ZUE is a general contractor operating in the rail and tram infrastructure sector. Recently, the company has become the only WSE-listed company not under the control of stateowned infrastructure entities for which this is a leading business. The current year is significant in two respects: i) completion of the "difficult" contracts of 2017, ii) geographic diversification. The company is in the final stages of completing orders signed in 2017, which are either being officially finalized or should be completed in Q4'23. These have burdened results for the past few years. ZUE has won rail orders in the Romanian market in 2022, which should be more clearly visible in revenues from 2H'23.

They account for about 30% of the company's backlog after 2Q'23. Entering Romania involves, among other things, risks specific to the market there, but at the same time, we believe that this may eventually be a successful step for the company to enter foreign markets. ZUE's current enterprise value (EV) is about PLN 150 million. This amount is lower than the sums of fixed assets and net working capital. We currently set the fair value (target price) of ZUE's shares at PLN 7.76, implying a Buy rating. The valuation does not take into account possible claims and valorisation from PKP PLK (lawsuits filed for PLN 93m, about PLN 4.0/share). ZUE's order backlog amounted to PLN 1.46 billion after Q2'23. The company has a pending contract worth PLN 0.79 billion with PKP PLK (CEF financing).

We estimate that the current backlog is more or less evenly split between rail contracts in the Romanian market / rail contracts in Poland / urban contracts (tram), at about 30% each. The remainder is made up of maintenance contracts and trading company orders. We note that the company's execution portfolio still includes contracts signed in 2017, from a period when competition on tenders was very demanding. These contracts recorded significant delays compared to the original schedules. We estimate that the value of work on these contracts may still amount to about PLN 30-50 million as of 2H'23. On previously completed contracts from a similar period and still from the previous EU perspective, the company has filed lawsuits and valorisation claims for about PLN 93 million.

This figure does not include potential claims on contracts currently being completed. Contracts in the Romanian market were signed by the company in late 2022/23 (tenders were bid in Q3'22, when concerns about cost increases were high and bids were cautious). At the time of signing, they had a total value of about PLN 490 million for ZUE. These contracts are not technically complex (replacement of track infrastructure), and have a built-in valorisation index. Entering the Romanian market is not ZUE's first approach to foreign markets.

A few years ago, the company had already executed a medium-sized contract in Slovakia, earlier it had also had an approach in the German market (which in the next few years may become more open to Polish companies in the field of network electrification due to the lack of local capacity) or for many years it has been observing the Bulgarian direction. In recent months, the first Latvian contract was also secured (the Baltic market may be very absorptive in the coming years due to the construction of Rail Baltica, which will also be accompanied by smaller local investments). In 1H'23, the company generated PLN 542m in revenue (+45% y/y) and PLN 4.1m in net profit.

We expect that in 2H'23 the y/y revenue dynamics may slow down (the backlog is currently marginally lower y/y), while we expect profitability to improve (decline in importance of "difficult" contracts, gradual emergence of revenues from Romania with declared higher-than-average margins). We assume that in 2023 the company will generate PLN 1.1 billion in revenues and PLN 11.8 million in net profit. In 2024, we expect similar revenues and PLN 13.3 million in net profit. We take a conservative view on the backlog for 2024-25 at this point.

The launch of EU funds would solve the sack of tender procedures in the tram market on the part of local governments, and would significantly accelerate the settlement of tenders on the part of PKP PLK.