ASSECO CENTRAL EUROPE: Software House from Slovakia

Profile

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]

P&L

	TTM	2013	2012
total revenues	134.9	131.3	134.4
Gross Profit	34.5	35.1	41.0
Gross Profit Margin	25.6%	26.7%	30.5%
EBITDA	24.3	25.9	28.0
EBITDA Margin	18.0%	19.7%	20.8%
Ebit	13.0	14.5	17.6
Ebit Margin	9.6%	11.1%	13.1%
Share in profits of associated companies	0.3	0.3	0.3
Net Income	9.8	11.3	14.2
Operating Cash Flow before WC changes	22.7	25.0	27.8
Net Capital Expenditures	?	-2.0	0.3
Free Cash Flow	22.7	27.0	27.4

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:

Leverage

	1Q2014	2013	2012
Cash and cash equivalents	36.0	34.9	26.4
Total liquidity	36.0	34.9	26.4
financial liabilities	16.4	2.2	2.4
Debt	10.0	8.8	9.2
Minorities	3.7	4.0	4.1
Total interest bearing liabilites	30.2	15.0	15.7
Net interest bearing liabilites	-5.8	-19.9	-10.7
NIBL/EBITDA	-0.24	-0.77	-0.38

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:

debt

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:

	1Q2014	1Q2014	ex Slovanet
Cash and cash equivalents	36.0	45.8	plus €11m -1.2m cash
Total liquidity	36.0	45.8
financial liabilities	16.4	16.4
Debt	10.0	1.5	minus €8.5m
Minorities	3.7	-0.3	minus €8.2m*49%
Total interest bearing liabilites	30.2	17.7
Net interest bearing liabilites	-5.8	-28.1
NIBL/EBITDA	-0.24	-1.62	minus 7m EBITDA

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

Valuation

	TTM	ex Slovanet
Shares Outstanding	21.36	21.36
Price PLN	16.3	16.3
Price EUR	3.9	3.9
Market Cap	83.6	83.6
Net interest bearing liabilites	-5.8	-28.1
Enterprise Value	77.7	55.4
EBITDA	24.3	17.3	minus €7m
EBIT	13.0	11.5	minus €1.5m
FCF	22.7
Net Income	9.8	9.0	minus €0.8m
EV/EBITDA	3.2	3.2
EV/EBIT	6.0	4.8
Cash flow yield	29.2%
PE	8.5	9.3

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:

	TTM	ex Slovanet
Shares Outstanding	21.36	21.36
Price PLN	16.3	16.3
Price EUR	3.9	3.91
Market Cap	83.6	83.6
Net interest bearing liabilites	-5.8	-28.1
Enterprise Value	77.7	55.4
EBITDA	22.4	15.4	minus 1.9m
EBIT	11.1	9.6	minus 1.9m
FCF	20.7		minus 2.0m
Net Income	8.1	7.3	minus 1.7m
EV/EBITDA	3.5	3.6
EV/EBIT	7.0	5.8
Cash flow yield	26.6%
PE	10.3	11.4

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:

Date	Dividend per share (EUR)	yield @3.91€
4/14/2014	0.37	9.46%
16/04/2013	0.47	12.02%
24/04/2012	0.66	16.88%
5/5/2011	0.22	5.63%
6/5/2010	0.22	5.63%

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.

Links 

Asseco Central Europe
Asseco Poland

Sniezka: Paint manufacturer from Poland

Profile

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.

P&L

	TTM	2013	2012
total revenues	576.2	573.9	576.5
Gross Profit	210.6	213.2	196.8
Gross Profit Margin	36.5%	37.1%	34.1%
EBITDA	74.4	76.7	72.9
EBITDA Margin	12.9%	13.4%	12.6%
Ebit	55.3	57.5	56.5
Ebit Margin	9.6%	10.0%	9.8%
Net Income	43.1	43.8	45.6
Operating Cash Flow*	71.0	74.6	70.3
Net Capital Expenditures	22.1	22.5	35.5
Free Cash Flow	48.8	52.1	34.8

*before changes in working capital

Leverage

	1Q2014	2013	2012
Cash and cash equivalents	23.618	24.3	17.5
Total liquidity	23.618	24.3	17.5
Debt	94.49	89.7	91.6
Minorities	5.921	9.1	8.4
Total interest bearing liabilites	100.4	98.8	99.9
Net interest bearing liabilites	76.8	74.5	82.4
NIBL/EBITDA	1.03	0.97	1.13

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.

1Q2014

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.

 Valuation

Shares Outstanding (Total A,B,C,D,E,F)	12.62
Price PLN	36
Market Cap	454.2
Net interest bearing liabilites	76.8
Enterprise Value	531.0
EV/EBITDA	7.1
EV/EBIT	9.6
Cash flow yield	9.20%
PE	10.5

 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

Conclusion

 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.

Links

valueinvestingblog.net

Sniezka

update Sirius Real Estate

Sirius has posted results for the the year ended 31 March 2014 on 18/06/2014. The results were good.

