Thursday, 10 July 2014

ASSECO CENTRAL EUROPE: Software House from Slovakia


The company has been listed listed on the Warsaw Stock Exchange since 2006.

The main activities are:
  • software and computer hardware consultancy
  • production of software
  • supply of software and hardware.

It provides comprehensive IT solutions and services for international financial institutions (Erste, Allianz, UniCredit, etc.), for the private sector enterprises, as well as for the public institutions of central and local administration. Its product portfolio comprises information systems for banks, insurance companies and construction firms, card transaction systems, healthcare information systems, data warehouses, Business Intelligence and e-Commerce solutions, reporting systems, and turn-key projects [Annual Report 2013 Asseco Poland].

The company is primarily active in Slovakia, the Czech Republic, Hungary.

The capital group of Asseco Central Europe incorporates the following companies:
structure [1Q2014 report]

Slovanet was sold at the end of June, 2014 for €11m. The aquisition of Asseco Solutions from Asseco Dach S.A. for €13.8m in January, 2014 has added footprint in Germany, Switzerland and Austria.

Maybe the activitites become clearer with the following picture. It is sometimes difficult to understand what a software company actually does.
solutions and services [annual report 2013]


total revenues134.9131.3134.4
Gross Profit34.535.141.0
Gross Profit Margin25.6%26.7%30.5%
EBITDA 24.325.928.0
EBITDA Margin18.0%19.7%20.8%
Ebit Margin9.6%11.1%13.1%
Share in profits of associated companies0.30.30.3
Net Income9.811.314.2
Operating Cash Flow before WC changes22.725.027.8
Net Capital Expenditures ?-2.00.3
Free Cash Flow22.727.027.4
Net capital expenditures are capital expenditures-depreciation+intangibe addition-intangible depreciation. Asseco CE is not growing at the moment. Necessary investments and depreciation seem to offset one another. I therefore use FCF=operating Cashflow before working capital changes for TTM period.

A breakdown of P&L per subsidiary looks as follows. Slovanet was sold.

"The negative phenomenon is decreasing project profitability. Last year we fully recorded the intensive pressure of the customers to reduce their own costs, which was negatively reflected in the reduction of our hourly rates, dropped revenues and change in the structure of revenues to the detriment of the lump sum payments. We had to deal with this reduction more intensively than in the past and focus rather on new customers and new projects of the existing customers. At present the income from the new projects amounts to 35-45% from the annual revenues when compared to 15-20% in the period from 2008 to 2011. New customers and new projects must be or had to be won in the tenders, while the main or even the only relevant criterion is the price (even with the commercial customers). It is extremely difficult to win such tenders and deliver the work for such low invoiced income and to avoid loss; this becomes even more difficult every year. For the reasons above our EBIT decreased when compared to 2012, i.e. our economic results dropped by almost 15%, a decrease of EUR 15 per invoiced EUR 100. It's a trend that we will have to face in the future. To achieve the same economic result in the absolute amount means to try to increase annual revenues compared to the past with lower profitability. And that means winning more and more new projects every year. "

"Sales revenues [for 2013] dropped as a consequence of the difficult economic situation in the region, and especially the political situation in the Czech Republic. The resulting stagnation in public administration procurements weighed on the financial results of Asseco Central Europe. Macroeconomic conditions caused the erosion of profit margins achieved on products and services. Therefore, Asseco Central Europe is now focused on looking for new customers."

The problem with reduced revenues from public institutions in the Czech Republic can bee seen on the revenue breakdown per sector:


Cash and cash equivalents36.034.926.4
Total liquidity36.034.926.4
financial liabilities16.42.22.4
Total interest bearing liabilites30.215.015.7
Net interest bearing liabilites-5.8-19.9-10.7

Increase of financial liabilities in 1Q2014 resulted from increase in liabilities due to acquisition of shares:
Financial liabilities Asseco CE 1Q2014
 Debt is mainly from the now sold subsidiary Slovanet:
The newest annual report for Slovanet, I could find, was from 2012. Which shows the following balance-sheet:
balance shhet Slovanet 2012
As of 31.12.2012 debt was €8.8m, cash €1.2m and equity €8.2m. The €8.8m debt approximately equalled the €9m Slovanet related debt on Asseco CE's balance sheet at the end of 2012. I will therefore assume all Slovanet related debt (€8.5m) as of 1Q2014 were parted with when Slovanet was sold. I don't know how much cash was on the balance of Slovanet and will assume €1.2m, which is the same as at the end of 2012. EBITDA of Slovanet was €7.0m. this would result in the following leverage:

1Q20141Q2014ex Slovanet
Cash and cash equivalents36.045.8plus €11m -1.2m cash
Total liquidity36.045.8
financial liabilities16.416.4
Debt10.01.5minus €8.5m
Minorities3.7-0.3minus €8.2m*49%
Total interest bearing liabilites30.217.7
Net interest bearing liabilites-5.8-28.1
NIBL/EBITDA-0.24-1.62minus 7m EBITDA

This looks even better. Asseco CE is nearly gross debt free.


