Śnieżka: a quality company in Poland

Fabryka Farb i Lakierów Śnieżka S.A. (Śnieżka for short) is a company that produces and sells paints and varnishes in Poland and Eastern Europe. Śnieżka showed up in a screen I ran a few months ago and I was impressed with what I saw. Unfortunately the stock didn’t look particularly cheap at that time, so I didn’t look into it further. Today the picture looks a little different. Śnieżka’s stock price has come down quite a bit and today the market cap of the company is 454 million Polish Zloty, which is around €108 million or $149 million.

Śnieżka went public in 2003. Śnieżka has produced a good record of growth in sales and net income over the years:

Sales 2001-2012:
Śnieżka sales
(source: Annual Report 2012)

In recent years sales have leveled off somewhat. One reason for this is that the construction industry in Poland has slowed down, which also affects the market for paints and varnishes.

Net income 2001-2012:
Śnieżka net income
(source: Annual Report 2012)

The year 2011 jumps out negatively. That year was impacted by a number of one time items, including an impairment on the sale of a subsidiary and foreign exchange differences. Looking at the record of the last 10 years it does seem that 2011 was an exception. Cash generation in 2011 was still solid.

This is a breakdown of the sales in geographical segments:
Śnieżka sales: geographical segments
(source: company presentation 2013)

I have made a simple table to show the development of sales in the various countries where Śnieżka is active:
Śnieżka sales: geographical segments historical

Śnieżka’s home market – Poland – is their most important market with 64% of total sales in 2013. Ukraine makes up 22% of sales, followed by Belarus with 9%. The company has 5 paint manufacturing plants: 3 in Poland, 1 in Ukraine (in the west and close to the border with Poland) and 1 in Belarus. Śnieżka estimates it has a 16.3% share of the market for paint and varnishes in Poland, behind PPG with 21.3% and Akzo Nobel with 17.8%. Tikkurila from Finland is the number four with a 12.9% share in Poland. In the Ukraine, Śnieżka’s share in paint and varnishes is about 24% and 30% in the emulsion paint segment. In Belarus Śnieżka reports a 15% market share.

For the year 2013 the company showed sales of 574m and net income of 43.8m. Currently Śnieżka is trading at 10.4x earnings.

Looking at the geographical segments of sales it is understandable why Śnieżka’s share price has recently dropped from almost 50 PLN to 36 PLN currently. Investors are worried about the conflict in the Ukraine and how it will impact the company.

Growing paint consumption

One reason I like Śnieżka is that it has good record of growing sales and free cash flow. It is also active in an industry that I think is reasonably predictable. The average paint consumption per capita in Poland is approximately 10 liters. In the Ukraine it is 7 liters and in Belarus 5 liters. The average consumption in EU states is around 15-16 liters.

I don’t know what Putin decides to do in Ukraine and how negatively it will affect Śnieżka’s Ukrainian sales in the short term. I do believe that 10 years from now people in Poland, the Ukraine and Belarus will consume more paint than they do today. As their economies grow and their people grow their disposable income, paint consumption will grow as well. Based on Śnieżka’s record and position in their markets, I think they will get their share of this growing pie.

Insider ownership & capital allocation

Management and directors own 60% of the outstanding shares. The company has spent significant amounts on capital expenditures to build out their activities. Average capex has been more than double the depreciation over the last 10 years. Śnieżka still generated excess cash which was returned to shareholders primarily through dividend payments:

Śnieżka dividends
(source: company presentation 2013)

Additionally the company has occasionally repurchased shares, most recently in 2012 when it spent 30m PLN, I believe in a tender offer. The maximum price the company was allowed to pay for those shares in the offer was 34 PLN, which is close to today’s share price.

What is risky?

