Overcoming the 14-year itch

The wider WIG index, meanwhile. has risen to above 70,000 points. And the last time we saw rises of 10,000 points was only… 14 years ago; but analysts are now expecting the next 10,000-point increase to happen a lot sooner. There are many current factors that have been pouring fuel onto the flames for investors. Firstly, the economy is bouncing back, despite the global disruption to supply chains (such as the shortage of semiconductors for the automotive and electronics industries). The rude health of the economy in the face of the continuing pandemic has, regardless of such issues, given us all grounds for optimism. High inflation has yet to become much of a problem and consumer spending is once again driving the economy, as the general public makes up for having been starved of goods and services for so many months. This can clearly be seen when it comes to companies across The Pond, but is also evident right here in Europe. You only need to look at the number of times when the S&P index in the US has recently broken previous records – this has happened at least 50 times since the beginning of the year. Investors have also yet to get the jitters about the prospect of the US Federal Reserve eventually curbing the bond purchases that have been fuelling the stock exchange growth over the last decade or so.

In spite of all these records being smashed, the Warsaw Stock Exchange actually suffered a small dip over August, but we are nevertheless still on track for average monthly trading to be higher than last year, when new life was largely breathed into the bourse by individual investors, who accounted for 24 pct of the trading volumes in the first half of the year, compared to just 12 pct in 2019. Since small investors have been somewhat discouraged by the interest rates on bank deposits and rising inflation, they are now looking for more profitable earnings. Clearly, one way to turn in a profit is to invest in apartments. The residential development segment has certainly heated up of late, even though, over the last few weeks, this has not been reflected by the WIG–Nieruchomości index. According to Deloitte, Poland has recently seen the highest number of apartment deliveries per 1,000 people in Europe and was one of the top three countries when it comes to the number of residential construction projects launched. Dom Development, the generally acknowledged leader of the sector, increased its number of handovers by 55 pct in H1 and its revenues by 48 pct, with a margin of more than 30 pct. The company expects high levels of continuing demand, although the main bottleneck faced by the sector is the shortage of available sites. The rising labour and material costs, however, could possibly be offset by gains from rising unit prices. Marvipol has seen similar growth in its revenues and profits (41 pct and 68 pct respectively), although the business line that has made an even greater contribution to its operating profits has been warehouse development. At the end of June, the company had seven such buildings in its portfolio, three of which it has already agreed to sell.

When these prospects are factored together for residential developers, along with their hunger for fresh capital, you are presented with a fair picture of the sector. Echo Investment is planning to issue PLN 300 mln of bonds to individual investors. This is the second developer, following Marvipol, to consider issuing such notes to the average John Smith. But they are not alone when it comes to looking to capitalise from the bond market. Lokum, Atal, and Develia are all turning to institutional investors, or at least intend to, even though such bond issues are generally aimed at buying back previously-issued notes. The residential development market might currently be booming, but analysts are still a little concerned about the medium term. Bank Ochrony Środowiska points out that the residential market has been in a growth cycle since 2013, with the last few months seeing a strengthening of this trend. The worry is that all the symptoms of overheating are now in place.

Construction companies have also been having to contend with rapid spikes in material prices and a shortage of skilled labour, meaning rising uncertainty for those that dabble in public tenders. The WIG-Bud has risen by 22 pct since the beginning of the year, but the real stars over the last few weeks have been Mostostal Płock and Mostostal Warszawa, which both posted excellent results for the first half-year. Both firms saw their share prices shoot up following multiple increases of net profits compared to the same period of the previous year.

Polimex has also regained something of its swagger. In the first half of the year, the construction group saw it revenues rise by 35 pct while its gross margin and profitability both hit double figures. The group is now projecting revenues for the year of PLN 2 bln while its order book should come in at somewhere around PLN 5 bln. Clearly, the rise in the prices of materials resulting from their current shortages haven’t been eating into profits, even though the data show that this is increasingly becoming an issue for the entire sector. In August, more than 9 pct of constructors declared that they were having problems securing the materials they needed – the highest figure for 14 years. Recruitment issues, although nothing new, have now become an even more pressing problem. Around 40 pct of firms have said that they are having difficulties in securing the required manpower. Railway construction specialist Torpol has also seen rising margins, but its reduced revenues have been compensated for by profits of almost 9 pct from its contracts. The entire sector is waiting for the latest EU budget and new infrastructure tenders. However, the EU’s freezing of the National Recovery Plan has become something of a concern, since, without funding, there will be no public tenders, which is why companies that are not entirely dependent on public financing might be in a better position. One good example of this is Erbud, whose subsidiary Onde is becoming the strongest company in the group. It is now responsible for almost half of its gross profit from sales. Onde, which specialises in constructing solar and wind farms as well as energy-efficient buildings, has around PLN 400 mln to invest in developing its projects, having raised PLN 215 mln from investors in a public offer. (Mir)