Kino Polska TV

I bought some shares in the Polish company Kino Polska TV (WSE:KPL) recently. The company is a TV broadcaster in Poland. Some of their channels are: Kino Polska, Kino TV, FilmBox Premium HD, Zoom TV and Stopklatka. This last channel was itself a small publicly listed company and was majority owned by Kino Polska before it was finally taken off the market in 2020.

Kino Polska is a small operator. There are over 200 television channels in Poland and three big companies control around 70% of the market. Kino Polska is number six on the market with a share of 1.97% in 2019. They are looking to become number five:

We believe that in 2020, we will be able to continue the Group’s development just as effectively. In the coming periods, we aim at making the Group the fifth largest TV group in Poland, with an average annual share in the commercial audience (SHR, All 16-49, live) of 2.5-3%.

Source: annual report 2019, page 8. Bold text mine.

The company was listed on the Warsaw Stock Exchange in 2011 and it is controlled by SPI International, which owns 65% of the outstanding shares. There are two other significant shareholders owning 5%+ stakes. That leaves just 21% of the shares for all the remaining shareholders. That remaining 21% of stock represents roughly 40m PLN, or only $11.1m USD. So I think it makes sense to look at this company more as a nano-cap.

SPI International is a major privately-owned company that operates 42 TV channels worldwide. The company is controlled by Loni Farhi. I haven’t been able to find much information about him. Farhi has been running SPI International for more than 30 years and it looks like he has been very successful. He now lives in New York. Farhi serves as the Chair of the Supervisory Board of Kino Polska. A detail that caught my eye is that it looks like Farhi only received a token 1,000 PLN in compensation during 2019 (AR 2019, page 136).

Some summary financial data about Kino Polska:

Share price: 9.85 PLN
Outstanding shares: 19,821,404
Market cap: 195.2m PLN (~$52.6m USD)
Net income 2020: 26.3m (preliminary results)
Net income 2019: 18.6m
BV (Sept. 30, 2020): 104.2m
P/E prelim. 2020: 7.4x
P/E 2019: 10.5x

The company has grown nicely since it became public. Revenues have grown from 85m in 2011 to 202m in 2019. Net income has grown from 8.6m to 18.6m in that period. This is also the type of business that you’d expect to generate free cash flow, and it has. In 2019 operating cash flow was 22.9m and capex was just 4.4m, producing 18.5m of free cash.

A chunk of that cash has been used acquire Stopklatka. In June 2018, Kino Polska paid 31.2m to acquire 41.1% of Stopklatka. Before that transaction, the company already owned 41.5%. After another small tender offer in December 2019, the company now owns 99.6% of Stopklatka. So the company obviously sees some potential in this channel:

In 2018, we purchased shares in Stopklatka S.A. and, consequently, assumed control over it. The past 12 months ended 31 December 2019 strengthened our belief that it was a good decision.

Stopklatka S.A. improved its profitability due to synergies in, among other things, the area of cost relating to purchases of licences, marketing and sales activities. In the 12 months ended 31 December 2019, the company recorded sales revenue of PLN 30,031 thousand which represents an increase of almost 10% compared with 2018. The net profit amounted to PLN 28 thousand, and it should be remembered that Stopklatka S.A. incurred a net loss of PLN 3,270 thousand in 2018.

Source: annual report 2019, page 8

Stopklatka managed to continue to increase its market share in Q1 of 2020. Perhaps these are some early signs of a turnaround for this channel.

Kino Polska has also paid some dividends along the way. In the 2015-2017 period, these were around 20m PLN a year. After the Stopklatka acquisition the dividends have been cut back. In 2018, around 11m was paid and just 6m in 2019. I think they’re now more focused on reducing the debt incurred in the acquisition. At the end of 2019 the company had debt of 59.3m.

The company has performed well during the Covid-19 pandemic. This is from the Q3 2020 report, published in the Polish language:

The Capital Group has a diversified revenue structure, thanks to which the impact of COVID-19 in the respondents the period was limited. 67% are revenues from emissions and revenues from the sale of licenses, where the Group has not recorded the impact of COVID-19. Advertising revenues, affected by the pandemic effect, constitute only 33% all revenues.

Source: Q3 2020 report (quote generated by Google translate)

Covid seems to have caused some short term disruptions in the TV advertising market, with companies cutting back their expenditures at the outset of the pandemic. That should normalize over time. Perhaps the 2020 results will show this. The preliminary results for 2020 (in Polish) have been released a couple of days ago, but besides revenue and profits, not much can be learned from that yet.

Longer term, the company sounds quite optimistic about its prospects. I already mentioned their views about increasing their market share. The management seems confident that the company will be able to increase revenues in the coming years:

The Issuer’s Management Board expects the revenues of the Kino Polska TV S.A. Group to increase regularly in consecutive years.

Source: Annual report 2019, page 24

Conclusion

Kino Polska is trading at a very modest P/E multiple and has also shown it can generate plenty of cash. If the company is indeed able to increase its market share and grow revenues in the coming years, I think investors are likely to do well at current prices.

The company is one of the very few micro-caps in Poland that offers periodical reports in English. That probably has to do with the majority owner, because I don’t think Farhi is Polish. That is good news for interested foreign investors, because it is a lot easier to get an impression of a company by reading an English annual report and not having to mess with Google translate.

Why is it cheap? I think it is a combination of the low float (only roughly $11m USD) and the decreased dividend in recent years. If you look at a longer term chart, you’ll see that the share price has drifted steadily downwards since 2015. I don’t think that makes much sense, because the underlying performance hasn’t deteriorated and the company in 2015 didn’t seem overvalued to me either. The company’s outlook seems pretty positive as well. You read too often in write-ups like this that a company is forgotten and overlooked, has a low float to boot and that these things have caused its undervaluation, but sometimes it can actually be true. 🙂 Hopefully I’m right and there isn’t a major skeleton in the closet that I overlooked.

I think one of the bigger risks in Polish companies with a relatively low float is that the majority owner takes the company private at a bargain price. I’ve seen a number of examples of that in the Polish market. It seems possible here as well. After a recent change in the Polish law, I believe a majority owner now needs 95% of the shares to be able to squeeze out minority shareholders, so that seems quite hard to do currently, even with support from a few other major shareholders. I’m not sure if it is currently possible to delist the company though. It could be possible to do that when holding less than 95% of the shares. Investor fear of a delisting could be an explanation for shares trading at depressed levels.

If debt is reduced a bit more, I think it is likely that the company will increase the dividend again. The company has paid relatively large dividends in the past. A substantial dividend payment could make investors more aware of the value of the company. Management could also decide to make another acquisition.

Disclosure: long Kino Polska TV (WSE:KPL)