Friday, January 2, 2015

Wawel - a Polish Company Creating the Long-term Value For Its Shareholders

This article starts the series of articles on companies creating or destroying value for their shareholders.
The series will comprise much more fundamentals than technical analysis. Due to the fact that, in my opinion, tough times are going for those investing in equities, I will try to find some companies, which preserve the shareholders value. I will also try to find the companies, which are doing the opposite - in these tough times such companies are the most vulnerable for big, negative surprises.

The company

Today, let me start with a decent, value creating Polish company, Wawel. Wawel is one of the biggest chocolate producers in Poland. The company builds its strategy on the steadily growing chocolate demand in Poland; according to KPMG, in the years 2008 - 2013 sales of chocolate in Poland were growing at the rate of 2% a year. Wawel, between 2008 and 2013 was increasing its sales at the rate of 13.9% a year - as you see, the company was growing much faster than the broad market. The main reason for that is, in my opinion, the well-recognized brand of the company. Apart from Wedel, Jutrzenka, San, Goplana and a few other brands, Wawel is one of the strongest chocolate brands in Poland. What is more, the chocolate market is quite resistant to economic cycles. Even during tough times, people want to eat chocolate (maybe then they eat even more chocolate).

Financial measures

The table below evidences the basic Wawel's economic measures calculated for the years 2006 - 2013:

As you see, the company was increasing its sales at the rate of 13.92% a year. But what is more convincing, the company was increasing the net profit on sales at the rate much higher than its sales, i.e. 21.87%.
Now, something about Noplat. Noplat is quite an artificial measure, which you will not find in financial statements. Simply put, Noplat pictures the economic profit the company makes. This profit was also growing at an impressive rate of 25.72% a year.
Another important factor - Wawel's share prices have not overshut the company's economic performance - they were growing at the similar rate to the Noplat (24.83%). So there is no bubble in the Wawel's stocks performance.
Now, let us look at the company's free cash flow (in thousands of PLN (Polish Zloties) (1USD = 3PLN)

As you see, apart from increasing its Noplat, the company in the years 2006 - 2013 generated the positive free cash flow - the cash from the company's operations was larger than cash invested in the company's development.

Note: the free cash flow is calculated in the following way:
  • for each year the capital invested is calculated - all values for property, intangibles, inventories, receivables etc. are compiled at their costs; all impairments are added
  • free cash flow for a year is calculated as a difference between the Noplat generated in that year and the difference between the capital invested in that year and the year before.
The free cash flow is also an artificial measure (not to be found in financial statements) but it discloses the company's economics in a very clear and reliable way, much better than the standard financial statements.
Anyway, this artificial measure is backed by the cash flow from operations recorded in the company's book entries.

cash flow in thousands of PLN:

The table above shows the cash flow from operations after clearing it from working capital changes - it simply shows how much cash the company has been generating from its core business. This cash flow was growing between 2006 and 2013 at a very high rate of 29% a year.

Return on capital invested

Finally, the most important measure - the table below shows the return on capital invested:

As you see, the company has been creating value for its investors since 2006. In 2013 the return on invested capital (roic) was standing at 20.2%, much more than its cost of capital. This is the best indicator confirming that Wawel is absolutely one of the best companies in the Polish Stock Exchange.

Share prices action

Below you will find the share prices action for Wawel (the Warsaw Stock Exchange ticker: WWL):

prices in PLN
The company is quite richly valued at the moment. As a valuation measure I am using the ratio enterprise value / adjusted ebitda. Ebitda is adjusted to exclude one-offs from the ebitda calculated in a classic way.

As you see in the table above, currently Wawel is valued at 14 of its ebitda.


Since 2008 Wawel has been paying regular dividends. What is more, these dividends have been growing at the rate of 14.87% a year. Therefore the company can be regarded as a dividend company. Unfortunately, due to the current rich valuation the dividend yield stands at only 1.9%.

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