Description

Thesis Summary

Mobruk (Warsaw: MBR), the dominant waste management company in Poland, may be one of the most misunderstood and/or overlooked stocks in the broader European markets. The stock, at 384 today, trades at ~13x current year earnings, with no debt and a 100% payout policy implying ~7.5-9.5% dividend yields - despite a likely 30%+ top- and bottom-line CAGR in the coming years, as the company is the biggest beneficiary of structural pro-recycling changes in Poland. The already-impressive financial returns (50% EBIT margins, >50% returns on capital) may well improve further due to idiosyncratic growth opportunities available only to it as the niche market leader, as well as likely accretive M&A. The opportunity exists because this was a 'hidden IPO' in December last year that until very recently had zero trading liquidity; because again until recent almost all disclosures were only in Polish; because it is a 'unique' asset with no direct listed comps locally; because investors (at least those who have bothered to look so far) misunderstand the precise competitive positioning of the company within the waste management industry; and because it is a relatively small company ($350mm market cap today but only ~$160mm free float). Despite all this, trading liquidity is OK ($300-500k/day recently) and many of the disclosures have improved. I expect the stock to trade at the premium valuation it deserves for a likely multi-year secular growth story, which to me means at least 20x earnings on out-year numbers, implying >100% upside from current levels. This accords no value for the potential for an 'ESG halo' to emerge in the stock (highly likely, in my view); nor any value for accretive M&A - either or both of which could easily push this in the 30s P/E range, resulting in a >2 bagger from current.

Background: the quick 101 on the Polish waste industry

Before detailing the Mobruk story, we need to spend a few moments understanding the waste management industry in Poland as it stands today. This investment is essentially a micro application of a macro-driven theme - and that macro tailwind is the inflection in attitudes towards waste in the country. Poland today produces ~130mt of waste per year, of which roughly 90% (115mt) is industrial waste (from mining, energy production, chemicals, etc), and the balance being municipal waste (treated/untreated sewage; wastepaper/domestic trash, etc):

Note that of this ~115mt in industrial waste, a majority of it is simply deposited/landfilled at the site of original (the mine, etc) and thus does not enter the waste management system, per se - that is, it is 'environmentally neutral' (consider moving a ton of excess rock during the mining process, and then simply dumping the disturbed ore on a stockpile, as a good example of this). What really concerns the country, and Mobruk, is the amount of hazardous waste: chemicals, slags, refuse dust, particulates, paint extracts, solvents, medical refuse, etc, that needs to be chemically treated to prevent environmental/social damage when it is finally stored/disposed. This quantum amounts to ~2mt per year (out of the ~115mt of industrial waste) and is the overriding focus of Mobruk's activities today.

Before getting deeper into the Mobruk specifics, though, it's important to appreciate that Poland lags far behind EU standards in its treatment of waste (both municipal and hazardous). Whilst developed Western European countries like Germany and Sweden have completely graduated from landfill usage, Poland is still reliant on landfill to dispose of 42% of its waste:

Poland is part of the EU and thus a signatory to, and bound by, EU legal directives as regards to waste management. Part of the binding legislation in this regard is the EU's 'Circular Economy Package', the most important component of which is the demand that member nations recycle 65% of their municipal waste by 2030, along with the proviso that any recyclable materials should not be landfilled at all, by 2030. Mobruk themselves estimate that the EU imperatives imply a Polish 10% landfill rate, in toto - implying the country needs to cut ~32 percentage points from its landfill ratio to meet the deadline. Since Germany et al basically already meet these standards, this essentially shifts the burden of compliance onto still-developing nations, like Poland, where current progress against these imperatives is still inadequate. Essentially, Poland today sits where Western Europe did 10-15 years ago, and is about to undergo a major transformation in how it handles waste to reduce permanent landfills in favor of recycling.

Obviously, as Poland's economy continues to grow - and Polish GDP has been growing at a 3-5% rate for most of the last decade - its citizen will produce more waste in absolute terms as well. Today, waste production per capita remains well below the levels of Western Europe:

If Poland is to hew to EU directives, then, the tailwind is both relative (in the changing mix of waste treatment, away from landfills and towards recycling), and absolute (as growing waste volumes and richer people remove landfill as a realistic solution). But do the Poles actually care about what the EU politicians think? And will they enforce Europe's rules within their own borders?

