Business Summary
Toplivo was established in 1947 as a state-owned company, specialized in supply, storage and trade with construction and heating materials. Gradually, the company widened its product range and in late 60s /early 70s/ started trading with liquefied petroleum gas (LPG). Toplivo offers a wide range of products through 380 stores, warehouses and gas stations in about 196 populated areas. The construction materials could continue to support the company’s performance in the future as Bulgaria’s housing market is said to continue to grow steadily in short term.
| Recommendation | Previous | From date | 52-week target |
| market Perform | - | - | BGN 25.96 |
Current market Activity
The current correction pushed down the price per share of Toplivo from the top of BGN 38.00 to as low as BGN 18.00. The bulk of the losses were posted in January when shares lost 25%, whereas the index SOFIX fell 17%. Toplivo outperformed the broad market during the next leg down in March as the price of BGN 20, which corresponds to the book value of the company, provided strong support. Volumes also increased recently and the offered shares for sale were absorbed by the market. The strong forth quarter report didn’t provide any boost for the price in February. The correction pushed down the P/E ratio to 20, which is close to the market average and is in the comfort zone for now as we expect 15-20% increase of the net profit this year.
Current market Activity (chart)
Financial Summary
The net profit for 2007 is far below the previous expectations as the management underestimated the negative effect from the mild winter last year. However, sales increased 3% last year and the profitability improved during the forth quarter. Toplivo is one of the cheapest stocks in terms of P/B ratio and the company has plenty of real estates that aren’t revaluated recently and could add to the revaluation reserve. The forth quarter performance is a reason to expect moderate growth for the next several years which should also improve the profit margin. The current P/E is 20 whereas P/B ratio is 1.20.
| Valuation Ratios | |
| Enterprise Value | 159 889 648 |
| Dividend Yield - Gross | - |
| Trailing P/E (ttm) | 19.84 |
| Forward P/E (2008) | 16.60 |
| PEG Ratio (1yr expected) | 1.24 |
| Price/Sales (ttm) | 0.38 |
| Price/Book (mrq) | 1.18 |
| Enterprise Value/Revenues (ttm) | 0.55 |
| Enterprise Value/EBITDA (ttm) | 10.21 |
| Profitability and Growth Ratios | |
| Return on Capital | 9.43% |
| Return on Equity | 5.95% |
| Return on assets | 3.16% |
| EBITDA Margin | 5.30% |
| Net Profit Margin | 1.90% |
| Revenue Growth | 3.11% |
| EPS Growth | -21.4% |
| Capital Growth | 12.5% |
| assets Growth | 19.1% |
market Position
The main activities of Toplivo are supplying, keeping and trading with propane-butane, coals and briquettes as well as trading with construction materials. Toplivo is official representative of Grohe - world leader on the sanitary fixture market, Keramac and Kolo - specialized in the production of sanitary faience for Bulgaria. The company maintains its orientation toward construction materials, which set up 37% from the 4Q 2007 sales. In recent years the construction posted solid growth. Demand is concentrated in office and commercial buildings as well as in residential estates.
Residential buildings and dwellings completed (useful floor space - sq.m) (chart)
Recently, the company decreased its retail trade revenues from liquid fuels due to the massive entering of Shell, OMV, LUKOIL and Petrol. The activity of Toplivo regarding of solid fuels is under the centralized method of Business strategy, negotiating, pricing and repartition of the quantity in case of necessity. The mild winter last year resulted to increased stockpiles of heating materials and lower than expected sales during the first quarter. The company’s balance sheet was also under pressure as Toplivo was unable to switch back in full scale to more profitable trading with construction materials during the second quarter. However, the sales during the forth quarter posted a visible increase which could diminish the excess stockpiles.
Revenues Structure (chart)
Seasonality
Toplivo is depending on the seasonal changes in the demand of construction materials and heating fuels. The strongest quarters for distribution of construction materials are the second and the third as largest sales are posted in July and August whereas the lowest revenues come during January and February. The demand of heating fuels is larger during the summer months before the cold season.
Ownership
The company was privatized in 1996 during the first wave of mass privatization, when Petrol Holding (now Synergon Holding) acquired 34% of the company’s shares. The holding gradually increased its stake in Toplivo and even tried to delist it in 2002, but its attempt failed due to the state’s blocking stake in the company. Recently, Synergon Holding owns 73% of the Toplivo’s capital.
Ownership (chart)
Stock Information (BSE Ticker: TOPL; Bloomberg: TOPL BU; REUTERS: TOPL.BB) (table)
Valuation
The valuation of Toplivo is heavily influenced by the relatively low growth rates as compared to other Bulgarian blue chips. The management’s projection for 9 million net profit in 2007 was too optimistic and our expectations for the growth rates have been influenced on the downside due to the lower results last year. We prefer to stay at the downside of the expectations for now and to revise them after the results for the first half of the year.
