Atal SA

WSE:1AT

Earnings Call Analysis

Atal Group Q3 Performance with Future Insights

In Q3 2023, Atal Group reported 760 preliminarily contracted flats, reaching levels from before the war, with sales up by 11%. Revenue dropped by 39%, but a significant catch-up is expected in Q4. The gross sales margin remains strong at 31%, and net profit margins increased to 23%. The company redeemed PLN 120 million in bonds and issued new bonds worth PLN 260 million. With PLN 252 million raised from Series F shares, Atal looks to maintain a stable net debt ratio of 0.06. Despite a nearly 40% decrease in flats handed over compared to last year, they've seen positive trends with 91% of the 2,756 built flats contracted. Land acquisition continued with an expected total spend of PLN 200 million for 2023. Atal anticipates an increase in flat prices by 7-10% in 2024 and targets sales between 3,000 to 3,600 flats, building on the current year's projected finish at 2,700 to 2,800 flats.

A Robust Portfolio and Stable Sales with Eyes on Q4 and 2024 Prospects

The company has reported solid progress in its operational activities, with 28 ongoing development projects for a total of 6,639 flats and plans for 51 new investments comprising 13,680 units. Sales performance is buoyant, with an 11% increase in sales compared to the previous year and strong figures from Q3 indicative of a return to pre-war levels. A significant number of flats sold were already under preliminary contracts, demonstrating demand stability and sales resilience even in the face of global unrest.

A Dip in Handovers but a Strong Quarter Four Awaits

The company has acknowledged a nearly 40% drop in handovers for Q3 compared to the previous year. This reduction was anticipated, attributed to the completion schedules of investments. However, positive signs emerge as the company expects a majority of flats that were not transferred during Q3 to boost the handover figures in Q4, indicating a stronger conclusion to the year.

Property Development Growth Supported by Land Acquisitions

By the end of Q3, the company spent PLN 132 million on land acquisitions, which enables them to build 85,000 square meters of sellable area, maintaining a cost-effective edge over competitors. Overall spending for the year is expected to be around PLN 200 million, with similar expenditure anticipated for 2024 as the company continues to capitalize on its sizable land bank.

Recorded Decrease in Revenue and Gross Sales Margin

Revenues saw a notable drop of 39% from the previous year, with a 31% gross margin on sales, nonetheless representing a healthy and strong level. The net result margin showed a 3% increase year-over-year, even with a nominal decrease in net income. Q3 saw lowered profitability due to fewer handovers, but projections for Q4 estimate a rebalance and potential increase in profitability.

Strategic Financial Management Bolsters Equity and Lowers Debt

The company's equity saw a significant increase of 19%, attributed to a new share issue which positively impacted the balance sheet. They also managed their debt efficiently, fully redeeming PLN 120 million bonds due in Q4 and issuing new bonds of PLN 260 million. Customer prepayments also contributed substantially to the financing structure, indicating good cash flow from ongoing operations.

Expectations and Guidance for Year-End and Beyond

The company remains prudent with its projections. They expect to close the year with 2,700 to 2,800 flats sold and set a target of 3,000 to 3,600 sales for 2024. Price increases for flats rose by 8% in Q3 compared to the previous year, with management open to a similar hike of 7% to 10% for 2024. These efforts are buoyed by a diversified product offering across different price ranges and a well-managed loan program. Despite uncertainties in the 2% loan program's future funding, which currently drives about 60% of loans, the company does not foresee any significant threats to demand at this time.

Earnings Call Transcript 2023-Q3

[Andrzej Biedronka-Tetla, executive]

Good morning, ladies and gentlemen, and the conference summarying the results of Q3 2023. Our conference is in 2 language versions, Polish and English.

[Operator Instructions]

Mr. Zbigniew Juroszek, CEO, is participating in today's conference. After the presentation, he's going to talk a little bit about the situation on the market end of the Atal Group, and he will be answering questions during the Q&A session. And my name is Andrzej Biedronka-Tetla. I'm a member of the Management Board for Finance. And the plan is, as usual, after a brief presentation that I'm going to give, we will ask the CEO to comment on the current situation. And then we will request you to ask your questions by using the Q&A section.

