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PKN ORLEN S.A.: The STAR gas station as a Polish dividend star with 5.6% div. yield? (PART 3) $PKN

3.cross-check of PKN Orlen S.A. using Piotroski Score and concluding remarks on the Polish energy company

Hello all,

After I placed PKN Orlen S.A. in its market structure in the previous first part of the analysis, I continued the same in part 2 with a Graham extrapolation and a market analysis.

Here in the third and last part of my remarks I will use the Piotroski Score as a validation or refutation of my statements.

Before that the Disclaimer: This is not investment advice. It is also not an invitation to buy/sell financial products. I only describe my opinion here. You have your own responsibility towards your investments. So I do not take any liability.

If you have not read the articles, you can find parts 1 and 2 here as a quick link:

https://app.getquin.com/activity/eNCwkpNXhH?lang=de&utm_source=sharing

https://app.getquin.com/activity/PuJDIhaiZQ?lang=de&utm_source=sharing

Let's start now with the evaluation of PKN Orlen S.A. via Piotroski Score. I will explicitly NOT assume that you know this and therefore take you by the hand.

What exactly is the Piotroski Score and which spice is best suited for it?

As a result, the Piotroski Score is simple and transparent: 9 different criteria are used and if the criterion is met, a point is awarded. Mathematical geniuses will immediately recognize: the maximum number of points for a company is 9 in the dream case and 0 in the case of absolute crash. In principle, it is not a new tool and its origin goes back 22 years to the year 2000 when the current Stanford professor Joseph Piotroski invented this tool (see (1), (2)).

The Piotroski Score is essentially a tool that can be assigned to the environment of value stocks, which is due to its focus on companies with a low price-to-book ratio. Thus, one wants to check whether this low P/B ratio is associated with potential economic difficulties and how high quality the company really is (cf. (2)).

In this regard, the Piotroski Score belongs to a whole range of stock valuation alternatives and compares best with those until the end of 2018. Thus, to the 2.9% annual return of the S&P 500, one still achieved 2.87 times the return via this methodology. Alternatives such as the FCF (-4.44%) or the Greenblatt formula (-4.27%) could not hold a candle to either the S&P 500 benchmark or the Piotroski score (see (3)).

Let's start with a short overview of the main test categories of the Piotroski Score (cf. (4)):

Profitability,
Leverage/Liquidity
Operational efficiency

So first we test the profitability of PKN Orlen S.A. How do we do that? First, we look at the "NET INCOME" of different years and hope to find a positive value here. Normally it would be sufficient according to the methodology to look at only one year, because the Piotroski Score focuses on stable value companies. However, in order to be able to include a slight cyclicality of PKN Orlen S.A. in this analysis, I will determine the average value from 2019 to 2022 and fundamentally check their profitability in advance.

This sounds terribly complicated

It is not in the application. We average the net income of PKN Orlen S.A. in the period in question and notice that all values are positive. I calculate using (4) and (5): 41,916 zloty / 4 time periods = 10,479 zloty on average. This is significantly positive and includes the crisis year 2020. I award my first point for this (cf. (4), (5)). (1/9)

The next point relates to the return on assets (RoA), which I also mentioned and whose interpretation I already presented in the second part. Let's look at the available data from 2022, since 2023 has only just started and no reliable data are available yet. Based on (6) we get a RoA of 17.35% and in the 5-year period of 8.55%. This means that currently and on average over the last 5 years, the company has made a significantly positive net result. As a reminder, assets include real estate, stocks, bonds, tangible assets (machinery) and foreign exchange. This means that, flatly, the company has regularly made more money from its warehouses, machinery and cash assets. This tends to be very desirable. Source (6) even provides us with comparative values from industry in this regard, and despite PKN Orlen S.A.'s lower sales, the company performs at industry-typical levels. The maximum deviation is just 0.02%. This is positive in my opinion and deserves a point (see (5), (6), (7)). (2/9)

The next point is awarded for a positive operating cash flow in the current year. For this, we can also look at the cash flow per share as an example and see that it is 31.3 zloty. So 6.65€. This is also positive and the score increases to 3 out of 9. (3/9)

The 4th point is a bit more complex and refers to the ratio of operating cash flow to net income. Here it is desired that the following applies:

CF(Operative) > Net result

We draw (5) to help us and see that the cash flow is 11,953 million zloty. The net result is 23,956 million zloty. Thus, this point is not awarded, because the above condition is not met for PKN Orlen S.A. (see (4), (5), (6)).

