Warsaw Stock Exchange - K2 Holding (WSE:K2H) - Report (July 2022)
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K2 Holding
Simpler structure, cash for growth
Since the publication of the news of negotiations with Netia regarding the sale of Oktawave, K2 Holding's stock price has risen by PLN 7.5 per share, while outperformance against the WIG index amounted to 54%, i.e. nearly PLN 12 per share. The ultimate outcome of the negotiations was a transaction worth PLN 33.7m (EV) and an estimated cash inflow to K2 Holding of PLN 26.1m (after deduction of tax and transaction costs), which is equivalent to PLN 11.3 per share. Oktawave has not generated positive cash flow in recent years and thus has not been sufficiently factored into the holding's valuation. As a result of the sale, the costs previously attributed to Oktawave and in subsequent quarters charged to other segments (ca. PLN 1m per year) may prove to be somewhat of a burden on the company. On the other hand, K2 Holding's office lease agreement expires at the beginning of 2023, and renting new space could generate savings also approximating PLN 1m a year. At the same time, the company has already managed to sublease part of the office space, which will affect the result in the second half of the year. The clearly positive investor reaction to the deal is, in our view, limiting the upside potential in the short-term, although we still see nearly 20 percent undervaluation over a 12-month horizon. In the nearest future, the stock price may have the following positive catalysts: 1) Fabrity's return to generating higher operating profit after several quarters of slowdown and negative y/y profit growth, 2) acquiring a partner for the PerfectBot project, which will result in a more realistic valuation of this subsidiary, which is currently burdening the holding's operating profit with a loss of ca. PLN 1–1.5m per year, 3) a small acquisition expanding the group's competence in the software segment.
The software segment will remain a major contributor to this result. In our forecasts for 2023–2024 Fabrity accounts for 80% of adj. EBITDA and operating profit of the K2H Group. In 1Q22, Fabrity's revenues grew by 25% y/y, and we think that growth approximating 20% should continue in the following quarters, and over the year we forecast revenues higher by 21%, up to PLN 48m. The scale of Fabrity's business is now 4–5x smaller than that of traded Spyrosoft or PGS Software (PLN 174m and PLN 203m revenues in 2021, respectively, y/y increases of +54% and +42% y/y, respectively), resulting in a discount to peers – we believe an inexpensive acquisition to increase the scope of business and support the Group's competence could meet with a positive market reception.
The PerfectBot Project. PerfectBot generates ca. 2% of the Group's operating income, but has the potential for significant scale improvement. The company is working on attracting an external investor, which is very likely to happen in the coming months. A potential transaction will reduce K2 Holding's bailout efforts, while also resulting in a more realistic valuation of the business, although unlike in the case of the Oktawave transaction, we would assume only dilution of shares, with no direct cash inflow to K2H. As a result of raising the share capital, it cannot be ruled out that K2H's stake will fall below 50%, and consequently the full consolidation method will be discontinued, which would improve the holding’s operating profit.
Valuation and recommendation. Our target price is based on several valuation methods, with 50% weighting assigned to the DCF method, 25% to market multiples valuation and 25% to sum-of-the-parts valuation. Our 12M target price is PLN 36, thus implying an upheld BUY recommendation.
Analyst
Dominik Niszcz
GPW’s Analytical Coverage Support Programme 3.0
