PKN ORLEN S.A.: The STAR gas station as a Polish dividend star with 5.6% div. yield? (PART 2) $PKN (-0.82%)
$BTI (+0.14%)
Dzien dobry w czwartek,
mam nadzieje, ze lubisz analiza czesci 1. Dzisiaj naszym tematem jest analiza zapasow spolki PKN ORLEN S.A.
And now I'll save you from my rudimentary knowledge of Polish. At least I'm trying. 😂
Let's start with my disclaimer:
Disclaimer: This is not investment advice. It is also not an invitation to buy/sell financial products. I am merely stating my opinion here. You have your own responsibility towards your investments. So I do not take any liability.
In the last part we learned a lot about the petroleum refiner and service station operator PKN ORLEN S.A. from Plock, Poland. We listened to data about the company, went into chart analysis with comparisons with the European energy sector on the one hand and with individual stars of it on the other hand, and finally got to know PKN ORLEN S.A. as a promising company that can definitely be analyzed.
If you did not have the analysis in your feed, here is the LINK to PART 1:
https://app.getquin.com/activity/eNCwkpNXhH?lang=de&utm_source=sharing
If you prefer to hear it recited, here's the Youtube video for it:
Today we start with PART 2:
2nd fundamental analysis of the stock including BASS-T analysis and Graham extrapolation.
PART 3
3. cross-check of PKN Orlen S.A. using Piotroski Score and concluding remarks on the topic
So that you don't all run away screaming because of all the technical terms, I will explain everything up front so you can follow along. If you have done something like this before or at least know it theoretically, then just think of it as a review.
It is important that these tools are logically not limited to PKN ORLEN S.A., but have to be adapted dynamically depending on the case. The main thing is that you can follow me in the most important points for now. Nobody expects you to be able to do that immediately.
Let's start!
2. fundamental analysis of PKN ORLEN S.A. including BASS-T analysis and Graham extrapolation
As usual, let's start with my consideration of key KPIs of PKN ORLEN S.A. stock and add Graham extrapolation to my analysis and Piotroski score in part 3.
In 2022, PKN ORLEN S.A. had a turnover of 311 billion zloty, which corresponds to approximately 66.007 billion euros. By comparison, Shell is "only" at 17.6 billion euros - but be careful: this only applies to the second quarter of 2022. In total, Shell is at 261.5 billion USD in 2021 which corresponds to 241.78 billion euros. In 2021, PKN Orlen S.A. reached 27,940,000,000 euros, which is rounded to about 28 billion euros. Thus, we have a petroleum company and service station operator that, in relative comparison with the largest in the industry, makes just 10.7% of its sales (see (4), (5), (6)).
However, it is the linking of the latter with its competitor Shell that is interesting, as the Shell Card can now also be used at 570 Star and ORLEN stations in Germany. The source also contains many warm words for the actual competitor in the context of an addition to the Shell partner network (see (20)).
In the year-on-year comparison, PKN Orlen S.A. achieved unsteady sales until 2021, which ran in the channel from 86,178 million zloty (2020) to 131,592 million zloty. However, since 2022, sales have increased significantly and the channel has more than tripled. Therefore, on the revenue side, we are now at 310,555 million zloty to 381,646 million zloty in the period from 2022 to 2024. Thus, on the revenue side, there is growth, which tends to be a plus.
If we look at the associated returns on sales, i.e. what is generated in profit from sales, we get a relatively diffuse picture. In the 2019 to 2021 period, the return on sales ranged from 5.2% to 9.73%. But part of the truth is that Shell did not do much better here, as its return on sales ranged from 5.96% (2020) to 12.5% (2021). In fact, TOTAL S.A. from Part 1 even underperformed the Polish hidden champion in 2020, so that TOTAL S.A. was only at 4.28% (see (6), (7), (8)).
