National Bank of Poland leaves rates unchanged, focus on tomorrow’s press conference The National Bank of Poland rates and statement after the June Monetary Policy Council meeting were unchanged. More information should come from tomorrow's conference by the central bank president. We expect a slightly more dovish stance.   As expected, NBP rates remain unchanged (reference rate still at 6.75%). The post-meeting statement noted a decline in first quarter GDP and a further contraction in consumer demand, with investment still growing. The document again underlined the favourable labour market situation, including low unemployment. As expected, the MPC noted a further decline in CPI inflation and a marked decline in core inflation in May. The Council continued to see a pass-through of rising costs onto finished goods prices. Aside from updating paragraphs on the first quarter GDP figure and the latest inflation data, the rest of the statement was largely unchanged. The Council reiterated its view that the return of inflation to the NBP's target will be gradual due to the scale and persistence of past external shocks.     The key event in the context of the monetary policy outlook is tomorrow's press conference by NBP President Glapiński. We expect its tone to be more dovish than a month ago. The decline in inflation has been faster than expected (albeit close to the NBP's March projection). The peak in core inflation is most likely behind us, and the strengthening of the zloty and lower commodity prices should favour further disinflation. The short-term inflation outlook has improved, and some MPC members have again begun to raise the topic of a readiness to cut interest rates before the end of this year.     In our view, the medium-term inflation outlook remains uncertain, and with a tight labour market, high wage pressures and strong consumer acceptance to price increases, inflation may therefore stabilise in the medium term at levels well above the NBP target. The NBP's projection, assuming it leaves interest rates unchanged, suggests a return of inflation to the target by the end of 2025, and a possible rate cut before the end of 2023 could delay this.   Therefore, in the baseline scenario, we see no rate cuts this year. However, an improvement in the short-term inflation outlook, the strengthening of the zloty and a possible softening of other central banks' rhetoric in the coming months could serve as arguments for a single MPC rate cut in the second half of the year. We estimate the probability of such a scenario at 30-40%.

Financial supply to remain at elevated levels in June  Financials supply was also substantial in May, totalling €33bn, although not to the same levels as corporates. The last week of May, however, saw a skew towards more financials supply. We expect financials supply will continue to come at significant levels over the coming few of weeks. YTD supply is still running ahead of previous years, now sitting at €163bn.                  

Expect supply in June to be decent, although below the large levels seen in May • There was substantial corporate supply in May, totalling €48bn, the highest monthly supply so far this year. Supply was heavier after limited windows of opportunity in March and April. The macro environment has become ever so important for credit and rates, and thus primary markets remain closed during economic data publications, central bank meetings and holidays. Therefore, when an issuance window is open, there is a big rush of new deals – from corporates, financials and SSAs.   Saturated primary markets therefore results in very heavy days of supply indigestion. As such, primary markets will continue to drive secondary spreads by pushing secondary spreads wider to match the primary levels, which is the true place where substantial supply meets substantial demand. This is one of the many factors that combined to pressure credit, as outlined in our report Small factors combine to pressure credit.       • YTD supply is at €161bn, currently running 13% ahead of last year. We continue to forecast supply to total €270bn, up 10% on last year. As such, we are likely to see a decent level of supply come to the market in June, and then slightly slower supply in the second half of this year.       • Reverse Yankee supply is adding to the barrage. Reverse Yankee supply was also plentiful in May, with €12bn issued. The calculation was favourable for a cost saving advantage for US issuers to bring a EUR bond to the market, namely on the back of USD spread underperformance versus EUR. This differential is now narrowing, particularly in the 5yr. Thus, we may not see too many more Reverse Yankee deals this month, unless the differential widens again.

