
8.6
9.6
Current Ratio
6.4
3.6
1.6
1.9
1.6
1.4
Quick Ratio
1.0
0.2
0.1
0.1
0.1
0.1
Bank Debt/Assets
0%
9%
25%
23%
30%
34%
Bank Debt/Equity
0%
12%
41%
37%
56%
68%
2005
2006
2007
2008E
2009E
2010E
44
53
53
109
117
136
4
5
9
10
13
15
-2
-38
-32
-92
-48
-49
Short -Term Debt
Cash Flow (PLN m)
Net Profit
46
20
31
28
82
102
-18
-33
-39
-41
-49
-52
-4
9
-10
1
1
1
-21
-24
-49
-40
-48
-51
Change in Debt
-19
19
63
31
73
63
0
0
0
0
0
0
-3
-39
-4
-7
-101
-108
-22
-21
59
25
-28
-45
30
33
9
11
23
29
3
-24
40
12
6
6
33
9
49
23
29
35
0.00
1.00
0.00
0.00
2.42
2.59
Other
Issuance of Shares
Other
Beginning Cash
Ending Cash
DPS (PLN)
150
Ng2 S.A.
Table 176 NG2 – 4Q08E Results Preview
P & L (PLN m)
4Q07
1Q08
2Q08
3Q08
4Q08E
YoY
QoQ
Revenues
164.8
138.9
201.1
203.9
220.0
33.5%
7.9%
12M07 12M08E
544.5
763.9
YoY
40.3%
Operating profit
21.8
20.4
43.6
35.5
41.4
89.9%
16.4%
73.9
140.9
90.6%
Net profit
18.5
17.1
32.7
27.2
31.9
72.6%
17.1%
53.5
108.9
103.7%
NG2 is expected to continue its bonanza of results in 4Q08, driven primarily by improved
sales efficiency. We expect double digit growth in sales per sq m in regard of CCC and
Boti brand, while Quazi is expected to be the poorer performer. The result of CCC brand
might be especially inspiring as it is expected to go above sales of PLN 700 per sq m in
4Q08 for the first time in history. Overall, we expect increases of 11%, 12.5% and 24%
of sales per sq m in CCC, Boti and Quazi, respectively, in 2008.
Cost side is expected to perform well this quarter too, driven by strict employment policy
and rents still only slightly affected by weaker PLN. The revaluation of prepayments is
not expected to suppress EBIT margin significantly, what would bring EBIT margin to
18.8% (vs. 13.2% in 4Q07).
We expect net profit of PLN 31.9m, though we apply 19% tax rate, which might in fact
be lower due to benefits of running operations in special economic zone. If lower tax rate
is applied and NG2 managed to beat our cautious margins’ assumptions that would bring
4Q08 net profit to PLN 34.5m.
We expect divided payout ratio of 85%, what with our 2008 net profit forecast of PLN
108.9m would result in dividend of PLN 92.5m.
Table 177 NG2 – DCF
Revenues
EBIT Margin
EBIT
2013E
2014E
Terminal
Year
2009E
2010E
2011E
2012E
24.7%
20.9%
14.5%
12.0%
5.0%
3.0%
2.0%
952
1 151
1 317
1 475
1 549
1 595
1 627
15.9%
15.6%
16.4%
16.5%
15.7%
15.4%
15.0%
151
179
215
243
244
245
244
19.0%
19.0%
19.0%
19.0%
19.0%
19.0%
19.0%
122
145
174
197
197
198
197
13
15
18
20
21
21
19
- Capex
-49
-52
-57
-45
-24
-23
-27
-62
-64
-58
-55
-15
-10
-10
24
45
78
117
179
187
180
10.7%
10.9%
10.8%
8.1%
10.4%
10.4%
40
64
86
122
115
Effective Tax Rate
NOPAT
+ Depreciation
FCF
Terminal Value
2 136
WACC
24
450
1 317
1 768
Value of Firm =
23
1 791
Value of Equity =
-113
1 678
Key Assum ptions
10.9%
15.9%
Market Risk Premium
5.5%
44
Beta
44
1
10.2%
Nominal Growth
17.0%
16.0%
15.0%
14.0%
13.0%
-2.0%
1.0%
47
45
42
39
37
-1.0%
2.0%
50
47
44
42
39
0.0%
3.0%
54
51
48
44
41
11.4%
10.9%
WACC in Perpetuity
Nominal Growth
10.4%
9.9%
9.4%
-2.0%
1.0%
39
40
42
44
46
-1.0%
2.0%
41
43
44
47
49
0.0%
3.0%
43
45
48
50
54
151
Wholesale
Wholesale
Polish FMCG market – snapshot and main trends
PLN 200bn market, with
a 5.2% 4y CAGR
Individual consumption in Poland is estimated at PLN 990bn, which accounts for 61% of
the total GDP. Over last five years, CAGR of private consumption amounted to 6.6% vs.
nominal GDP growth of 8.3%. In terms of gross added value trade and repairs generate
over 20% of the total. Based on Polish CSO data, retail sales through retail outlets
amounted to PLN 498bn, which indicates a jump of 11.5% yoy; food, beverages and
cigarettes had 36% share in the total retail sales (PLN 181bn).
Polish retail FMCG sector is estimated at between PLN 160 - 220m depending on the
quoted source. Based on the PMR estimates the retail sector is worth PLN 217.4bn and
grew 6.4% vs. 2007. The earlier forecasts of PLN 230bn this year (or 5.8%) are likely to
be revised down, in our opinion to some 4-5%. GFK Polonia estimates the value of FMCG
market at PLN 162bn.
