Poland is quite the flirt. It has attracted a number of JSE listed companies to its shores over the years. And as long as the SA economy remains dim and exchange controls are kept intact, industry players say that their home country will continue to push its companies into the arms of foreign suitors. And Poland does hold promise. It has increased its GDP per capita by almost 150% since 1989, more than any other European country.
For SA companies, the push into Poland comes from the uncertainty surrounding the local economy. Analysts believe it is forcing local corporates to look abroad for diversification and risk hedging local risks and growth prospects. They argue that the attraction for SA capital ranges from anything between high yields to stable currencies as well as access to cheaper debt.
For JSE-listed real estate investment trusts, the Eastern European market has proved particularly prosperous. There are 61 companies listed on the JSE for a combined market cap of R770-billion. Significantly, up to 40% of this sector’s assets are managed offshore. And half of that is in Eastern Europe.
“The reasons behind this are fairly simple. In some ways Poland and SA are very similar,” says Glen Baker, a portfolio manager in alternative investments, at Anchor Capital. “Almost cut from the same cloth. Where asset managers from more developed economies would be wary of entering less-than-known terrain, South Africans feel more at home,” he says.
Baker says that SA and Poland are fairly similar in the size of their economies and in population, and are both forecast to be led by the emerging consumer. Poland, however, has significantly better GDP growth prospects.
“Part of the difference is they have a highly educated population, which is financially included and is coming from a low-consumer base. Property players and retailers have realised the potential in that. There is no high street retail in Poland, and the retail sector is very underdeveloped,” Baker says.
In addition, low interest and high growth rates have made taking on debt both attractive and very easy, he says, meaning that a company could buy a shopping centre delivering a 6%-9% yield at funding costs well below that.
Success has been mixed with property companies. Certain retailers and other operations have performed well, while health care has been a slightly tougher nut to crack.
Back home property companies have been under pressure due to subdued economic growth and rising unemployment. Expansion into other markets that supply rental and more tangible evidence of capital growth have therefore been pursued, with good reason. Nepi Rockcastle, MAS and Echo Polska Properties are exclusive owners of European property.
Growthpoint, the largest SA property counter, also owns 52 properties in Romania and Poland, 100% valued at €2.5bn through its 28.96% share in LSE AIM-listed Globalworth Investment Holdings (GWI) and its 21.6% share in Warsaw-listed Globalworth Poland Real Estate (GPRE).
Chief investment officer at Reitway Global Garreth Elston says the risk with emerging market economies is often the impact of currency fluctuations, which can substantially harm returns. There is a political risk dimension as well. Poland, though, has matured and stabilised to a developed market status where these issues are not as volatile as they once were.
In 2018 it was elevated to the group of developed economies in the Russell Index, run by the Financial Times and Stock Exchange, or FTSE.
“Poland is the eighth-largest economy in the EU, and the FTSE designation is one the country’s leaders have chased for years because of its status,” says Elston.
“The country has shown it is creditworthy and its citizens earn enough to qualify for the FTSE designation,” he says.
“It is a well-run economy and business is benefiting from it, which includes South African property investors. The investors into Poland have been well rewarded for their investments, and the future remains positive for the real estate sector in Poland.
“Poland is seeing several large new developments taking place, including mixed use, and new logistics and warehouse facilities. We are seeing Redefine and Growthpoint (through Globalworth) aggressively push new logistics developments,” says Elston.
When it comes to migration, Brexit can have a positive impact on the Polish economy. A key goal from the point of view of Poland’s economic interests should be to use Brexit to reverse migration trends and attract back some of the tens of thousands of Poles living and working in Britain. Thus, Brexit may positively influence Poland’s labour market and long-term economic growth.
South Africans invested in Polish retail — property or otherwise — are well positioned to benefit from the country’s growing consumer spend and the popularity of mall shopping among Poles.
Local clothing retailer Mr Price entered the country in 2018. It was the company’s second foray into the northern hemisphere, after entering Nigeria in 2012. It joined its counterpart Pepco, which had found success there. Mr Price CEO Stuart Bird told Business Day at the time that the country was attractive because of its growing middle class and healthy economic growth prospects.
Mr Price tends to take a cautious approach when entering new markets. It is rather testing the Polish waters with its mrpHome brand — which stocks homeware, furniture and decor — rather than the clothing and apparel chain, which is subject to seasonal consumer spend.
It did the same in 2003, when the retailer closed six test stores in Chile, while it is testing mrpHome and apparel stores in Australia. The group has consolidated its three apparel stores in Australia into one.
Analysts said at the time that a low seasonality mrpHome pilot store in Poland provided Mr Price with a low-risk entry point into a high growth European economy with positive fundamentals. The company is currently in a closed period.
