A Hidden Compounder from Poland

Asseco South Eastern Europe (ASEE), this under-followed IT/fintech company serving the banking and payment industry in Southern Europe has compounded EPS at an impressive CAGR of 19% since 2013.

I want to go over this under-followed and inexpensive IT/fintech company based in Poland trading under the ticker WSE:ASE. The stock trades on the Warsaw stock exchange at 46-47 zloty ( about 9.70 EUR) and is not very liquid. I first got intrigued by the strange name: Asseco South Eastern Europe, which reminded some much of RISK .. the board game, Southern Europe, a location in the Board game where you don’t want to put your armies … surrounded by armies from Europe, Africa and Asia..

If you are in USA or Canada, you can trade Polish stock with interactive broker. There is so much value on the Warsaw stock exchange or the Tokyo stock exchange right now, that it might be worth the trouble for deep value folks to get Interactive Broker setup.

Although $ASE trades in zloty, the local currency in Poland, as an international shareholder, I am converting everything to euros, so better assess the value of the company. Since zloty has devaluated over the last 5 years, growth would be artificially increased if using zloty. At the time of writing, you need 4.78 zloty to get 1 Euro.

As such, all figures in this article are in Euros.

The article constitutes my personal views and is for entertainment purposes only. This is not an investment advice. Please refer to the disclaimer at the end of this article for more details.

Markets: Good Old Yugoslavia and more!

The company has developed proprietary banking software solutions for banking and payment and has been offering these solutions in the South Eastern Europe.

Not sure the reason, but countries that came out of old Yugoslavia are major markets of ASEE: Serbia #1, Croatia #2, Bosnia-Hercegovina #4, Macedonia#7.

In 2022, total sales for the first 9 months were 227 m EUR (versus 76 m EUR in 2013), and the top 6 markets in 2022 were:

1. Serbia: 20.0 m EUR (2013) to 60.9 million EUR (2022)

2. Croatia: 7.8 m EUR (2013) to 34.6 million EUR

3. Iberia: nil in 2013 to 32.5 m EUR

4. Romania: 17.47 m EUR (2013) to 31.6 million EUR

5. Bosnia: 2.4 m EUR (2013) to 21.4 million EUR

6. Turkey: 8.4 m EUR (2013) to 18.6 million EUR

Sales in Bosnia and Iberia have skyrocketed since 2013.

Besides old Yugoslavia… Spain, Romania and Turkey are major markets and ASEE is present in Albania, Bulgaria, Montenegro, Egypt, Latam (Peru) and Slovania.

Over the last 9 years, revenue has grown steadily but accelerated in the last 5 years at a CAGR of 17.2% as shown below:

For 2022, I am using the 12 mo trailing results. I will update the 2022 numbers, once the company issues Q4 results - on February 22nd 2023.

A True Compounder - EPS CAGR of 19% since 2013

The characteristic of a true compounder is to be able to grow steadily and organically and reinvest a good portion of the profits back into the business to grow even further without requiring to leverage up the balance sheet.

This is what ASEE has done, growing the bottom line at a CAGR of 19%. The number of shares has been kept the same during all this time at 51 894 251 shares - no dilution which is very rare for a technology / fintech company.

Cash balance has actually increased from 14 m EUR in 2013 to 50 m EUR, while still paying a good dividend and making a large number of bolt-on small acquisitions.

Bolt-on Acquisitions

Asseco South Eastern Europe has been making an impressive amount of small bolt-on acquisitions in the payment segment in recent years:

Here is a list of acquisitions in 2021:

• Acquisition of shares in Things Solver d.o.o. Belgrade. On 7 October 2020, ASEE Serbia concluded a conditional agreement to acquire 53.76% of shares in the company Things Solver d.o.o. based in Belgrade. On 28 February 2021, the equity interest held by ASEE Serbia in that company increased to 60% following an increase of its share capital.

• Merger of Payten d.o.o. (Sarajevo) with Bassilichi CEE LLC The merger of Payten d.o.o. (Sarajevo) (the taking-over company) with Bassilichi CEE LLC (the acquired company) was registered on 1 February 2021.

• Acquisition of shares in Vebspot d.o.o. Skopje On 17 February 2021, Payten DOOEL, Skopje acquired 100% of shares in the company Vebspot d.o.o. based in Skopje (Macedonia).

• Acquisition of a minority interest in Monri Group d.o.o. On 10 June 2021, Payten d.o.o. (Sarajevo) acquired 20% of shares in the company Monri Group d.o.o. based in Sarajevo, thereby becoming the owner of 100% of shares in this company.

• Acquisition of shares in ContentSpeed s.r.l. On 22 July 2021, Payten Payment Solutions s.r.l. acquired 80% of shares in ContentSpeed s.r.l., a company based in Bucharest (Romania).