Chart 47 Key facts of the FMCG market in Poland
Value and growth (PMR)
25%
300
20%
250
PLN bn
15%
10%
5%
-15%
Oct-08
Apr-08
Oct-07
Apr-07
Oct-06
Apr-06
Oct-05
Apr-05
-10%
Oct-04
-5%
Apr-04
0%
Value and growth (CSO)
257
6.4%
200
6.1%
8%
7%
6%
160
7%
5.8%
5%
6%
CAGR
2008-2011
150
5%
4%
5.7%
100
120
3%
4%
3.0%
80
3%
2.0%
2%
1.5%
2%
50
40
1%
1%
0
0
0%
2005 2006 2007 2008 2009F
Food, beverages and tobacco growth
Total retail sales growth
6.6%
200
9%
7.9%
PLN bn
Retail sales
Value of food FMCG market(lhs)
0%
2003
2011F
2004
Food and beverages
Growth
2005
2006
2007
Alcohol and tobacco
Growth
Source: CSO, PMR, Gazeta Prawna, IPOPEMA estimates
We expect retail sales to
slow to 5.5% in 2009
Deteriorating economic outlook, visible in deteriorating macroeconomic indicators,
leading indicators, slowing wage bill growth and deteriorating consumer confidence will
surely feed into falling consumption. In 2008, retail sales have marked a falling trend –
the total retail sales in December increased by a mere 6.6% in current prices and 5.7%
in constant prices. We expect that with the real growth at the level of 1.3% yoy, retail
sales are likely to slow to 5.5% in 2009 vs. 14% in 2008 and 2007.
A fragmented market
with nearly 60% from
traditional trade
Polish FMCG trade is very fragmented; with approximately 102k small food stores.
Modern forms of trade generate approximately one third of the total turnover. The fastest
growing segments in the last years were the supermarkets (14.5% CAGR), while the
traditional stores numbers was decreasing by 3% per year in the recent years.
Chart 48 FMCG market structure
Value by channels
Number of stores
Hypermarkets
13.2%
7 544
25 929
2 043
8 528
25 962
2 347
27 374
2 716
7 917
25 335
3 003
113 203
109 518
113 004
117 042
8 211
8 421
27 001
3 506
Supermarkets
12.1%
Discount
stores
0.8%
293
2003
Other
73.9%
Source: CSO, PMR, Gazeta Prawna, Emperia, IPOPEMA estimates
152
374
338
2004
Hypermarkets
Supermarkets
Cosmetic stores
2005
101 608
410
2006
396
2007
Traditional stores
Specialised food and liquor stores
Wholesale
Modern forms to become
more important – but not
as much as in the EU…
We expect that the coming two years of slowdown will be marked by increasing
significance of the modern trade, mainly to the benefit of discount stores. In our opinion,
the switch of the traditional – modern will be most likely owing to smaller supermarkets,
as specifics of demographics in Poland makes development of more hypermarkets
unprofitable. Moreover, shopping profile of Polish consumer is also different than
elsewhere. Smaller apartments with less storage space and lack of car imply smaller and
more frequent visits paid to groceries; a promising perspectives for convenience stores.
Chart 49 Largest Polish retailers
2007 Revenues (PLN bn)
Size of network (2007)
Jeronimo Martins Dystry-bucja
8 970
Tesco Polska
8 100
Carrefour Polska
Auchan Polska
Lewiatan
290
Carrefour Polska
349
5 200
Real Polska
52
5 100
Auchan Polska
22
4 465
Kaufland
1 050
Tesco Polska
7 354
Real Polska
Jeronimo Martins Dystry-bucja
Lewiatan
2 900
2 032
Kaufland
Grupa Muszkieterów
2 120
Grupa Muszkieterów
Penta Investments
2 054
Penta Investments
E. Leclerc
2 039
E. Leclerc
Lidl Polska
1 900
Lidl Polska
POLO Market
1 900
POLO Market
94
132
1 900
18
270
225
Source: Detal Dzisiaj, Rzeczpospolita, companies’ websites, IPOPEMA estimates
…which means a huge
opportunity for
wholesalers
So-called convenience stores will face an important challenge on one hand – the
customers will become price oriented, therefore in order to keep prices attractive for
their customers, strict cost control is and will be required. On the other hand - the
customer will be willing to pay a premium for convenience, which in many cases equals
proximity and attractive shop concept with comprehensive product range. Therefore,
more and more individual stores will become associated under franchise networks with
strong recognizable brand name and coherent policy.
Large-space outlets and group of stores source their supplies directly from producers,
however there is still a large number of companies, which buy at wholesalers. Dispersed
stores and intense competition pose a challenge for wholesalers.
Chart 50 Polish wholesale market outlook
Change of wholesale sales (yoy)
Polish wholesalers - market shares
Makro C&C, 7%
30%
Eurocash, 5%
25%
CEDC, 4%
20%
Emperia, 3%
15%
Selgros, 2%
10%
Total wholesale
8-2008
2-2008
8-2007
2-2007
8-2006
2-2006
8-2005
2-2005
8-2004
2-2004
-10%
8-2003
-5%
2-2003
0%
8-2002
Sobieski, 2%
Lekkerland, 2%
2-2002
5%
12m moving average
Others, 71%
PHP Polski
Tyton, 1%
Kolporter, 1%
MPT, 1%
Source: CSO, Internet Securites, Detal Dzisiaj, companies’ websites
Wholesale market
concentration ratio will
increase from current C4
of 19%
Thin margin environment and great fragmentation trigger consolidation; since 1995 from
over 20 000 companies there are only 5 000 left currently. Polish wholesale market is
very attractive due to its value, declining number of competitors, very few international
players, and large number of Polish towns with a lack of professional operator, which are
however too small for demanding and costly investments. Emperia and Eurocash actively
participate in the consolidation, however there is still plenty of room for growth.
153
Wholesale
Emperia and Eurocash – financial highlights and dividing lines
24% of Emperia’s
revenues come from
retail…
The revenues of Emperia and Eurocash nearly tied in 2007, however, with the acquisition
of McLane, Eurocash now exceeds Emperia’s revenues by nearly PLN 1bn, and ranks
number two in the total wholesale market.
