Kruk SA
WSE:KRU
If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.
Utilize notes to systematically review your investment decisions. By reflecting on past outcomes, you can discern effective strategies and identify those that underperformed. This continuous feedback loop enables you to adapt and refine your approach, optimizing for future success.
Each note serves as a learning point, offering insights into your decision-making processes. Over time, you'll accumulate a personalized database of knowledge, enhancing your ability to make informed decisions quickly and effectively.
With a comprehensive record of your investment history at your fingertips, you can compare current opportunities against past experiences. This not only bolsters your confidence but also ensures that each decision is grounded in a well-documented rationale.
Do you really want to delete this note?
This action cannot be undone.
| 52 Week Range |
408.2
483
|
| Price Target |
|
We'll email you a reminder when the closing price reaches PLN.
Choose the stock you wish to monitor with a price alert.
This alert will be permanently deleted.
You don't have any saved screeners yet
Good afternoon, my name is Jerzy Kosinski. I would like to welcome you on the conference call with KRUK to discuss first quarter 2018 results.
We'll start with the speech of KRUK's CFO, which will be followed by the Q&A session.
I have the pleasure to introduce our speaker, Mr. Michal Zasepa, a member of the Management Board, CFO.
Now would like to give the floor to Mr. Zasepa.
Thank you, Jerzy. Good afternoon, everyone. Thank you very much for your interest in our company.
Let me give you an overview of Q1 2018 results. I'll be using the presentation that was made available on our website and referring to the number of slides that I'm discussing.
So it has been a good quarter, PLN 91 million of net profit is slightly above what we budgeted for this quarter. This result, yet again, is based on very good performance of our Polish and Romanian business. But for the first time, I can say that we also made our recovery targets for Italy and Spain. This result is reinforced by strong cash flow that you can see in cash EBITDA, which was PLN 223 million for Q1. Recoveries at PLN 362 million were strong, above plan in Romania, above plan in Poland, somewhat above plan also in Italy and Spain. And they were below -- still below the Q4 numbers. But the reason is there was a significant one-off corporate payment in Romania in Q4 2017. So if you exclude that revenue, the cash flow, the recoveries actually grew.
The investments of PLN 225 million may seem modest, but we have secured more deals already in Q1 that will be closed in Q2 in Poland. And Poland, again, is becoming our most important investment market in 2018.
The business, as you can see still on Slide #3, remains to be very lowly leveraged at 1.1x net debt to equity. Cash flow was strong. So this is a good place from which we could grow investments if the market allows us.
On Slide #4, once again, key points of this quarter, the net profit of PLN 91 million was expected. This net profit does not change our view on our budgeted results for 2018, it's too early for that. Cash recoveries are good. I mentioned to you that they were very strong in Poland and Romania. So I can repeat today that they constitute good basis for our future expectations and, likely, we'll see more positive revaluations from Poland and Romania in the following quarters. I was very glad to be able to tell you that our recoveries in Spain and Italy were on plan or a little above plan. However, this is the result of a mixed results of some portfolios, which were very good and some that were below plan. As a result, there was not significant negative revaluation of our Spanish and Italian assets for this quarter. And the logic for that is that some of the portfolios that we have bought 1 year ago and earlier have gone through the full revision already, some of them were written down. They are going on or above plan. Some of them have not gone through this revision yet, they are going through it. And some went through this revision in Q1 and that resulted in a markdown. I'm telling this to tell you, there's still a risk that some portfolios have not gone through the revision but will be going through it in Q2 or Q3. And whether this will mean a negative revaluation or not will depend on Q2 recoveries.
In terms of the investments, this budget, I, a quarter ago, was telling you that we budget about PLN 1.2 billion investments for this year. This still holds. This is our target. However, the guidance today would be we probably will be exceeding the budget of investments in Poland. Certainly, by some margin. There is a chance, by a significant margin, especially if some assets from secondary markets from our competitors will be put for sale this year. Obviously, this is not certain. On the other hand, we may see somewhat slower pace of investments in Romania this year. And we are likely to be more selective, more careful than budgeted, than planned in our investments in Italy and Spain this year and, hopefully, only this year.
