Sector: Construction materials
Market Cap: US$ 46 m
Fundamental rating: Buy (→)
Bloomberg code: GRN PW
Market relative: Neutral (→)
Av. daily turnover: US$ 0.1 m
Price: PLN 13.22
12M range: PLN 12.34-20.50
12M EFV: PLN 17.30 (→)
Free float: 34.2%
Recommended action
Due to a slump in the construction and assembly industry we expect the demand for traditional electrotechnical goods to weaken. At the same time however the Company may experience a growing demand in the RES segment (photovoltaic installations and heat pumps). We believe that the Company’s business perspectives in the long term look favorable, therefore our LT fundamental Buy recommendation stays intact.
3Q22/23 financial results review
3Q22/23 results are good and beating our expectations. Sales did not surprise the market as the Company reports regularly monthly estimations. The meager sales growth (+3% yoy in 3Q22/23 vs +6% in 1-3Q22/23) stems from the high base effect coupled with a slowdown in the construction and electrotechnical markets observed from the beginning of 2022. The high base results mainly from the change of photovoltaic installations accounting system for prosumers in force since April last year. It is worth reminding that in 4Q21 a number of PV installations connections reached c. 141,000 while in 4Q22 it was merely 33,000.
Our concerns for falling margins did not come true. The Company managed to improve the EBITDA and EBIT margins qoq.
Due to the need to be well stocked with heat pumps Grodno’s working capital requirements are high. At the same time the Company manages to maintain operational efficiency. The working capital to sales ratio is almost flat yoy, so is the inventory to revenue ratio.
Guide to adjusted profits
No factors necessitating adjustments.
Upcoming events
- Release of the financial report for 4Q22/23: July 2023
- Release of the financial report for 1Q23/24: August 2023
- Release of the financial report for 2Q23/24: December 2023
- Release of the financial report for 3Q23/24: February 2024
4Q22/23 financial results preview
The Company’s 4Q22/23 financials will be probably released in the end of July. We do not expect big surprises at the top line level as the Company reports monthly revenues estimates. In January and February Grodno’s revenues reached PLN 87.3 million and PLN 93.9 million, respectively, and for March we forecast PLN 95 million, albeit last year’s March base is very high due to the later change of photovoltaic installations accounting system for prosumers (from April 2022).
With regard to profits we assume the EBITDA margin to stay flat qoq close to 4.1% vs 5.3% in 4Q21/22. We believe, this expected yoy fall of profitability stems from a drop in the demand for traditional electrotechnical goods caused by a slowdown in the construction and assembly industry and smaller interest in PV installations.
Financial forecasts and valuation
Incorporating our expectations for 4Q22/23 we slightly modify our FY22/23 (ending in March this year) forecasts. Our valuation of the Company’s equities stays intact.
Catalysts
- Warehouse space optimization
- Rising electricity prices for end-users
- New support programs for the RES segment investors
- Further acquisitions of peer companies (to-date Grodno has concluded 10 takeovers)
- Automation of warehouse storage and distribution processes
- Successful development of e-commerce channel in B2C and B2B segments
Risk factors
- Rising generation costs of suppliers because of raw materials prices growth and lack of possibility to transfer the prices growth onto customers
- Pressure on wages growth
- Sales seasonality
- Dependence on main suppliers
- Insolvency of buyers
- Bad inventories management
- IT system crashes
- Impact of the majority shareholders controlling 79.3% of the votes on the GSA
- Inability to reach strategic goals (annual growth of sales at 10% by 2024/25)
- Withdrawal from/ limits imposed on the government support programs for the RES segment investors
- Inability to continue further lucrative acquisitions of peer companies 12. COVID-19 pandemic fallout (shortages of components necessary for the production or lack of goods due to broken supply chains)
Competitive advantages
- Strong geographic diversification (one of the most extensively developed sales network among independent distributors of electrotechnical materials)
- Exposure to the fast growing segments of the electrotechnical market (photovoltaics and heat pumps currently, earlier LED lighting)
- Comprehensive offer including consulting services, design and construction
- Numerous acquisitions all of which proved to be value accretive
- A vast client base including households, SMES, local and regional government units, and industrial plants as well
- Lack of dependence on one/few suppliers
- Multiple points of sale (suppliers more willing to cooperate with the big partner with a well-developed logistic base)
GPW’s Analytical Coverage Support Programme 3.0
Analyst: Maciej Wewiórski
3/2023/GPW (9) March 2, 2023
This report is prepared for the Warsaw Stock Exchange SA within the framework of the Analytical Coverage Support Program 3.0.