Many people will consider Śnieżka too risky, because they have exposure to the Ukrainian market. But what is risky? Often the answers to questions like this are counterintuitive in investing. Let’s look at some of Śnieżka’s competitors: PPG Industries, Akzo Nobel and Tikkurila. PPG is a $26 billion company trading at 26x earnings. Akzo Nobel is a $18 billion company with a 21 P/E. Tikkurila’s market cap is €780 million and is trading at almost a 16 P/E ratio. Well known and stable companies like these often get a premium valuation in the market and rarely drop to bargain levels. I think investing in these competitors is a lot riskier than investing in Śnieżka. Śnieżka is a lot cheaper and has a lot more room to grow.

Of course a better relative valuation does not make Śnieżka a good investment. I don’t invest based on relative valuations. I just think these valuations illustrate how investor sentiment works and what investors consider risky. Investing based on gut feelings will produce bad results over time. Paying too much for a stock is the biggest mistake to look out for.

I do wonder if Śnieżka could be an attractive acquisition for one of these larger companies. It’s probably too small to move the needle for PPG or Akzo, but I think it could make sense for a company like Tikkurila to purchase Śnieżka.

Conclusion

The situation in the Ukraine doesn’t concern me too much at this point. The main reason is that none of the parties involved have an incentive to let things escalate to something that really resembles a war. The conflict will probably impact Śnieżka’s Ukrainian sales this year and perhaps for a few years thereafter, but I think that’s all priced in at this point.

Śnieżka is not a typical investment for me. Often I invest in companies where the book value supports the valuation of the company, but this company is not a book value bargain. My investment in Śnieżka is based on the quality of the company and their growth prospects. The company is capable of achieving a 20% ROE, it has a favorable trend working for them (increasing paint consumption in Eastern Europe), management seems rational in their capital allocation and owns a significant stake in the company. Paying 10x earnings for what I believe is a quality company seems like a good deal.

Disclosure: long Śnieżka

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NeverLoseMoney

Author of ValueInvestingBlog.net. Private investor.

6 Comments

  1. This company looks profitable (ROE) and stable. Do you know if there is a website which provides 10-year financial statements (income statement+balance-sheet) for polish companies or Sniezka in particular? Is the screen you used for free?
    I don’t have access to fancy databases and this would help alot.

    My approach is to go to the stock exchange http://www.gpw.pl/root_en and simply look at each company from A to Z, go to their websites and take a glance at the annual report. But this takes time.

    • I really like using the Financial Times website: FT.com. I use their free screener from time to time to generate some ideas.

      If you sign-up for a free account there you’ll be able to see balance sheet, income statement and cash flow data for the past 5 years for practically any publicly traded company in the world. It’s a great resource in my opinion for small investors like me without access to expensive databases and screeners. It isn’t the 10-year data you were looking for, but I find the 5 year overview often gives you enough data to give you a sense of whether an idea is worth pursuing.

      • Thank you. looks good at first glance. They have used cashflow instead of letting cash built up (buy back shares, pay dividends, invest in business, increase/decrease debt).

        I don’t know why they earn that good returns. Is their franchise/brands worth something?

      • It’s hard to answer that question. I do think their brand is well established in Poland and the Ukraine and that marketing is an important factor that shapes the customer’s decision on which brand of paint to buy. Sniezka spends some attention on these marketing activities in their annual reports.

        This is an interesting quote from the AR about the Polish market:

        On the one hand big renowned multinational companies are present on the market, while on the other small local entities compete strongly on price. It is possible that a new paint producer could enter the market, however, it is very difficult to create a new brand with a strong market position and it would require huge financial outlays. Therefore, the Parent Company anticipates that new competition could emerge on the market mainly as a result of ownership transformations. In 2012 several acquisitions were performed on the paint and varnish market, for instance PPG Industries announced finalisation of the acquisition of Dyrup A/S from its then owner, the Monberg&Thorsen conglomerate (in 2010 Dyrup A/S acquired 100% shares of the Polish paint and plaster manufacturer Malfarb).

        Sniezka’s market cap is a little over €100 million. How much would it take for a competitor to replicate Sniezka’s postition in their key markets? It might be cheaper to simply buy Sniezka.

  2. Pingback: Berling SA: a cash-rich book value bargain in Poland | ValueInvestingBlog.net

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