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Stalprodukt S.A.

Stalprodukt (‘company’) is based in Poland and is one of the leading European manufacturers of processed steel products. It sells electrical sheets (23% of revenues), steel profiles (19%), and extracts zinc-lead ores for the production of zinc and lead (50%) along with related activities.

About half its revenues are generated in Poland and half is exported (mostly within the EU).

It is at a competitive disadvantage to non-EU manufacturers who don’t have to pay as much for CO2 emissions and have lower energy costs. Energy is a substantial component of the cost structure – and currently rising costs will negatively impact operations. Management’s report on the latest quarter almost reads like a plea to the EU to impose anti-dumping duties on foreign manufacturers whilst extolling the importance of the industry.

An offsetting factor is currently high (and volatile) prices of its finished goods. The most recent quarter saw large price spikes in all segments though volumes were stable or lower. This resulted in large profits.

The company reported TTM sales of 5.1b zloty (2020: 3.3b), ebitda of 706m zloty (2020: 340m), and net profits of 598m (2020: 184m).

There were one-off items totaling a 150m zloty increase in TTM net profits – largely comprised of mine decommissioning provisions no longer required. There was an audit disagreement on the treatment of a further 78m zloty in provisions written back directly to PY retained earnings – but we shall remove the effects of these in our analysis below.

2020 was a subnormal year for the industry due to decreased demand and staff absences resulting from the pandemic. Therefore, averaging revenues for the period to 2020 and applying conservative five-year average operating margins indicates pre-tax earning power of 447m zloty and after-tax earnings of 360m zloty.

The financial position is strong with net cash of 510m zloty (even after deducting non-controlling interests).

The current market cap is 1.8b zloty, which is 5x earnings. Net of cash, the operation sells for just 3x pre-tax profits. It could support debt for this valuation.

Management is somewhat stingy with past dividend payouts, which equated to about 1/10th of profits. They are fairly efficient, however, in managing operations – generating about 13% on tangible assets. The result is the reinvestment of a large proportion of earnings to fairly satisfactory effect.

We consider the current price to represent good value for money given the size and profitability of this operator.

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