Portfolio Holdings - TIM SA

Polish Electrical Equipment Distributor

Disclaimer: The below write-up is not investment advice. The author is long shares of TIM SA and his views may be biased. Investment in these shares is risky and may lose the investor money. Please do your own research.

Poland - Uninvestable or Land of Milk and Honey for Value Investors?

I tend to have a soft spot for countries which go out of favour. For example, when the Euro crisis hit, I took a dive into Southern European Companies and pulled the trigger on a few Italian and Greek shares. So I like to be a country-contrarian. On the other hand, country risk is certainly a real consideration, as we have learned in various countries, from Argentina to Russia. As a general rule, I tend to be sceptical when it comes to countries where property rights are in question. That always kept me out off Russia and also makes me cautious on China.

I believe that Poland is a different animal. Even though there are political issues in the country, in particular the struggle for domination of courts is to be taken seriously, and you do not have to like the current government, Poland in my view is and wants to firmly part of the Western world - including the market system - and this is not questioned by anybody relevant. Hence, Poland for me is as investable as any European country. Still, there is some ignorance/arrogance on the part of some Western Europeans (I am German) who still consider Poland some unenlightened which may one reason why the market appears to be orphaned and cheap. If you like to run a quantitative value screen, Poland is a great place to start - you will find a lot of cheap companies with high capital returns there.

One obstacle for me is language. I understand Polish about as well as I understand Tibetan which is an issue, given that many companies publish in their own language only. I have however found Google Translate a helpful tool that does a decent job at translating financial statements well enough.

Introduction to TIM

One of those cheap high-return companies is TIM SA. It popped up in one of my screens and I also read about it when glancing through Dave Waters’ Alluvial Capital Letter . Dave is a great and very creative investor, also make sure you subscribe to his substack.

So what do they do? TIM is Poland’s largest wholesale distributor of electrotechnical products. Products include, lighting, connectors, wires, cables, meters, switchboards, sensors and more. Reporting is split into three segments

• E-Commerce Distribution

• Remote Distribution

• Logistics Services (3LP)

Clients of TIM include Corporates in the automotive, construction, IT and electro sectors as well as individuals. To get an idea, just check their website. TIM is the largest specialty distributor in its sector and the first which brought its offer online. If done well, specialty distribution can be an interesting business as evidenced by US company Fastenal, probably one of the best-performing stocks in the US over the last decades. Critical success factors come down to (1) scale, (2) logistics and (3) capital allocation. In terms of scale, TIM, the growing market leaders looks competitive.

TIM’s fully owned subsidiary 3LP runs two logistics centers in/near Wroclaw with 112K square meters in storage area. 3LP does not exlusively work for TIM but also provides logistical and warehosuing services for other companies (notably IKEA). TIM is planning to separate 3LP and was preparing an IPO which however was pulled on 09 May due to the weak market environment. While 3LP is a fairly small part of of TIM group, excellence in warehousing/logistics may be a major line of defense against the “Amazon risk” (someone with more efficient logistics taking over your E-Commerce business)

History & Management

TIM was set up as a “Youth Cooperative” at the end of the communist era in 1987 and led by Krzysztof Folta, Krzysztof Wieczorkowski and Bogumil Moszczynski as a trading company for electrotechnical articles and a producer of measuring instruments (a business line later spun off). The company went public at the Warsaw Stock Exchange in 1998. The company started venturing into E-Commerce in 2011 when it bought marketeo.com in 2011. The company then started its current E-Commerce Platform in 2013 and established 3LP, the logistics centre operator, in 2016.

Both Krzysztof Folta (63) and Krzysztof Wieczorkowski (60) have driven the expansion and growth of TIM. Folta is still the company’s and biggest owner of TIM shares (5.2mm shares, 23.4% of the company. Krzysztof Wieczorkowski serves as Chairman of the Supervisory Board and still owns  3mm shares (13.5% of the company). Their entrepreneurial success over decades in TIM has made them both very wealthy and they remain committed to the committed to TIM. In addition to the “two Krzysztofs”, the management board is staffed by “two Piotrs”, Piotr Nosal (39, COO) and Piotr Tokarczuk (47, CFO), younger managers who might represent the next generation.