Let's start traditionally with the presentation, summarying the results for Q3 2023. Let's start from operating activities. Our portfolio investments in progress and in the pipeline at the end of September, we had 28 development undertakings. 6,639 flats altogether. And we are planning 51 new investments encompassing 13,680 flats.

What we're very happy about is that we can notice that these investments are distributed quite evenly in all the cities where we are present, biggest agglomerations in Poland that you are very well familiar with. As for something that is of interest now, this is sales of flats here in this top diagram, we're presenting sales by quarters, contracts signed preliminary contracts were at a level of 760 flats. This is a level that is reaching those levels from before the war. And as we said, this level will be quite -- it should be quite stable or even growing.

We've already started observing increased sales of flat -- purchase of flat due to the secure loan that is made available now. So the number is slightly more than in Q2. And now number of flats sold, net comp and in the bottom diagram, we see the division by years, and the comparison of an increase in sales by 11% as compared to the previous year comparable period.

Now sales of flat among the biggest developers were still quite high. And our offer at the end of Q3 2023, we offered 3 flats to the customers and the level was quire typical for us, a 4,170 flats. As you can see, though, Q3 in 2022, this number is a little bit lower. So the sales decreased the number of flats in the offer. In other words, handovers in the first 3 quarters of 2023, here, the revenues were contributed mainly by flat issued and handed over in Wroclaw almost 500, but also in the Tri-City and in Poznan.

In the first three quarters, we handed over 1,606 flats altogether. Handovers in the first 3 quarters in comparison to the analogous period of the previous year, with 3 quarters of 2023, there's a drop compared to the previous year by almost 40%, but this is -- this was predictable. We were aware of that, and we reported to you because this is dictated by the completion of investment and the schedules of completion because majority of the -- of construction works that we were to finalize this year, have been completed. We are just to give one more permit for use. This should be given to us shortly. So we'll be handing over those flat -- majority of those flats in Q4 and now the handovers in the first 3 quarters of this year.

In terms of total users salable area, the number is almost 90,000 square meters as compared to 152,000 in the comparison period previous year. New land, this is something of interest usually, to everybody. By the end of fee we purchased land for PLN 132 million and the land that we purchased will allow us to build 85,000 meters -- square meters of total sellable area. We purchased the land in all the city and the average price per square meter in the first 3 quarters was PLN 1,554. So we're quite happy to have achieved that.

As you can see, we buy land, not only selectively, but we buy the best land that will allow us to build attractive buildings in attractive locations. But the purchase price is maintained at a very decent level, I think, better than that of the competition. The land bank of Atal will allow us to implement projects for 752,000 square meters dividend. We spoke about dividend last quarter.

Let's just mention that in Q3, we paid out the dividend in the amount of PLN 193.5 million, which was 54% of the net profit of Atal in the previous year. And the dividend rate was almost 11%. And let me just remind you that since our IPO on Warsaw stock exchange, we've paid out PLN 950 million of dividend. Potential of handovers in 2023. I've already mentioned that. These are the projects that we're presenting in the slide that we've already built finalized, practically all of them. The gray ones are those that have the permit for use and one project in [ Watch ] has not received it yet, but we are anticipating to receive it shortly.

Now the premises we've built like 2,756. We've already contracted 91% of them. Now it's probably higher because these numbers refer to the end of September. So it's 2,510 flats that are contracted. And the number of flats that were not transferred it's 1,157 and this will perpetuate the fourth quarter and the handovers will be increased due to this number. So by combining these 2 numbers, 1,157 plus the 91% of contracts that will give you the answer on handovers for Q4. The potential of handovers in 2024 is presented in the next slide.

In 2024, we're anticipating to finalize the construction of 2,195 flats out of which 1,123 are already sold. So at the end of September, the sales contracting was at the level of 51%. So it's a very good level and total potential of planned projects from 2025 onwards. These are all the cities where we are present, where we're planning on implementing 64 new projects, including 17,450 flats and let me emphasize that this is to be built on land that we have as owners or we have the perpetual user factor to it. We've got some preliminary contracts signed. So I mean the land is not subject to some preliminary contracts, but we already have rights to that land. So that's good news.