Chart 51 Sales split
Emperia
7 000
6 000
5 000
4 000
3 000
2 000
1 000
0
Eurocash
Other
7 000
Other
Retail
5 000
Active distribution
3 000
Traditional distribution
Active Distribution
Traditional distribution
1 000
2004
2005
2006
2007
-1 000
2008E
2004
2005
2006
2007
2008E
Source: Emperia Holding, Eurocash, IPOPEMA estimates
…which implies higher
margins
Emperia’s margins are higher than those achieved by Eurocash, mainly due to retail
operations and lower share of cigarettes in the sales structure. We expect slight
improvement of margins in the coming years – in Eurocash due increasing sales of noncigarettes and in Emperia – growing significance of retail.
Table 178 Profitability comparison
Gross profit margin
2004
12.9%
13.0%
3.0%
3.2%
Emperia
Eurocash
Emperia
Eurocash
EBITDA margin
2005
14.2%
13.7%
3.8%
4.2%
2006
15.4%
9.5%
3.6%
2.7%
2007
15.4%
9.0%
3.9%
2.6%
2008E
15.4%
9.2%
2.8%
2.4%
Source: Emperia Holding, Eurocash, IPOPEMA estimates
Eurocash has lower debt
levels…
Emperia is more indebted than Eurocash. As of the end of 3Q08, Emperia had net debt of
PLN 210m, while Eurocash had net cash of PLN 17.6m; after 3Qs 08 net debt-to-EBITDA
amounted to 1.27 for Emperia and -0.12 for Eurocash.
Working capital management looks better in case of Eurocash, which is partly due to
…and better working
capital management
different sales structure. Half of Eurocash’s sales are generated by traditional wholesale,
hence shorter receivables cycles. As an effect Eurocash group operates on negative
working capital, which indicates cash influx from working capital with increasing sales.
Emperia’s cash conversion cycle currently amounts to low teens and the Company plans
to work on its cycles in the near future and has a great potential for improvement.
Chart 52 Operating cycles – Emperia and Eurocash
Emperia 2008E
28
Eurocash 2007
28
26
Inventory
days
Payables
days
42
22
18
13
12
Receivables
days
35
Days
28
18
17
41
Days
Days
44
Eurocash 2008E
Days
Emperia 2007
Cash cycle
days
Receivables
days
Inventory
days
Payables
days
Cash cycle
days
Receivables
days
Inventory
days
Payables
days
-3
-4
Cash cycle
days
Receivables
days
Inventory
days
Payables
days
Cash cycle
days
Summing up, Eurocash achieves twice as high return on equity as Emperia – lower
margins (both reported and adjusted for one-offs) are more than offset by faster assets
turnover and lower equity-to-assets ratio.
Table 179 Emperia and Eurocash - DUPONT
Net profit magin
Assets Turnover
Financial leverage
ROE
2004
Emperia
1.3%
3.54
3.24
2005
2006
2007
1.6%
4.01
3.24
1.7%
2.94
2.06
2.0%
4.23
2.02
14.7%
20.8%
10.1%
16.9%
Source:Emperia, Eurocash, IPOPEMA estimates
154
2008E
2004
Eurocash
1.0%
1.5%
3.44
4.16
2.20
2.57
7.8%
15.5%
2005
2006
2007
2008E
1.9%
4.17
2.54
1.3%
5.68
3.04
1.2%
6.03
3.63
1.2%
6.07
3.99
20.5%
22.2%
27.2%
28.7%
Wholesale
Emperia and Eurocash – international backdrop
We run multiples valuation of Emperia and Eurocash based on a sample of comparable
companies operating mainly in Europe. The selected companies are active in food
wholesale, food retailing or both. None of them is perfectly comparable, as the revenue
structure differs among the firms.
Table 180 Multiples valuation
COMPANY
2008E
2009E
2010E
2008E
P/E
2009E
2010E
EPS
Ave EBIT m argin
CAGR
(2008-10)
(2007-10)
EV/EBITDA
JERO NIMO MARTINS
14.3
13.0
10.8
6.7
6.0
5.2
17%
4%
CARREFOUR SA
10.7
11.3
10.5
5.1
5.0
4.7
-7%
4%
METRO AG
10.6
10.0
9.2
4.0
4.0
3.7
7%
3%
SAINSBURY (J) PLC
16.2
15.4
13.6
6.8
6.6
6.4
7%
3%
KO NINKLIJKE AHOLD NV
12.4
11.1
10.0
6.5
5.6
5.1
-25%
5%
TESCO PLC
13.0
12.2
10.8
8.6
7.8
7.3
7%
6%
LOBLAW CO MPANIES LTD
18.0
16.3
13.8
7.8
7.2
WM MO RRISO N SUPERMARKETS
15.2
15.3
12.7
7.9
7.8
CASINO GUICHARD PERRACHO N
9.1
13.0
9.1
12.2
8.5
10.8
5.0
6.7
4.8
6.0
15.5
12.4
8.6
7.2
19%
2%
-20%
7%
Median
Emperia
premium / discount to MEDIAN
Eurocash
premium / discount to MEDIAN
Valuation implied by the multiple
Emperia
Eurocash
-243%
3%
6.8
1%
5%
4.5
5.2
-9%
7.0%*
4%
4.4%
6.8
5.0
6.1%
2.0%
14%
-4%
20.7%
1.8%
16.0
11.7
10.5
7.5
5.8
5.1
23%
-4%
-2%
11%
-2%
-2%
2008E
2009E
2010E
2008E
2009E
2010E
Median
47.0
54.9
70.1
51.1
47.1
58.6
7.8
9.7
9.0
7.9
8.9
8.9
12M Target Price
53.0
8.9
59.0
9.9
Source: Bloomberg, companies’ websites, IPOPEMA estimates, * - median calculated excluding Ahold and Loblaw Companies
Based on the above valuation, the target price of Emperia amounts to PLN 61.1 and of
Eurocash – PLN 9.9. We feel however, the valuation based on the 2009E and 2010E
multiples underestimates the fair value of the companies, especially that of Emperia, as
we believe that the real improvement in results and economies are to be expected from
2010. The Companies that we compare to are in a much more established position.
Compared to the companies we selected for comparison, Emperia has lower EPS growth
pace vs. the peer universe, however Eurocash, based on our assumptions it is expected
to grow by 21% per year vs. 7% median. We decided to exclude Ahold and Loblaw
Companies from the comparison, as the former has disinvested part of its operations in
2007, and the latter is undergoing significant restructuring.
