The Capital Group of the Warsaw Stock Exchange is the central institution of the capital and commodity markets in Poland and is the largest stock exchange in Central and Eastern Europe.
GPW SUBSIDIARIES
BondSpot SA
It focuses its activities on trading in treasury and nontreasury debt securities and runs, at the request of the Minister of Finance, as part of public debt management, an electronic wholesale securities market - Treasury BondSpot Poland, which is an integral part of the Treasury Securities Dealers system in Poland.
Towarowa Gieÿda Energii SA
It is the only licensed commodity exchange in Poland that has a permit to operate a regulated market. The activity of TGE is supervised by the Polish Financial Supervision Authority. The primary commodities traded on the exchange are electricity, natural gas, property rights, and CO2 emission allowances.TGE has also been organizing trade in agricultural goods since March 2020.
» Izba Rozliczeniowa Gieÿd Towarowych SA (a subsidiary of TGE)
The Company provides a clearing service for all markets operated by TGE.
» InfoEngine SA (a subsidiary of TGE)
The Company operates an electronic platform for trading in goods in the OTC segment and provides services to electricity market participants.
» GPW Benchmark SA
The Company is a licensed administrator of regulated data benchmarks (WIG Stock Exchange Index Family, CEEplus) and non-interest rate benchmarks (TBSP Index), as well as interest rate benchmarks, including the WIBID and WIBOR Reference Rates, of which WIBOR has the status of a key reference index of systemic importance for the Polish money market, used for the valuation of most bank loans, derivatives and debt instruments issued in PLN.
» GPW Tech SA
The subject of the Company's activity is the construction, development, and commercialization of IT solutions dedicated to the broadly understood financial markets.
» Teelgren Investments SA
The Company joined the Capital Group on January 19th, 2022. In the future, the Company will act as a provider of crowdfunding services, tokenization services, and trading in financial and non-financial assets. The start of the Company's operations is planned for the fourth quarter of 2022.
Future Plans
Primary Market Development (GPW Growth) - Launch an educational program supporting the development of entrepreneurs from the SME sector. The pillar of the project is the introduction and development of the WSE Growth program, the primary purpose of which is to support companies in building their value through expansion with the use of external financing sources, in particular with a strong emphasis on development through the capital market.
WSE Private Market - GPW is working on creating a connecting platform for companies seeking capital from private investors. The initiative complements the offer of the WSE capital group so that it can be used by companies at every stage of development.
The WSE plans to take over the Armenian Stock Exchange (AMX). On September 18th, 2020, the WSE Management Board signed an agreement with the Central Bank of Armenia to negotiate the purchase of a majority stake representing 65% of shares in the Armenian Stock Exchange. The potential acquisition of AMX will allow GPW to expand its services further and accelerate the implementation of the # GPW2022 strategy. On the other hand, it will let the Armenian stock exchange take advantage of the know-how of the GPW Group.
Telemetry Operator TeO - development of the innovative TeO system, i.e., a multi-module auction platform intended for comprehensive handling of transactions on the media market
Biggest Growth Catalyst
Implementation of Employee Capital plan in Poland
Due to the growing number of post-working-age people and the increasing income generation gap between an individual's active work versus fixed income years, the public and private sectors cooperatively have developed a solution to improve the quality of life for all Poles in their retirement.
The Polish government's solution was to create the 2019 Employee Capital Plans Act (PPK). Thus, Poland has become the region's first country to create a universal, voluntary employee savings model. Such mechanisms are already used in other highly developed economies of Europe and worldwide, including Great Britain, Sweden, Norway, Denmark, Australia, and many more, with others soon to follow suit.
The PPK was officially launched on July 1st, 2019, and was first implemented in companies with over 250 employees. Medium-sized companies followed, then small businesses were invited to participate. Finally, the last stage, which started on January 1st, 2021, includes micro-enterprises and public administration employees.
Where will the money come from in the PPK?
Primary contributions are calculated and paid by the employer when paying the salary. When enrolling into a PPK, employees agree to have 2% of their salary transferred to their PPK account. Employees may also declare voluntary contributions of up to an additional 2% of the salary.
The employer's contribution will be 1.5% of the beneficiary's salary, which is mandatory and cannot be deducted from the employee's salary. The employer may also declare additional voluntary payments towards an employee's PPK of up to 2.5% of their salary.
Additionally, once the statutory requirements have been fulfilled, employees will receive funds from a third source – the state. These funds include a one-off welcome payment of PLN 250 and annual contributions of PLN 240.
An automatic registration of persons aged between 18 and 54 will apply to the PPK (a staff member who is over 55 and under 70 years of age applies to join the program himself)
How are funds invested in PPK?
The employer may entrust the management of the PPK to one of three types of entities:
Investment fund
Pension fund
Insurance capital fund
The bottom line is no matter which fund is chosen or how the funds are distributed between fixed income and equities, all the funds will end up flowing throw GPW.
One of the first things I look at when evaluating a company is the return on Net Tangible Assets because it shows how much return a company is earning on the Owner's Capital. But since GPW is a serial acquirer, it would be wrong to leave out goodwill and even other intangible assets because they primarily consist of licenses the business needs to operate. The only thing besides Cash and Short-term investments I have subtracted is Prepaid expenses because they are much higher than every other year.
Return on capital is 28% which means that for the Company to grow earnings by 28 cents, it needs to retain 1 dollar or that for every dollar the Company retains, it should grow earnings by 28 cents.
Now the question becomes, has the Company grown earnings by 28 cents for every dollar retained?
If we simply look at the growth in earnings vs. the amount retained, the answer would be a no, as the Company has only been able to earn an 11% return on retained earnings over the past decade, but at the same time, we also have to keep in mind that the Company has increased its net cash position by PLN 351million.
So out of the 494million that the Company has retained over the past decade, the Company only has been able to actually employ 143 million,
After adjusting for the increase in net cash, we can see that the Company has earned a very high 40% return on retained earnings. And for a company that has mainly grown through acquisitions, that number seems even more impressive.
GPW's management has been very disciplined about its acquisitions over the past decade. All the investments have been within their circle of competence, and none have been for expanding an empire. Managements' actions accurately predict their future behavior rather than their words. If GPW"s management keeps behaving the way it has been, I'd have absolutely zero complaints.
Another point to mention is the dividend. Gpw has paid a dividend every year since its IPO in 2010. Over the past decade, GPW has consistently paid out 60% of its earnings, and this dividend is very well protected in the sense that there are no competitors in GPW's major segments, and the Company has plenty of cash on its balance sheet.
The ability of the Company to produce cash is well established, and it pays out a majority of it through dividends. The cash retained by the management that has been invested has earned 40% over the decade. I'd be thrilled to see the management announce a buyback plan with all the excess cash on its current balance sheet. Still, it is unlikely to happen anytime soon because the Company sees its high dividend yield as a source of pride. It would much rather pay dividends than issue a share buyback, as you can see below from the email I received when I enquired about management's thoughts on buybacks.
Is it a cheap stock?
The Company has a net cash position of 9 PLN per share, while a share sells at about 35 PLN. So you are paying just 26pln net for a company paying a 2.74 PLN dividend. That's a yield of 10.5%, and this yield is very well protected. The stock is selling at an EV/EBIT of just 5.6, which seems quite cheap for its quality.
One last thing to mention before the ending is that the State Treasury is a majority shareholder owing 35% of GPW. I think this is a plus because it keeps management from making empire-expanding decisions and deworsifying just to employ cash. It makes the management focus more on long-term moat-building decisions than short-term profit margin-helping decisions.
Disclaimer: I currently have an investment in GPW.