Now the second part of the presentation, consolidated financial results. Revenues from sales as of the end of September, that's PLN 861 million is a drop by 39% as compared to the analogous period of the previous year, but this is the result of a smaller number of handovers by the end of Q3 and we are to catch it up in Q4. If you look at the gross result of sales, 266 million for those 3 quarters, we observed again a drop as compared to the previous year, but it's just by 18%. We obviously need to refer to the diagram on the right-hand side, where you can see a gross margin on sales at the level of 31%. So this is a very decent strong level that we're very happy to see versus the previous comparable period where it was almost 26%.

Now net result, it was PLN 196 million. So it generated a net margin at the level of 23% as compared to 20% in the comparable period of the previous year. Now a comparison of those results in diagrams net gross margin on sales increased by 5 percentage point net result even though it dropped in nominal terms by 22%, the net margin increased by 2.7 percentage points. And here you can see gross margin on sales by quarter.

Obviously, we see this Q3 2023 with the lowest margin this year, which was obviously -- do you do a small number of handovers in Q3 2023 were 2 investments -- they were a little bit less profitable. They contributed the most to the results as regards of profitability of Q3 2023. And combined with the flats that we handed over with high profitability, but specifically arranged. This generated this profitability that we see. But if we hand it over more of those flats in Q3, the total profitability would be probably higher, and in Q4, we are to improve the profitability.

Mainly based on the fact that we'll have a lot of projects, and there'll be -- the result will be more average. Net margin by quarter, 16%. As a result of what I have said, this is the lowest margin this year.

Now the balance sheet, financial standing. The main changes, assets increased, inventory increased. I will mention it in a moment. The balance sheet amount also increase. What happened here and what we want to emphasize is an increase in equity by 19% due to the issuance -- due to the issue of July, an increase of share capital by PLN 252 million. We issued a new series of shares, the value of PLN 252 million. The nominal value is PLN 5 per share, and the issue value was PLN 56. This is the main change in the balance sheet. We'll define and describe it in detail. Net debt ratio for the group is 0.06, according to the definition provided by the bank.

Now if you look at these diagrams in terms of the balance sheet, you can see an increase in inventory, the ongoing construction works, cash dropped due to the investments that are being carried out. But on the other hand, liabilities increase -- sorry, equity increase and liabilities decreased. So we can say that in this last quarter, the increase in inventory, so the construction production was financed from our own funds. And let's have a look at inventory once again, this increase in inventory.

As you can see by the end of 2022, it was lower at the end of Q3 2023 was PLN 2,823,000 billion. This was mainly due to work in progress PLN 2,387,000 billion, so you can see an increase. And finished products, there's almost -- this number has almost doubled as compared to the end of last year. But let's go back to finish, but not handed over flats, that 1,152 flats and contracting 91%. So these are flats that we did not manage to hand over, but they are already sold. So there's not much finished products left.

And structure of debt maturity, as of 30th of September 2023, we had PLN 120 million to be redeemed in Q4, and these bonds or purchase, we redeemed them on the first of October, PLN 120 million. Next deadline is PLN 70 million in 2024, that's PLN 70 million. And in Q4, we issued a new series of bonds PLN 260 million with a margin of 1.5, 6 months WIBOR. Now sources of financing for the Atal Group, that's again equity, mainly [ PLN 1,554 billion ] prepayments from customers, PLN 760 million corporate bonds, PLN 270 million loans granted by the shareholder and bonds acquired by the shareholder.

So to summarize, in this period, we started 7 projects. In -- throughout this year, we launched the sales of 6 investments. We finalized the work for 14 investments. The number of currently offered flats is 4,170 flats. We redeemed the bonds in April and June with a total volume of PLN 160 million. And obviously, we issued the bonds worth PLN 260 million. And in Q3, we issued Series F shares worth PLN 252 million. So this is the summary. Now I would like Mr. Zbigniew Juroszek, the CEO, to tell us a little bit about the current situation in the market and of Atal Group.

