Summary
+ Exchange business are attractive both for their moat and resilience in an inflationary environment.
+ GPW is trading a highly attractive valuation where even a bear case gives upside in share price.
+ Attractive dividend yield north of 5%.
+ Polish stock markets have not seen the rally developed markets have, perhaps the best is yet to come?
– Poland is politically moving in a worrying direction and GPW is majority own by the state.
– Although revenue has increased nicely in the past 10 years, net income has not expanded as much.
First, thank you all for the warm words in the comment section, it’s good to be back! The inflation debate is still raging, transitory or not, at least temporarily it is a reality. Some companies are really hurt by inflation, struggling to pass on the cost, others do better. I put quite a lot of thought into what companies except banks do well in a high(er) inflation environment? I came to the conclusion that stock exchanges with reasonable current valuations (not priced for too much growth) could be a sweet spot. The hunt started and I quickly honed in on the Polish exchange – GPW. A lot of listed exchanges has re-rated in the past 5 years, many driven by the strong local equity markets, buyouts etc. Others, like Hong Kong Exchange have benefited from the US/China conflicts with Chinese companies opting to list in Hong Kong. But Poland has not seen a proper equity bull market for a very long time, valuations are still very reasonable in general and the country and its savings/pension mechanism are in early days. So the days in the sun for the Polish exchange seems to still lie in the future. Let’s dig into what the company is about and if it’s something for our portfolios.
History
The Warsaw stock exchange held its first trading session on April 16, 1991 with five listed companies, all of which were formerly State-owned companies that had been privatized. In 1999, Poland reformed its pension system, which contributed to an increase in domestic institutional investment, and in 2004 it joined the EU. With a record high growth in EU over the past 20 years, all these developments helped to boost trading volume on the exchange. In 2010 Giełda Papierów Wartościowych w Warszawie (GPW) listed on its own exchange.
Through my other Polish holdings I have written about how Poland is one of Europe’s strongest growing markets. On the back of such growth naturally a large population like Poland is creating national champions. Two worthy mentions would be CD Projekt (18bn PLN) and Allegro (71bn PLN) which recently listed. Overall the Polish equity market is very strong in gaming companies with many smaller players listed. GPW has also successfully developed a commodities exchange over the past 10 years. Today the commodities segment revenue is as large as the Equity/Fixed Income trading segment. To summarize on the back of Poland’s growth, so has also the exchange grown. That said, GPW is still tiny compared to developed markets with a market cap of 430m USD. Being in such an early stage of development I see plenty of long term growth opportunities for Poland and the exchange.
Company Overview
To get a better grasp of the company the below picture gives a good overview of how revenue is generated (press to read more):