FFBH Equty Research - Industrial Holding Bulgaria Update October 2018
HUGE UPSIDE POTENTIAL ON FURTHER ECONOMIC GROWTH AND LESS DEBT
- Following the conversion of IHB’s convertible bonds at BGN 1.00/share in end-Q1’18, the stock price of the holding dropped by 12.8% since its peak at BGN 1.12/share on 12 January’18. The dip in IHB’s price, the strong recent financials, and the announced investment and optimization plans, motivated us to revise our valuation. After refining and updating our NAV model, we estimated fair value of BGN 1.43/share, implying 45.4% upside potential and recommendation ‘BUY’.
- After a couple of very difficult years, IHB’s 2017 financials started to recover and the holding finally returned to profitability, after operating at a loss since 2014. The H1’18 financials kept on improving, as the revenue from all core activities strengthened YoY, eventually leading to 4.1x increase in the bottom line. Despite the serious turbulence in international trade, the freight markets remain stable and the global environment is still favourable, potentially allowing IHB to maintain its current growth pace until the year-end.
- The conversion of BGN 30m convertible bonds in end-Q1 reduced the IB Debt/Equity 2x to 21.9% as of end H1’18, strengthening the bottom line and releasing cash for alternative use. In addition, the management announced that it would renegotiate existing loans with UniCredit Bulbank and Allianz bank, and repay them within 5 years, hence further reducing the debt and the associated interest expense.
- Backed by the additional cash, IHB’s intended investments include expanding its port business, which we consider with the highest fundamental potential, and funding mostly marketing activities for the mature machine building, which is the most profitable among the core activities. The management of IHB continues to invest in its successful companies, but also optimizes its portfolio and liquidates the loss-making ventures, as would be done with IHB Electric.
An additional upside trigger could be if IHB regains its membership in SOFIX, after it was left out of the index in Sep’18. The exclusion was on reduced market capitalization and liquidity, as there were no buyers until the debt conversion-driven selling dried out.
First Financial Brokerage House (FFBH) is a leading non-banking financial institution on the Bulgarian capital market. Founded in 1991, FFBH offers the complete spectrum of investment banking services spanning corporate finance, privatisation advisory, mergers and acquisitions, financial consulting, brokerage services, research & analysis and asset management.
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