Chart 53 Emperia and Eurocash peers – median of margins
5.5
3.9
2.0
2000
3.7
1.7
2001
2.0
2002
4.7
4.2
3.9
2.3
4.0
2.5
1.7
2003
Net profit margin
4.1
2.7
2.6
2004
2005
2006
2007
EBIT margin
Differences in profitability of Emperia and Eurocash vs. their foreign peers are apparent.
Over last years both of them had operating margins which did not exceed 3%. In our
forecast we assume slight improvement for both companies, however we keep them
under 3% in terminal year, which takes into account differences in scale, however we
believe is on the conservative side.
155
Emperia Holding S.A.
Closer to the target
Emperia’s share price followed WIG index during the recent sell-off starting in
October. 3Q08 results, burdened with restructuring costs did not help the stock
price performance either. We think that the Company’s strategy of consolidating
the wholesale and organising the franchise network is promising and will allow for
17 February 2009
BUY – Medium Risk
12M TP PLN 80.2 / (Feb 13th) PLN 56
profitable growth in the future. We believe that it Emperia will be one of the
Companies that will still be present after the end of the upcoming concentration
process. We advise using the price weakness to take a position in the stock.
450
400
Emperia vs. WIG=100
350
Emperia is a number 3 wholesaler with over 2k stores in its network
300
250
Through organic growth and numerous acquisitions Emperia almost quadrupled its
sales over the last two years and transformed from a regional to a nationwide
player. It currently has a third position in terms of FMCG wholesale (excluding
CEDC), operates through 74 distribution stores and 5 distribution centres. Its
200
150
100
50
Jan- Apr06
06
Jul06
Oct- Jan- Apr06
07
07
Jul07
Oct- Jan07
08
Apr08
Jul08
Oct- Jan08
09
retail network includes 146 supermarkets and delicatessen as well as 2 347
compact supermarkets, mostly associated under franchise agreements.
PLN 158m to be spent on capex and acquisitions in 2009E
Emperia plans to develop its retail operations by opening 10 Stokrotka stores, 2
Delima stores and to attract more shops to join its franchise network. It also plans
to open two new distribution centres, however one investment will be an extension
of an existing infrastructure. The split of investments for retail vs. wholesale will
most likely be close to 25-75 wholesale versus retail.
Depressed margins and suboptimal working capital-great upside potential
2008/09E
2009/10E
EBITDA Margin
2.8%
2.9%
Unfortunately the profits dynamics didn’t follow the revenues expansion – swelling
EBIT Margin
1.9%
1.9%
structure invited in many efficiencies. That and the decision to speed up
ROE
7.8%
9.0%
16.0%
17.3%
investments slashed 2008 profits by 40%. Although the first quarters of 2009E will
most likely be not impressive in terms of results, we believe that Emperia will be
able to slightly raise its margins this year and in 2010E. We expect that the efforts
to improve its working capital management will start bearing fruit since 2010E.
Key Ratios
Bank Debt / Assets
Share data
15.1
Market Cap (€m)
177.4
Our estimates are below the consensus
20.0
We expect that the 2009E net profit will slightly exceed PLN 70m vs. the
consensus of PLN 100. The revenues should grow by 7% yoy. Our forecasts for
1.0
52 W High / Low
156.8 / 40.0
WIG Weight (%)
Reuters
EDRO.WA
0.9
Bloomberg
EMP PW
this and next years translate into P/E of 12.2x and PLN 8.5x, respectively. We
expect that EBIT margin for 2009E and 2010E will not exceed 2%. Our target
Performance
Abs.
vs. WIG
price, derived from our DCF model is PLN 80.2, which implies 43% to the current
3M
10%
24%
price. Emperia trades with a 4% discount to its international peers based on
YTD
4%
25%
12M
-64%
-24%
2009E results and with a discount of 21% discount based on 2010E results.
2006
2007
2008E
2009E
2010E
1 406.7
4 479.6
5 434.0
5 790.8
6 222.1
EBITDA (PLN m)
51.2
176.2
153.0
168.9
220.3
EBIT (PLN m)
33.0
136.2
100.7
109.8
148.6
Net profit (PLN m)
23.4
88.4
56.2
70.1
101.3
EPS (PLN)
1.8
6.0
3.7
4.6
6.6
DPS (PLN)
2.7
1.6
0.9
0.6
1.0
15.9
41.2
5.4
10.2
7.0
15.1
6.7
12.2
4.9
8.5
Revenues (PLN m)
Shareholders
Stake
CU Pension Fund
10.4%
Wawerski Jarosław
Kawa Artur
ING Pension Fund
Others
7.2%
6.6%
5.4%
70.4%
Analysts
EV / EBITDA (x)
P/E (x)
156
+ 48 22 236 92 08
Table 182 Emperia – Financials
P&L (PLN m)
2005
2006
2007
2008E
2009E
2010E
Revenues
1 280
1 407
4 480
5 434
5 791
6 222
10%
218%
21%
7%
7%
217
688
839
874
943
8%
- yoy change
Gross Profit
181
- yoy change
20%
217%
22%
4%
Hedging gain/(loss)
0
0
0
0
0
0
8
4
16
2
0
0
EBIT
- yoy change
31
33
5%
136
313%
101
-26%
110
9%
149
35%
EBITDA
- yoy change
49
51
5%
176
244%
153
-13%
169
10%
220
30%
-5
-3
-26
-18
-22
-22
0
0
0
0
0
0
Pretax Profit
26
30
111
83
88
127
Income Tax
-6
-6
-22
-26
-18
-25
0
0
0
0
0
0
Net Income
EPS (PLN)
21
23