[Zbigniew Juroszek, executive]

Good morning once again. Let me start with current ongoing sales. In the last month it was at the level of 306 flats in Q4, it's maintained at this level. So this assumption that was increased before the previous conference, the range to 2,700 to 2,800. This is quite realistic. I think this will be finalized. This year will be finalized at this level. Currencies are very good. We spoke a lot about the 2% mortgage loan. It's in operation. It functions well. We know that the servicing of that loan is longer in banks than the standard loan. There's some kind of jam in banks, and we've noticed that it was at the end of August, beginning of September. Now it's a little bit better in banks. That the bank -- the first wave of loans is behind us already.

And obviously, we see regular other loans being banking, and we see other cash investments as well that are quite stable. We've got products to respond to those needs. So as for sales, the situation is quite good. Normal, but with no single direction like only 2% loans. No, it's quite balanced, quite even because -- and that fits us because we have very diverse products, not only geographically, but also within one branch, we have more expensive and less expensive products. So it's all stable, we're not expecting major changes yet.

As for profitability, orders, handovers and so on. Mr. Andrzej Biedronka, he's already described it in detail margins, handovers and so on and so forth. I would like to make it all little simpler. As a rule, we've been earning PLN 120,000 net per flat. That's what we should be focusing on because analyzing each quarter like a quarter when there were less profitable flat handed over, then there will be more profitable flat handed over. So these bars will be changing up and down.

So on average, in the last 3 months, we earned about PLN 120,000 per flat. Probably this Q4 will maintain this level. Now the question is how many flats will be handed over in that in Q4? And Andrzej also mentioned that we are handing over some flat on the verge of the next quarter. We plan to do it at the end of Q3, but at the beginning of Q4, they are handed over or have been handed over already. And we're also handing over further flats that were planned to be handed over.

The whole range of flats that has to be handed over this year. We're just awaiting one last permit for us that we should be getting within the next few days. And actually, there's no other project that has not been completed, not finalized or where the permit for use has not been achieved. So I suspect this one will also be granted this permit. So this is quite stable.

As for our plans, according to the presentation, we'll be introducing -- and I'm not anticipating any major changes so much of my general introduction, but obviously, feel free to ask questions. Now I would like to ask you to use the Q&A box to write in your questions, and we'll be back in a minute.

[Zbigniew Juroszek, executive]

We're back from the break and we'll try and answer your questions. The third question about Q3 why this huge drop of margin -- gross margin and sales? What about the profitability in the next -- in the last quarter of this year? We've already discussed it, but let me repeat. In Q3, when we had a small number of handovers, the situation was that we handed over flat with lower profitability and more profitable products could not balance this margin. But for Q4, majority of projects are of very good profitability. Therefore, the profitability should rebounce and increase.

What are the plans for land purchase for 2024? Is it going to be a more intense period in terms of than 2023? And what's the situation concerning the price of that?

Let me answer that. In the presentation, we said that 2023 Q3, we already increased the number that was in the presentation by PLN 13 million. then by the end of the year, it should be even bigger. So in total, we should have spent PLN 200 million for land purchase this year in total. As for 2024, we do have quite a lot of land. You could see it in the slide. So the priority is to develop on land that we already have, but to better supplement the amount of land to have a similar or bigger number of projects that the purchase will have to be like PLN 200 million, PLN 300 million, probably. That's what we assume and that's what we require. These are our estimates, but we're still buying land at the end of this year.

Another question, on what scale, have you increased the price 2023? And what price rises can you afford in 2024? And for example, and what's the trend in increase, for example, the offer by other developers taking that into account?

Now in Q3, as compared to the average price of 2022, the increase was 8%. That's the average value. Therefore, it's in comparable between projects. We've got different projects, some have lower, some have higher prices. So you need to remember about that. We think that for FY 2024, there's still potential for some increase in prices and could be some level -- similar to this year, so 7% to 10% higher in terms of prices of flat.

Now the loan 2%, the funds for this program should end in January, probably. Don't you worry that demand might be affected by this fact. And this -- we are not sure about further drop in interest rates also. Obviously, this loan -- 2% loan has increased sales for all the developers, about 60% of loans that are granted are under the safe loan 2% scheme. But we see that some demand is investment demand and traditional loan demand. So there will be some probably settlement on the market, and it will level this demand, but we don't see any major threats with this regard at present.