Dividend

Sirius intends to recommence the payment of a regular dividend, starting with a final dividend of 0.30c per share for the period. Whilst only a modest payment at this stage, the 0.30c dividend represents 65% of the recurring profits after tax for the March 2014 quarter, following the capital raising completed in December. The Board has set a policy to pay a dividend equal to 65% of the recurring profits after tax in respect of each financial year of the Group.  It is intended that dividends will be paid on a semi-annual basis and offered to shareholders in cash or scrip form. 

Recurring profits are profits after tax and before property revaluation, change in fair value of derivative financial instruments and non-recurring costs.

Putting dividend into perspective:
Earnings Per Share amounted to 7.31c (2013: -9.52c) while Adjusted Earnings Per Share excluding property revaluation, change in fair value of derivative financial instruments and non-recurring costs amounted to 2.73c (2013: 2.66c). 

implied yield at share price of 34c:

2.73x65%/34=5.2%

Despite the dilutive equity issuance last year Sirius Real Estate is able to offer a good forward yield in this yield starving environment. My initial thesis regarding the dividend has played out as expected. But if yield seeking investors pour in after one year of semi-anual dividends I am inclined to sell. This yield has to be taken with a grain of salt because management has used a weighted average number of ordinary share. As shown in the P&L analysis and before savings for 2014 from refinancing loans I would use 1.84c as adjusted earnings: 1.84x65%/34=3.5% is a realistic yield without factoring in the favourable operational upside of Sirius.

NAV

Opening adjusted net asset value per share 48.4c
Impact of equity capital raisings and issues during the year (10.1)c
Impact of valuations/disposals 3.8c
Impact of retained profits 2.2c
Closing adjusted net asset value per share 44.3c

My personal calculations of NAV differs slightly with a NAV of 43.9c:

	31.03.2013	31.03.2014
Cash/Marketable Securities	16,718	13,747
Current/Non-Current/Property	440,020	443,720
Derivative financial instruments	0	678
Borrowings	(289,390)	(224,884)
Financial Derivative Liabilities	(197)	(174)
minority interest book	(17)	(22)
accrued interest and expenses	(8,108)	(7,690)
NAV	159,026	224,697
Deferred tax liabilities	2,636	4,200
Epra NAV	161,662	228,897
shares with voting rights	317,578,176	512,238,576
NAV per share	€ 0.50	€ 0.44
Epra NAV per share	€ 0.51	€ 0.45
P/NAV @0.34	67.90%	77.51%
P/Epra NAV @0.34	66.79%	76.09%

The equity issue was dilutive. It is difficult to follow the logic of raising equity in order to pay out this cash as a dividend to shareholders in the future. Debt is cheap like never before. At least the NAV would have increased without the effect of the equity issue.

LTV

The lower LTV has enabled Sirius to refinance at competitive financing rates.

	31.03.2013	31.03.2014
Borrowings	289,390	224,884
Financial Derivative Liabilities	197	174
minority interest book	17	22
accrued interest and expenses	8,108	7,690
Cash/Marketable Securities	(16,718)	(13,747)
Derivative Financial Assets	0	(678)
sum loan	280,994	219,023
Current/Non-Current/Property	440,020	443,720
LTV	63.86%	49.36%

  

P&L 

	year to 3/31/2013	year to 3/31/2014
Rental income	46,115	45,065
Direct costs	-16,889	-16,519
Net rental income	29,226	28,546
Surplus/(deficit) on revaluation of investment properties	-35,776	22,735
Loss on disposal of properties	-1,201	-1,687
Administrative expenses	-4,684	-4,043
Other operating expenses	-2,411	-2,298
Operating profit/(loss)	-14,846	43,253
Finance income	25	64
Finance expense	-14,998	-12,155
Change in fair value of derivative financial instruments	350	-128
Profit/(loss) before tax	-29,469	31,034
Taxation	-783	-2,102
Profit/(loss) for the period	-30,252	28,932
Profit/(loss) attributable to:
Owners of the Company	-30,227	28,927
Non-controlling interest	-25	5
Profit/(loss) for the period	-30,252	28,932
shares with voting rights	317,578,176	512,238,576
Profit/(loss) per share cents	-9.53	5.65
	year to 3/31/2013	year to 3/31/2014
Profit/(loss) before tax	-29,469	31,034
Surplus/(deficit) on revaluation of investment properties	-35,776	22,735
Loss on disposal of properties	-1,201	-1,687
Profit before revaluation, disposal and tax	7,508	9,986
Non-recurring costs	1,537	1,235
surrender premium	1,000	1,700
Change in fair value of derivative financial instruments	350	-128
tax effect of revaluations	564	1,564
normalised profit before tax	8,259	11,213
tax @15.825%	1,307	1,774
normalised net profit	6,952	9,439
shares with voting rights	317,578,176	512,238,576
normalised Profit/(loss) per share cents	2.19	1.84
Weighted average number of ordinary shares for the purpose of adjusted earnings per share	317,559,843	395,758,526
	2.19	2.38

Non‑recurring costs relate primarily to loan extension fees associated with the debt facility with ABN Amro Bank N.V. and early payment penalties associated with the refinancing of the debt facility with Berlin Hannoversche Hypothekenbank AG.