88
56
70
101
3.09
1.81
5.99
3.71
4.60
6.58
-41%
231%
-38%
24%
43%
- yoy change
Gross Margin
14.2%
15.4%
15.4%
15.4%
15.1%
15.2%
EBIT Margin
2.4%
2.3%
3.0%
1.9%
1.9%
2.4%
Net Margin
1.6%
1.7%
2.0%
1.0%
1.2%
1.6%
20.8%
10.1%
16.9%
7.8%
9.0%
11.9%
ROE
2005
2006
2007
2008E
2009E
2010E
168
187
797
858
912
973
7
13
92
36
36
40
161
174
705
822
876
932
Total Fixed Assets
159
443
690
812
911
935
Tangible Assets
152
177
436
539
635
656
6
265
254
272
275
278
Total Assets
327
630
1 487
1 670
1 823
1 907
107
357
689
746
807
893
0
0
0
0
0
0
38
76
145
217
177
136
Long -Term Debt
36
72
130
201
161
121
1
3
15
15
15
15
182
197
653
708
839
877
144
Other Fixed Assets
Short -Term Debt
38
30
81
66
154
144
168
572
642
685
733
327
630
1 487
1 670
1 823
1 907
BVPS (PLN)
16.1
27.6
46.7
49.3
53.0
58.1
Current Ratio
0.9
0.9
1.2
1.2
1.1
1.1
Quick Ratio
0.4
0.5
0.7
0.6
0.5
0.6
23%
69%
16%
28%
14%
31%
16%
36%
17%
39%
14%
30%
Bank Debt/Assets
Bank Debt/Equity
Cash Flow (PLN m)
2005
2006
2007
2008E
2009E
2010E
Net Profit
21
23
88
56
70
101
17
18
40
52
59
72
Other (incl. WC Change)
0
13
-29
-29
11
15
38
55
99
79
140
187
-22
-42
-106
-159
-158
-95
0
-13
-32
-15
0
0
-22
-55
-138
-174
-158
-95
-8
27
-75
57
48
-50
0
0
229
13
0
0
-7
-21
-35
-31
-31
-37
Other
Change in Debt
Issuance of Shares
Other
-15
6
119
39
17
-88
Beginning Cash
6
7
13
92
36
36
1
6
80
-56
0
4
Ending Cash
7
13
92
36
36
40
0.3
2.7
1.6
0.9
0.6
1.0
DPS (PLN)
157
4Q08E will most likely be
uninspiring yet better
than 3Q08
We expect that the Company will generate over PLN 5.4bn revenues this year. The EBIT
margin should slightly improve in 4Q08E qoq (from 1.4% to 1.9%), however the
Company’s earnings will still be depressed by the group restructuring and reorganization.
We assume that the financial results will grow from to PLN 7.3m in 4Q08E, and the tax
rate will be higher as part of the subsidiaries will still be making losses in this quarter.
Table 183 Emperia – 4Q08E Results Preview
P & L (PLN m)
Revenues
4Q07
1Q 08
2Q 08
3Q 08
4Q08E
YoY
Q oQ
12M07
12M08E
YoY
1 207.9
1 297.5
1 336.5
1 333.8
1 473.7
22.0%
10.5%
4 479.6
5 434.0
21.3%
40.4
24.9
26.9
18.0
30.7
22.1
18.7
5.5
27.8
15.1
-31.3%
48.2%
-39.3%
176.1%
136.2
88.4
100.7
56.2
-26.0%
-36.5%
O perating profit
Net profit
Based on our DCF
valuation we set a target
price at PLN 80.2
Our DCF valuation derives a target price of PLN 80.2, which implies 36% upside to the
current price. If we valued the Company using the international peers comparison, the
target price would have been set at PLN 61.1, which is close to the current market price.
In our DCF model we assume that the sales will increase by 9% annually until the
terminal year with increasing importance of retail. We assume that Emperia’s margin will
not revert to 2007 levels (2.7% adj. EBIT margin) until 2011E due to ongoing
restructuring costs. We estimate 2009E capex at PLN 158m, similar to 2008 with 75% of
the amount spent on retail (new locations) and 25% for wholesale part (2 distribution
centers, including one extension of an existing unit). The need for working capital will be
decreasing with slowing sales growth as well as optimizing the working capital
management (cash cycle days going down from 13.4 days in 2008 to 10.4 days in
terminal year). Increasing significance of retail sales will help to speed up receivables
cycles. We do not assume any acquisitions in 2009 except for the ones already executed.
The cost of capital is based on the risk free rate equal to yield on 10Y Polish Government
bonds, beta of 1 and risk premium of 5.5%. The perpetual FCF growth rate is set at 2%.
Table 184 Emperia – DCF
2009E
2010E
2011E
2012E
2013E
2014E
Term inal
Year
Revenue G rowth Rate
6.6%
7.4%
11.1%
10.2%
6.5%
5.9%
2.0%
Revenues
5 791
6 222
6 910
7 612
8 110
8 590
8 762
1.90%
2.39%
2.50%
2.56%
2.48%
2.47%
2.47%
110
149
173
195
201
212
217
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
88
119
138
156
161
170
173
59
72
79
87
95
103
105
-158
-95
-97
-99
-102
-115
-118
EBIT Margin
EBIT
Effective Tax Rate
N OPA T
+ Depreciation
- Capex
FCF
-11
-8
-18
-17
-9
-8
-8
-22
88
103
127
145
150
153
10.0%
10.2%
10.5%
10.9%
11.0%
11.0%
80
85
95
98
91
1 699
Terminal Value
WACC
-22
425
Value of Operating A ssets of the firm =
1 031
1 456
Value of Firm =
36
1 492
- Value of O utstanding Debt =
Value of Equity =
-267
1 225
Key Assum ptions
Revenue CAG R 2009E-2014E
8%
2.4%
Market Risk Premium
5.5%
79
Beta
12 Month Target Price (PLN ) DCF
80
1
10.5%
D CF Sensitivity (PLN)
3.0%
2.5%
2.0%
-2.0%
1.0%
100
87
73
59
45
-1.0%
2.0%
111
96
80
65
49
0.0%
3.0%
124
107
89
72
54
10.0%
10.5%
12.0%
Real Growth R ate in Perpetuity
Nom inal Growth
3.5%
1.5%
WACC in Perpetuity
Real Growth R ate in Perpetuity
Nom inal Growth
11.0%
11.5%
-2.0%
1.0%
80
76
73
70
67
-1.0%
2.0%
89
84
80
77
73
0.0%
3.0%
100
94
89
85
81
158
Eurocash S.A.
