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Polish Equities Monthly: February 2019

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Polish Equities Monthly: February 2019 Monthly Report 2/2019/MR (12) February 4, 2019 Polish Equities Monthly: February 2019 4Q18E earnings: A tipping point? Analysts: Sobiesław Pająk, CFA, Sylwia Jaśkiewicz, CFA, Maciej Wewiórski, Michał Sobolewski, CFA, FRM, Jakub Viscardi, Łukasz Prokopiuk, CFA, Tomasz Rodak, CFA, Wojciech Romanowski Monthly Report 2/2019/MR (12) February 4, 2019 Analysts: Sobiesław Pająk, CFA, Sylwia Jaśkiewicz, CFA, Maciej Wewiórski, Michał Sobolewski, CFA, FRM, Jakub Viscardi, Łukasz Prokopiuk, CFA, Polish Equities Monthly: Tomasz Rodak, CFA, Wojciech Romanowski Next month’s top potential outperformers 11 bit studios, AB, Asbis, Asseco Poland, Asseco SEE, CD Projekt, Ciech, Dino, Dom Development, Erbud, GTC, February 2019 Inter Cars, LPP, Lotos, Marvipol Development, Mercator, Mercor, Pekao, PKO BP, Ten Square Games, Unimot, VRG Next month’s top potential underperformers 4Q18E earnings: CI Games, Elektrobudowa, Farm 51, KGHM, Lena Lighting, mBank, Millennium, Vivid Games Market scenario & key parameters A tipping point? 1. FY18E/ FY19E/ FY20E sum of reported (unadjusted) net earnings of companies in our coverage at PLN 37.3 billion (-7% down yoy)/ PLN 42.8 billion (15% up yoy)/ PLN 46.8 billion (10% up yoy). 2. FY18E/ FY19E/ FY20E sum of recurring (adjusted) net earnings of companies in our coverage at PLN 36.1 billion With the 4Q18 earnings season on the WSE already started (-6% down yoy)/ PLN 41.7 billion (15% up yoy)/ PLN 46.7 billion (12% up yoy). 3. 2018E/ 2019E/ 2020E average (index-weights-weighted) P/E for WIG index (based on recurring earnings): – with in-line (final or selected preliminary) figures at 15.1x/ 12.9x/ 11.6x. PKN Orlen, LPP, Forte and Budimex, yet disappointments 4. 2018E/ 2019E/ 2020E median P/E for WIG20 companies in our coverage (recurring-earnings-based): 13x/ 12x/ 11x. 5. 2018E/ 2019E/ 2020E median P/E for non-WIG20 companies in our coverage (recurring-earnings-based): delivered by preliminary selected numbers of Santander BP 12x/ 9x/ 8x. and Bogdanka – it is high time to delve into the composite 6. 2019E eop WIG index fundamental value assessment: 65.0 ths. points. earnings forecast numbers for our coverage universe in order to assess the current state of the companies’ earnings power and strive to draw some inferences for the Fig. 1 1Q18A-4Q18E pooled financial results for DM BOŚ’s universe future (traditionally our analysis is based on the recurring yoy yoy yoy yoy (i.e., one-offs-adjusted) profit figures). In a nutshell, we PLN billion 4Q18E chg 3Q18A chg 2Q18A chg 1Q18A chg believe that the last quarter of 2018 will mark the onset of a Entire universe change in the tendency that had prevailed in the preceding Sales 128.7 8% 122.2 16% 115.7 12% 113.2 7% three quarters of the year, with the composite recurring EBITDA 21.5 1% 21.1 -3% 22.4 13% 21.6 -1% corporate earnings yoy momentum (negative for 1-3Q18) Adj EBITDA 22.4 3% 20.5 -2% 20.6 -1% 20.6 -3% turning positive (albeit, by only a narrow margin). EBIT 15.5 8% 15.1 -7% 16.0 12% 15.8 -4% Adj EBIT 16.4 4% 14.5 -4% 14.6 -5% 14.8 -6% aaTo provide some background, we remind that the momentum Net profit 8.9 -2% 9.5 -11% 8.9 -3% 9.8 -10% of recurring (one-offs-adjusted) corporate earnings over the Adj net profit 9.6 4% 9.0 -7% 8.6 -14% 9.0 -10% course of first three quarters of last year was feeble, coming WIG20 companies out (on composite for our coverage universe) in yoy perspective Sales 92.4 8% 89.2 16% 83.6 12% 83.3 7% lower by c. -5% on the operating level and approx. -10% on EBITDA 16.8 7% 16.8 -3% 18.1 16% 17.3 -2% the net level. From the standpoint of our expectations from Adj EBITDA 17.8 6% 16.2 -1% 16.4 0% 16.2 -4% late 2017 such dynamics of recurring earnings constituted a EBIT 12.0 18% 12.0 -6% 12.9 15% 12.6 -5% negative surprise (especially for 1Q18 and 3Q18). Adj EBIT 12.8 9% 11.3 -3% 11.4 -4% 11.6 -7% Net profit 6.9 6% 7.7 -7% 7.1 -2% 7.9 -13% Additionally, the yoy weakness of corporate recurring profits Adj net profit 7.5 8% 7.0 -3% 6.8 -12% 7.0 -12% during past three quarters was quite broad-based; this was Non-WIG20 companies especially the case during the first half of the year (when less Sales 36.3 7% 33.0 15% 32.0 12% 29.8 8% than half of the companies in our coverage universe managed EBITDA 4.7 -16% 4.3 -3% 4.3 3% 4.4 2% to improve their recurring profits in yoy perspective), with Adj EBITDA 4.7 -7% 4.3 -4% 4.3 -5% 4.3 -1% some improvement visible in 3Q18, yet still of an unimpressive EBIT 3.5 -18% 3.1 -8% 3.1 0% 3.2 -2% magnitude (broadly 50-50 split between companies growing their Adj EBIT 3.6 -9% 3.2 -8% 3.2 -8% 3.3 -4% recurring profits and those seeing them sinking further in yoy Net profit 2.1 -23% 1.8 -24% 1.8 -9% 2.0 5% perspective). Adj net profit 2.2 -9% 1.9 -18% 1.8 -23% 1.9 -1% Source: Companies, DM BOŚ SA estimates aaComing into 4Q18E, on the composite basis (see Figure 1 regarding the details), built bottom-up from our projections for particular companies in our coverage, we expect the profits in the large-cap sub-universe (positive one) than in companies in our universe to generate approx. 4%/ 4% yoy the mid- & small-cap sub-universe (negative one). We expect increase of normalized operating/ net earnings for the last the strongest positive yoy dynamics to be delivered by quarter of 2018 (marking finally a positive dynamics in yoy the consumer staples (recurring NI up by c. 50%), oil & gas perspective, albeit only a tepid one). (recurring profits up yoy at a mid-teens’ per cent pace) and banking sectors (recurring NI up by c. 10%), with the weakest aaIn terms of large cap and mid- & small-cap comparison, we dynamics (recurring profits almost halving in yoy perspective) expect 4Q18 to show better yoy dynamics of normalized at chemicals, construction and real estate. Polish Equities Monthly: February 2019 aaFinally, we expect the breadth of envisaged yoy growth of Portfolio performance. Last month our portfolio outperformed corporate recurring profits to stay neutral for 4Q18, with the market by 2.1 pp, rising by 4.5% (compared to 2.4% increase broadly 50-50 split between companies growing their recurring of the WIG index). From the ytd perspective our top potential out- profits and those seeing them declining in yoy perspective. and underperformers portfolio yielded absolute positive rate of Such a figure, while still unexciting, would be comparable to return of 8.9% (versus 5.1% rise of the WIG benchmark) translating the preceding quarter of 3Q18, yet would mark improvement into 3.7 pp market-relative outperformance. Finally, the cumulative compared to the 1H18 levels. (i.e., since the inception at the end of March 2008) market-relative performance of our top potential out- and underperformers aaWe expect the 4Q18-originated tendency (i.e., improvement of portfolio remains robust, the way we see it, with absolute positive composite recurring profits for our coverage universe in yoy rate of return of 10,594.9% (compared to 26.3% increase of the perspective) to extend into the subsequent quarters of 2019. WIG benchmark) translating into 10,568.6 pp market-relative outperformance over the course of past 130 months. Changes in ratings. The LT fundamental ratings for the companies in our coverage universe stay intact. We upgrade our Positioning for next month. Our portfolio for the coming month is ST market-relative bias for the equities of Erbud to Overweight subject to moderate turnover. Specifically, as far as longs are concerned, (from Neutral), as there is a chance that the financial results of (i) we add Erbud, Pekao, Ciech and Unimot with (ii) Famur and the Company will bounce back soon given the short-term nature PKN Orlen being removed from the next month’s list. There are four of the Company’s contracts. Regarding the complete list of new additions to our potential laggards list (Vivid Games, Farm 51, ratings for the companies in our coverage universe (as well as mBank and Millennium), with INGBSK removed from the potential assessments of their 12M EFVs), please refer to the Appendix 2 to laggards list; please see the right-column figures on page 2 regarding this research report. the complete list of our bets for the next month. 3 Appendix DM BOŚ’s coverage universe valuation table Multiples priced as of the close of February 1, 2019 Polish Equities Monthly: February 2019 DM BOŚ’s WSE coverage universe valuation table (continued on the next page) Sector Company LT ST market Current 12M EFV Upside P/E EV/EBITDA, fundamental relative price (PLN) (downside) (P/BV for financials, rating bias (PLN) to EFV P/NAV for real estate) 2018E 2019E 2020E 2018E 2019E 2020E Chemicals CIECH Buy Overweight 52.85 63.40 20% 9.9 8.9 7.5 6.3 6.0 5.3 GRUPAAZOTY Sell Underweight 37.14 24.20 -35% 68.5 18.9 11.7 6.9 5.1 4.1 PCCROKITA Buy Overweight 88.00 122.10 39% 8.8 8.4 7.3 7.1 6.9 6.0 POLICE Sell Underweight 14.05 11.00 -22% neg.
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