But don't worry: it goes even deeper in the sales yield limbo. BP, as one of the larger energy companies, achieved just 1.55% more return on sales in 2019 and even fell below 0 with -1.58% in 2020. In terms of returns, PKN ORLEN S.A. is thus not at the top, but seems to have done something right in terms of resilience in the gas station crisis year 2020 vs. the competition around TOTAL S.A. and BP (cf. (6), (7), (8)).
If we look at the company's market value in addition to the increasing revenues, we see the company on a strong expansion course just since 2021, where the company's value more than doubled (increase of 210% in one year). However, the P/E ratio does not follow this development analogously, as it does not increase proportionally.
I see this especially in the rather high valuations from 8.17 times in 2019, which almost tripled to only 38.3% of the original valuation level. What does this mean now? The P/E ratio as a quotient of the current price and earnings per share, as a popular tool of stock analysis, indicates how "expensive" or "cheap" a stock is basically priced. In other words, we compare how much "distance" there is from the current price level to the earnings per share achieved. Experience shows that this value is usually high for tech companies, as they are on an expansion course and finance their growth by borrowing. Only when profits start to trickle in does the valuation level fall, for example. As a result, the P/E ratio also falls (see (9)).
In the case of value stocks, the opposite is true: Growth is usually completed and we see stable sales at the expense of a lack of growth at the technology level (see (8), (9)).
To which category can PKN ORLEN S.A. be assigned?
To be considered a value stock, only one simple-sounding condition must be met: The intrinsic value of the company must be higher than the currently traded value on the stock exchange. For this, it is necessary to analyze the company via various methods.
A typical characteristic are exemplary low valuations in the price-to-book ratio KBV. This indicates how much book value I get back for e.g. 100€. If the ratio of current price and book value per share is below 1, I get more book value than I spend. This is usually not the case with tech stocks. Alphabet, for example, is at 7.62 times in 2022. So we distinguish (cf. (10), (11), (12)):
P/B ratio <1 : Unternehmen tendenziell unterbewertet (möglicher Value Titel)
KBV = 1: Unternehmen gemäß Buchwert bewertet
KBV > 1: Company tends to be overvalued.
In the case of PKN ORLEN S.A., we see:
KBV (2019) = 0.95
KBV (2020) = 0.59
KBV (2021) = 0.63
KBV (2022) = 0.45
This means a trending favorable valuation, because each of the KBV is below 1. So we get more for our 100€. BUT: There is a small balance sheet problem here (cf. ibid.).
The book value is drawn from the fixed assets, which in turn consist of property, plant and equipment, financial assets, financial property, goodwill and patents (cf. (13)).
Now my silly question: You buy a rare patent whose value has been assigned by the original owner with 1 million Euros. But now you realize that the related product line has become unprofitable and that you will probably not need this patent anymore - but how do you now value this patent in the context of fixed assets? According to the value of the purchase (1 million €)? According to the current value for you? Now only as a part of the original sum?
While in the context of real estate, e.g. warehouses, there are standard land values or fixed (usual) depreciation rates for the value, the fixed endowment is often lost with patents, so that the valuation is not clear. In principle, a patent does not lose value through its use (cf. (13), (14)).
Companies tend to have an interest in being able to show as much book value as possible in order to present as attractive an opportunity as possible by means of KBV and BVPS (I will explain this in a moment) (cf. (12), (13)).
Therefore, this analysis is only a rough analysis on a detailed level. To really go into depth, we would have to take a closer look at the balance sheets of the respective companies and have a far-reaching idea of the respective fixed assets. Even then, a result would not be clear.
A look at the BVPS provides some insight -
The what?
The BVPS value stands for "book value per share" and is "simply" the book value divided by the number of shares traded. Here, the opposite of the KBV applies - the higher the BVPS value, the better. However, this statement must be viewed in light of the previous statements made. How I value an asset and what possibilities result from it complicate the statement of this parameter. In the case of PKN ORLEN S.A., the BVPS value consistently increases even through the crisis year 2020, from 90.7 zloty (2019) to 119 zloty (2021). This is a desirable development and it may suggest that the company has increased in terms of warehouses, patents, equipment, machinery if necessary OR alternatively fewer stocks on the market have to share the same amount of book value. Either way - book value would increase.