• Acquisition of shares in IT SISTEMI-NOVE TEHNOLOGIJE d.o.o. On 28 July 2021, Asseco SEE d.o.o., (Zagreb) signed an agreement to acquire 100% of shares in IT SISTEMI-NOVE TEHNOLOGIJE d.o.o., a company based in Split (Croatia). The Group obtained control over IT Sistemi d.o.o. on 8 September 2021 upon satisfying all the conditions precedent.

• Establishing of a new company Monri Columbia SAS Monri Columbia SAS, based in Bogota, was established on 25 October 2021. 100% of shares in this company were acquired by Necomplus SL, based in Alicante (Spain).

• Acquisition of shares in Web Studio d.o.o. On 25 October 2021, Payten d.o.o. (Zagreb) acquired 100% of shares in Web Studio d.o.o., a company based in Rijeka (Croatia).

• Acquisition of shares in Smarttek A.Ş. On 1 December 2021, Payten Teknoloji A.Ş. based in Istanbul acquired 100% of shares in Smarttek Yazılım ve Endüstriyel Otomasyon Sanayi ve Ticaret A.Ş., a company based in Manisa (Turkey).

• Acquisition of shares in BS Telecom Solutions d.o.o. Sarajevo On 10 December 2021, Asseco SEE d.o.o. (Sarajevo) acquired 60% of shares in BS Telecom Solutions d.o.o. Sarajevo, a company based in Sarajevo (Bosnia and Herzegovina).

In the first 6 months of 2022, these acquisitions contributed to a 7 m EUR increase in sales. Merger and acquisition cost 34 m EUR in 2021, so about 2.4 times sales, which is quite reasonable.

Business Segments

ASEE operates in three major segments:

Payment solution: provides end-to-end payment industry solutions for financial institutions and merchants. The offering includes solutions for eCommerce, mPayments, Processing as well as ATM and POS related services. The company operates under the Payten brand.

Banking solution: solutions and products necessary to run a bank such as omnichannel solutions designed to distribute banking products and services, solutions allowing to improve communication with the customer, integrated core banking systems, authentication security solutions, reporting systems for regulatory compliance and managerial information, as well as risk management and anti-fraud systems.

Dedicated solution: solution to the sectors of utilities and telecommunications, public sector (including road infrastructure), government as well as to the banking and finance sector within the following business lines: BPM business process management, customer service and sales support platform, data registers, smart city, AI & Machine Learning, e-Tax, border control, authentication, dedicated solutions, BI and ERP.

The following sections will provide a deeper look at each segment including historical revenue and EBIT for each segments.

Payment (Payten brand)

The payment segment represents half of the overall revenue of ASEE based on the 9mo results of 2022. This is also the most attractive segment in terms of growth and prospects. The vast majority of the acquisitions completed in the recent years are bolt-on acquisitions in this segment.

Management is breaking down sales into 4 sub-segments: POS, ATM, e-commerce and processing.

Based on the last 9mo 2022, the majority of sales are related to POS related services (58%), followed by ATM (27%), e-commerce (14%) and processing (4 %). So payment processing is very small, and so Payten does not compete directly with the Payment processor giants (Fiserv, JP Morgan Chase, Worldpay, Adyen, Stripe, Braintree, etc).

Payten provides eCommerce (online payment gateways, support for alternative payment methods – cryptocurrencies, QR codes, solutions enabling tokenization of cards, subscription payments), mobile payments (mPOS, vPOS, SoftPOS), payment card processing, as well as services related to ATMs and EFT POS terminals

Payten is the leading regional provider of POS services and solutions in 10 countries cooperating with 100+ banks.

Payten manages a network of 1 200 000 POS and 10 300 ATMs. Services related to the maintenance of POS terminals and ATMs still generate most of the segment’s revenues. In this business, the most important markets are Spain, Croatia, Serbia, Romania, Bosnia and Herzegovina, Slovenia, Macedonia, Czechia, Slovakia, Colombia, and Montenegro.

Revenue for the payment segment has grown at an impressive rate of 20.1% from 2013 to 2021. Earnings before Interest and Taxes (EBIT) has grown at an even higher CAGR of 20.8%. EBIT margin is relatively stable at around 14-16%.

Historical Revenue of Payment segment:

Historical EBIT of Payment segment:

Historical EBIT margin of Payment segment:

Banking

ASEE offers many products for the banking industry. Some key products are:

Digital Edge: a digital banking platform with a set of touchpoint applications and a set of customer engagement capabilities that ensure true omnichannel experience for bank’s customers. Digital Edge fulfils the PSD2 requirements for strong customer authentication, transaction authorization, fraud monitoring, and provides open APIs for access to customer information and payment initiation.

Digital Origination is a sales and underwriting system that provides full flexibility in offering of bank products, services and bundles, enabling short time to market and full control and transparency of origination processes for both assisted and self-service touchpoints.