Take a Defensive Stance
Eurocash stock price has been strong relative to the broad market, as during the
October correction it lost 22% vs. WiG’s decline of 37%. Nevertheless good track
record, well thought-out strategy, rich cash generation and generous dividend
payment lead us to rate the stock as a Buy.
17 February 2009
BUY – Low Risk
12M TP PLN 11.6 / (Feb 13th) PLN 8.75
Well Set for Coming Contraction
Since its IPO on WSE Eurocash has been developing dynamically – organically and
300
Eurocash vs. WIG=100
through acquisitions. Since then it supplemented its cash&carry operations with
250
Delikatesy Centrum (delivering to its franchise network under the same name),
200
KDWT (tobacco and impulse products distributor). The Company has just
150
completed a merger with number 11 wholesaler/logistic operator McLane for PLN
100
92m, which diminished its gap to Macro Cash & Carry, the leader in Polish market.
Eurocash is now the number two wholesaler of FMCG products to smaller shops,
50
Jan- Apr06
06
Jul06
Oct06
Jan- Apr07
07
Jul07
Oct- Jan- Apr07
08
08
Jul08
Oct- Jan08
09
restaurants and petrol stations, it operates 111 cash&carry centres, its franchise
Delikatesy Centrum consists of 376 shops and the abc network comprises nearly
3 000 shops. It is likely to take advantage of expected consolidation in the Polish
FMCG market – it has a track record of though-out, careful and value creating
acquisitions. With PLN 17.6m net cash and negative working capital Eurocash is
very well prepared for the coming difficult times.
Key Ratios
Stable EPS growth and dividend, excellent working capital management
We estimate the 2009E sales of Eurocash to grow by almost 18% to PLN 7.1bn,
partly as an effect of annualisation of sales of McLane (consolidated since mid
2008E
2009E
EBITDA Margin
2.4%
2.5%
EBIT Margin
1.7%
1.8%
29.4%
33.3%
3.9%
0.9%
ROE
Bank Debt / Assets
2Q08) organic growth (8 new cash&carry stores) and 5% increase of LFL sales.
We assume only minuscule improvement of margins as we believe that
Share data
improvement of Eurocash’es negotiating position will be offset by lower margins
132.3
realized by McLane. We expect that Eurocash will be able to deliver stable EPS
Market Cap (€m)
242.6
growth of 22% p.a. and dividend pay out ratio of 50% on consolidated profit. We
38.1
1.1
expect that even with the including McLane Eurocash has negative working capital.
52 W High / Low
13.5 / 7.9
Valuation & Recommendation
WIG Weight (%)
Reuters
ERCS.WA
0.6
Bloomberg
EUR PW
Based on our DCF model, we set the target price at PLN 11.6, which indicates 34%
upside to the current price, therefore we rate the stock as Buy. For comparison,
Performance
Abs.
vs. WIG
we run a peer valuation, which returns PLN 9.9. On 2009E P/E basis the Company
3M
-9%
2%
is trading with 6% discount to its European peers, which we find unjustified taking
YTD
-15%
2%
12M
-29%
49%
the specifics of its business and EPS growth potential.
Revenues (PLN m)
2006
2007
2008E
2009E
2010E
3 237.0
4 729.9
6 042.8
7 111.7
7 678.9
EBITDA (PLN m)
87.3
122.5
147.8
180.5
193.7
EBIT (PLN m)
55.2
86.8
105.7
131.1
144.2
Net profit (PLN m)
41.6
58.9
71.6
97.6
108.7
EPS (PLN)
0.3
0.5
0.5
0.7
0.8
DPS (PLN)
0.2
0.2
0.3
0.4
0.4
13.2
26.9
8.7
19.0
7.5
16.0
6.0
12.0
5.2
10.8
EV / EBITDA (x)
P/E (x)
Shareholders
Stake
Conceicao de Amaral, Luis Manuel
53.7%
CU Pension Fund
ING Pension Fund
BZ WBK AIB Asset Management
Others
Analysts
5.4%
5.2%
5.0%
30.7%
+ 48 22 236 92 08
159
Eurocash S.A.
