Drozapol-Profil SA: shareholder friendly nanocap but also cheap based on several multiples
Drozapol-Profil SA distributes steel products and manufactures steel products and concrete reinforcements. Furthermore, the company provides transport services. This is a Polish company.
I have analyzed this stock on 11 and 12 August 2022. Here is the annual report over 2021 en here is the subsequent quarterly report (31 March 2022). Disclosure is in Polish. My analysis depends on the accuracy and readability of software translations.
The stock trades on exchange in Warsaw (Poland) with ticker DPL.
A search on the company name and keyword “fraud” did not reveal any relevant information. In addition, I could not find any worrisome information on the forum on bankier.pl.
According note 11 of the financial statements over 2021 the IPO was in 2007, when almost 2 million shares were issued (post reverse split, 1 new share for 5 old shares in 2014).
Unfortunately the key audit matters are in a scanned image in the pdf with the auditor opinion. Therefore I was not able to get it translated. But I think there was only one key audit matter. Judging from the number in the description of the audit matter I think it is the “Investment estates” with book value 44 million PLN (38% of Total Assets). More on that later.
I have not found any significant dilutions or buybacks for this company. I found several dividend payments. The last dividend payment was very large: 9.2 million PLN in total or 1.5 PLN per share, in June 2022 (filing). I do not think the June dividend is included in the last balance sheet (31 March 2022). Therefore, at 6.4 PLN per share the stock is about 25% more expensive than it seems based on a naive computation of the EV/EBIT multiple.
Multi-year metrics for judging earnings quality and asset allocation are not great, probably worse than average, but the Piotroski score is great.
The balance sheet is strong with low leverage, lots of cash but also small short term debts. The combination of a pretty large cash pile is a red flag.
Almost all revenue comes from Poland. In 2021 about ¾ of the profit was from distributing/trading steel products and the rest was mainly from manufacturing. However, distribution revenue is not very stable. In 2020 the mix was roughly 50/50 because of lower distributing revenue.
According to the annual report there are 44 million PLN of real estate investments. This represents 7.3 ha of industrial land with buildings. Ownership of the land is mostly through “the right of perpetual usufruct”. I think the company started with 27 million PLN of investments in 2017, in 2019 this was increased to 41 million PLN and now it is 44 million PLN. When looking at the profit and loss accounts for the past 5 years it seems the increases are the result of extra investments instead of revaluations. However when looking at note 5 in the annual report it seems the company does use an appraiser to value its real estate. All in all, I do not think it is very likely book value much understates real value, but mind this conclusion is based on limited information.
I estimate about 5 million PLN of the EBIT over 2021 is from one-time gains, excluding revaluation of the real estate. This is partly offset by an inventory impairment of 3.6 million PLN.
Substantial shareholders: CEO Wojciech Rybka 36.37% (40.35% voting interest) and “independent proxy” / ”independent attorney” Grażyna Rybka 27.92% (34.36% voting interest).
Related party transactions: According to note 26 in the financial statements over 2021 the CEO earned 1.1 million PLN. I suspect that is a bit more than for some other small Polish companies but I do not think it is worrisome.
The deputy chairman of the supervisory board is Aneta Rybka, probably a relative of the 2 main shareholders. The 2 major shareholders have the right to appoint and dismiss one member of the Supervisory Board.
I have not found any other significant related party transactions. See also note 25 in the financial statements over 2021.
My take: Cheap Polish steel trading company based on metrics P/B, EV/EBIT, EV/Revenue and P/FCF at 6.4 PLN per share. Shareholder friendly. Not a quality business.
Because of a large dividend paid recently most investors looking at enterprise value multiples will think the stock is cheaper than it really is. But even after correcting the enterprise value and recomputing the multiples it turns out this is still one of the best nanocaps. Moreover it is also among a good low EV/EBIT stock, compared to other low EV/EBIT stocks.
I think this is a good nanocap stock to own. If you have stocks in 100 different companies that are as cheap as Drozapol, then over time your returns will be high.
Disclosure: long Drozapol-Profil SA.