Of course, compliance to European (or, indeed, Polish) mandates is the key question since historically Poland has had a huge issue with the so-called 'grey zone' waste market - that is, illegal waste dumping. Indeed, the entire reason why pre-2018 returns for Mobruk were relatively poor was because environmental laws in-country were poorly constructed, overly lax, and rarely enforced. With no enforcement of waste separation laws, and rock-bottom landfill prices, there was limited demand for value-added waste treatment from companies like MBR, and the concomitant environmental result was catastrophic. A huge amount of illegal dumping occurred across the country, and was even imported from other countries as Poland gained a reputation as a lax regulator of garbage. The situation came to a head in 2018, after a number of toxic waste dumps were set on fire throughout the country in an attempt to 'destroy the evidence' when nearby townships found out and were incensed. When this prompted a huge popular backlash, the government realized environmental standards were a core issue for the people and committed to a new regime of regulation and enforcement.

The first major change in legal framework was a mandated rapid increase in the Marshal's Fee - the tax on segregated waste disposal, payable by landfills, that serves as the lower-bound price-setting mechanism for value-added (and more environmental friendly) waste treatment services. Various stringent financial penalties for illegal dumping were also introduced (up to 8000 PLN/t for hazardous waste clean-up, for example). Before 2018, the Marshal's Fee was so low (and enforcement on the mixing of hazardous waste into landfill mix was so poor) there was simply no incentive for dumpers to 'do the right thing.' Once the Marshal Fee began escalating, though, and as the cost of non-compliance began to rise, so too did better behavior emerge from waste producers. Here is how the Marshal fee has developed over time:

Note that the Marshal's fee is simply the tax paid by the landfill operator towards the municipality; it does NOT represent the total cost of legal landfilling (which would encompass sorting/separation of waste; transportation of waste; the landfill operator's cost coverage; and some profit allowance for the landfill operator). This is why there remains a considerable gap between whatever the Marshal fee is, and supplementary treatment prices like Mobruk's gate fees (which we shall discuss in more detail shortly). It is also worth noting that this is a 'basic' tax for segregated (ie, sorted) municipal waste - ie, not the hazardous waste which is Mobruk's main purview (and which obviously demands a premium price as requires special know-how, licenses and technology to dispose of safely).

But the key point is that the Marshal's fee sets a baseline for overall sector pricing, and establishes the direction of travel for the industry in so much as it reflects government attitudes towards waste management. The higher the Marshal's fee, the more the government wants to discourage landfilling, and encourage recycling. In this regard, it's crucial to appreciate that the relevant waste management laws suggest the Marshal's Fee will continue to rise - it is already slated to be 276 PLN/t in 2021 - at least at the inflation rate, if not faster. As long as this remains the status quo, the environment for Mobruk, et al, should remain highly favorable.

The macro tailwind, then, encompasses two key drivers: the 'primary' opportunity, that is the increased supply and demand of value-added waste treatment solutions beyond landfilling; and the 'secondary' opportunity to clean up all the illegal dumping done in the past decade plus. This secondary opportunity is already affecting the PnL today and I think is wildly under-estimated by the market, so is worth perhaps dwelling further on for a moment.

Today, Mobruk estimates Poland has over 130 'ecological time bombs' - illegally-dumped hazardous landfill sites - that will require >15bn PLN (>$4bn USD), and take 20 years to clean up.The company has confirmed the location of such deposits throughout the country as per below:

Note that these sites are just ones identified so far. More recent newspaper reports - from national dailies, no less - are describing the situation in far worse terms. This recent article from the Krakow daily suggests that there are as many as 768 'local Chernobyls' (the term being used in the press) of illegal dumping sites, of which 231 are in locations and of sizes 'hazardous to human life and the environment.' The exact locations are not being disclosed (for now) by the Minstry of the Environment, likely to prevent public outcry - but the conclusion should be clear. There is an increasing public concern with regard to the endemic problem of illegal dumping; and an emerging (and populist) consensus that these sites need to be cleaned up. We will come to the financial impact of this clean-up - and its hugely positive impact for Mobruk - later on. But keep in mind for now that the majority of these illegal dumps are located in the lower/Southern part of the country (where historically lots of the mines, chemical plants, steel plants, etc are situated - and thus in close proximity to Mobruk's facilities. Obviously, the further corollary of increased environmental conscientiousness will be less landfilling and more alternative treatment - underwriting the multi-year tailwind for the likes of Mobruk.