SA grocer Spar announced in 2019 it will also be tapping into the generous Polish consumer segment. It said in mid-May that it is in the final stages of talks to buy a controlling stake in Polish deli and supermarket chain Piotr i Pawel, which they said forms part of their expansion efforts into Europe. The group already has operations in Ireland, south-west England and Switzerland.
Piotr i Pawel operates 77 delicatessen and supermarket stores plus a wholesale distribution network. Spar said at its interim results for the half-year to 31 March 2019 that it had been awarded a licence to operate its brand in Poland. It did, however, not give details on the value of the deal, which is subject to regulatory approval.
On a request for an interview, CEO Graham O’Connor said he would discuss the matter only once the transaction was complete and announced.
Surely, Spar and Mr Price would like to replicate the great success of Pepco’s European chain of discount shops offering affordable apparel and household goods.
“It is one of the largest non-food retail chains in Central and Eastern Europe, with 1,300 stores in Poland, the Czech Republic, Romania, Hungary, Slovakia and Croatia, says Chantal Marx, head of Equity Research at FNB Wealth and Investments.
“Pepkor was exceptionally successful in rolling out Pep-type format stores in Poland and Romania,” says Marx.
“Reports suggest that the embattled Steinhoff wants to bring Pepkor back into the fold. For the three months to 31 December 2018, Pepco grew revenue by 37% in constant currencies to €477-million. Unfortunately, as part of the Steinhoff stable it will be difficult to translate its success to shareholder returns,” Marx says.
Meanwhile, the company continues on its aggressive expansion drive. It opened its first two stores in Bulgaria, in March and in April announced that it will open a logistic centre in Gyál, near Budapest, in a €85-million investment.
A bit outside the core contingency of retail therapy, a shortage of hospital beds is what enticed, among other things, Life Healthcare to invest in the country.
The health provider bought a majority stake in Scanmed Multimedis in 2014. Based in Krakow, Scanmed provides medical care services to individual patients and corporate customers in Poland.
“The company had a rocky start,” says Marx.
“Major health reform in 2017 which led to a substantial reduction in tariffs for publicly funded procedures, significantly affected its cardiology segment, which is 45% of its revenue stream.”
Marx says that in 2018, the business recovered off a pretty subdued base, and the Polish portion is still quite small in light of the larger Life Healthcare Group, particularly after the acquisition of Alliance Medical — a leading European diagnostics provider in 2017.
Also off the beaten track was local vehicle battery and component extraordinaire Metair, which acquired 90% of Romanian battery manufacturer Rombat for R424-million in 2012. In 2018, Rombat achieved 6% overall growth in volumes and achieved a record performance, delivering a 29% increase in operating profit, at R108-million.
As these new players set out on a newish journeys, there are two stalwarts that have been around for longer and have evolved much along the way. In 2006 SABMiller launched its international premium lager, Peroni Nastro Azzurro, via its Polish subsidiary Kompania Piwowarska, into Poland’s $250-million premium lager market. Kompania Piwowarska was already Poland’s leading brewer with a 37% market share.
“SABMiller held a strong Eastern European footprint for many years. However, as part of AB-Inbev’s takeover of the business in 2016, the company agreed to sell SABMiller’s businesses in Poland, the Czech Republic, Slovakia, Hungary and Romania to Asahi from Japan for €7.3-billion,” says Marx.
IT giant Naspers had exposure to the region for some time as well. It was wholly invested into Allegro — an online shopping platform in Poland with more than 20 million registered users — for eight years, before in 2016 it sold it for $3.253-billion to a private equity consortium.
“It was well above its carrying value,” says Marx, “and the market would have been satisfied with about $2.5-billion. It was a substantial value unlock for the company. “
Naspers maintains a presence in Poland through OLX, PayU, Otomoto and Otodom. In the rest of the region Delivery Hero, Luno, eMag and PayU continue to demonstrate strong growth in their sectors, Marx says.
Clearly, SA operators believe in the Polish fairy tale. How long it will last is anybody’s guess, but already economic growth is projected to slow down to 4.0% in 2019, from more than 5.0% in 2018, according to the World Bank’s Economic Update, released at the beginning of April 2019.
The banks, however, add that the country’s growth rate will remain robust compared with other European economies.
“It will be driven by strong domestic consumption and accelerating investments, supported by low-interest rates and the availability of EU funds,” the World Bank says in a press release.
“The low unemployment rate and strong wage growth are still driving private consumption; investments, both public and private, are growing too. In 2018, the fiscal budget was close to balance,” says Carlos Piñerúa, World Bank country manager for Poland and the Baltic states.
“We do expect, however, that Poland’s fiscal situation may deteriorate soon.”
The World Bank estimates that GDP growth in 2020 will amount to 3.6%, and will slow to 3.3% in 2021. DM