Table 186 Eurocash – Financials
P&L (PLN m)
2005
2006
2007
2008E
2009E
2010E
Revenues
1 687
3 237
4 730
6 043
7 112
7 679
92%
46%
28%
18%
8%
306
424
556
661
722
9%
- yoy change
Gross Profit
230
- yoy change
33%
38%
31%
19%
0
0
0
0
0
0
-7
-5
-6
-9
-9
-10
EBIT
- yoy change
45
55
24%
87
57%
106
22%
131
24%
144
10%
EBITDA
- yoy change
70
87
24%
122
40%
148
21%
181
22%
194
7%
-3
-1
-12
-15
-9
-8
0
0
0
-1
0
0
Pretax Profit
42
54
75
89
122
136
Income Tax
-9
-13
-16
-18
-24
-27
0
0
0
0
0
0
Hedging gain/(loss)
Net Income
EPS (PLN)
33
42
59
72
98
109
0.25
0.33
0.46
0.55
0.73
0.81
28%
42%
19%
33%
11%
- yoy change
Gross Margin
13.7%
9.5%
9.0%
9.2%
9.3%
9.4%
EBIT Margin
2.6%
1.7%
1.8%
1.7%
1.8%
1.9%
Net Margin
ROE
1.9%
1.3%
1.2%
1.2%
1.4%
1.4%
20.5%
22.2%
27.2%
28.7%
32.8%
30.2%
2010E
2005
2006
2007
2008E
2009E
261
436
591
742
820
938
99
41
131
89
102
165
162
395
460
653
718
773
Total Fixed Assets
181
262
278
379
384
385
68
109
121
172
176
176
Other Fixed Assets
113
153
157
207
208
209
Total Assets
442
698
870
1 121
1 204
1 323
390
Tangible Assets
176
199
233
266
330
0
0
0
0
0
0
5
5
19
17
24
28
Long -Term Debt
0
0
0
0
3
3
5
5
19
17
21
25
262
480
619
831
847
903
0
74
73
46
11
3
262
407
546
785
836
901
442
698
870
1 121
1 204
1 323
BVPS (PLN)
1.4
1.6
1.8
2.0
2.5
2.9
Current Ratio
1.0
0.9
1.0
0.9
1.0
1.0
Quick Ratio
0.5
0.5
0.6
0.5
0.6
0.7
Bank Debt/Assets
Bank Debt/Equity
0%
0%
11%
37%
8%
31%
4%
17%
1%
4%
0%
1%
Short -Term Debt
Cash Flow (PLN m)
2005
2006
2007
2008E
2009E
2010E
Pretax
42
54
75
89
122
136
26
32
36
42
49
49
26
-49
81
79
-26
-6
94
37
192
210
145
179
-51
-26
-18
-52
-63
-54
2
-50
-10
-98
0
0
-24
-68
-62
-161
-54
-51
-1
-3
-3
-39
-35
-8
0
0
0
0
14
0
-3
-23
-37
-54
-56
-57
-4
-26
-40
-94
-77
-66
Beginning Cash
34
99
41
131
89
102
65
-58
90
-44
13
63
Ending Cash
99
41
131
87
102
165
DPS (PLN)
0.0
0.2
0.2
0.3
0.4
0.4
Other
Change in Debt
Issuance of Shares
Other
160
Eurocash S.A.
We expect stable 4Q08
results
We expect the net income to improve by over 4% yoy in 4Q08E, 3pp lower than the
revenues growth. In 4Q08 the Company already started feeling first signs of slowdown in
sales. The share of SGA costs should be higher than last year, due to inclusion of
McLane, which has a larger proportion of service sales and lower margin. We expect
higher interest on payables than in the last quarter. The tax rate is likely to be higher
than the statutory 19%.
Table 187 Eurocash – 4Q08E Results Preview
P & L (PLN m)
Rev enues
O perating profit
Net profit
4Q 07
1Q 08
2Q08
3Q 08
4Q 08E
YoY
Q oQ
12M07
12M08E
YoY
1 276.6
1 226.5
1 569.3
1 733.3
1 513.7
18.6%
-12.7%
4 729.9
6 042.8
27.8%
31.2
19.6
13.3
9.1
31.0
23.2
30.0
18.9
31.4
20.4
0.8%
4.8%
4.1%
8.2%
86.8
58.9
105.7
71.6
21.8%
21.5%
We value the stock at
PLN 11.6 while the peers
valuation returns PLN
9.9
Our DCF model returns a target price of PLN 11.6, based on the current number of
shares, which indicates a 33% upside to the current price.
We assume that in the coming years Eurocash will open average 8 new cash & carry
centers per year, until it reaches the saturation point of 145-150. We expect that the
cash and carry LFL will increase by 4.3% per year over the next four years and reach 2%
in the terminal year. We assume some margin improvement due to increasing purchasing
power. However we assume that the margins will stay lower than in Emperia, as
Eurocash is active in cigarettes distribution and does not have its retail sales in its sales
structure. EBIT margin is assumed at 2.01% in the terminal year. We conservatively
assume that there are no significant changes in the net working capital area. The cash
cycle days at the end of our implicit forecast period drops to minus 1.3.
The cost of capital is based on the risk free rate equal to yield on 10Y Polish Government
bonds, beta of 1 and risk premium of 5.5%. The perpetual FCF growth rate is set at 2%.
Table 188 Eurocash – DCF
2009E
Revenue Growth Rate
2010E
2011E
2012E
2013E
2014E
Terminal
Year
17.7%
8.0%
6.6%
5.1%
3.9%
2.9%
2.0%
Revenues
7 112
7 679
8 186
8 603
8 939
9 195
9 379
EBIT Margin
1.8%
1.9%
2.0%
2.0%
2.0%
2.0%
2.0%
EBIT
131
144
160
170
178
185
188
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
20.0%
105
115
128
136
143
148
151
49
49
51
53
56
60
61
- Capex
-54
-51
-57
-64
-73
-80
-81
-24
6
6
5
6
7
8
FCF
76
120
128
130
132
136
138
1 540
11.2%
11.2%
11.2%
11.2%
11.0%
10.8%
108
104
95
86
80
Effective Tax Rate
NOPAT
+ Depreciation
Terminal Value
WACC
76
549
909
1 457
89
Value of Firm =
1 546
-48
Value of Equity =
1 498
Key Assumptions
5%
1.9%
Market Risk Premium
5.5%
11.4
Beta
11.6
1
11.1%
2.5%
2.0%
1.5%
-2.0%
1.0%
14.3
12.6
9.2
7.5
-1.0%
2.0%
15.4
13.5
10.9
11.6
9.7
7.8
0.0%
3.0%
16.9
14.8
12.6
10.4
8.3
10.0%
10.5%
12.0%
Nominal Growth
3.0%
1.0%
WACC in Perpetuity
Nominal Growth
11.0%
11.5%
-2.0%
1.0%
11.6
11.2
10.9
10.6
10.3
-1.0%
2.0%
12.5
12.1
11.6
11.3
10.9
0.0%
3.0%
13.7
13.1
12.6
12.1
11.7
161
This document has been prepared by:
IPOPEMA Securities S.A.
ul. Waliców 11
00-851 Warszawa
www.ipopema.pl
IPOPEMA Securities S.A. is supervised by the Polish Financial Supervision Authority (Komisja Nadzoru Finansowego).