Mobruk today: emerging Polish waste management champion

Mobruk operates across three complementary segments, all under the broader waste management banner:

• Incineration of industrial and hazardous waste (hereafter 'Incineration'): ~40% of FY20E revenues;

• Solidification & Stabilization of inorganic waste ('S&S'): ~39% of FY20E revenues;

• and Refuse-Derived Fuels ('RDF'): ~21% of FY20E revenues (note: I ignore non-waste 'Other' revenues totally as these are all immaterial to the story and will likely be divested near-term).

The company deck highlights the locations, and capacities, of each of their plants as per the below. You will note that they are all located in the south of Poland (the key industrial waste-generating zone):

We need to take a deeper dive into each of these segments, but before doing so, the company shares the below flow chart describing where each service sits within the broader waste management ecosystem:

The purpose of my red markups above each segment is to try to demonstrate that for two out of three of MBR's segments, the product inputs for MBR are in fact largely outputs of another waste management process. That is, for the S&S segment, a large input for the business is fly ash, sludge, and treated sewage slurry sourced from municipal waste treatment plants; meanwhile for RDF production, the main input is the combustible fractions of (already sorted and segregated) municipal waste. What this means is the majority of MBR's business is a huge beneficiary from growth in the volume of already-treated waste, and is thus a secondary treatment process in the value chain. This is important because the major bearish pushback on the current earnings power of the business is an argument around a reversion to lower returns driven by increased treatment capacity coming online - but crucially, this would in fact create more feedstock to serve much of Mobruk's excess capacity today. More on this point later on.

Let's turn now to the Incineration segment.

Incineration

MBR operates two incineration facilities with a total capacity of 35kt: a 10kt facility attached to PKN Orlen's oil refinery in Jedlicze; and a 25kt facility that is adjoined to the RDF production plant at Karsy. Both plants derive the overwhelming majority of their revenue from the fee they charge to accept waste (the 'gate fee'), but they do also sell some product post-incineration as well (steam to the oil refinery, in Jedlicze, for example). Note also that the Incineration segment provides sludges and fly ash to the S&S segment as an input (completing much of the 'circularity' of the system) as well as heated air used in the RDF production process (at the Karsy facility). Incineration is a fairly common form of waste management, whereby the quantum and character of waste can be reduced (through heating) and controlled (through filtration and capture of off-gases, slags, and fly ash, etc). The final incinerated product (absent recycled or re-used fractions) is generally made inorganic (chemistry!) and stored in silos.

MBR's position in the Incineration market is near dominant: at 35kt, they control ~35% of capacity in the country (at ~100kt), but this understates MBR's true price-setting power. Of the nominal 100kt in total capacity, some of it is 'captive' incineration (ie, attached to a certain hospital or oil refinery and thus not able to accept third-party waste); or not permitted up to the latest emission standards (and thus not in operation); or, is not large enough to accept the complex 'ecological bomb' projects that are an increasing segment of the market. Also, as mentioned, MBR's plants are ideally situated amidst most of the worst ecological sites.

This all means MBR has significant pricing power over its customers (hospitals, municipalities, chemical plants, paint factories). Over the last few years, gate fees for incineration have expanded sharply, rising from 775 PLN/t in 2017 to 3780 PLN/t in the most recent quarter (3Q'20), a function both of rising Marshal fees; increasingly punitive financial penalties for illegal hazardous waste disposal; and, crucially, the advent of 'ecological bomb' cleanup projects at much, much higher rates than typical 'normal' waste disposal. Here is how gate fees have developed in the segment:

Obviously, such an escalation in rates seems likely to prompt newbuilds in the near-future (indeed, the country needs them). But barriers to entry remain substantial: hazardous waste treatment remains a highly-regulated and specialized business, and new facilities need at least 4 different permits to operate (in addition to local council approval, where 'nimbyism' often rules) - resulting in an approvals process that can take '2.5-3 years' according to the company (and construction another 1-2 years). Moreover to guarantee profitability you still need to run at reasonable utilizations meaning you need pre-secured supply (of waste) as well as customers for your refuse product (slags, slurries, and fly ash particulates) since these can't be stored easily or safely. There may well not be a shortage of waste, but there is most certainly a shortage of S&S facilities to accept the sludges created through incineration - and most all those are controlled by Mobruk (as we shall see). Furthermore, the 'ecological bomb' cleanup issue is an urgent one for many municipalities - they simply cannot wait 4-5 years for new facilities to come online from untrusted operators, they have angry constituents who want the cleanups done posthaste. Perhaps this is why currently there are no new greenfield Incineration plants under construction in Poland - despite the pressing need. Certainly, it seems the tight market is unlikely to solved by new builds anytime soon.