Large supply in May pushed YTD total ahead of most previous years There was very substantial corporate supply in May totalling US$124bn, in line with the large supply seen in February. On a YTD basis, supply is sitting at US$394bn, running ahead of previous years, and second only to the record-breaking 2020 levels of US$694bn by this time. Supply is now over US$100bn ahead of last year’s US$292bn in the same period. We believe much of this year’s supply has been front loaded as economic uncertainty persists, resulting in our expectation of a slowdown in supply in the second half of this year.   After US$58bn redemptions in May, corporate net supply amounted to US$66bn. Supply in Healthcare was significant this May, with US$40bn supplied. This is the highest month for the healthcare sector in the past year and a half. TMT supply was also large, at US$29bn, although on a YTD basis TMT is still aligned with last year.   Reverse Yankee supply is adding to the barrage. Reverse Yankee supply was also plentiful in May, with €12bn issued. The calculation was favourable for a cost saving advantage for US issuers to bring a EUR bond to the market, namely on the back of USD spread underperformance versus EUR.   This differential is now narrowing, particularly in the 5yr. Deals included Booking, AT&T, Corning and American Tower. These deals were priced very much in line with the market, with new issue premium (NIP) higher due to some supply indigestion. Reverse Yankee deals tend to offer a more attractive NIP, particularly when the cost saving advantage is decent. This added to the barrage of EUR supply we saw, further adding supply indigestion pressure to EUR credit.         Financial supply very low on a YTD basis  Contrary to corporates, financials supply was low in May with only US$26bn in new issuances, due to the large uncertainties surrounding the banking environment currently matched with much higher funding costs. This is lower than the already small supply of US$29bn in April this year, and significantly lower than the US$47bn from May last year. YTD supply now sits at US$170bn, down 43% compared to the same period last year. Pressure on the financial sector persists, resulting in low supply numbers.                  

A good start to the year, challenging base in Q2 After a strong first quarter, we raise our price target by PLN 3 per share to PLN 38, but we reiterate a Hold rating. The excellent results of Fabrity, which reported over 30% growth in operating revenues and a similarly strong increase in operating profit, improve our perception of the company compared to other representatives of the software house segment listed on the Warsaw Stock Exchange, where the organic growth rate is slowing down and pressure on margins is visible.     We approach the second quarter with a bit more caution, taking into account last year's demanding base for Fabrity (Q2 was the most profitable quarter for the company in 2022) and less favorable exchange rates, with the strengthening of the PLN, which naturally affects the profitability of revenues from foreign markets in the short term.     We believe that it will be harder to improve the result in Q2, but we hope for a return to higher dynamics in the second half of the year. Fabrity's customers are in many cases less dependent on economic fluctuations. Apart from Frontex, many contracts are projects with a horizon of several years, which should offset the impact of the slowdown in the sector on the company's results. At the same time, it has become easier to recruit employees. Fabrity increased the team by nearly 30 people in the first quarter, compared to 220 at the end of 2022.   Dividend The proposed PLN 4.0 per-share payment is slightly higher than the PLN 3.2 mentioned by the Management Board at the previous conference as the lower limit of the range resulting from the dividend policy. The amount is close to the net cash the company had at the end of Q1'23 and together with the PLN 8.4 per share paid in the previous year, it probably ends the period of above-average distribution, at least until (if) the marketing business is sold.   PerfectBot will use the potential of GPT models Currently, the company is rebuilding the product to use the full potential of GPT models, and in the second quarter it plans to increase the number of US customers testing PerfectBot GPT (a dozen or so entities). Commencement of commercialization is planned for 3Q23.   Results forecast We present restated annual results for the years 2021-22 and in the forecast period with the marketing segment in discontinued operations, which means that practically only the Fabrity business affects revenues and operating results. We assume that it will be more difficult to attract new customers this year due to the weakness of the entire market and, consequently, we expect revenue growth to slow down from +26% y/y in 2023 to +16% in 2024, with a similar operating margin.   Dividend payment in Q4 will reduce financial income in subsequent quarters, which will result in a lower than EBIT increase in net profit in 2023. Below EBIT, we assume a positive contribution from the marketing segment of PLN 1.9m in 2023 and PLN 1.8m in 2024, minority interest profits in Fabrity (PLN 1.1 million and PLN 1.3 million, respectively) and a loss of approximately PLN 0.5 million annually attributed to the 50% stake in PerfectBot   Valuation Our target price is based on DCF (PLN 36.3) and total-of-the-parts (PLN 39.2) valuations. In the sum-of-the-parts valuation, we rely on the Polish peer group for Fabrity, the valuation from the last financing round less a 10% discount for PerfectBot, and target EV/EBITDA and EV/EBIT ratios for marketing.           Valuation Valuation Approach After moving the results of marketing to discontinued operations in our forecasts, we change the weights of individual valuation methods in the calculation of the target price. We no longer take into account the comparative valuation, where 50% weighting were foreign companies from the marketing sector.   Our target price is now based on the DCF valuation (PLN 36.3) and the total-of-the-parts valuation (PLN 39.2, including the Polish peer group for Fabrity, the valuation from the last financing round less a 10% discount for PerfectBot and EV/EBITDA and EV/EBIT ratios for marketing). In the sum-of-the-parts method, the Fabrity valuation range is set by comparison to a wider IT group (lower end) and only to two representatives of the software house sector (upper end).   DCF valuation DCF valuation assumptions: 1) Risk-free rate at 6.0% in the detailed forecast period (previously 6.5%), and 5.0% on TV (unchanged); 2) 7.5% market premium (according to our methodology for entities below sWIG80); 3) Beta unleveraged 1.0x, residual growth rate 3.0% (previously 2.5%, we are increasing after excluding the marketing segment)         Risk factors • Risk related to increased competition in the software house segment • General economic situation • Risk of losing customers • Risk of losing key employees • The risk of failure of the PerfectBot project • Risk related to customers' failure to meet payment deadlines • Currency risk (most of Fabrity revenues is denominated in foreign currencies)   The abovementioned risk factors were covered in detail in the initiation report.        

