ABE is a manufacturer, retailer, and distributor of IT and consumer equipment, the biggest retailer of apple products, and the leading provider of cloud services in Poland, the Czech Republic, and Slovakia that is selling at a 23.3% discount to its Net Current Asset Value.
After the coronavirus pandemic, in which the IT distribution market in Poland and the Region saw significant increases related to remote work, there are now symptoms of cooling down the IT product market associated with the gradual saturation of the market after a period of rapid growth. In the second quarter of 2022, the combined market growth amounted to + 6% in the three Regions the Group operates (in Poland + 12.8%), while the Group's turnover dynamics in this period was + 9.6% (+ 15.6% in AB SA). The increase in market turnover was observed in the following categories: smartphones, notebooks, tablets, and monitors. However, in the following categories: inks, toners, and PC, decreases were recorded.
The increased demand also resulted from the periodic closure of schools. Distance learning has created a demand for education devices, mainly notebooks, monitors, and printers. The government launched subsidies for the purchase of hardware and software for education, two programs: Remote School and Remote School, under which funds amounting to PLN 185 million and PLN 182 million, respectively, were released for students and teachers.
The AB GROUP owns 11 subsidiaries that cover the entire supply chain, from putting together hardware products, logistics, and distribution to retail stores and marketing services, along with one subsidiary that is a wholesaler of toys and board games for children.
The activity of the AB Group is based, on the one hand, on the implementation of sales that guarantees high market shares in the core business, which is the distribution of products from the IT and consumer electronics, RTV / household appliances sector. On the other hand, on the dynamic development of new business segments (including advanced Enterprise products) such as Smart Home, Cloud, Networking, Data Center, or Security IT, realizing high market shares in the main sales channels such as SMB, retail, VAD, and telco.
The main trends driving the IT market today include cloud services (expected CAGR for this market in Poland is as much as + 34% in the next four years), XaaS ("all as a service" from predicted CAGR in 2021-2026 at + 25%), IoT (technologies for smart home, wearables, smart city, smart buildings, assets trackers, car trackers), cybersecurity, circular economy (circular economy), solutions for remote learning, work, telemedicine, trade, and financial services, technology development for industrial robots, blockchain, 3D printing, sensors, artificial intelligence and VR. Significant changes include new trends related to remote work, e-administration, digitization, automation, and robotization.
The Group is a leader in cloud services distribution in Poland, the Czech Republic, and Slovakia. In this category, sales are growing dynamically, and the potential for the coming years remains large. In the first half of 2021/22, cloud service sales increased by 61% y / y.
The AB Group consistently expands the portfolio of offered products with goods from the IT sector and segments such as electronics/household appliances. The Group is developing its activity only in the Polish market in this area. It offers the most influential brands, incl. such as Amica, Beko, Bosh, Candy, Electrolux, LG, Philips, Samsung, Whirlpool, and Zelmer.
The Group is developing the Digital Signage segment, with sales growth of 30% y/y in the financial year. The Group is ranked number 1 in the distribution of LCD and LFD monitors. The global DS market is estimated to grow at double-digit rates annually until 2026. Another area developed by AB Group is the Smart Home /Smart Life segment. It is a market with excellent prospects, and the prospects for both markets mentioned earlier are excellent.
This segment posted strong double-digit growth, increasing sales by 28%. The AB company signed a distribution contract with one of the leading manufacturers of household appliances, the company MIDEA. The agreement covers the brands Toshiba / Midea and Comfee.
Rekman( a 100% owned subsidiary of AB Group) is the leading toy distributor in the Polish market. It is characterized by high recognition, the trust of customers and suppliers, and the opinion of a reliable company. Rekman is an authorized distributor of all the world's leading brands in the toy industry. The company's strongest assets include access to advanced logistics services within the AB Group and a modern B2B internet platform for customer service. Rekman is consistently developing its portfolio of offered goods. In the financial year 2020/21, Rekman signed new distribution agreements with suppliers: Lego, Russel, Ravensburger, Lucky Duck, and Harper Collins.
According to independent RMD Research studies, in 2021, Poland's toy market grew by about 22% on average. Significantly higher growth was recorded in the e-commerce channel, i.e., about 30%, compared to the traditional market, where the estimated growth was about 12%.
2023 may bring changes to the toy market. The first months of 2022 showed much lower growth dynamics in all channels, including e-commerce. Due to the Covid-19 pandemic, the increase in the prices of raw materials and a much higher cost of transport, and the problem with the availability of goods, Credit costs, and toy prices are rising; therefore, customers are holding back their purchasing decisions.
Rekman can diversify sales in various channels thanks to a diversified customer base. Rekman has its own franchise network for sale on the traditional market called Wyspa Szkrabów (163 points of sale). Rekman also cooperates with most of Poland's leading online stores/platforms.
FINANCIALS
In the financial year 2020/2021, the Group achieved sales revenues of PLN 14,031 million, which was 7.3% higher than the previous year.
The profit margin on sales reached a record level of PLN 529.4 million, compared to PLN 472.7 million in the previous year. Gross margin with sales accounted for 3.8% of turnover (3.6% during the last year).
Consolidated selling and general and administrative (SG&A) costs amounted to PLN 318.9 million, thus constituting 2.27% of the Group's sales revenues. The SG&A indicator is one of the most common operational efficiency measures used in the industry, and its level obtained by the AB Group places it among the most efficient entities in its industry.
89%(PLN 3.04Billion) of the total assets are current assets, and fixed assets amount to 11%(PLN 378 million) of the Group's total assets. The most significant item among the fixed assets is tangible fixed assets accounting for 5% of the total assets—their substantial value results from constructing the new logistics center in Magnice near Wrocław, Poland.
At the end of the financial year, the largest shares of current assets were inventories (55%; PLN 1.68 billion) and receivables (43%; PLN 1.28 billion). A first glance at the balance sheet with such increasing and high inventory levels would make it seem like the company has a lot of dead stock, but that is certainly not the case which we realize when we look at Days Inventory Outstanding, which is only 44 days and even with such high receivables the company has a very healthy Receivable turnover ratio of 10.4
With such quality in current assets, the company selling below NCAV has virtually no downside in the medium to long term.
Total liabilities amount to PLN 2.27 billion, with only PLN 117.6 million in long-term debt and a significant portion dominated by Accounts Payable (PLN 1.4 billion). With Days Payable Outstanding being only 33 days, the Group's working capital is very well managed.
The Group financed a decidedly greater part of the current assets with external sources through interest-free trade credit, bank loans, and bonds. The total value of bank debt incurred by the AB Group amounted to PLN 242.1 million, which accounts for around 7% of all funding sources. The nominal value of the bonds was PLN 80.0 million, which accounts for 2% of liabilities.
BUYBACK
With stock being undervalued, the company has announced a buyback worth 16 million, equal to just 2.7% of the company. I expect the management to make further buyback announcements as more and more current assets get converted to cash and inventory decreases from its record high levels.
DIVIDENDS
The company has paid a dividend yield of 2.78% and has paid a dividend for two consecutive years. The management board has further said it wants to become a regular dividend-paying company.
VALUATION
With the downside being capped by the Solid Current Asset base, the upside is almost 80-90%.
With the growth of more SAAS products like cloud services and e-commerce solutions, I expect the Profit margins to rise over the next 3-4 years, along with an expansion of earnings multiple from the current p/e of 3.8 to at least 7/8.