Elite Client Idea #30

Gielda Praw Majatkowych Vindexus Spolka Akcyjna (WSE Ticker: VIN; Price: zł 6.16/share)

Vindexus (‘group’) operates primarily as a purchaser of distressed debt portfolios from banks, telecom operators, and others.

It generated revenues managing its purchased receivables (75% of revenues), external entity receivables (11%), and sale of residential spaces (14%). Practically all profits in the last nine months to September 30th, however, was generated from managing its purchased receivables.

The group is facing substantial headwinds from rising interest rates in Poland – the base rate rose from 0.1% in September 2021 to 6.85% in September 2022. This increased its financing costs from ~8% to ~12%.

Further, management expects an economic downturn and a rise in payment backlogs. This is compounded by cost inflation reflected in rising salaries and legal service costs.

Moreover, the regulatory environment is somewhat hostile with laws increasingly favoring the borrower, which increases court enforcement actions that are more expensive than amicable settlements.

The primary asset on the balance sheet is purchased receivables of zł 234.7m. Management estimates undiscounted cash flows of zł 370m over 10 years; and used discount rates for debt portfolios ranging from 6.96% to 84.86%.

Purchased receivables are consistent with levels maintained since FY17 (over zł 200m) but collections hit an all-time high of zł 106m over the last nine months vs. zł 82m in the prior period. The income statement, however, reflects conservative assumptions of expected losses by management in an (expected) economic downturn.

The group recorded TTM revenues of zł 133.6m (FY21: zł 125.6m) and net profits of zł 30.9m (FY21: 36m). Earnings have averaged over zł 20m since FY17.

The balance sheet is minimally leveraged with net debt of zł 17m (cash of zł 62m offsetting borrowings of zł 79m). Management replaced most of its floating rate debt with fixed leaving it in a strong position to face headwinds. It repaid a further zł 10.6m of borrowings post September 30th.

The net current asset value is zł 221.4m and net tangible asset value is zł 239.9m.

The equity is currently selling for zł 72m, which is 30% of tangible book and 3.6x average earnings. The stock is also selling at 5-year valuation lows (on price/tangible book basis). Dividends yield ~4% at market.

At a certain price, the pessimism is overdone; and there seems to be enough conservatism in the accounting to leave surprises to the upside. There appears to be an adequate margin of safety available to the investor at this price.