Equity Research: MoBruk S.A.

Sustainability and Profitability: Mo-Bruk's Winning Formula

Abstract

Mo-Bruk S.A. (OTCPK:MBRFF) (Warsaw: MBR), the leading waste management company in Poland, presents a compelling investment opportunity due to its alignment with the European Union's waste management policies, strong growth potential, and commitment to environmental sustainability. The company's three main business segments include solidification and stabilization of inorganic waste, incineration of hazardous and medical waste, and production of alternative fuels. Mo-Bruk's environmentally sustainable business model is expected to attract investments from the ESG movement, providing significant value to shareholders in the long term. Based on our valuation, we target Mo-Bruk's long-term price to be at least two-fold from its current level. The opportunity exists due to the company's unique position in the market, misunderstood competitive positioning, and recent improvements in trading liquidity and disclosures.

Company Overview

Mo-Bruk S.A. is a Polish industrial waste management company that operates in three main business segments: solidification and stabilization of inorganic waste, incineration of hazardous and medical waste, and production of alternative fuels. The company's proprietary technology allows it to treat inorganic waste from chemical and construction firms, producing granulated cement that is made into concrete as a final product. Mo-Bruk also conducts thermal treatment of industrial and medical waste in an environmentally safe manner, generating technological steam to produce electricity for sale. Lastly, the company collects combustible industrial waste to be converted into alternative fuel after safe mechanical processing.

Mo-Bruk has experienced significant growth in recent years, with its revenue and profitability increasing substantially. The company was inducted into Poland's Warsaw Stock Exchange mWIG40 index, placing it among the top 40 medium-sized companies in the country.

Value Proposition

1. Alignment with EU's Waste Management Policies: Mo-Bruk's business model aligns with the EU's waste management policy to reduce landfills and implement a closed-loop economy. This involves reusing and recycling municipal waste, which is set to increase steadily and hit 60% by the end of this decade. Mo-Bruk's waste management services will benefit from this trend, as the company is able to incinerate toxic waste to produce electricity and alternative fuel for usage.

2. Shareholding Structure: Mo-Bruk is perceived as a family company, with the Mokrzycki family holding many executive positions and owning 35% of the company's total shares. This leaves the percentage of free-floating shares in the market at 63.3%. We favor such a shareholding structure, as it allows for strategic decisions that benefit shareholders. Additionally, Mo-Bruk has been generous in its dividend payouts, with a current dividend yield of 10.2%.

3. Well-Positioned for the Future: Mo-Bruk is well-positioned for the future, given the increasing focus on environmental sustainability and the ESG movement. The company's waste management services help reduce the volume of greenhouse gases produced in landfills, ultimately benefiting the environment and slowing the increase in global temperatures.

4. Unique Competitive Positioning: Mo-Bruk's unique position in the waste management industry, with no direct listed competitors locally, allows it to capitalize on idiosyncratic growth opportunities available only to it as the niche market leader. The company's strong financial returns (50% EBIT margins, >50% returns on capital) may well improve further due to these growth opportunities and likely accretive M&A.

5. Improved Trading Liquidity and Disclosures: Despite being a relatively small company ($350mm market cap today but only ~$160mm free float), trading liquidity has improved recently ($300-500k/day), and many of the disclosures have been enhanced. This makes the stock more accessible to investors and increases its visibility in the market.

Valuation

Based on our analysis of Mo-Bruk's peers in the waste management sector, the company has a higher EV/Revenue multiple, indicating high growth potential. However, its EV/EBITDA is significantly lower than its peers, suggesting an undervalued opportunity. We believe that Mo-Bruk has enormous upside potential, with its long-term price target projected to be at least two-fold from its current level based on our DCF with conservative assumptions.

Risks

The primary risk associated with investing in Mo-Bruk is the potential for changes in governmental policies on waste management, specifically in Poland. Currently, regulations favor Mo-Bruk by closing loopholes that allow for illegal waste disposal. However, if policies change or new loopholes are created, this could significantly impact the company's revenue.

Conclusion

Waste management is an undercovered sector that is poised for growth as environmental sustainability and ESG considerations gain prominence. Mo-Bruk's strong growth potential, alignment with EU waste management policies, commitment to environmental sustainability, unique competitive positioning, and recent improvements in trading liquidity and disclosures make it an attractive investment opportunity. We believe that the company will continue to benefit from the Polish government's efforts to reduce toxic waste and the broader EU region's waste management policies. As the ESG movement gains traction, we expect significant capital inflows into waste management companies like Mo-Bruk, providing substantial value to shareholders through dividends and capital appreciation.