To roughly check this in balance sheet terms, I look at the "Assets" item and discover that this item has increased from 67,758 million zloty (2019) to 94,897 zloty (2021). Assets include fixed assets (we already know this from above) and current assets. It is more or less the short-lived brother of fixed assets and often includes items that are to be used up within one year. Appropriately, this includes inventories, trade receivables, shares in other companies, cash in the till, etc. But also prepaid expenses fall in here.
Especially the latter are always exciting, because they can be formed for many purposes. For example, I don't want to pay the rent for the warehouse I use on the balance sheet date from current assets via a reduction in cash on hand, or I don't want to have to reduce the dividend due from the net profit for the year. In this case, I may be able to set up a deferred item "Rent next year" already this year and may be able to present this as security to the investors. So much for "we will pay the rent in any case, we are solvent". Often I mean to recognize that certain behavior patterns are to address typical basic needs of investors and in this reference the prepaid expenses can play a worthwhile role. Quasi, the money is for another period of time that I can foresee now (cf. (13), (14), (15)).
In order not to go beyond the scope of this analysis, I will not discuss this further here.
Parallel to the increasing BVPS, the cash flow per share, which is considered as a trend information on the solvency of the company, also increases. It tells how liquid the company really is at the moment and whether it can service sudden investments or higher receivables on an individual share level. It is important to know that this value is inherently coupled to the industry of the associated company. For example, if I am Bumsbude A and knock out products every day (and get paid for them, otherwise receivable from LuL), I will receive continuous inflow of money. But if I am a Bumbude B and sell large equipment on an investment basis, I usually get my money only after planning, implementation and control of the project completion.
Why is this important?
It's very crucial - because I can go bankrupt despite having millions in outstanding receivables. This works quite simply and should only be explained here in outline: Your friend borrows 2€ at the Dönermann for a Coke (modest investment, I would take Pepsi). But you ordered the big kebab plate for 10€ in advance. As long as your friend doesn't give you back the 2€, you can't pay the kebab plate. Your balance sheet would then look simplified like this:
ACTIVE: 1. fixed assets (illequid): Wallet 0€
ACTIVE: Current assets: 2€ receivable from your friend, 8€ cash on hand, 10€ kebab plate as perishable stock
TOTAL 20€
LIABILITIES: Shareholders' equity 18€, trade payables 2€.
TOTAL 20€
It is important that the sum of ASSETS must always be equal to the sum of LIABILITIES. This is the principle of double-entry accounting.
The what?
Left you see where money as what available; Right you see where money come from (own capital, borrowed capital). In your case, you are in the unfavorable situation that you have a receivable open, but the kebab man wants to have his plate of kebabs paid before you. What happens? You can't pay the bill and get into trouble.
So for this it would be necessary to know how solvent the sector is. Since we are talking about the energy sector and transactions take place every day in the service station network, I initially rate the risk as low. Therefore, the responsibility of this parameter relaxes somewhat.
But what about the debt that has been mentioned?
In the case of ORLEN S.A., a typical picture of a value company emerges, as here the debt is far below EBITDA and we are virtually at only 0.35 in 2022. This means that the EBITDA of the year is completely sufficient to pay off the existing group debt. More than welcome in times of rising interest rates (see (16)).
But what does the company do with its existing fixed assets in the form of return on assets? The RoA here is between 4.26% and 10.7% and thus tends to jump, even though assets are increasing. This means that the net result has not always been at the level of the fixed assets and thus this could have been a sign of expansion. The values are considered good at >5% according to (17), but are industry dependent. This also fits into the picture around the acquisition of the OMV service station network in Eastern Germany from Part 1 (see Part 1). This therefore speaks less for belonging to the value sector (see (17)).