In terms of our progress in foreign expansion, I'm very glad to be able to tell you that we have closed acquisition of a servicer -- servicing company in Italy. This company, its business is to serve the Italian banks and doing outsourced debt collection for consumer loans. So this is the business we're doing on a very big scale in Poland and some other countries, including Spain, but we have not been doing that business yet in Italy. Our whole operations and our acquisition of a small company there was about managing our own bought purchase portfolios. This company, which is located in Sežana, near Rimini, is an 80-people team, focused on serving several Italian banks and some other clients. It's a well-organized company. A company we also got to know well over the previous year, and we were very happy to buy them up. The owner is selling its stake, the owner and his family are selling their stake to us. We intend to keep this company as a standalone business. And grow, most likely, mostly organically, in the servicing business in Italy. The business, the industry, the servicing industry is large. You may know [indiscernible] or you may know doBank, which are both very successful servicers on those -- on these markets. There's many more companies in that industry. The total market, in terms of revenue, is at least EUR 700 million. So this is a market on which we could see ourselves growing nicely over the next 10 years, and it will also be giving us good synergy with the debt-buying business as we will be able to talk to the banks, who are selling earlier before the sale is actually planned, we'll have additional access to data, to contact data, and this synergy, we know it works very well when we have it in Poland and Romania and, increasingly, in Spain.
On Slide #5, we just reiterate something, which, in Poland is, I think, valued more dearly today that we are a company running a healthy balance sheet, strong cash flow with good access to funding. And today or Monday, we'll be paying out the dividend of PLN 5 per share as announced and approved by shareholders recently.
I will now jump to slide #10, where you see splits of our investments per countries, as you can see in Q1, we mostly invested in Poland. [ As I said ], the investments in Poland that are secured are significantly above this PLN 85 million you see here. There's still large banking deals that we already signed but yet not closed. And there will be more coming. So if I look at Poland, I see stable supply, I see a market that is very different, in terms of competitive landscape, to what it was for the past [ 3 ] years after one of our competitors lost liquidity and is not able to compete for new portfolios. That one event changed that market dramatically, and we and our competitors are back into the market buying. But please bear in mind, this is a very competitive market. This is a market where us, Hoist, [ Interim ], EOS, B2Holding and some other smaller Polish players, PRA, are present, and all of us have big appetite to buy in Poland. So the expectations for IRRs, actually, prices paid, are relatively -- prices are relatively high. But the transactions are going there, and those are profitable transactions, yet not at a very high profit expected. This is Poland. I mentioned, in Italy, we are planning to be more selective and more careful. This comes with our intention to limit investment [ rate ], given the experience we've had. We have an increasing comfort in our operations, we're still developing on the legal collection. So far, it goes on plan. And with that, with every quarter, we have a better, wider, deeper, statistical benchmark from the local market. But this is the beginning, those 2 past months were the beginning where we only were able to start to use it. And I hope we'll be much better at using and developing it when we have another 6 -- 3, 6, 9 months of history of those portfolios to be able to extrapolate these results into new portfolios. But therefore, this is because we are in this transitionary situation, and I think it will only be by the second half, late 2018, where our comfort and valuation will be significantly better than it is now. It's not to say we're not buying, we're bidding for everything. But we are more courageous, only for the types of portfolios which we deem less risky today. And same logic applies to Spain today.
Looking at -- still at Slide #10. You can see a -- that the ratio of cost recoveries is at 30%. This is driven mostly by legal costs, which are lower than last year in Poland but are much higher than last year in Italy. And Italy will be the main driver for the increase of costs, legal cost this year. How much that will be, we'll be deciding every quarter, looking at the results of the legal collection and the scoring tests for those new places that we could be [ sent ] potentially to legal. It is an important element for -- of cost element for net profit this year. So the more we will send to court this year, possibly the lower the results for 2018 be. But this eventually be a good news because it will mean that we'll have much higher recoveries and, eventually, higher profits for the following years after '19.