'Ecological Bombs' cleanup: huge excess earnings potential (and very long runway)

As attractive as the Incineration segment story is, the real 'juice' is in the massive earnings potential of 'ecological bomb' cleanup in the coming years. Because MBR is one of the only providers who can do the work, and because they have minimal/no price competition in this crucial task; and, crucially, because the central government is invariably funding a good portion of the cleanup costs, the ecological bomb-related revenues will super-charge the PnL for many years to come. Let's unpack it a little...

The company has guided that ecological bomb-related revenues comprise ~10% of segment revenues in 2H'20, but that this can potentially grow to 50% of the segment revenues over time. How much is MBR getting paid to clean up the mistakes of the past? Well, late last year MBR disclosed two significant contracts: one with the city of Zgierz to clean up 2kt of waste with a net cost of 15.7mm PLN (ie, 7800 PLN/t) over 2 years; and another mammoth contract with the city of Gorlice, to clean up 5kt for a net cost of 48.9mm PLN - that is, an implied 9780 PLN/t, over just 1.5 years. In both cases, MBR was either the sole bidder or one of two - and yet is receiving prices 2-3x their broader average take-rates (which are themselves at multi-year highs)!! Discretely, the company estimates they can handle 5kt/year of special clean-ups of this magnitude - ie, ~14% of their capacity by volume - but I expect this to rise to at least 10kt/yr given the attractiveness of the business and the evident need. Recall that the initial estimates for cleanup volumes encompass 4.5 tons of material: if only 10% of this volume is deemed hazardous and in need of collection and safe incineration, MBR would be busy for 45 years, even if they only did 10kt per year! The company is more conservative in estimating 'only' a 10-year (but 15bn PLN!!) opportunity (recall that earlier third-party observers thought the scale of the problem was much bigger):

And even if not every contract is as juicy as these first two, the scale of the problem is such that the incentives (for the municipalities) are not really economic - they need to solve the environmental issues urgently. It helps, also, that the central government has set aside a special fund (up to 400mm PLN, likely to be topped up in future budgets as cleanups progress) that can be tapped to partially fund the works if local governments need the assistance. In any case, it always helps to be a service provider to customers whose demand for the product is totally inelastic...

Here is my attempt at breaking down the reported revenue per ton into 'normal' incineration (ie the normalized gate fee), and ecological bomb cleanup components. As you can see, the ecological bomb cleanup is likely a huge contributor to overall PnL, as soon as this year and next, at 22-29% of total company EBIT. Given the scale of the problem and MBR's status as one of the only solution providers, this earnings stream alone should be valued at a very high multiple by the market, once it is well understood, in my view:

Solidification & Stabilization (S&S)

In the S&S segment, Mobruk accepts inorganic (mostly) secondary waste of various kinds from the likes of municipal waste treatment plants; chemical plants; sewage sludge; and of course fly ash and effluent from the Incineration segment; treats it chemically; and turns it into an input for road manufacturing (granulated aggregate). This output is then sold (basically at cost) to construction companies for use in roads, etc. In so doing, MBR turns highly-harmful secondary waste products like fly ash and sewage sludges into carbon-neutral, reusable products - the cornerstone of the 'circular economy' concept and thus a boon for broader society.

Mobruk operates two plants, at Nieciw and Skarbimiecz, with a combined 170kt/pa capacity today, currently operating at near-full utilization in the mid-90s%. The Skarbimiecz facility has been built out for another 70kt/pa, meaning there is an organic volume growth story here from early 2021 (when the 70kt additional capacity should be permitted and brought online). The company is apparently likely to build a further brownfield 70ktpa in the near-term, as well. Crucially, MBR competes only with one or two other companies in the S&S business (ZUO, in Konin, and a subsidiary of Novago, acquired by a Chinese company, Evergreen, back in 2016). Otherwise, the competition for S&S treatment is either direct landfill (with all the discouragement that receives these days); or underground caverns across the border in Germany, in K+S' abandoned potash mines. Note also that there are NO competing plants in Southern Poland, making MBR's position extremely strong, once again, in its core locality.