Multiples analysis
Toplivo is a retail company and the P/S ratio is the lowest among Bulgarian stocks. Other multiples based on the 2007 results are close to the market averages. P/EBITDA is 7 due to the significant interest payments and depreciation, whereas the P/E ratio is 20. An attractive valuation ratio is the P/B of 1.16, which is not only lower as comparing to other Bulgarian stocks but also don’t include the possible revaluation of tangible assets like real estates. We consider the P/B of 1 as a significant level of support but the market price of real estates cannot be estimated due to their differences in terms of location and size. Our expectations for 2008 results are based on the stable growth of sales and profits during the last several years. This leads to figures of forward P/E of 16.77 and slightly better EV/EBITDA.
| BGN '000 | 2007 | 2008 |
| Net Profit | 5 576 | 6 459 |
| EBIT | 9 833 | 10 777 |
| EBITDA | 15 662 | 16 935 |
| sales | 293 244 | 307 906 |
| Equity | 93 758 | 100 217 |
| market Cap | 108 337 | 108 337 |
| Cash | 5 324 | 5 324 |
| Debt | 54 602 | 54 602 |
| EV | 163 898 | 163 898 |
| P/E | 19.43 | 16.77 |
| P/S | 0.37 | 0.35 |
| P/B | 1.16 | 1.08 |
| EV/EBIT | 16.03 | 14.63 |
| EV/EBITDA | 10.06 | 9.31 |
| EV/Sales | 0.54 | 0.51 |
| P/EBIT | 11.02 | 10.05 |
| P/EBITDA | 6.92 | 6.40 |
Calculations: ELANA Trading
5Y Projections
As a result of gradually improved margins in 4Q of 2007, we expect also higher net profits for the next five years. The company managed to increase its profit margins during the last quarter of 2007, which assures us that 5.5% EBITDA margin is achievable during the period but we cannot exclude any seasonal volatility. In addition, the growth of interest expenses should decelerate due to the already transformed debts to long-term bank loans. Those figures are used for the calculations of discounted cash flows.
| BGN '000 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 |
| sales | 293 244 | 307 906 | 323 302 | 337 850 | 353 053 | 367 175 |
| Growth | 1.91% | 5.00% | 5.00% | 4.50% | 4.50% | 4.00% |
| EBITDA | 15 662 | 16 935 | 17 782 | 18 582 | 19 418 | 20 195 |
| EBITDA margin | 5.34% | 5.50% | 5.50% | 5.50% | 5.50% | 5.50% |
| Net Profit | 5 576 | 6 459 | 6 764 | 7 043 | 7 341 | 7 601 |
| Net Profit margin | 1.90% | 2.10% | 2.09% | 2.08% | 2.08% | 2.07% |
Estimated data for 2008-2012;
Calculations: ELANA Trading
Discounted Cash Flows
Discounting of the cash flows gives better picture for the price, according to the growth opportunities as the long-term perspectives are not included in the multiples P/E or EV/EBITDA.
The DCF model is based on our projections for gradual increase of sales and modest improvement of profit margins for 2008 and beyond. Growth rates are expected to decelerate to the end of the ten-year period. The projected long-term growth rate is 2.5% with WACC of 12%. The discount rate could be higher as the BSE is very volatile at the moment and investors could be requiring higher risk premium.
The working capital increased from 2% of sales in 2005 to 12% in 2006 due to the changes in debt structure of the company. It remained above 10% last year and we prefer to create our DCF model at higher working capital as the company struggled with excessive stockpiles last year.
The model gives a price per share of BGN 8.65. This is lower than the other used methods. When using 2% working capital of sales, the calculated price is above BGN 10.
Discounted Cash Flows (chart)
Valuation
The valuationrequires different approach as the low P/B ratio is in contrast to the calculated price by the DCF model. This is due to the moderate growth we used in the model, following the sales growth deceleration in 2007. Toplivo needs to show better profit margins as the current P/E of 20 is close to the market average. The current P/B is providing good support for the price and this is the reason to give higher weight on this component.
Valuation (table)
Recommendation
We give market Perform recommendation of Toplivo as we give preference to only moderate growth rate of the total market for the next one or two quarters. The one year price target depends on the market psychology at the moment. Investors are focusing toward the P/E ratios and factors like liquidity and management are also weighting on their decisions. However, the main risk is the investors’ reluctance to support stock that trade at higher than average P/E ratio in later stage of the market recovery. This will lead to profit-taking and below market performance for Toplivo. Still, the strong forth quarter of 2007 is factor for better expectations and positive surprises in 2008 despite the though market conditions. Our price target is calculated by P/B of 1.5 or BGN 25.96.
Financial Data (tables)
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Copyright: 2006 Elana Trading. All rights reserved.For further Information pleasecontact Elana Trading, 49 Bulgaria blvd. , 1404 SofiaPhone: +359 2 810 00 40, fax: +359 2 810 00 99, e-mail: research@elana.net, web site: http://www.elana.net
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