The next question, what are the target sales in 2024?

Yes. Well, our assumption as of today, with the market environment we have today. We're assuming about 3,000 to 3,600. This year, we'll finalize with probably 2,700 to 2,800. And the assumption for 2024 it's going to be above 3,000. We're assuming it's going to be closer to 3,500 but we're assuming in our projections is going to be 3,000 to 3,600 flats.

Request for the comment of the structure of sales after the reduction of interest rates, is there more interest from clients? Well, we do see -- we think yes, but we don't have hard statistics. We cannot run them, but we are estimating that about 40% of sales funds that own the funds and 60% that's loans and the 60% -- out of the 60% that -- out of the 60% of that amount that save credit 2%. That's more or less our estimate.

So since we're talking about the structure of sales. Let me add that about 70% to 80%, according to our estimates, that's purchased for the buyer's own needs like the first flat or improvement of living conditions -- and about 20%, 30%, these are flat for rent or typical investment purchases.

The next question why you -- what's your -- why are you capable of buying land at such attractive prices? Are there any flaws to that land that require improvement? Or does it depend on the worse location?

Well, we cannot give you all the details. But first of all, we've got cash, so we can like very quickly run a transaction -- execute a transaction. So this is our benefit. Our advantage and we prefer to have an underdeveloped infrastructure at lower prices and then improve the infrastructure instead of buying at commercial prices because if the price is at start already quite high, there's always some additional costs. And our approach is that we -- first of all, prefer to add some money, to invest further money in infrastructure. And remember, the biggest plots are a bit cheaper than a small plot. We usually buy very large plot, and we divide them into phases of construction. Very often, you see like [ Lagoon ] 1, 2, 3, 4, 5, 6. This is a famous location in Poland that was divided into 6 phases of construction. And the purchase was at a low level.

So in the statistics, you will have this low price of purchase, but this is due to the fact that the preparation process lasted quite some time. It was divided into several phases. And this land is simply cheaper per square meter. We don't like very, very expensive land. And with the assumption that it's to provide 100% of joy, right, everything ready because sometimes people think that if they -- if you pay a very high price then everything will be fine, but it's very often not the case, and we need to add some money to that. Sometimes we do buy land at higher prices, but bigger land plots, that's our business model.

Another question about this safe loan 2%. What was an increase in sales, the prices that -- we've answered that. What -- now the next question. What part of sales is financed by the 2% loan?

Well, about 60% in general, is bought by funds from loans. And out of that, another 60% is about -- this is safe on 2%. So 20%, 30% in total is financed by this safe loan.

Now what can the sales look like if the stay loan finishes? We've already answered that.

What's the current situation with contracting of subcontractors and the general construction cost? Does their level and prospective further not allowed to increase the margins? Well, in the last 2, 3 quarters, the situation was good. We had some increase in crisis at the end of last year and the beginning of this year in Q2, Q3, the prices were stabilized with some drops actually. As for the perspective for 2024, the situation might be a little bit worse because the potential of development is measurable and the potential of subcontractors. It depends on subcontractors companies and logistics centers and so on. In the next year 2024, also 2025 because of KPO funds being made available. There will be probably more such entities. And therefore, subcontracting will have more maneuver to operate, and therefore, the prices, the rates might be higher for labor. As for materials, they will probably be at a relatively similar level. In the budget, what we assume is about to 5% to 7% of increase as general contracting services as a whole.

And the last question, I also think we've answered it. What do you think -- will the sales of flats in 2024? Can it be higher than in 2023 or maybe the demand that would normally be distributed over 2 years, will it be condensed in 3, 4 quarters. And in Q3, '24, there will be a drop in the sales of flats?

We've answered this question actually. Our analysis shows that the demand will be either the same or even higher. We've assumed 3,000 to 3,600 flats for next year because the program to present, it will be on a smaller scale. It will keep functioning probably, but this basic level will be growing, I think. This was the last question.

Therefore, thank you very much for participating in our meeting. And next time, we'll probably meet next year already around March. So feel free to contact us in the meantime, all the best to all of you for the coming year, and thank you very much. Goodbye.