Much like in Incineration, the gate fee earnt by the company has been rising progressively in recent years, driven by the overall increase in Marshal's fee; the high native utilization of the existing facilities in Poland; a lack of direct/accessible alternatives; and the increasing cost of transportation to competing storage options in Germany. Here you can see the evolution of the gate fee for S&S in recent years:

Since MBR is operating at basically full capacity; the Marshal Fee (for segregated, non-hazardous municipal waste) is already approaching 300 PLN/t; and the fully-delivered cost to store in Germany is >500 PLN/t (150 EUR/t gate fee, plus transportation, etc), it seems quite likely the S&S gate fee has further room to rise.

Moreover, MBR has an excellent opportunity to increase both volumes and prices, since the advent of new munipical waste treatment plants - necessary to meet EU directives - will create a huge amount of new feedstock that will need to be treated by S&S plants before it is safe for deposition into the environment. S&S is therefore likely to remain a stable earnings pillar for the medium term.

Refuse-derived Fuel ('RDF')

The third segment within waste management is the RDF business. Mobruk produces a coal supplement, 'refuse-derived fuel', from the combustible fractions of municipal waste, and on-sells this fuel overwhelmingly to cement manufacturers. Since there is an excess of coal in Poland, the price at which Mobruk sells the RDF is actually negative - that is, they pay the cement manufacturers ~120 PLN/t to take the product - but this is still a reasonably profitable business for MBR because the gate fee for accepting the input has risen significantly in recent years (driven by many of the same factors as the other business lines) and is currently ~560 PLN/t:

Mobruk has two RDF plants with a combined 260kt/pa capacity, but currently is only producing at a ~30% utilization due to a glut of coal at cheap prices; and, uniquely, for Mobruk, a reasonable number of competing RDF sources in the market (competitor Novago has a number of RDF plants in the north of the country).

Nevertheless, the forward outlook for RDF is quite attractive, as the company has excess capacity available to service new markets and products should they be developed. With regard new markets, MBR recently concluded an agreement to sell 10kt of RDF into the Ukraine - a first for Polish-Ukrainian business - without having to pay the 120 PLN/t placement fee (thus saving the company 1.1mm PLN in costs). This was possible because unlike Poland, Ukraine is coal-poor, and thus cheaper coal alternatives are attractive to its native cement and/or power plants which can run on RDF. It seems reasonable to expect there to be greater scope for more transactions of this type going forward (the Ukrainian contract has a provision for an additional 20kt/pa as a starter).

But more interestingly, Mobruk announced another novel contract last July, when they agreed to process 16.5kt of railway sleepers, with a contract value of 18.1mm PLN (and thus, 1100 PLN/t), into RDF, for on-sale into Germany. Spent railway sleepers are considered hazardous waste, and yet are high in calorific content (softwood, birch, etc) and thus make a great feedstock for the creation of RDF. This contract was obviously concluded at a huge premium to typical gate fees for the segment (basically double the going rate) and yet may simply be a harbinger of things to come, as Poland has an aging railway sleeper problem too. >70% of wooden railways sleepers in Poland are considered 'obsolete', and, assuming each one weights 80kg, this suggests >1ton of potential feedstock - at higher calorific values, and thus much higher gate fees - for Poland's RDF plants. Once again, you don't need a huge amount of the feedstock to become available to Mobruk, on an annual basis, to generate attractive incremental returns, given the capacity is already there (indeed Mobruk has repurposed its Walbrzych facility, a 60kt/pa plant, to handle railway sleepers in an anticipation of an increase in this kind of business):

Once again, it's important to remember that a key feedstock in the RDF production process is the combustible waste fraction of municipal waste treatment plants. So, again, to the extent Polish cities and towns get their acts together and build more plants, they will be creating more feedstock that simply needs to be treated (and not landfilled) - meaning there is a natural tailwind to increasing RDF adoption, above and beyond the pure economics of coal substitution (even though today thermal coal prices are going back up, a further tailwind for RDF prices too!). Despite all these potential long-term positives, Mobruk is unaware of any greenfield or brownfield RDF projects currently under construction in the country.