I have been told that in addition to assets, companies also have people. Their efficiency is assessed by the return on equity (RoE) as the division of net income / equity. How well does the management handle its own money? In the case of PKN ORLEN S.A. we see basically good values between 8.2% to 28.2% - unfortunately without trend and very volatile. One can argue whether this is complaining on a high level. Nevertheless, the value series "dances" around the average value of 12.18% from 2022 of the European energy companies, which makes me think (see (6), (17), (18), (19)).
Finally, let's look at research spending: How much is the company investing in the future? This value is very essential due to the transformation of the petroleum industry and PKN ORLEN S.A. surprises me positively here, because despite increasing sales, the percentage of CAPEX in sales remains almost the same around 8%. This would already speak for a value company whose future is to be secured (see (6)).
On the other hand, I was less pleased with the view of the earnings per share in Q4 2022, where a loss of 2.26 PLN was generated, but by means of the profits in Q3 and Q1, a dividend of 3.50€ was nevertheless paid. In 2022, PLN 6.48 + PLN 20.2 - PLN 2.26 was earned. That is: PLN 24.42 for 2022, of which only PLN 3.5 has been paid out. This would be a dividend payout of just 14.33%, so there is still room for improvement (see (6), (19)).
Let us now use the Graham extrapolation to make a judgment about PKN ORLEN S.A. based on the given values. I assume the following values:
Book value per share (BVPS) = PLN 142.
Annual growth (2021-2024): ((337300/131592)^(1/3))-1 = 36,86%
P/E ratio (2022): 2.2x
EPS: 29 PLN
Thus, according to Graham formula for the intrinsic value of the stock, we get:
=29 PLN *(8.5+2*36.86) = 2,384.38 PLN
For the maximum purchase price we get:
=(22.5*29*142 PLN)^1/2 = 304.39 PLN
According to Graham formula, the growth is very fair as expected:
=36,86/2,2=16,75 > 0,9
What is the problem? We continue to expect the company to expand strongly. However, this is not necessarily the case.
A simple example: In addition to joining Shell's partner program, PKN Orlen S.A. will buy OMV's Avanti service station network. The latter's service stations were mainly found in front of Aldi Süd stores, so that PKN Orlen S.A. with its Star and Orlen service stations could now also have a direct presence at the discounter (see (21)).
But what then?
The decisive problem with expansion courses is often market displacement or the limited potential that can still be achieved. PKN Orlen S.A. is firing from all cylinders: Participation in Shell, acquisition of complete service station networks from competitors, and since September of last year, you can now buy food with a limited expiration date via app at Star and ORLEN service stations. This is by no means a matter of course, and I interpret it very positively against the background of the figures described. For example, I'm also committed to combating food waste and think it's great that you can take gas station rolls or cakes home at a reduced price after filling up. The standards of larger service station operators are already being implemented and the assets are growing massively (see (21), (23), (24)).
Why is this problematic?
I could have ended on this note and left you with the graphic on gas station death. Here is where the industry's biggest problem can be found. While there were 46,091 gas stations registered in Germany in 1970, there were only 14,459 in 2021. That is a decline to just 31.37% of the original service station network. The number of service stations has already fallen below 20,000 since the mid-1980s. This means that a) there are fewer places to sell the product (gasoline/diesel/electricity...), b) the same number of players could have fewer absolute branches, and c) gas station operators need to revitalize their business (see (24)).
This revitalization can also be seen in the above-mentioned Lebensmittelapp and is NOT a real nice-to-have concept, but seems to me inevitable in the competition with strong brands like TOTAL, SHELL and BP. It is not made any better by the fact that the main turnover of gas station owned bistros is 60% from tobacco. It is not difficult: gas station operator realizes: fewer gas stations are more profitable, Fewer gas stations: I have more competition, Competition: I have to offer bistros, Bistros: Yes let's just take the fast moving goods (Cf. (23), (24)).
And what goods are these? Phone cards?
No: the classic cigarette pack. I have already made a video on the transformation of the cigarette industry using British American Tobacco as an example. There I pick up on the key tasks, challenges and problems facing the industry. I'll link that to you below. Feel free to watch it after this, because they are two correlated industries with different product but same task of repurposing the products.