One more comment to Romanian market. As I mentioned, it has its slow beginning. One of the reasons is that there was a new tax legislation introduced in Romania several weeks ago, which for tax reasons made it less attractive for the banks to sell portfolios. It affects only part of the deals as some of them are in different structures, different jurisdictions. The banks are telling us that they're looking for a good solution to transact, that they are very eager to transact. But the fact is some of the transactions are delayed. So there is some uncertainty. I'm not sure today whether this is only timing or actually there will be somewhat less transactions. My -- today, my gut feel, my expectation is that we're talking about some delay. And that those transactions will come to the market, only later than initially expected.
On slide 11, we're showing the results of the servicing business. Q1 show a worse result than Q4. The reason is Spain, where 2 of our significant clients sold parts of these portfolios and reduced business in servicing for us. Our managers see that as a temporary situation before we get some new business or attract a new customer. So we hopefully will see a better Q2 for that business.
The cash flow business, NOVUM, is going fine, but there's not big growth there. The ERIF credit information business in Poland, on slide 12, is doing very well, it's growing double digits, and we are very pleased with that.
On slide 13, you have a snapshot of our revenues and breakdown of assets per country. You can see that revenues from Italy jumped in Q1. It would be even better if it wasn't for relatively small negative revaluation, also in this quarter. You can see that the other markets show a decrease in revenue for this quarter. This is a result of some negative revaluation of some of our portfolios, this time happening in Slovakia, in Germany, and in Spain.
If you look at the balance sheet, about 47% of the assets come from Poland, 27% come from Romania. And looking at the prospects, opportunities to buy, it may be that you will see Poland's share increasing this year.
Looking at the P&L on slide 15. I want to guide you to expect, again, positive revaluation from Polish and Romanian market businesses in the following quarters. For the other markets, I do not have expectations for positive revaluations. I want to tell you, there is some risk that some of those new, not yet validated portfolios bought within the first -- the last 12 months will be going through some negative tests in Q2 or Q3. This is not to say it will happen, but there is a risk in that. However, that risk is not big because roughly 70%, or over 70% of those portfolios have already gone through this verification, and now they are doing better than planned. Having said that, we are in a situation, in those new markets, where we are very quick, and we are doing negative revaluations as soon as need be. But we are not doing positive revaluation or -- because even if the situation in -- such a situation in Poland or Romania, which would be sufficient to make a positive revaluation because we lack long-term history of legal repayments. So because we don't have this long history in Italy, even if we see some positive [ additions ] now, we're very reluctant to say, " Ok, the future will be much better, we'll see more money in 2, 3, 4 years." So it may be that you would see, in retrospect, 2 years from now, that we have downgraded some of -- rolled down some of those portfolios in Italy last year. And this year, and we'll actually be marking them up in 2019 or '20. Now I hope that this will be the case, but there's no guarantee that will be the case. I want to tell you.
You also see in our net profit that the tax rate was actually negative. This is an exceptional situation, we do expect higher tax in the coming quarter. And today in our forecast, we still target this 10% of effective taxation rate.
So looking at balance sheet, I mentioned that it looks strong. We could easily increase leverage by another PLN 1 billion or more. And we have good access to funding through banks. And our prospect for issuing public bonds in Poland has been approved recently. It is a viable option for us to issue bonds in Poland. However, we are fully aware of the fact that, with all this uncertainty caused with GetBack's loss of liquidity. This is not a good market to go and issue bonds today. We do not have such a need. Currently, it is an option which we'll be testing and comparing it to some alternatives we have. So all in all, it's been a very good quarter, but we realize there is still some challenges ahead of us in the new markets. We will be carefully investing in the new markets. This is temporary, we hope to go back to more significant investments in second half of this year and definitely in 2019 and further. And this year may be a big opportunity for us in Poland.
Thank you very much for listening, and I invite you to ask questions.
[Operator Instructions] We have a question from Mr. Michal Kuzawinski, JPMorgan.
I have actually just 1 question, it was pretty clear. On the remaining costs of the group tax restructuring, which was conducted last year. I remember that we said -- you said that there was a possibility that some remaining costs related to that tax restructuring of the group could be booked this year. It doesn't seem to have happened in Q1, are you still looking to have some potential charges related to that?
Yes, that is correct. We have not concluded this transaction. This is payment of assets from Maltese company to KRUK S.A. for the assets of the Luxembourg company that we have done last year. This transaction will be done at some point, likely this year at market terms. And it can result in one-off noncash loss, ForEx loss that will be booked in our financial costs. But we have not done this transactions, we're still waiting for the right moment.