This document is intended for IPOPEMA Securities S.A. clients, yet it may be sent to the mass media. Its copying or publishing in whole or in part as well as dissemination of
information enclosed to it is allowed only with prior written permission of IPOPEMA Securities S.A. It was prepared by its authors to provide background information only and it is
based on publicly available information viewed as reliable. It has been produced independently of the company mentioned in this report and any forecasts, opinions and expectations
are entirely those of IPOPEMA Securities S.A. Unless otherwise stated, sources of all information in charts and tables are IPOPEMA Securities S.A. estimates.
IPOPEMA Securities S.A. prepared this document with the preservation of all adequate diligence, thoroughness, reliability and attention on the basis of publicly available information,
which IPOPEMA Securities S.A. believes to be reliable. While all reasonable care and diligence has been taken to ensure that the facts stated herein are accurate and that any
forecasts, opinions and expectations contained herein are fair and reasonable, IPOPEMA Securities S.A. has not independently verified all the information given in this document.
Accordingly, no representation or warranty, express or implied, is made as to the fairness, accuracy, completeness or correctness of the information and opinions contained in this
document. The opinions expressed can change without notice and IPOPEMA Securities S.A. is under no obligation to keep these opinion current. None of the company, IPOPEMA
Securities S.A. or any other person accepts any liability whatsoever for any loss howsoever arising from any use of this document or its contents or otherwise arising in connection
therewith. This document has been furnished solely for your information and may not be reproduced or redistributed to any other person. This document nor any copy hereof is not to
be distributed directly or indirectly in the United States, Australia, Canada or Japan.
This document does not constitute or form part of any offer for sale or solicitation of any offer to buy any shares nor shall it or any part of it form the basis or be relied on in connection
with any contract or commitment whatsoever. Investment decisions should be made only on the basis of the prospectus or other publicly available documents and materials.
Investors should be aware that IPOPEMA Securities S.A. may have a conflict of interest that could affect this report’s objectivity. IPOPEMA Securities S.A. may seek to do business
with the companies mentioned in this document.
IPOPEMA Securities S.A. uses a number of valuation methodologies including discounted cash flows models (such as discounted operating earnings or dividend discount model),
and earnings and cash-flow based models, which are often related to comparisons with selected peer companies. Cash flow models encapsulate the cash streams forecast to flow to
a company, and are widely used in the investment industry. Peer comparisons factor in amongst other factors, differential growth rates, and indicate how expensive one company
might appear relative to a chosen comparator. The subjective opinions of the reports author or authors, formed by their knowledge and experience, play a significant role in the
valuation. Also included are assumptions on numerous economic variables, particularly interest rates, inflation and exchange rates and varying these assumptions could results in
significantly different opinions. The strength of the earnings and cash flow based models is the closer attention to a company on a standalone basis, and tying the valuation to its
fundamental value. The weakness of such method is the number of assumptions, which need to be adopted and resulting sensitivity to those assumptions. The peer comparisons
methods are less dependent on the analyst’s judgment as to the individual parameters, however the problem with this method appears when the peer comparator is over- or
undervalued. Moreover, leading multiples (based on the future earnings, book values, operating profit or cash flows) include an analyst’s estimate of those values.
This report was not transferred to the company prior to its publication.
Recommendations issued by IPOPEMA Securities S.A. are valid for twelve months or unless it is updated. The updates to the recommendation will be provided based on the
analyst’s judgment and there is no predefined frequency of issuance of such publications
The date stated on the front page is the date of the publication of this document. The price used throughout the recommendation to calculate adequate ratios is the “last” price stated
on the front page of this report.
The definitions of terms used in the recommendation include:
NII – Net interest income – interest income minus interest expense
Net F&C – Net fee and commission income – fee and commission income minus fee and commission expense
LLP – loan loss provisions – an expense set aside as an allowance for bad loans
NPL – non-performing loan – loans that are in default or close to be in default
Cost/Income – operating expenses divided by total banking revenue
ROE – return on equity – net income (or adjusted net income) divided by the average shareholders’ equity
ROA – return on assets – net income (or adjusted net income) divided by the average assets
EBIT – interests before earnings and tax
EBITDA – interest before earnings, tax, depreciation and amortization
EPS – earnings per share – the net income (or adjusted net income divided by the number of shares outstanding
P/E – price to earnings ratio – price divided by earnings per share
PEG – P/E ratio divided by the annual EPS growth, usually over a certain period of time
CAGR –compound annual growth rate
BVPS – book value per share, the book value of the Company’s equity divided by the number of shares outstanding
P/BV – price to book value - price divided by the BVPS
DPS – dividend per share – dividend of a given year divided by the number of shares outstanding
DY – dividend yield – dividend of a given year divided by the current price
DDM – dividend discount model – a fundamental method of valuation based on the assumption that the value of stock equals the sum of all discounted future dividends
TP – target price, calculated based on valuation methods outlined in the document
Our recommendations are:
Buy – expected 12 moths total return of 15% or more.
Hold – expected 12 months total return of 5%-15%.
Sell – expected 12 months total return of below 5%.
There are three risk ratings: High Risk, Medium Risk and Low Risk that take into account fundamental factors as well as liquidity and volatility of the stock. Please note that the risk
rating may impact the level of total return that is required for specified recommendation.
The author has no conflict of interest with the company that is the subject of this document.
Investors should be aware that flexible part of the author’s compensation may depend on general financial performance of IPOPEMA Securities S.A.
IPOPEMA Research - Distribution by rating
category (Oct 1 - Dec 31, 2008)
Number
Buy
6
Hold
6
Sell
0
Total
12
162
%
50%
50%
0%
100%

Report v8

Transcription

Similar documents

OFFER Online payments

Poland TSsupply-and-background-2014

1 EU non-Grant financiaL instrUmEnts at Bank Gospodarstwa

COMPANY PRESENTATION

Being an Equity-Oriented Leader

4 MB Biuletyn 4/2015

Company Presentation

Renewable source of eco-development

InterMail has a strong standing within digital and mail

BGK - HBOR