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Warsaw Stock Exchange: Mirbud – Valuation, relative valuation, ESG section, risk to fair value

Warsaw Stock Exchange: Mirbud – Valuation, relative valuation, ESG section, risk to fair value| FXMAG.COM
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Table of contents

  1. Valuation
    1. Relative valuation
      1. ESG Section
        1. Environment
        2. Governance
      2. Risks to fair value
        1. Demand volatility
        2. Potential rise in competition
        3. Workforce shortages
        4. Rise in receivables
        5. Economy slowdown
      3. Financials

        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)

        warsaw stock exchange mirbud valuation relative valuation esg section risk to fair value grafika numer 1warsaw stock exchange mirbud valuation relative valuation esg section risk to fair value grafika numer 1

        Figure 6. DDM Valuation (PLN m)

        warsaw stock exchange mirbud valuation relative valuation esg section risk to fair value grafika numer 2warsaw stock exchange mirbud valuation relative valuation esg section risk to fair value grafika numer 2

        Figure 7. Valuation Summary

        warsaw stock exchange mirbud valuation relative valuation esg section risk to fair value grafika numer 3warsaw stock exchange mirbud valuation relative valuation esg section risk to fair value grafika numer 3

        Figure 8. DCF Valuation Summary

        warsaw stock exchange mirbud valuation relative valuation esg section risk to fair value grafika numer 4warsaw stock exchange mirbud valuation relative valuation esg section risk to fair value grafika numer 4

        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.

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        Figure 9. Relative Valuation

        warsaw stock exchange mirbud valuation relative valuation esg section risk to fair value grafika numer 5warsaw stock exchange mirbud valuation relative valuation esg section risk to fair value grafika numer 5

        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)

        warsaw stock exchange mirbud valuation relative valuation esg section risk to fair value grafika numer 6warsaw stock exchange mirbud valuation relative valuation esg section risk to fair value grafika numer 6

        Figure 11. BALANCE SHEET (PLN m)

        warsaw stock exchange mirbud valuation relative valuation esg section risk to fair value grafika numer 7warsaw stock exchange mirbud valuation relative valuation esg section risk to fair value grafika numer 7

        Figure 12. CASH FLOW STATEMENT (PLN m)

        warsaw stock exchange mirbud valuation relative valuation esg section risk to fair value grafika numer 8warsaw stock exchange mirbud valuation relative valuation esg section risk to fair value grafika numer 8

        Analyst

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        Robert Maj

        robert.maj@ipopema.pl

        + 48 22 236 92 90

        GPW’s Analytical Coverage Support Programme 3.0


        GPW’s Analytical Coverage Support Programme 3.0

        GPW’s Analytical Coverage Support Programme 3.0

        The Warsaw Stock Exchange's (GPW's) Analytical Coverage Support Programme 3.0 supports investment firms in drafting analytical reports which are financed by GPW. The objective of the Programme is to improve the availability of research covering less liquid companies, facilitating investors' informed investment decisions based on a reliable independent source of issuer information. Eligible to participate in the Programme are companies listed on the GPW Main Market (other than WIG20 participants) and on NewConnect. The Programme covers up to 50 issuers.

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