Okay. And the expected magnitude of this potential loss would be how big?
Between PLN 20 million, PLN 40 million would be expectation today.
Okay, okay. And maybe, when we talk about FX losses, this PLN 9 million FX loss, which crystallized in Q1. Which currency -- which market did this loss come from?
Yes. We can go back to you with an answer because I don't have this breakdown with me.
Okay. No problem.
[indiscernible] PLN 8 million loss on FX booked in Q1. So we'll go back [indiscernible] with this information.
Maybe just finally on Romania. So you mentioned there's not enough certainty at the moment about this new tax legislation. But do you see the situation just temporary, and this is case of the law being -- may be still changed, or the banks in Romanian just trying to find ways where they could off-load NPLs in a tax-efficient manner?
The latter. So the law is clear, and the law was introduced already. Now it's a matter of, will banks find another way that will make it equally or comparably profitable for them to sell portfolios. Or they will wait until the write-off of these portfolios is big enough for them to substantiate the sale. [indiscernible] that they cannot treat as freely the cost of funding debt as tax deductible. There is [indiscernible] by some banks, and some of those banks are just keeping the assets somewhere else, and this law does not affect them.
And it's, to me, somewhat strange that the Romanian lawmakers enacted a law which essentially makes difficult, [ sir ], for banks to off-load bad loans. Do you know anything more about the motivation for that move among the Romanian legislators? Why did they do that? What was the motivation?
My sense was this was some attempt to increase taxation on the banks, however effective it was. So I would expect that the reasoning there was, well, those are international banks, let's make their life a little -- let's make them take a little more taxes there. Whether this legislation actually achieved that, I'm not sure, probably not.
Yes. But the question then is if the banks do find a way to do a float, NPLs in a tax-efficient manner, would then the legislators go after them again and block these new routes, yes? So...
I don't see a specific attempt in this legislation to prevent NPL market from functioning. So there was a fiscal agenda, not market agenda there.
So NPLs essentially got caught together with other expense items, essentially, yes?
That's what I think. That's how we interpret it. And we don't see it at this point as a major [indiscernible]. Obviously, there is a delay, but we know some important deals are already being prepared because those assets are somewhere else. And there is some consulting work with looking for another formal contractual way to achieve similar results. So at this point, I don't think it's a major concern. Maybe it will become, but this is not, at least, what the banks are telling us today, and then they say, "We'll come to the market, but we need some more time to manage that situation."
Okay. So then to sum up on the -- on your investment plan. I mean, PLN 1 billion to PLN 1.2 billion, it seems a bit of a stretch, probably, in this situation, with Romania probably a bit slower this year. And Italy and Spain, too, but Poland is clearly the situation, has changed quite dramatically, and this is the question, how much Poland could offset, yes, the slower pace of investments in other countries, right?
That's right. Well, for Romania, I wouldn't be pessimistic already. I would say -- because if it -- if there is a good way for the banks to proceed, they will off-load everything they wanted in Q1, Q2 and the rest of the year, in the second half of the year. So the market will not decrease, it's only the transactions will be much bigger in second half of the first year. And obviously, there is a scenario that it would be less. But Poland [ as a fact ], the achievable market for us will be couple times bigger than it was in 2017.
We currently have no questions. [Operator Instructions] We have a question from Roman Fuzaylov, Prince Street Capital.
I just wanted to ask a question, if there's an update on what's going on with GetBack. The news flow seems like it's, sort of, continued to grow more dark. I know the stock has been suspended now for almost 2 weeks. I just would be grateful for any comments that you have on what's happening there today? And how you expect things to develop going forward?