The results for the first quarter of 2023 are in line with preliminary estimates and we assess them as weak. Revenues amounted to PLN 6.7 million, of which revenues from games generated PLN 5.8 million (the remaining part of revenues was generated for own needs). This is a decrease of 14.9% y/y and 0.6% q/q.   These values confirm that the pandemic boom in game sales is coming to an end. At the level of results, Vivid Games also disappointed, with an operating profit of just PLN 64k (decrease by 5.2% y/y), while the net loss amounted to minus PLN 17k (a year earlier the net profit was PLN 50k). On the other hand, preliminary estimates for April are optimistic. Monthly revenue from games increased to PLN 2.14 million (an increase of 8.1% m/m), and the net result was positive and amounted to PLN 0.32 million. This means a significant improvement compared to March and the entire first quarter of 2023.   However, the April’s enthusiasm related to the improvement of profitability was quickly brought down in May, when the Company received information about the suspension of financing the project from the National Center for Research and Development for a total amount of PLN 6.4 million (of which PLN 3.9 million was subsidized). The reasons for the suspension are unknown, while the consequences are clearly negative. In addition to the lack of the cofinancing amount in the category of other operating income, the Company will not receive cash in the assumed time (or at all), which worsens its liquidity.   Finally, we lower our valuation to PLN 0.90 (from PLN 1.05) per 1 share at the end of 2023, which results from a lower valuation both using the DCF and comparative method.    

