Bowim - Solid steel distributor trading near ATL-multiples

“Back-of-the-envelope”

BOW (share price 6.7 PLN) is valued at a low P/TB of 0.39, EV/S of 0.05, EV/EBIT of 2.9, and P/E of 9. It is profitable (EPS 0.8 PLN) and has made a profit in approximately 85% of quarters over the past ten years. Further reduced downside is found in net cash of 1.5 PLN/share and financial assets (mainly investment properties) of 2.3 PLN/share. Backing out these 3.8 PLN/share (”non-core”) reduces TB/share from 18.2 to 14.4 PLN. At the same time, the "price we pay for the business" decreases from 6.7 PLN to 2.9 PLN. This results in a P/TB of 0.20x for the business. Additionally, it is worth mentioning that the book value of buildings and land is 4.7 PLN/share (cost 5.6 PLN/share), considered a latent cash reserve. Paying 2.9 PLN/share for the debt-free business can be compared to BOW delivering EPS of 1.5 PLN in good times and as much as 9 PLN in 2022 (see more below).

Balance Sheet

A simplified balance sheet consists on the asset side of financial investments of 39 million PLN, PPE of 111 million PLN, NWC of 159 million PLN, and net cash of 25 million PLN. This is financed with 25 million PLN in other liabilities (net) and 309 million PLN in tangible equity. Inventory is about 220 million PLN, compared to COGS of about 1700 million PLN. The company has significant financing costs related to factoring, which is worth keeping an eye on.

Buildings and land have a book value of 80 million PLN and a cost value of 96 million PLN. HQ and central warehouse are in Sosnowiec. The distribution network covers "almost the entire country," including hubs with inventories in Syawkow, and sales offices in Biayystok, Gdansk, Kielce, Lublin, Poznay, Szczecin, Toruy, and Warsaw. The network is complemented by a “Sheet Metal Prefabrication Plant” in Sosnowiec and a warehouse in Pyock (subsidiary Passat-Stal) and a distribution center in Rzeszow along with inventories in Jasyo and a “Prefabricated reinforcement production plant” in Gliwice.

Operations

Bowim is one of Poland's largest players in the distribution and processing of steel products, with its own sales network in wholesale and retail and a network of nine distribution sites in Poland. The company also provides production of prefabricated reinforcement units and guides for the mining industry as well as transport services. Customers are mainly companies in steel construction (26%), trade (16%), metal (16%), and construction (16%). Almost all sales are in Poland. BOW has been listed on the Warsaw Stock Exchange's main list since 2012. The number of employees is about 390. Approximately 70% of purchases are in EUR. The group consists of the parent company Bowim SA and the three subsidiaries Betstal (“prefabrication of reinforcement”), Passat-Stal (“steel service center”) and Bowim-Podkarpacie (75% owned, “sale of steel in the Podkarpacie region”). In 1Q2024, revenues decreased by 21% compared to the same period last year, mainly due to the continued decline in steel market prices and weak market conditions. However, net income increased from 2.5 million PLN to 3.6 million PLN, due to increased efficiency.

Background

Revenues have grown from 451 million PLN in 2005 (no data before) to 1940 million PLN (7.5% CAGR), and BOW has only made one operating loss; in 2009 (-14 million PLN). In the past three years, EBIT% has been 11%, 6%, and 2%. The Russian invasion of Ukraine on February 28, 2022, significantly altered the global steel market since Ukraine and Russia are major players in this market. Before the war, Russia was the 5th largest steel producer globally, and Ukraine was the 14th. According to PUDS data from 2021, 25% of the European market for foreign supplies were goods from Russia, Ukraine, and Belarus. In Poland alone, steel imports from these countries in 2021 amounted to 3 million tons. In 2022, 71% less steel was produced in Ukraine compared to the previous year. The decline in production in Russia was 7%.

In 2023, steel demand gradually weakened, leading to further declines in steel product prices. In response to decreased market demand, manufacturers announced production cuts or sales restrictions. Despite the unfavorable market, the group managed to increase its market position. In 2023, BOW paid a high dividend of 20 million PLN (1.2 PLN/share) and significantly reduced long-term debt.

Market

According to data from the Steel Chamber of Industry and Commerce, EU raw steel production decreased by over 7% in 2023 to 126 million tons year/year. This is part of the decline in production in Europe, which has been ongoing for a couple of decades. Raw steel production in Poland was only 6.4 million tons in 2023, a decrease of 13% year/year - meaning that the utilization of Polish production capacity was about 61.5%. The last time such low levels of raw steel production in Poland were noted was in the 1950s. Steel demand has deteriorated - steel consumption has significantly decreased due to the economic situation and the ongoing war in Ukraine. In 2023, steel consumption amounted to 11.8 million tons, a decrease of almost 23% compared to the record in 2021 and 11% compared to 2022.

**Management believes that 2024 will be another challenging year in terms of business stability, sales, and margins but expects to achieve positive results again. EUROFER has once again lowered its forecasts for the European steel market in 2024, with a decrease in steel consumption of 1.7% annually. A decline in production in steel-using sectors is also expected. According to EUROFER estimates, real steel consumption will begin to grow only in 2025, due to continued geopolitical tensions, high inflation, energy prices, and economic uncertainty.

Shareholders

NOSH is 19.5m divided into A-F series. Only A shares (6.4m) have double votes and these are not traded on the WSE. There are three shareholders with strong voting shares, and they also own an equal part of the company; Adam Kidaya (4.1m shares, 21.18% of capital, 26.7% of votes), Jacek Royek (4.1m shares, 21.18% of capital, 26.7% of votes), and Jerzy Wodarczyk (4.1m shares, 21.18% of capital, 26.7% of votes). Kidaya, Royek, and Wodarczyk have all been “Vice-President of the Management Board” since 2001. From 4Q18 to 4Q20, NOSH decreased, through buybacks, from 19.5m to 17.3m. This was at a time when BOW was valued at P/TB 0.46x (historically low). Today, BOW owns 2.47m own shares or about 12.66% of the capital. Adjusted NOSH is 17m.

Summary

Today's P/TB of 0.39x is low compared to its own history since 2012: average 0.70x, median 0.65x, and max 1.9x. The 10-year low P/TB of 0.24x occurred briefly in the spring of 2020 during the “COVID crash”. Currently, the market is very weak. An improvement is not expected until 2025, but the company is expected to make a profit. We see BOW as a counter-cyclical "bet" where the upside appears much greater than the downside. BOW has proven operational leverage. At the average P/TB (0.70x), the stock should be at over 12.7 PLN. With historically low valuation, historically low expectations, and historically strong balance sheet, most bows are drawn. Bowim also seems strong in the domestic market as one of the largest steel distributors in the country. The market capitalization is only about 110 million PLN ($27m), which should attract takeovers by international distributors/producers such as ArcelorMittal, BE Group, ThyssenKrupp, Voestalpine, or Tenaris, to name a few.

(Disclaimer: at the time of publication, the writer owns shares in the mentioned company)