Coast is clear for Pegas shares
By: Cristina Muntean, 17. 09. 2007
Sept. 20 is the last day when investors can purchase shares of Czech textile producer Pegas Nonwovens with a dividend right. Pegas will pay € 0.76 (Kč 20.9) per share around Sept. 27 in a move that will bring some € 7 million from the company’s accounts into investors’ pockets.
Pegas has a progressive dividend policy depending on a company’s financial performance. “We have demonstrated this by paying out a dividend a year earlier than promised at the initial public offering (IPO) in December last year,” company spokesman Josef Válek told CBW.
Pegas’s shares have maintained a constant value around Kč 750 after its IPO on the Prague and Warsaw stock exchanges Dec. 18, 2006. Petr Novák, an analyst with Atlantik finanční trhy, said that shares are strongly affected by Pegas’s current structure of investors. On June 30, 2007, the company’s largest shareholder was private equity fund, Pamplona Capital Partners with a 43.4 percent stake. Following the sale of Pamplona’s shares, completed on July 16, 2007, 100 percent of the shares are now in free float held by institutional and retail investors, of which a 2 percent stake is held by senior management of the company.
“They are doing their best to attract larger investors, but the company will need some price share boost,” Novák said. “For the moment, Pegas is not a big story for investors,” he said. ¨
How to boost investors’ interest
Novák said that adding new production capacity would generate more cash, a higher margin and a stronger cash flow that could boost investors’ interest in Pegas’ shares. Announcing the ninth production line would be a clear message to investors.
Currently, Znojmo, South Moravia-based Pegas is setting up a new daughter company that will allow it to receive state investment incentives for its ninth line. The line could be launched by March 2010 at the latest, Válek said. Pegas applied for investment incentives and received an offer from the state investment and business development agency CzechInvest. “We now have six months to setup a daughter company and accept this offer,” Válek said, adding that still, “the final success of this incentive program is subject to final approval of the Ministry of Industry and Trade (MPO).”
No further information can be disclosed about the status of incentives for Pegas’s ninth production line for the moment because of confidentiality agreements, according to CzechInvest’s PR executive Jiří Sochor. The company will most probably receive state support as tax relief. Till now, Pegas received investment incentives valued at some € 95 million, he said.
“If they get the incentives and announce the new production line, this will mean a big potential for them,” Novák said. “Their attempt is perceived as very positive, but for the moment it means nothing for the shares. If the company announces its [concrete] plans for the new line, analysts will have to include this into their new positive predictions,” he said.
“The current strategy at Pegas is to plan a new line every two-to-three years,” Válek said. In 2005, Pegas received another set of incentives for its eighth production line that will be launched in October 2007. Válek said that the eighth line, which is Pegas’s “most advanced and complex line on the market today,” will run full production only from January 2008. Initially, the line won’t produce the quantity of sellable final products at full capacity, as some products will have to be recycled, but by January the capacity will be increased step-by-step to full-speed operations. “We believe that our experience in commissioning new lines will ensure a smooth process and we expect to have this line running at full production capacity from January,” Válek said.
The investment for the eighth production line will reach some € 40 million. The line that uses ultramodern technology in today’s nonwoven textile production will enable Pegas to produce the ultralight textiles, such as diapers or feminine care products. The company’s production capacity will increase by approximately 15,000 tons per year, an increase of 28 percent in capacity. “By our estimates, the new line should increase our [continental Europe] market share in hygiene polypropylene nonwovens from 17.9 percent to 19.3 percent,” Válek said.
Pegas will employ 50 more people for “production line and laboratory positions.” At the end of the first half of 2007, Pegas employed 357 people, compared to 329 in the same period in 2006. In the first half of the year, Pegas had an adjusted profit of € 8.6 million, compared to € 5.8 million in the same period in 2006, showing a 47 percent increase. The net cash balance grew by 5.1 percent, from € 114.1 million in 2006 to € 120 million in 2007. The company’s shares are listed on the Prague Stock Exchange (PSE) and the Warsaw Stock Exchange (WSE).
Lining investors’ pockets
The eighth production line is expected to stimulate Pegas’s profits. “Pegas is a company focused on providing strong returns significantly above the industry average,” Válek said. However, it is not clear yet when the next dividend period will be. “By further increasing capacity we should generate more cash which, in turn, should positively affect our free cash flow. We definitely expect the project to deliver returns above the cost of capital, which should put us in a position where we can distribute our funds between dividends, further expansion or a reduction of our debt levels,” Válek said, adding that Pegas is hedged from the risk of raising costs of raw materials. The primary raw material used in the production of Pegas’ nonwoven textiles is polypropylene and polyethylene supplied by “several reliable suppliers.”
“Pegas has contracts with customers where the price increase or decrease in polypropylene is passed on to the customer so Pegas is hedged against the price fluctuations of this material,” Válek said. Yet, these costs “can’t be recovered in one moment and this is bad for their margins,” Novák said.