Warsaw Stock Exchange: Mirbud – Valuation, relative valuation, ESG section, risk to fair value
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Valuation
Our valuation approach for construction companies uses two methods: the discounted cash flow (DCF) and the dividend discount model (DDM). We calculate our Fair Value for Mirbud by taking the average of the two results. The two methods are aligned, as they are both based on the same financial model. The model assumes cashflow projections over a 10-year period for the firm based on our forecasts for the construction market, GDP in Poland as well as other parameters including volume growth, product mix changes, changes in the financing model, efficiency gains, production cost increases, capital expenditures and working capital needs. Our dividend projections are a derivative of the earnings forecasts in our financial model. Payout levels are determined by corporate policy in the short-term (15%) and then drift towards a target payout ratio of 50% in the long-term. The DDM is also a useful tool for understanding P/E multiples [P/E = (D/E)/(k-g)], with differences explained by a combination of earnings growth and dividend payout. Both our DCF and DDM models have terminal values with a growth rate of 1%.
Our assumptions for cost-of-equity were established by using a variable risk-free rate (equal to the 12-month forward interest rate) and adding a 5.5% equity risk premium each year. The 12-month forward interest rates were derived from the yield curve of the 2023-2032 period. We also consistently use a beta of one (1) so as not to distort the WACC and the comparability of our valuations.
Figure 5. DCF Valuation (PLN m)
Figure 6. DDM Valuation (PLN m)
Figure 7. Valuation Summary
Figure 8. DCF Valuation Summary
Relative valuation
Mirbud trades at a 2022E EV/EBITDA of 3.1x, which constitutes a 37.5% discount to international peers and a 38.2% discount to the most prominent Polish construction company, which is Budimex. Budimex is recognized due to its high dividend payout track record; however, we still feel the premium to Mirbud should be smaller due to Mirbud’s continued inking of new contracts which we believe will allow the company to increase margins going forward.
Figure 9. Relative Valuation
ESG Section
Environment
Mirbud takes environmental concerns very seriously. The company has implemented several measures to control its dust emissions and to prevent it producing excessive waste. The company is enhancing its environmental policy by reducing its use of natural resources. Furthermore, the company has endeavoured to optimise its use of resources by focusing on recycling, waste control and water circulation.
Governance
Mirbud maintains transparent and continuous communications with its employees and shareholders. Regular meetings are held between employees and managers to provide updates and consolidate the company’s strategy. It publishes quarterly and annual reports in a timely manner.
Risks to fair value
Demand volatility
With its asset-heavy business model, Mirbud is fully exposed to local demand for construction services. Weak demand may lead to sharp declines in profitability.
Unfavourable trend in prices of materials and services Adverse trends such as rising raw material costs or inflation of transport service costs may hamper the company’s profitability.
Potential rise in competition
Given the company’s superior profitability, arising from complex solutions and a growing scale of operations, several local competitors might attempt to copy Mirbud’s business model, which could potentially increase competition in the company’s most important segments.
Workforce shortages
A shortage of skilled labour in the construction industry could result in Mirbud having insufficient employees to operate its business. There are no shortages at the moment, which would likely allow the company to lower its cost base and cost of third parties in quarters ahead.
Rise in receivables
The biggest threat to Mirbud would be a rapid increase in receivables stemming from construction contracts, which would cast a shadow over the profitability of the executed contracts.
Economy slowdown
Estimates for the Polish economy point to lower growth rates going forward. As a result, some investments could be suspended, which would raise questions about the level of Mirbud’s future backlog. Decreasing EU funds are likely to accentuate the problem.
Financials
Figure 10. INCOME STATEMENT (PLN m)
Figure 11. BALANCE SHEET (PLN m)
Figure 12. CASH FLOW STATEMENT (PLN m)
Analyst
Robert Maj
+ 48 22 236 92 90
