Description

COMP

Summary

Comp is a thinly-traded Polish nanocap (and therefore best suited for personal accounts) that operates in two divisions: IT (security solutions) and retail (fiscal registers and software). A historically complicated group structure is currently being simplified (cost-cutting, potential M&A of strategic assets, excess real estate, ownership of 20% treasury shares) which along with the company’s growth and a number of near-term call options could lead to a 2-3x return over the coming years.

History

Comp was founded in 1990 by Jacek Papaj as a Polish distributor of hardware and software. In 1993, the company created Comp Rzeszow, which eventually became Asseco Poland. In 2005, the company went public and acquired Enigma, which today is a leading IT security firm. In 2011, Comp acquired stakes in Novitus and Elzab (producers of fiscal registers). In 2017, Comp’s management created a new SPV to acquire shares in Comp (which today remains a significant shareholder). In 2018, Comp became the majority shareholder of Comp Platforma, which in a JV with Grupo Zywiec, the Polish subsidiary of Heineken, owned a solution connecting FMCG manufacturers directly with retailers (more on this below). Today, the company is led by CEO Robert Tomaszewski, an incredibly astute operator that has been involved with Comp for around 20 years.

Background

Comp’s retail division (under the brands Novitus and Elzab) is the market leader for fiscal devices (mostly cash registers) in Poland and Hungary. In these markets, retailers are required to ensure that their cash registers are “online” in order to continually share sales information with the government (Hungary was successful in implementing the online ecosystem and Poland later emulated). There are currently 1.8m cash registers in Poland, of which nearly half are online. Therefore, in addition to the initial sales of the balance of these fiscal devices, the lifecycle of 5-7 years ensures recurring replacement sales for Comp. But more interesting are the potential opportunities once all these devices are online (discussed below).

Comp’s retail division also incorporates M/Platform, a software solution that connects FMCG manufacturers with retailers in order to avoid the opacity of distribution. Instead of a company like Heineken giving a promotion to a number of distributors and hoping that it will successfully be disseminated to a distributed number of supermarkets, the solution allows Heineken to send promotions directly to the retailer’s POS and receive real-time data on the acceptance. Retailers utilizing M/Platform have achieved a marked increase in sales and FMCG companies have saved significant amounts that otherwise would have been lost to marketing rebates to distributors (with little ROI).

Comp’s IT division consists of Enigma and general IT. Enigma is specialized in IT projects related to security, ranging from the design/production of cryptographic equipment and software, through implementation, training, and security management. The majority of the solutions consist of Comp’s own developed software and hardware (and therefore carry higher profitability than the typical IT solutions business). The general IT division designs and implements dedicated IT systems for clients (for corporate security and key business processes) and substantially incorporates third-party hardware and software.

Catalysts

• Increasing dividends and buybacks (management’s share ownership is partially funded through loans, which creates an added pressure to increase shareholder returns in order to improve the company’s valuation). Currently 5 PLN is returned to shareholders each year (8% of market cap).
• Shift from one-time cash register sales to subscription sales: in addition to the retail fiscalization requirements, there are also government requirements for vending machines, ride sharing, and car washes. For instance, Comp’s backend works with Uber’s and Bolt’s to process the transactions and sends the information to the Ministry of Finance. Elzab then sends the information back to Uber so it can offer an e-receipt to the rideshare passenger. Given that no hardware is required, margins are very high.
• Ability of ECR to accept payments: currently, Polish retailers utilize a payments POS device (typically rented) and an online fiscal device (per the government requirement). Over time, Comp’s aim is to allow the fiscal device to act as a payments POS (which vice-versa is not possible), allowing retailers to abandon their POS rental and save costs. Later, Comp could also become an acquirer and generate earnings from each transaction. If either of these is successful, each could each represent a substantial upside to the market cap (e.g., 500k terminals paying 5 PLN per month instead of the 30 PLN they pay their POS rental, with limited incremental cost = 30m PLN annually).
• Strategically, this could lead to M&A interest in Comp from merchant acquirers as both a defensive strategy (avoid losing a payments income stream) and offensive strategy (they would suddenly gain distribution to all Polish retailers given the requirement for fiscal devices).
• Comp has expanded into selling fiscal devices into countries such as Kenya.
• M/Platform has recently signed a contract to be implemented into what is effectively the second largest retailer chain in Poland (Eurocash). Eurocash historically attempted to imitate the solution (via its own IPH) but was not successful. M/Platform may also expand internationally into similar markets as Poland.
• Strategically, Comp could attract M&A interest in Enigma given the increasing need for cybersecurity and IT security. Enigma EBITDA in 2022 was 41m and is growing rapidly and the division could therefore be worth more than the entire market cap of Comp (which includes other IT as well as retail and M/Platform).

Valuation

Comp will generate around 100m PLN EBITDA this year and expects around 120m in 2024 and 145-150m in 2025. This will lead to FCF of around 70m on a current market cap of 280m (adjusted for 20% treasury shares). The majority of this FCF will be distributed to shareholders.

Another way to consider the valuation is the sum of the parts. Enigma is likely worth 400-500m. Other IT is worth another 150m (13m EBITDA in 2022 but around 20m normalized). M/Platform could be worth anywhere between 100-200m depending on the results with Eurocash and international expansion. Retail (fiscal devices) is worth 100-150m and could be worth significantly more if the payment angle is successful and if international sales grow. Excess real estate at Elzab is 30m. Net debt is 140m and declining. Central costs following further cost-cutting (corporate remuneration and potential reduction of public listing of subsidiary Elzab) is 20-25m and can therefore be capitalized at 100-150m. Shares outstanding are 5.6m but 1.1m (20%) are owned by Comp, so true shares outstanding are 4.5m. Value per share given these estimates would be around 120-160 PLN per share (nearly 2-3x current prices) and does not account for management’s visionary objectives.

The biggest risk for Comp is a shift toward software fiscalization instead of hardware fiscalization (which until now was not considered secure enough vs. hardware). If this happens, Comp will no longer generate earnings from the sale of replacement fiscal devices (but will nonetheless generate high margin earnings from its ECR software).

Catalyst

Above