EUR 900.00 For Business Accounts Only

Pekabex_Initiation note_IPOPEMA_2019_08_05

Shining star in a dark sky
We initiate coverage of Pekabex with a HOLD recommendation and a Fair Value
of PLN 9.27, which implies 6.3% downside. The firm is heavily dependent on
the macro situation in Poland and its influence on construction activity, which
has slowed down in the last few months. With the decelerating pace of Polish
economic growth, we believe construction activity will continue to slow down,
as the correlation between these two factors stands at almost 0.9. On the other
hand, Pekabex predominantly operates in the niche segment of pre-fabricated
concrete production, which is characterized by a short backlog and is therefore
less exposed to any potential margin squeeze stemming from increases in the
cost base. In addition, the firm remains a dividend payer. The planned
investment in a production facility in Gdansk will add another product to
Pekabex’s portfolio, namely filigran slabs; however, this will also dilute the
average product selling price and is set to stretch the company’s balance
sheet. All in all, we expect the firm to post EBITDA of PLN 45.9m (down
43.9% y/y) in 2019E, PLN 41.2m (down 10.4% y/y) in 2020E and PLN 46.0m (up
11.7% y/y) in 2021E, with the downward pressure stemming from declining
demand and rising costs for personnel, materials and energy.
GDP and construction growth to decelerate going forward: We assume Polish
GDP growth to decelerate to 4.3% y/y in 2019 from 5.2% y/y in 2018. We expect
Poland’s construction sector to grow by 4% y/y in 2019 after 9.2% y/y growth in 2018
and the superb 12% y/y growth in 2017. Construction output data for June came as
an unpleasant surprise. According to Statistics Poland (GUS), construction output
decreased by 0.7% y/y in June versus the PAP consensus estimate of 3.4% y/y
growth. Both the current and projected backlog in the construction industry indicates
a persistent slowdown. We expect the sector to slow down by 2.44% from current
levels in the remainder of the year due to decelerating industrial and export activity.
We expect a further slowdown of growth in 2020 and 2021 with growth rates at
1.62% and 1.65% respectively.
EBITDA to decrease going forward: We expect Pekabex’s EBITDA to decrease at
a CAGR of 10.9% in 2018-2023, which we link to the steep fall in operating profit in
2019. We estimate EBITDA at PLN 45.9m (down 43.9% y/y) in 2019, as the firm
currently executes less profitable contracts in prefabrication and has a higher share
in general contractors’ contracts. (The latter are, by definition, less profitable than
production). We expect the EBITDA line to fall by 10.4% y/y to PLN 41.2m in 2020E
due to the rising cost base and decreasing average realized price in prefabrication
production. Thereafter we expect EBITDA to rise 11.7% y/y in 2021, driven by the
inflow of new EU proceeds and a stabilizing cost base as the economy stagnates.