TTMex Slovanet
Shares Outstanding 21.3621.36
Price PLN16.316.3
Price EUR3.93.9
Market Cap83.683.6
Net interest bearing liabilites-5.8-28.1
Enterprise Value77.755.4
EBITDA24.317.3minus €7m
EBIT13.011.5minus €1.5m

Net Income9.89.0minus €0.8m
Cash flow yield29.2%


One might have to adjust for the one-off sale of non-IT logistics projects in September 2013 with the impact on the net other operation income in the amount of €1.7m. The projects generated annual revenues in the amount of EUR 3.8 million and represented 115 employed persons in Czech Republic:

TTMex Slovanet
Shares Outstanding 21.3621.36
Price PLN16.316.3
Price EUR3.93.91
Market Cap83.683.6
Net interest bearing liabilites-5.8-28.1
Enterprise Value77.755.4
EBITDA22.415.4minus 1.9m
EBIT11.19.6minus 1.9m
minus 2.0m
Net Income8.17.3minus 1.7m
Cash flow yield26.6%


The company looks cheap. After the sale of Slovanet EV/EBITDA coincidently stays constant but EV/EBIT gets even lower. This looks like the future for Asseco CE is bad or Mr Market is wrong.

Asset allocation is not the problem either as the company pays a healthy dividend:

DateDividend per share (EUR)yield @3.91€

Remuneration of Members of the Board of Directors for 2012 was €1.745m and €0.025m for the supervisory board.

Reasons for being cheap may be:
  • Asseco Poland owns 93.51%, which leaves a float of just 6.49%*€83.6m mcap=€5.4m
  • low liquidity of shares
  • related party transactions may not be at arm's length at the expense of the minority investor
  • revenue recognition may be too optimistic: "The progress of contract execution is measured as a percentage of the total estimated contract execution costs incurred from the date of contract conclusion to the date when the related revenues are determined, or as a proportion of the work completed out of the total work effort planned." 
  • customer's focus on price has already negatively impacted profitability and the company expects this trend to continue 
  • bad results 1Q2014 in Czech republic
The aquisition of Asseco Solutions from Asseco Dach S.A. for €13.8m in January, 2014 is already reflected in the EV calculation above, but potential benefits are not fully reflected yet. Asseco Solutions D made a net profit of €0.4m in 1Q2014.
My assumptions regarding cashflows (no net expenditures, ignoring WC changes) may be too optimistic but in my opinion Asseco CE is a cash cow. The increase in receivables is a little bit troubling though. The company is interesting for a basket approach of statistically cheap companies. A concentrated position is not warranted due to the lack of a moat.

I am long Asseco Central Europe.


Asseco Central Europe
Asseco Poland

Monday, 7 July 2014

Sniezka: Paint manufacturer from Poland


The Group business focus consists of:
  • manufacture of paints, varnishes, adhesives, solvents, etc.
  • wholesale and retail trade 
Evolution of sales and profit
annual report 2012
annual report 2012

The company is reasonably stable and meets the criterions of making a profit more than ten years in a row. Furthermore the company operates in a growth market which results from convergence of Eastern Europe especially Poland, which is Sniezka's main market. I recommend the recent special report of the economist on Poland.


total revenues576.2573.9576.5
Gross Profit210.6213.2196.8
Gross Profit Margin36.5%37.1%34.1%
EBITDA 74.476.772.9
EBITDA Margin12.9%13.4%12.6%
Ebit Margin9.6%10.0%9.8%
Net Income43.143.845.6
Operating Cash Flow*71.074.670.3
Net Capital Expenditures 22.122.535.5
Free Cash Flow48.852.134.8
*before changes in working capital


Cash and cash equivalents23.61824.317.5
Total liquidity23.61824.317.5
Total interest bearing liabilites100.498.899.9
Net interest bearing liabilites76.874.582.4

Capital structure
Shares series A and B are preference shares with respect to the vote in such a manner that each share carries five votes. Shares series C, D, E and F carry one vote per share. Shares of all series have the same preferences with respect to the dividend and return on equity.
Registered shares of A series are preferential in relation to the right to indicate members of the Supervisory Board within the scope stipulated in § 12 para. 2 – 4 of the Articles of Association: Members of the  Supervisory Board are elected by the General Meeting with the reservation that 4 (four) members of the Supervisory Board are elected exclusively from among the candidates indicated by shareholders holding the shares of A series in such a manner that each 25 000 shares of A series give entitlement to indicate a candidate for one member of the Supervisory Board.

Management holds the majority of shares. The capital structure certainly warrants some kind of discount for the traded bearer shares.

Capital Allocation: Buy-Back via Tender in 2012 and Dividends

Sniezka purchased 932,898 equity shares priced at PLN 31.00 per share spending PLN 28.9 million on that purpose. The Company redeemed these shares during the General Meeting of Shareholders in 2013.
1Q2014 presentation
The company has proven its willingness to return cash to shareholders. This may be due to Management's high ownership of shares.


Shares Outstanding (Total A,B,C,D,E,F)12.62
Price PLN36
Market Cap454.2
Net interest bearing liabilites76.8
Enterprise Value531.0
Cash flow yield9.20%

 Low leverage combined with an ROE of 21.3% makes this a compelling valuation. Reasons for being cheap may be:

  • low liquidity of shares
  • capital structure with special rights for controlling shareholders
  • bad 1Q2014
  • income from Ukraine and Belarus
presentation 1Q2014

  •  plants in Ukraine and Belarus
presentation 1Q2014


 Sniezka falls into the compounder and GARP categories. ROE is high and relatively stable. Growth is to be estimated due to convergence of paint consumption in Eastern Europe. Especially the Polish market looks promising. Poland is the biggest net beneficiary of EU money. GDP growth is robust. In contrast to my investments in real estate companies Sniezka could become a long-term holding.

I am long Sniezka.