Thus, we have "already" completed the point Profitability. Here, 3 out of 4 possible points are awarded. A relatively good result.

In the case of Leverage & Liquidity we first check whether the long-term debt has been reduced compared with the previous year. In other words, we want the company to break free of its debt grip and thus also increase its profitability, which we have just described. What is the situation at PKN Orlen S.A.?

This is a somewhat mean point of the Piotroski Score, where I think you can see the punishment of expansion via debt capitalization. Those who have read my Part 2 will remember the absolutely necessary expansion course and its justification on my part (see Part 2).

We get an expected result here: The criterion is not met. In 2021, the debt amounted to 12,235 million zlotys and in 2022 to 18,443 zlotys. Debt is also expected to increase in 2023. So it is not foreseeable that this point will change for the first time. So we are not awarding any point.

So let's look at the required "Current Ratio" and define it first. This is the English term for 3rd degree liquidity.

Ahaaa! Why don't you say that right away? (Huh?)

The liquidity 3rd degree puts the short-term assets (here by the existing assets) in relation to the short-term liabilities. This is always extremely itchy when the company can run the risk of not being able to pay its invoices due to outstanding receivables from its customers (see kebab example in part 2). We can assign the following items from current assets to assets (see (7), (8), (9)):

Current assets (UV) = Inventories + Receivables and other assets + Securities (e.g. shares in other companies) + Liquid assets (cash on hand, money in banks)

Current liabilities (CT): The counterpart to receivables are payables, which are included as follows: CT = payables from trade + payables to banks.

We subsequently calculate: Current Ratio = UV / KV

This results for PKN Orlen S.A. (cf.(6)): Current Ratio = 1.5

Thus, the current assets are one and a half as large as the current liabilities. That's good for now. What did it look like a year ago (cf. (10), (11))?

In 2021, assets amounted to 106.75 billion zloty. Current liabilities were 30.29 billion zloty. zloty.

We calculate: 106.75 billion zloty / 30.29 billion zloty =. 3.52 for 2021

This tends not to be good and indicates a declining working capital ratio. Thus, no point for PKN Orlen S.A.

The next point is the avoidance of share dilution. There are 1,160,942k shares issued in 2023 and the same number in 2022. Therefore, I award one point (4/9).

In operational efficiency, we first check if the gross margin of this year is higher than last year. The current one is 18.73%. The one of 2021 is 11.4% averaged over all quarters of 2021. This means that the criterion is basically met (see (10), (11)). We are at 5 out of 9 points.

Finally, we look at the asset turnover ratio. It is 1.61 for the last 12 months. In 2021, it was 1.11, 1.14, 1.24 and 1.38, i.e. an average of around 1.22. This means that the last criterion has also been checked and we end up with 6 out of 9 points (see (11)).

What does this tell us now?

The bottom line is that the Piotroski Score is a good value investment if the test gives 8 or 9 points. Bad are the results from 0 to 2 points. PKN Orlen S.A. does not seem to be a bad investment in itself, but it faces the challenges mentioned above and will therefore have to prepare for the future (see (1), (2), (3)).

What do you think about PKN Orlen S.A.? Does the Polish dividend champ convince you as a value investment? Feel free to write it in the comments! Otherwise, thank you for your constructive feedback on the stock!

If you are in the mood for a more "conventional" dividend company, please watch my video on Pepsi :)

https://youtu.be/vGCzY5DWDVs

See you next time!

Your Bass-T

Sources

(1) https://levermann24.com/piotroski-f-score/

(2) https://diyinvestor.de/der-piotroski-f-score/

(3) https://www.oldschoolvalue.com/investment-tools/piotroski-f-score-screening-early-often/

(4) https://www.investopedia.com/terms/p/piotroski-score.asp

(5) https://www.marketscreener.com/quote/stock/POLSKI-KONCERN-NAFTOWY-OR-1413342/financials/

(6) https://www.investing.com/equities/pkn-orlen-ratios

(7) https://www.it-times.de/news/asset-arten-bedeutung-und-definition-von-vermogenswerten-125910/