EUR 900.00 For Business Accounts Only

KRUK - Crossing the Rubicon - SELL - IPOPEMA 2017-09-22

Crossing the Rubicon
We resume coverage of Kruk with a SELL recommendation and set target price of
PLN 242.2 per share vs. PLN 200 previously, which implies 19% downside potential.
“Veni, vidi…” but will “vici” ever come?
Foreign expansion is necessary for Kruk to deliver earnings growth and to justify the
current rich valuation. Two first steps in Italy, which seems to be the most promising
market, have been completed: the company acquired a small debt-collection
company and bought several large and smaller NPL portfolios from local banks. It is
now time for Kruk to develop operating structures in Italy to replicate the successful
business models already introduced in Poland and Romania. However, we apply
more cautious assumptions for Italy, bearing in mind that performances in Czechia,
Slovakia or Germany is weaker than initially anticipated. In our opinion, lower returns
must be accepted at Kruk going forward, thus the company will need to increase its
investments if it is to sustain high growth. So far there have been no tangible signs
that Italy will be a failure, but the write-off of 40% of the price paid for a small
PLN 20m portfolio was a red flag.
Brute contra me
We see two additional risks ahead for the company. The first of these – taxes – has
already started to materialize: with the tightening taxation system Kruk will start to
pay higher contributions from 2018. The company now has to apply a 19% tax rate
versus a low single-digit rate so far. In our view, however, the risk of retrospective
payments for financial years 2014-2016 is now limited, as the outcome of the Polish
Tax Office investigation into financial year 2014 was rather mild and required only
PLN 2.6m of additional costs.
Second, we argue that Kruk reduced significantly investments in Poland given the
high competition on this market, especially from GetBack, which recently floated on
the WSE. If this situation continues, Kruk may lose its dominant position on one of its
core markets. In a worst-case scenario, Kruk may find itself in a position where taxes
are high, profitability in Italy is low and investments in the core market are reduced.
Multiples still above global peers
Kruk continues to trade above the multiples for its major global peers. On our
forecasts, Kruk’s P/E ratio is 16.2x for 2018E versus 10.2x on average for the peer
group. We prefer to look at the EV/cash EBITDA ratio. The consensus does not
provide this multiple, but based on annualized 2Q17 data we estimate it at 8.8x for
Kruk versus 6.6x median for the peer group (of which, for example, 3.8x for PRA,
6.4x for Hoist, 6.6x for B2 Holding, 8.7x for Intrum and 8.8x for Arrow Global).