As the refinancing is finished I am inclined to accept this related costs as non-recurring. I did not add them back in the original write-up.

Management uses Weighted average number of ordinary shares for the purpose of adjusted earnings per share, but I think it is more accurate to use the actual number of shares, although the raised equity did not work for the whole period already. The cost savings from repaying and refinancing borrowings would raise the adjusted EPS from 1.84c abviously.

Conclusion

Sirius Real Estate still offers a yield above 5% base on my conservative normalized earnings of 1.84c per share. This is not bad for German Real Estate. Additionally Sirius Real Estate is on an upward trajectory operationally. They will add new sights and have enough cashflow to invest in their - according to management high ROI projects. Nevertheless I will start to sell my position at these prices around €0.35 and reinvest into Dream Global REIT.

Quick look at spin-off: BUWOG

 Research has pointed to spin-offs as being well worth resarching in the pursuit of alpha. I have not added new holdings to my portfolio in the recent past, although adding to IMW Immobilien (blogposts), when it fell under 3€. This is just a preliminary look at BUWOG.

"BUWOG AG has successfully completed its spin-off from IMMOFINANZ AG. The BUWOG share (ISIN: AT00BUWOG001) has been listed in the Prime Standard of the Frankfurt Stock Exchange (main listing) and the Prime Market of the Vienna Stock Exchange for the first time today. Trading with BUWOG shares opened at EUR 13.00 in Frankfurt, which represents a market capitalisation of approximately EUR 1.3 billion based on this initial price.  In connection with the spin-off, IMMOFINANZ shareholders received one BUWOG share per every 20 IMMOFINANZ shares in their portfolios. At the present time, 51% of BUWOG’s 99,613,479 bearer shares are held in free float. IMMOFINANZ currently holds 49% of BUWOG’s share capital, but plans call for the reduction of this holding over the medium-term. [immofinanz]"

The plan of Immofinanz to reduce their 49% holding could lead to an overhang of shares in the medium-term, which may results in an attractive entry point. There is a 90 days lock-up period for IMMOFINANZ. BUWOG has posted a presentation on their website.

Business model

BUWOG main business is Asset Management complemented by Property Development and Property Sales and they are active in the residential markets of Autria and Germany. Results from Property Development and Property Sales are more lumpy and less predictable than asset management, which is why my portfolio holdings in the real estate market focus on asset management.

The company expects a payout ratio of 60-65% and an amount of about 4% of EPRA NAV. My first feeling is

The portfolio is located in major cities. You can easily see why the company focuses asset sales on Austria and unit purchases on Germany. The rental yields are simply higher. The reason is a regulated rental market in Austria which makes it very hard to increase rents even when market rents are way higher. This makes an immediate sale ofter a units gets vacated highly value adding, although selling does not necessary increase NAV. If you are not allowed to charge  market rent you have to sell at the market price to realize value.

At first sight it's astonoshing to see this rent increases in their Autrian portfolio in the past despite the restrictions, but the footnote explains it is not like‐for‐like, i.e. disposals and development affect these numbers. The vacancy is low with 2.9% for Germany and 5.5% for Austria, where the vacated units are marketed for sale. I wouldn't worry about the vacany in Austria as reletting would be faster than selling. Selling the Austrian units is the right choice for shareholders.

The development segment is focused on Berlin and Vienna exclusively which makes the company more exposed to these markets than the current portfolio implies.

The maturity profile is long-term. Average interest rate of 2.6% is low and 90% is fixed rate or hedged. Subsidized loans (for development) make up 36% and bank financing 54%. The problem with bank financing is that it is actually short-term if problems arise due to covenants. Covenants are not on the presentation slides.

For a market cap around €1.3 billion the FFO generation is unimpressive. Recurring FFO for 2012/2013 of 79.3 over the market cap of 1.3billion is ca. 6.1%. The figures are available because BUWOG has been operating as a stand-alone company under ownership by IMMOFINANZ.

The company trades at a 14% discount to book and 22% discount to EPRA NAV. If the dividend really comes in at 4% of EPRA NAV dividend yield would be 5.1%. At a payout of 60-65% recurring FFO had to be €102m - €111m.

The improvement of FFO would be unrealisitc where it not for a recent purchase and the definition of recurring FFO by the company, which includes unit sales.

Conclusion

The price is not attractive enough for me to purchase shares. If the price falls significantly due to Immofinanz selling, I would take a closer look. At the moment the small real-estate companies in the portfolio are priced more attractively.
The lack of attractive portfolio additions is also the reason why there are so few posts in the recent past. Maybe it is more rewarding to search for holdings in the portfolio to sell than to look for new portfolio candidates.