Absolut is a suite of applications designed to support finance and banking operations. The system consists of the core module and several additional modules, such as Internet banking, management information system, cards management system, and insurance management system.

Bapo is an integrated core banking system offering numerous front-end functions, optimized for retail and commercial banks conducting operations in Southern and Eastern Europe.

AML (Anti-Money Laundering) is an integrated solution that uses sophisticated patterns and wide range scenarios to identify real-time and near real-time illicit activities and potential money laundering actions by analysing the behaviour of internal customers and counterparties, through every transaction across the enterprise.

Revenue for the banking segment has grown at a good rate of 7.3% from 2013 to 2021. Since EBIT margin doubled from 12.5% in 2013 to 25% in 2021, Earnings before Interest and Taxes (EBIT) has grown at an excellent CAGR of 17.5%.

Historical Revenue of Banking segment:

Historical EBIT of Banking segment:

Historical EBIT margin of Banking segment:

Dedicated solution

Revenue for the dedicated solution segment has grown at a good rate of 5.2% from 2013 to 2021. Since EBIT margin doubled from 12.5% in 2013 to 25% in 2021, Earnings before Interest and Taxes (EBIT) has grown at an excellent CAGR of 17.5%.

Historical Revenue of Dedicated solution segment:

Historical EBIT of Dedicated solution segment:

Historical EBIT margin of Dedicated solution segment:

Price Performance

The following chart shows the year end stock price - converted in EUR - from 2013 to 2022. I used the current price at the time of writing for the 2022 entry. This demonstrates that the fundamental improvement of the business did translate to an impressive stock price appreciation of CAGR of 22.3%. Considering a 2-3% dividend rate, this is a return of about 25% per year in Euros. WSE:ASE is a 6 bagger in less than 9 years.

Attractive PE and PEG

The stock currently trades at a very low PE of 12.45, based on the 12 months trailing earnings.

Considering that historical EPS has grown at a CAGR of 19%, and that the growth rate has actually accelerated in the last 5 years (EPS CAGR of 25% in the last 5 years), it is likely that the EPS will continue to grow at a similar rate (18%-25%) over the next few years. The PEG is at at an attractive 0.65.

Since 2019, ASEE is trading at a PE much higher than previously. The market is assigning a larger multiple in the recent years, due to the acceleration of the growth in the last 5 years.

Shareholders and management

It is important to note that Asseco South Eastern Europe (ASEE) is controlled by Asseco International with 51% of the votes. Asseco International is controlled by Asseco Poland which trades also at the Warsaw stock exchange. Asseco is much larger than ASEE. As such, unless Asseco Poland decides to spin off the entity, there is little hope for a takeover.

The current CEO, Piotr Jeleński, has been CEO of the company since 2007, and owns 2% of the shares. As such, the CEO has a founder mentality being with the company since the beginning and skin in the game.

Key KPIs: RoE, EV/EBITDA, P/S

The return on equity for the trailing 12 months is 19.44

The EV/EBITDA is at a cheap (for a IT company) of 8.4 for the trailing 12 months.

The current P/S is at 1.7 sales for the trailing 12 months.

Moat in South Eastern Europe

In the South Eastern Europe region, ASEE has a leading position in providing SW for the banking and payment industry. They are serving the majority of the largest banks in this region. To illustrate this, when a SWIFT changes was implemented in 2021 in the foreign payment system, 29 banks in Serbia, Bosnia, Montenegro, and Croatia, all working on the ASEE core system were upgraded.

It is difficult to get a clear view of the competitive landscape in this region. Information I gathered is that they are serving 10 of 15 largest banks and they have the largest market share. Difficult to confirm.

Summary - Compounder at Attractive Value

ASEE has grown EPS at an elevated rate of 19% per year since 2013 and even higher at 25% if you consider the last 5 years and all this without incurring debt. ASEE is an asset lite business with a high RoE of around 20%. Such a business should be traded at a PE of 20+. This stock deserve more than the current valuation of a PE of 12.45. In any case, even if the under-followed stock does not get a valuation expansion, current shareholder should be well rewarded over the next few years, based on continued EPS growth and a nice 2.5% dividends.

Disclaimer: The above article constitutes my or the authors’ personal views and is for entertainment purposes only. It is not to be construed as financial advice in any shape or form. Please do your own research and seek your own advice from a qualified financial advisor. I / The authors may from time to time hold positions in the aforementioned stocks consistent with the views and opinions expressed in this article. The information provided in this article is not making promises, or guarantees regarding the accuracy of information supplied, nor that you guarantee for the completeness of the information here. The information in this article is opinion-based and that these opinions do not reflect the ideas, ideologies, or points of view of any organization the authors may be potentially affiliated with. The authors reserve the right to change the content of this blog or the above article. The performance represented is historical" and that "past performance is not a reliable indicator of future results and investors may not recover the full amount invested