Roman, obviously, I'm not in the company so I cannot be sure what's going on there. But from the point of view that we have at KRUK, and this point of view has been developed over those past 3 years when we were watching this company buying at the prices we could not afford, showing to investors that they want to make 3x money where comparable return for us, for these portfolios, for the prices that we were bidding was more like 1.6x. So double the effect that we wanted to achieve, this company showed. When looking at their cost of funding, which is over 10%. I'm really surprised this company got into trouble so late. So I'm not at all surprised about what happened. And my thinking is, the real big problem is this business model does not work. And if that is true assumption, there is no business. It's just a matter of how to extract, maximize the value of the assets. And through somebody who has quality operations that can professionally take those cases and put them to work properly. And we are one of the few, very few that could do it seamlessly and save some value from the [indiscernible]. I don't think there's any value for shareholders there. So that's my subjective view based on the assessment of the prices of portfolios this company paid. Only, I really -- I feel pity for our industry that analysts, rating agencies, investors did not see that.
Do you have any sense for how long it might take for us to get to that stage?
Well, the first stage for that process is for the management, the board, and supervisory board of this company to realize what is their situation. Because my suspicion was that, until recently, they did not know. I think that will come now within days or weeks. So I think that this team of people, who are now on the ground, will soon realize what's the worth of the assets and the cash flow -- real cash flow forecast for the next weeks and quarters. And then, they will be able to realistically assess the chances they have to save something. So I think it's weeks, it's weeks until something will start to have an effect. Something that would be realistically achievable.
Yes. Is the new CEO, who was appointed, someone who comes from the industry?
The new CEO was supervisory -- the Chairman of the supervisory board. This is a foreign national, I'm not sure whether he's British or Australian. I don't know him. But he -- well, I know he is from the industry.
I imagine the appointment of a CEO like that is already a step in the right direction.
Maybe. I'm saying, maybe, because I know [ indebted ] customers are calling this company, are calling us and saying, "We don't want to pay them." Do we know if they pay salaries this month, maybe. Their call center is half empty because people are leaving. I think this is a very deep crisis. So I don't think this company needs a proper operational management. I think they [ need ] somebody who will organize sales of the assets efficiently.
Okay. And maybe, on just a different subject, and this is sort of picking up on Michal's point just earlier. Looking at the guidance for new investments that you reiterated at PLN 1.2 billion. It seems, given that you're going more slowly, intentionally now in Italy and the potential delays that you're looking at in Romania. It seems like that's a very big target to reach so I'm surprised that, that target hasn't been reduced, given where we are now in the middle of April. Is PLN 1.2 billion still realistic?
Well, it is within the range that is realistic. Is this an easy target? No. Is it possible to do if only invest, say, PLN 300 million in Poland? No, I don't think so. So, no, I'm not sure if I guided that, but I said to Polish investors today. Today we are definitely into PLN 1.2 billion, that's the plan. But please understand, this is a very dynamic situation. If we [ buy a ] chunk of GetBack's assets this year, that will completely change the situation. If we buy 3 big banking portfolios yet in Poland this year, we'll make PLN 0.5 billion investments in Poland alone. So it's too early to say, "Dear investors, we'll not make it." It is to say, "Yes, [ we have invested that ] and budgeted it in Italy," [ let them budget it ] in Spain. There is a risk in Romania, but we're not there to say, "We will not make the budget yet." And we'll definitely do much better in Poland. And much better in Poland, maybe 1.5x better than last year. It may be 3x better than last year.
Fair enough. Okay. Have the banks in Poland slowed their own selling behavior in response to what's happened at GetBack?
No. However, they complained that the pricing is dropping.
Well, you're right. That's natural.
They earned so much money last year, the banks to GetBack. So they had their present already.
So they're continuing to move ahead with whatever sales they had planned?
Yes, I don't see any delay there.
Great. And maybe one final question, if I may. You mentioned a negative revaluation again in...
That's right.
In Italy. Is it possible to quantify how big that was?
High. It's...
High single digits?
Between a few and a PLN 10 million.
Thank you. We have no further question over the phone. Back to you for the conclusion.
Okay. If there's no further questions, I want to thank you very much for listening. It's not an easy year, but it's a year where we deal with a lot of turmoil in Poland, which for me, means good business opportunities. Opportunities to make transactions and higher than average returns. And please count that we'll be there to maximize these chances. Thank you very much. And I invite those of you who will be in New York to meet me and Piotr Krupa there on [ Wood ] event. Have a good day.
Ladies and gentlemen, this concludes today's conference call. Thank you all for your participation. You may now disconnect.