The company has a share-based Incentive Program in place for its Management Board and key managers of its subsidiaries. The current program runs for 3 years (2021-23) and is for 4.7% of the company’s capital. It comes in the form of options (at an exercise price of 10.34 PLN/share which the managers will be granted upon achieving a certain EBITDA level. The value of the existing Incentive Program is set at about 10.2mm PLN which is not huge. Still, it is good that there are incentives and the upside is potentially unlimited.

Financials:

A quick look on selected items of TIM’s last five years (source: TIKR):

There is a lot to like here: Revenues have roughly doubled (CAGR 15%) while Gross Profit is up 3x. The company is now highly profitable with EBITDA margins approaching 10%. At the same time, it does not require a lot in terms of invested capital and generated 49% in Return on Equity last year. A dividend was initiated in 2018 and, at the current stock price (around 34 PLN as of writing), the dividend yield stands at a juicy 7%. This is the rare example of a stock pairing high growth with high profitability and high income.

Based on its E-Commerce driven model (and potentially some Covid tailwinds), TIM managed to significantly overdeliver on its 2019-21 strategy, achieving revenues of 1.25 bn PLN (versus a target of 1.0 bn) and  an EBITDA margin of 9% (versus a target of 3.6%). The company has set a ew knew strategy for 2022-26, focusing to further facilitate the use of use of its B2B e-commerce platform. The declaration sounds simple to trivial: “At TIM, you order easily, wait shortly and you always get everything you need: product, support and knowledge”. Not exactly a revolution, but rather a statement of the goal to further roll up the market in which TIM is a leader but has further to grow. Financially, TIM targets revenues of 3bn PLN and an EBITDA of 250mm PLN (EBITDA margin of 8.3%) by 2026.

At the same time, there are two aspects to be mindful of:

(1) This performance was achieved in a favourable environment. There have been various tailwinds which will not necessarily last forever: Over the last decade, Poland has been one of Europe’s best performing economies. It has not caught up to Western Europe, but the gap has been narrowing. This has included a boom in some of the sectors relevant to TIM, such as construction, IT and industrial. Worse days for the Polish economy may come at some point. Moreover, TIM benefitted from adopting early to a digital model, which made the company a Covid beneficiary. Some of this effect may reverse.

(2) It will also be important to watch the company’s cash flow. Cash flow has been lagging accounting earnings as the company increased its working capital while growing. Still, ratios like the Cash Conversion Cycle or Working Capital Turnover improved until 2020, but somewaht worsened in 2021. Given the supply chain issues last year which still persist, this is not too surprising. Still it is something to look out for as inflation recevables/inventory levels might be a warning sign for a distribution business.

For the TIM being, TIM is firing on all cylinders. First Quarter 2022 show another record quarter with revenues of 393mm PLN (+50% vs. Q1 2020), EBITDA of 47mm PLN and Net Profit of 31mm PLN (more than doubling the year before). The company noted that customers’ fear of product availability and price hikes may have pushed sales, so may be growth this quarter was somewhat above trend. Still, it sets up TIM for an EPS of more than 5 PLN/share in 2022.

Valuation

I really prefer situations where you know something is cheap without havingto prepare a fully-fledged DCF model. Based on 2021 results of 4.10 PLN/share and a stock price of 34 PLN, TIM is trading at a PE ratio of 8.3x. If they do 5.20 PLN/share this year (might be conservative after 1.41 in Q1), this becomes 6.5x. For 2026, let’s assume an EBITDA of 250mm PLN and an EBITDA->Net Income Conversion of two thirds. This gives an EPS of 7.50 PLN.

Given that there is no debt to speak of and the company is generating high returns on capital while growing, this can also trade for 10x earnings for a double or some higher multiple. Also, while waiting, you may collect a dividend which currently yields 7% and can be expected to grow.

Summary

TIM is a Polish specialty distributor market with great financial metrics in terms of growth and profitability. The company is still led by its founders with significant skin in the game. TIM’s strengths are e-commerce and logistics and it looks like a winner from digitalization and electrification trends. While its revenue source are diverse, it is potentially vulnerable from an economic cooling. Cash generation is to be monitored. Based on simple metrics, the company looks dirt cheap. Overall, the company looks very attractive at its current price which is why it is one of my biggest portfolio positions. I will also look more into Poland as a potential hunting ground for investments (ideas welcome!)