Looking at the recent financials

It should be clear from the above that Mobruk is a fairly unique collection of recycling-related assets: it is a B2B service business, providing hazardous waste treatment solutions, mostly to others in the waste industry but also to industrial clients. The majority of its revenues are provided by gate fees paid, generally speaking upon delivery of the waste product; and it carries little to no inventories and pays its suppliers on reasonable terms (about 45 days currently). As a result it carries barely any working capital (note the recent spike in receivables is purely to booking the sale of the non-core metals recycling unit, the cash for which is being paid in installments, and is not related to the normal course of business):

Meanwhile, the growth in gate fees across all business lines since 2017 has demonstrated the huge operating leverage in the company's model, as basically all costs outside of third-party contracting (labor, depreciation, a lot of COGS) are pretty much fixed. This year, with the beginning of the ecological bomb earnings dropping through the PnL, incremental margins have exploded to >90%, from already-impressive levels in the mid-60s % on the underlying business the last two years:

The numbers are fairly eye-popping (for a waste management business): you may think you're looking at a software or tech business but MBR really is growing topline at 40-50% with 80-90% incremental margins and printing >50% EBIT margins today. The real question, I suppose, is, is this sustainable?

I took a shot at measuring what greenfield returns on capital may look like at current blended gate fees. This is something of an exercise in futility, since, as has been discussed, MBR is not seeing any newbuilds in its markets; is basically unchallenged in Incineration, being the only player of scale able to handle the ecological bombs; and is extremely well position in S&S as well. Meanwhile there actually is a bit of excess capacity in RDF, at the moment, even though that business is still increasing its profitability due to the oligopolistic nature of the market.

Still, with gate fees optically very high and likely heading higher, it is perhaps a matter of time until new capacity enters the market, so we need to try to understand exactly what a competitor may earn if they were able to replicate Mobruk's suite of assets, today. The below scenario analysis derives an estimated gross PP&E of all waste management assets (from the prospectus disclosures), with my other assumptions as in the notes on the right. You can see that, even in this relatively generous scenario, current run-rate gate fees only imply 25% pre-tax, pre-financing returns on my estimated FY21E gate fees - levels that, whilst decent, hardly cover the risks of projects like this for new operators:

Astute readers will note that I use a 'blended' average gate fee, which is a bit of a cheat in that you could feasibly argue someone could go after the juiciest (read, highest) gate fees in the market, namely, Incineration. But I would push back that this would be futile, since those huge excess fees are only available to MBR because they have an unassailable position in treating the ecological bombs - the actual 'normal' gate fees in Incineration are much lower, I believe, and not far removed from the average blended rate used in the above analysis. Hence, my contention still stands: despite the putatively attractive returns on greenfield, I believe returns could go a lot higher still before new competition rushed to enter the market.

Fleshing out the financial model: 10x P/E, 8% EV/EBIT, net cash, 10% div next year

All that said, I am not modeling for further margin improvement: indeed, the salient feature of my out-year model is an increasing expense load, through the PnL, particularly in the employee cost and third-party services lines. This is Poland, notorious for powerful labor unions, and I expect that, as the business continues to print cash, there will be inflation++ type cost pressures through some of these cost centers. This is the principal reason why incremental margins this year and next fall, aggressively, from recently observed levels, to the much more pedestrian 40s% range, driving group margins to 'just' ~50% for the next couple of years (!):

As for other discrete assumptions, I basically assumed a steady ramp in S&S utilization to account for the new capacity coming online; I modeled the increasing influence of ecological bombs, on the gate fees in the Incineration segment (as discussed earlier); and I increased the utilization and gate fees in RDF to account for the sleeper and Ukrainian opportunities. But I include nothing for potential M&A, despite the company having this to say in their disclosed marketing materials:

In other words, you could get another 10-15%+ added to your EBIT/EBITDA here through acquisitions alone, which - given the strength of the balance sheet - would not be equity-funded. The broader waste market remains pretty fragmented, so there's no reason either why MBR would have to stop at two acquisitions...

You get all this, and, I believe, a truly mid/long-term feel-good, ESG-inspiring growth narrative for 13x P/E, 7.5% yield in year one (likely paid quarterly), and an 11x P/E (and ~10% yield!) in year two. Clearly, these multiples seem borderline absurd for a business/story of this quality, so what am I missing? Why are we so lucky?

Why does this opportunity exist?