The phone cards I mentioned account for just 10% of the sales of gas station stores in Germany and are not further relevant (see (25)).
And what about e-mobility? Couldn't that possibly save PKN Orlen S.A.?
It's not quite that easy. Although (25) says that the population of charging stations will increase, it doesn't say that this will increase the number of filling stations. In addition, despite all the constant hype, there is still no unified approach from the automotive industry. In my BMW article, for example, I talked about the benefits of having a diverse portfolio of drive types. For BMW, that's great: The e-fan gets his car, the diesel fanatic (me) too, and even in other drive forms is actively researched (see BMW contribution).
For the filling station operators, however, this is less nice - they cannot make major changes to the existing network of charging stations, which can be expanded considerably, and must continue to stock all forms of propulsion, such as fossil fuels, electricity, hydrogen, etc. This leads to considerable costs for the filling stations. As a consequence, this leads to considerable investment costs for alternative energy columns, whose product may not have any acceptance security. For PKN Orlen S.A. with the fraction of the turnover of Shell (the big player in the industry) I do not see the investment possibilities in these technologies. Therefore, e-mobility is not directly a salvation in principle, but depends significantly on macro factors on the subject of gas stations and fuel of the future.
The decisive advantage for e-car drivers can be the home charging station in the garage - for PKN Orlen S.A. this is a kick. By refueling at home, it may not be necessary to drive to the gas station depending on driving load, route, car, battery level, etc. Sources (26) and (27) represent publicly accessible instructions, price comparisons and general procurement info to this exemplarily. If necessary, e-mobility does not save PKN Orlen S.A., but perhaps makes it more difficult (cf. (26), (27)).
What is your intermediate conclusion by means of your analysis and the Graham extrapolation?
In general, PKN ORLEN S.A., as a Polish energy conglomerate, is an exciting participant in the European energy market. We have thematically covered the following:
- Sales analysis
- P/E ratio analysis
- P/B ratio analysis
- Cash flow analysis incl. first assessment of dividend quality
- Key competitors such as TOTAL, Shell and BP
- Challenges of the market
- Role of e-mobility for PKN Orlen S.A.
- Graham extrapolation isolated on company number basis
we now know at a fundamental level key relationships between the market and the company, as well as in B2B, and have developed a general understanding of the market.
In the following third and last part of my analysis I will validate or refute my statements via Piotroski Score and thus provide an open basis for discussion.
Did you like this part? Then follow me here at Getquin and on Youtube. Every follower counts 😊 Here is the promised BAT video:
AND HERE WE GO TO PART 3 SOON:
#dividend #dividenden
#dividendenstrategie
#aktien
#aktienanalyse
#etf
#emobilität
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/
(5) https://de.statista.com/statistik/daten/studie/159788/umfrage/umsatz-von-shell-seit-dem-jahr-2005/
(6) https://de.marketscreener.com/kurs/aktie/POLSKI-KONCERN-NAFTOWY-OR-1413342/fundamentals/
(7) https://de.marketscreener.com/kurs/aktie/SHELL-PLC-6273/fundamentals/
(8) https://de.marketscreener.com/kurs/aktie/TOTALENERGIES-SE-4717/fundamentals/
(10) https://www.biallo.de/geldanlage/ratgeber/value-aktien-was-ist-das/
(13) https://welt-der-bwl.de/Anlageverm%C3%B6gen-Definition
(14) https://www.deltavalue.de/anlagevermoegen/
(15) https://www.buchhaltung-einfach-sicher.de/buchhaltung/rechnungsabgrenzung
(16) https://www.bwl-lexikon.de/wiki/verschuldungsgrad/
(17) https://www.investopedia.com/terms/r/returnonassets.asp
(18) https://exporo.de/wiki/return-on-equity/
(26) https://www.adac.de/rund-ums-fahrzeug/elektromobilitaet/laden/elektroauto-ladesaeulen-strompreise/
(27) https://www.energieheld.de/energie-trends/mobilitaet/elektroauto/stromtankstellen
