We initiate our coverage of Selena FM with a price target of PLN 40.4 and a BUY recommendation. Despite unfavourable demand trends in the construction materials market in Europe, which will put pressure on sales and gross margin over the next 12 months, we appreciate the company's growth in recent years and note the strong fundamentals that will support further business development. Over the last five and ten years, the sales CAGR has been 10.7% and 6.4% respectively. The company's history has been underpinned by numerous mergers and acquisitions, and we expect the strategy of building shareholder value through acquisitions to continue well into the future. The acquisition of Imperalum in Portugal is arguably one of the first steps in expanding its geographic and product presence in Europe. As well as focusing on its core segment, the company also sees potential in developing its offering in complementary ways, as exemplified by the joint investment with Masterplast in glass wool.
The downturn in the construction industry provides an opportunity for further acquisitions. We expect the company to continue its M&A-driven strategy in the coming quarters. Given the low level of debt at the end of Q1'23 (PLN 66m) and the potential to generate recurring EBITDA in the range of PLN 150-175m, while maintaining the DN/EBITDA ratio at 2.5x, the company has the potential to generate approx. PLN 300-375m of cash for potential acquisitions (vs. <PLN 50m for a 90% stake in Imperalum). We expect further acquisitions to be focused on Western and Central European countries, and only as a next step will the company decide to go outside Europe. We do not rule out a scenario where acquisitions are aimed at adding complementary products to the current product portfolio.
Falling raw material prices and competitive pressure may lead to deflation in construction chemicals prices. Since the beginning of the year, the prices of the basic chemical raw materials used by the company have fallen. Given that raw material consumption costs account for around 50% of sales, the current decline in TKW is encouraging competitors to fight more aggressively for market share in a situation of limited demand. PSB's data does not yet indicate deflation in construction chemicals prices (visible stabilisation), but we believe such a scenario is very likely in the coming quarters.
Significant scope for cost optimisation. The average gross sales margin between 2018 and 2022 was on average 6.6pp lower for domestic companies and 9.6pp lower for foreign companies. For the EBITDA margin, the difference was 3.6 pp and 7.2 pp respectively. It appears that the company has the potential to improve margins in the medium to long term by implementing appropriate cost optimisation programmes. Our forecasts take a conservative approach to the assumed EBITDA margin (8% on average over the forecast period), but we note the upside potential in this area for our valuation.
The EU's policy on energy-efficient buildings is gaining momentum. Over the next few years, the momentum for building insulation in the EU is expected to increase, partly funded by national NIPs. In Poland, more than 662,000 applications have been submitted under the Clean Air Programme (as of 4 August '23), for a total of more than PLN 16.4 billion. In Italy, the Superbonus programme has been in place since 2020, offering a 110% tax credit for thermomodernisation (as of July '22, 220,000 applications had been accepted under the programme for a total of EUR 44bn).
In Germany, EUR 56.3bn will be made available for building modernisation and renovation between 2023 and 2026. We believe that the secondary market will largely compensate for the loss of demand from the primary market as a result of central banks' monetary policy. Valuation. Our target price of PLN 40.4 is based on a DCF model. The comparative valuation implies a PER of PLN 41.7, which is PLN 32.9/share based on the domestic peer group only and PLN 50.5/share based on the foreign peer group only. Based on our 2024-25 forecasts, the company is valued at 8.6x and 6.2x PER, respectively, and with a target price of PLN 40.4, the PER is 13.7x and 9.9x, respectively.