Like many names I have been trafficking in lately, a good portion of the opportunity is linguistic, situational, and, I feel, ultimately temporary. MBR has been listed on the main Polish board since 2012, but, since only a handful of shares floated (I think <2% of the company), it was borderline-untradeable, and, therefore, forgotten. It was only after the selldown by PE and the founding family last December did the float begin to open up. Today, of the 3.5mm shares out, ~1.4mm float - about $140mm USD at current prices - and the stock is trading around $300-500k/day nowadays. For Central Europe, that is not too bad, and certainly enough for smaller and mid-sized European funds to do the work. A further reason for the (temporary) cheapness is the language barrier. The prospectus for the recent secondary was entirely in Polish (which I translated using a document translator), but since then a couple of Polish banks (M-Bank and Ipopema, the deal bookrunners) have initiated coverage, in English, and the company has put out some English marketing materials, along with a decent machine-translated IR site. They also have a company-translated English Prospectus now (if you ask IR directly for it). In other words, the language discount is also likely quickly being ameliorated.

Of course this still begs the question of why we are buying if the insiders are selling (and note, they sold at 200 PLN, so a good deal lower than where we are today). Of course for every buyer there needs to be a seller. In this case, it is no real secret that the founding family is looking for an exit in the coming years, and selling down a piece of their stake now - to maximize value on the balance through creating a real mark on the business and adequate currency - is perhaps their plan. Note that their competitor, Novago, was acquired by the Chinese at 15x EV/EBITDA a few years ago (before the market inflected), so I do think this company remains a highly desirable asset and will likely be folded into a larger European waste management or specialist service company at some point in the coming years. For now, the founders still own 35% of the business (and PE owns another 20%), and PE is locked up until November this year, so there won't be any near-term overhang on the shares (the founders' 35% stake is locked up for a further 21 months). At current valuations 35% of the business is still a huge incentive to maximize value for all holders, so I believe interests remain very much aligned here despite the sell-down.

A few more good thoughts on valuation

What would you pay for a business like this? Given my belief in the longevity of the macro tailwind supporting waste management in Poland, I find it hard to believe this stock won't garner something of a growth multiple as more investors understand what it is. To me, this means a bare minimum 20x P/E on next year's numbers - good for a 750 PLN stock, or a double from here. It would not surprise me in the least to see the multiple closer to 30x, or more, as ESG funds like this one just established get a hold of the story - in fact, I believe it may well become a 'must-own' name for any ESG funds operating in CEE, as there are precious few stocks that so perfectly capture the zeitgeist of what ESG investing aspires to be (environmentally-conscious, EM-supportive, pro sustainable development) as the Mobruk story today.

Direct comps are more difficult to isolate: there are no Polish comps listed in-country, and since many of the dynamics are unique to the Polish market, you can't really look at Western European or American names and slap a similar multiple on Mobruk (even though if you did this invariably it would imply also a much higher Mobruk price). Nothing in Western Europe/the US is growing anything close to this; the competitive positioning/market structure is better; the capital returns are superior; the valuation is bargain basement; and the long-term outlook is likewise more favorable. If a company like Befesa (BFSA in Germany), a high-quality but limited growth recycler of steel dust, that generates mid-20s% margins but has massive sensitivity to the Zinc price, can trade at >30x P/E and a high-teens EV/EBIT multiple, then I think its only a matter of time before the superior Mobruk story garners similar love from the market (meaning at least a double if not near triple from here). And in the meantime we get paid a near-double digit yield...

Risks

Returning to the discussion of why this opportunity exists, perhaps its worth considering the question again in light of what could go wrong with the investment. Poland is well known to be a politically difficult market, where the regulatory winds often blow one way, then the other, in short order. Of course, I firmly believe a stronger environmental policy, to the benefit of Mobruk but of course to broader Polish society, is a set course and basically unalterable going forward (given the social imperatives resulting from the 2018 crisis). Still, if the government were somehow to backflip and allow a return to cheap and unregulated landfilling, this would ruin the thesis immediately. No doubt some in the market remain wary of the Polish government given this particular history in the waste industry. And remember, this is still an emerging market, so take that into account as well :)

Otherwise, the biggest bogey to the thesis is a huge raft of new capacity - particularly in the Incineration and S&S segments. With lead-times on newbuilds measured in multiple years, and no new plants currently under construction in either area, this risk, whilst real, seems at least 3-4 years off (if it ever comes) - and by then the waste market should have grown by leaps and bounds, taking Mobruk with it. Of course, if any larger multi-national player wanted to enter the market, it woudl be far simpler, cheaper, and quicker to simply buy Mobruk, even at a huge premium to where we trade today, than to attempt to navigate the Byzantine permit approval process and consume 3-4 years of opportunity cost in the waiting for permits that may never come. So, I sleep well at night with regard to this risk too.

Catalyst

quarterly earnings progression

more sell-side coverage

ESG funds piling in