Polnord SA (PND PW) is a residential homebuilder in Poland focused primarily on middle-class units in Warsaw and selected large cities in Poland. The company is trading at 0.4x book value of $270M almost all of which is tangible book and consists of land plots and finished lots. We will keep this write-up short as the story is simple: a deep value price with mcap of $98M, an improving macro environment, and strong catalysts to close the valuation gap. We think the stock could appreciate by more than 100% in the next 6-12 months.
Deep Value Price:
Polnord is a small but well-known property developer in Poland operating in the country for decades. The company’s main assets are in an upscale and fast growing area of Warsaw called Wilanow, although the company also has land parcels elsewhere in Warsaw and also in other regions of Poland. The company’s assets are nearly all residential plots except for two office buildings in Wilanow. However, these are a small % of the company’s net asset value. Finally, the company has several hundred million Polish zloty (the Polish currency, also known as PLN) in outstanding litigation claims against the city of Warsaw for a variety of past actions most of which are off balance sheet – to put this in perspective, the entire market cap of Polnord currently is 390M PLN.
A conservative and to us the best way to value a homebuilder is to add up the fair market value of its assets less all liabilities and put no value to the company as an operating concern. We engaged two different appraisal firms in Warsaw to do this analysis, and both firms independently came to a net asset value (NAV) in the 800M PLN range. We would encourage interested investors to conduct their own independent appraisal. However, we believe this valuation is conservative as we engaged both appraisal firms in early 2015 and land prices in Warsaw have increased 10-20% this year.
In addition, as noted, the company has off balance sheet claims against the city of Warsaw and per a Polish law firm we spoke with which specializes in Warsaw municipal real estate claims, Polnord’s claims have real merit. We add no value for these but note it as a potentially large source of upside.
As such, our conservative target equity value is 800M PLN, or over 2x the current share price (with potential significant further upside).
One counter-argument to our valuation approach could be that the company’s earnings level in recent years, which has been well below its cost of capital, justifies a deep discount to book value. However, we think that this is backward looking instead of forward looking as the company has had substantial debt and also the Polish property market has only recently begun to boom. The company has paid back a substantial amount of debt in recent years, and we expect debt reduction to continue going forward, dramatically increasing earnings due to lower interest expense. Also, with the strong Polish property environment currently (please see next section), the company expects its sales volumes to increase further, driving earnings growth. Finally, we are using 800M as our target value, not the ~ 1.1B stated book value. With the falling interest expense and the rising sales level, we think Polnord can earn 75-100M+ PLN of earnings in 1-2 years justifying an 800M-1B valuation on a cost of capital basis.
In terms of comps, larger Polish developers such as Dom Development (DOM PW) and Robyg (ROB PW) trade at meaningful premiums to book value (both at c. 1.5x) which is not surprising given the strength of the Polish property cycle currently. Smaller developers such as Inpro (INP PW) and Ronson (RON PW) still trade at some discount (each of these are at 0.8x book and others are at even lower valuations). As we haven’t engaged in appraisals of these other developers, it is hard to know whether the discounts to book are due to company specific factors or represent an opportunity.
Another useful data point is that leading global private equity firms are taking advantage of the strong property cycle and acquiring control of listed Polish property developers at prices near 1x book value - see for example Lonestar’s purchase of Global Trade Centre or Oaktree’s purchase of Echo Investments.
Supportive Macro Environment:
The Polish residential property market has been performing strongly since mid to late 2013.The Polish economy has been growing at c. 3-4% and interest rates are at historical lows – as Polish buyers typically acquire homes through mortgages, the low cost of financing spurs home buying.
Rather than going into full detail here, we encourage you to visit the website of REAS, which is widely considered to be the leading data provider and forecaster of the Polish residential market, particularly the Warsaw market. Their 3Q15 market update and commentary (http://www.reas.pl/scripts/download.php?file=files/reports/reas-residential-market-in-poland-q3-2015.pdf) provides a good overview of historical trends, where the market is now in the context of history, leading indicators, and key political issues impacting the sector.
With the Polish economic growth continuing (Poland is being referred to as the ‘tiger’ of Eastern Europe) and the Polish Central Bank indicating it may reduce interest rates further, the overall backdrop is quite constructive. However, one negative which has arisen in the last couple of months is the Polish election, which could impact some of the policies which have led Poland to such strong economic growth. Most political observers think the new ruling coalition will be moderate, but it is a factor to watch going forward.
The company until just a few months ago was controlled by Prokom Investments, an investment firm/family office of a Polish businessman named Richard Krause. This was perceived by the market as a negative as Prokom had made previous investments in oil & gas ventures which had gone bankrupt and Prokom’s other investments including its ~ 24% stake in Polnord were now being held as collateral by Polish banks.
Altus TFI, a well-regarded Polish investment firm with a history of value creation and shareholder activism, recently purchased 9.5% of Polnord from the banks which held Prokom’s investment as collateral. We speculate that Altus may be buying the remaining ~ 14% stake from the banks as well. Altus’s first purchase led to a material re-rating of the stock and we think the stock will re-rate again if/when the final stake is purchased.
However, more importantly, Altus, with support from Polnord's other large institutional shareholders, already reconstituted Polnord's board several weeks ago and has numerous plans to create value. Just earlier this week, Altus replaced the CEO and CFO and brought on new management with a top tier background and track record. The stock appreciated over 15% on the news and Altus may just be getting started.
Interestingly, similar to activists in the US, Altus has in previous activist investments pushed for the company to be sold. If Altus repeats the strategy with Polnord, we think there would be numerous strategic as well as private equity firms interested in acquiring a controlling stake in Polnord (note the various take-overs of Polish listed property developers that have already happened this year).
In summary, with the new board just constituted several weeks ago, new management, and a controlling position in Polnord potentially up for grabs, we think the next several months could be filled with catalysts that will take Polnord closer to its true value.
On top of this, there is a chance the company’s outstanding litigation claims reach a settlement and the company conducts a special dividend with the proceeds. This amount, even at a fraction of the face value of the claims, would be material relative to Polnord’s market cap.
Finally, the strong Polish macro backdrop and improving company results should also bode well for the stock at these low valuations levels.
I do not hold a position with the issuer such as employment, directorship, or consultancy. I and/or others I advise hold a material investment in the issuer's securities.
New board, new management, potential sale, litigiation proceeds