Friday, January 9, 2015

Polna - Another Polish Company Creating Long Term Value For Its Shareholders

Polna is a small Polish company (with a market capitalization of around $10 million) manufacturing a number of industrial products as: automatic control engineering products, casts, heat engineering products, central lubrication equipment etc. The market, where Polna sells its products, is very competitive, with big world players being Polna's competitors. In spite of this, the company is increasing its sales and improving its financial results.

Financial measures

The table below evidences the basic Polna economic measures calculated for the years 2009 - 2013 (apart from share prices which are calculated for the period 2009 - 2014):
As you see, sales were growing at the rate of 8.2% a year. But net profit on sales and noplat were increasing at the rate of 13.2 - 15.00%, i.e. much faster than sales. It is an evidence in favor of the good management work. What is more, Polna share prices were appreciating at the rate of 14.7% a year, which is similar to to the appreciation rate of Noplat. In my opinion, it supports the idea that there is no bubble in Polna's share prices action.

Now, let us look at the company's free cash flow (in thousands of PLN (Polish Zloties) (1USD = 3PLN)

Since 2010 the company has brought more free cash flow than noplat. In such a case, a good management should give back the excess cash to the company's shareholders. The Polna management have just done it - since 2009 Polna:
  • spent PLN 15.0 million on share buy-backs
  • paid PLN 2.8 million in dividends

Return on invested capital

Let me be a little bit more precise on that subject. The main reason for providing shareholders with an excess cash was quite a low return on invested capital:

As you see, the return on invested capital has never been higher than 7%. It is quite a low ROIC - probably the management has some problems with finding interesting investment ideas so....the cash has being going back to the company's shareholders. This is not a common behavior in the financial world but it is a behavior recommended by Warren Buffett. By the way, the main Polna's shareholder, Zbigniew Jakubas, is a fan of Mr. Buffett.
Going further, the pro-investor attitude of the company is best seen when looking at the company's cash flow. Between the beginning of 2009 and the third quarter 2014 Polna:
  • had PLN 28.7 million in cash from operations 
  • of that cash, PLN 4.7 million was invested by the company
  • PLN 3.7 million was spent on purchasing currency options
  • PLN 15.0 million was spent on share buy-backs
  • PLN 2.8 million was paid as dividend in 2014
As you see, the biggest part of cash from operations was paid back to the company's shareholders - PLN 17.8 million of PLN 28.7 million.


Another thing - share buy backs are the most efficient when the company market value is low. Let me look at that metric. The chart below shows the history of Polna's valuation. As a metric, I have chosen the relation between Polna's market enterprise value and its EBITDA.
As the chart evidences, since 2008 the company was valued by the market at relatively low ratios. Putting it simply,  currently Polna is valued at around 4 its ebitda - it means that the investor investing and controlling this company would be paid off in just four years. In my opinion, this company is very cheap at the moment.

Some additional notes.

1. Polna is slowly becoming an exporting company. The table below shows the geographical breakdown of sales in 2007 and 2013:

An increasing share of exports makes Polna more and more vulnerable to currency fluctuations, with a main impact coming from EUR / PLN. In the fourth quarter 2014 the Polish currency weakened against Euro - we should see the positive effects of that in the fourth quarter 2014 report. But, please, remember that this vulnerability works in the opposite direction when PLN strengthens against Euro.

2. It is rather difficult to buy many Polna's shares at the Warsaw Stock Exchange (ticker: PLA). In most cases, only around 1,000 shares are changing hands daily.

3. The main Polna's shareholder, holding a stake of 43.85% in the company's share capital, is Zbigniew Jakubas, the respected businessman and investor. This is a big plus for those investing in Polna's shares.

Share prices action
The chart below shows share prices action since 2007 (prices in PLN):

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