1Q2023 the effects of the slowdown and the high base of the previous year  Decrease in revenues and lower margin in TIM SA, net profit lower by over 50% y/y - as expected. Weaker results of 3LP (costs of launching new facilities), decline in EBITDA and negative net result - in line with our forecasts. Weaker operating CF (renewed increase in working capital: PLN +35 million q/q) and higher CAPEX - as a consequence, an increase in DN by over PLN 30 million. TIM's results are of secondary importance in the situation of the ongoing tender offer for 100% of the company's sharesat the price of PLN 50.69 per share.     Companies' results Sales of TIM SA in the first quarter of 2023 decreased by 8%, reflecting the deterioration of the market situation. In addition, the margin on goods fell (-1 pp y/y and similarly q/q), which the management explains by the intensification of competition and a change in the attitude of buyers (they no longer buy "in stock"). At the same time, operating costs increased (+10% y/y), mainly in external services (transport, warehouses +13% y/y). The balance of other activities and the balance of "financials" were not significant for the final result in TIM SA.    Unfortunately, the results of the logistics company 3LP fell short of our expectations. This entity showed a 2% decrease in sales to customers from outside the Group (to approx. PLN 16.5 million), generating a loss already at the EBIT level (PLN -0.7 million, for the first time in at least 2 years).   The EBITDA result was the lowest since Q1 2020 (below PLN 5 million). The negative impact of the "financials" was partly offset by positive exchange differences (balance of financial activities in Q1 approx. PLN -2 million). The net loss in the first quarter amounted to almost PLN 3 million. In the following quarters, the results should improve, as 3LP will use the newly launched warehouse space more and more effectively, however, the weaker results of TIM SA will be weighed down (decrease in the volume of orders). Throughout 2023, we expect an increase in EBITDA with lower EBIT and a slightly negative net result.     Renewed increase in inventories and receivables offset by slightly higher trade payables In Q1 2023, TIM SA increased the level of inventories by PLN 17 million and receivables by PLN 18.5 million. On the other hand, trade liabilities increased by approx. PLN 6 million, financing the increase in current assets only to a small extent. As a result, the net working capital (KON) increased by approx. PLN 30 million, and the cash turnover cycle increased to almost 50 days (parent data).     The quarterly value of the consolidated operating CF (PLN -10 million) was the lowest since mid-2015, mainly due to the decrease in EBITDA and the outflow of funds to working capital. Debt increased (+PLN 17 million q/q, the effect of launching new warehouses and showing long-term leases), with a clearly lower level of cash - the result is an increase in net debt (+PLN 32.5 million q/q). The increases relate mainly to 3LP, in TIM SA alone there is still net cash (PLN 12 million, but PLN 15 million less than in the previous quarter). The DN/EBITDA ratio in the Capital Group increased to 0.9x, but remains at a very safe level. The decline in earnings was expected by us (as a result of the downturn in the industry). We are negatively surprised by thepoor 3LP data, although we hope for an improvement in the coming quarters. We maintain our full-year forecasts. On the other hand, we are aware that until the ongoing calls are resolved (beginning of July 2023), the exchange rate will react poorly to information not related to the call itself. We assume that the tender offer will be successful (the proposed conditions are attractive for TIM SA shareholders), which will result in the delisting of the company's shares from stock exchange trading

  • The company published its Q1'23 results on Tuesday before the trading session. A results conference call with management is scheduled for Thursday (12:00). • Q1'23 revenue amounted to PLN 97.5m (+86% y/y), slightly above our expectations.   • On a standalone basis, the Installations segment (which accounts for the contract at the Belarusian border) generated revenue of PLN 54m (vs. PLN 157m in Q4'22 and PLN 14m in Q1'22). After Q4'22, we estimated that about PLN 90m of revenue remained from the border contract to be recognized in 2023, and we tentatively estimate that more than half of that value could remain after Q1'23. The current expected completion date for the contract is June 2023.   • Gross margin (15.1%) significantly higher y/y and above our assumptions.   • SG&A costs as much as 2% higher y/y.   • Impact of other operating activities negative in Q1'23 (PLN -1.5m).EBITDA amounted to PLN 8.6m in Q1'23 (vs. PLN -3.1m a year ago). A much better result than we had anticipated (we expected PLN 3.5m).   • Financial activities slightly positive at PLN +0.3m.   • Q1'23 net profit at PLN 5.8m (effective tax rate at 26%), we expected PLN 1.9m.   • Cash flows from operations amounted to PLN +9m in Q1'23. Prepayments at PLN 16m (down sharply vs. Q4'22 - settlement of prepayments on a border contract).   • The company had PLN 60m in net cash at the end of the period.   • Backlog: PLN 618m (vs. PLN 558m after Q4'22 and PLN 598m a year ago).   BDM Comment: The company's Q1'23 results were above our forecasts. The main reason for this was the gross margin, which was very high for Q1. At the end of Q1'23, the company recorded a very good cash position, which even increased compared to Q4'22.   The contract on the barrier on the border with Belarus will still have an impact on Q2'23 results, at the same time the company has a significant portfolio in other areas as well (the portfolio is now even marginally larger than a year ago). An earnings conference call with management is scheduled for Thursday (12:00).