I’m glad to introduce you to my first thesis, with this extraordinary business: Mo-Bruk, a waste management and recycling company that operates in Poland. A few key points are:
Predictable and recession proof sector, with tail winds thanks to EU regulations.
Huge barriers of entry.
Strong market position with 15-20% market share.
+15bn PLN growth opportunities.
50% ROE and ROIC.
No debt and 70m in cash.
Low risk and expected 5 year CAGR: 9-25%
COMPANY HISTORY AND BUSINESS OVERVIEW
The company was created in 1985 as a seller of terrazzo products. It wasn’t until 1995 that the corporation entered the waste management business, with the construction of its first plant in Niecew. From there, the business started scaling up, until it went public in 2011.
The business operates in three different branches:
Incineration
This is the most profitable branch, which manages mostly medical waste. In 2014, the company launched an industrial waste incineration plant located at the Alternative Fuels Production Plant in Karsy. The investment was carried out as part of the project "Implementation of innovative technology for the production of high-calorie fuel mix", for which Mo-Bruk obtained funds from the European Union. The resulting incineration plant is a source of warm air used to dry alternative fuel (RDF).
Solidification and stabilisation
Inorganic waste is transformed into cement granulate or it’s stabilised and safely stored. Mo-BRUK has been processing a number of types of waste since 1996 based on its own unique technology. Hazardous waste accepted by the company is subjected to the cementation process at a later stage of processing. For waste accepted for cementation, it collects a fee from entities delivering waste for disposal. As a result of the reactions taking place during the above process, hazardous substances contained in this waste are neutralized.
Two plants operate on the basis of the developed technology of waste cementation: the Waste Processing Plant in Niecwi and the Inorganic Waste Recovery Plant in Skarbimierz.
RDF production
Flammable waste is synthesised into RDF, an alternative fuel sold to cement plants. Mo-BRUK was one of the first companies in the country to develop the technology necessary in the production of alternative fuels.
Alternative fuel is produced in two plants (Karsy and Waÿbrzych) from segregated combustible municipal waste, which is delivered by waste collection companies. In addition, flammable industrial waste directly supplied by industrial plants and waste collection companies is used for the production of alternative fuels.
COMPETITIVE ADVANTAGES
The waste management market has huge barriers of entry because of the significant initial investment it requires. Moreover, once a company obtains a contract from the government or the local town hall, it’s almost guaranteed that it will continue to provide its services for perpetuity, because it makes no sense for another company to invest in a recycling plant in the same town with the hope of taking market share, considering the important amount of capital it requires and the difficulty of stealing business contracts.
Mo-Bruk is no exception and its EBIT margin of 50% and ROE and ROIC of 40-50% are proof of its quality. The most outstanding characteristics of the business are:
Entry barriers. The appearance of new entities is limited because of the long investment period, social objections to newly built plants, difficulty of obtaining permits for construction of a plant, requirements concerning experience in obtaining contracts and lack of know-how.
Location (moat). The majority of the waste produced in Poland comes form the southern regions, where Mo-Bruk’s plants are localed. As mentioned before, once a plant starts operating and acquires contracts form local town halls and companies, it’s extremely difficult for another company to try to compete against them.
Executive team (competitive advantage). The company is controlled by the founder family, who owns 35% of the business. They have scaled the corporation from a small seller of terrazzo products to one of the biggest companies in Poland, with an extraordinary alignment with the shareholder’s interest.
Technology (competitive advantage). Mo-Bruk has was the first company to develop the RDF production technology in Poland and continues to invest on R+D to increase the productivity and efficiency of its processes. The company now intends to become fully energy independent: electricity production is set to increase to more than 2.5 MW by mid-2024.
Scale (competitive advantage).
GROWTH OPPORTUNITIES
The European waste management and recycling market is estimated to grow from 2020 to 2024 at a CAGR of 10% (source: technavio). And the waste per capita in Poland is significantly lower than the one in major European countries, so it would be reasonable to expect a higher growth rate in Poland.
Moreover, the market for the exploitation of areas with illegally disposed waste is estimated to be worth +15bn PLN, so being conservative and predicting a 15% market share, this represents a potential +2.25bn revenue growth.
In 2022 the company started the following expansion program of several industrial plants:
SOLIDIFICATION AND STABILISATION
*Revenue per thousand tons of solidification waste is 0.5 million PLN.
INCINERATION
*Revenue per thousand tons of incineration waste is 4.5 million PLN.
TOTAL
*Assuming an EBIT margin of 45%.
To end this section, the company has mentioned the possibility of acquiring other businesses if the price is reasonable. Nevertheless, I’m not going to factor this scenario in, as the enterprise has never made an acquisition, but it’s positive to know that the executive team is open to acquisitions in case the sector slowed down.
RISKS
Undoubtedly, the key of every investment thesis is analysing the potential risk factors. However, it seems extremely challenging to think of any feasible hazard. The industry is recession proof and current regulations ensure double digit future growth.
If we have a look at the income statement of waste and recycling companies (Stericycle, Republic Services, Waste Connections, Clean Harbors…) during the 2008 crisis, the majority of them grew their revenues and kept their operating margin stable.
In addition, Mo-Bruk is trading at an extremely cheap price, just LTM PER of 11x, while major waste management companies in the US are at 20-25x. Its low valuation can be explained by the following reasons:
Polish company.
Small-cap.
War in Ukraine.
Economic uncertainty and quantitative tightening.
Generalised fear of recession in financial markets.
The only risk I can think of is the management execution. The board of directors is made up of the Mokrzycki family (the founders), who own 35% of the shares through the entity Ginger Capital . Their execution over the years has been extraordinary and their decisions have been completely aligned with the shareholder’s interest. Besides, it’s very difficult for a manager to perform badly in such a good business. As Warren Buffett would say:
“Invest in businesses that are so wonderful that an idiot can run them. Because sooner or later, one will.”
CRUNCHING THE NUMBERS
As a mathematics graduate, I know from experience that investing models tend to be wrong and only give us a faint idea of the future. For this reason, I prioritise the quality of the company, and the numbers are only a way of reassuring myself of the price I’m paying. Thus, doing some quick calculations in my head is usually enough for me. Nonetheless, I’m aware of the fact that the reader might need further elaboration on this to truly develop conviction on the business, so here we go. We are going to model 3 different scenarios:
Bearish: 8% growth, 44% EBIT margin and stock repurchases. PER 12x, EV/EBITDA 8x and EV/EBIT 10x. Average CAGR 5 years: 9%
Conservative: 12% growth, 47% EBIT margin and stock repurchases. PER 15x, EV/EBITDA 10x and EV/EBIT 12x. Average CAGR 5 years: 18%
Bullish: 18% growth, 48% EBIT margin and no stock repurchases. PER 17x, EV/EBITDA 11x and EV/EBIT 13x. Average CAGR 5 years: 25%
CONCLUSION
Mo-Bruk is an excellent company at a cheap price in a fast growing country, with a large moat and minuscule downside risk. If in the distant future, the growth slows down, the company can repurchase stock and acquire other businesses. Its predictable capital flows makes it perfect for periods of uncertainty and volatility, giving stability to the portfolio. All in all, Mo-Bruk is a business to own forever.
