Delko, European Small cap distributor and acquirer.
Opportunities and some problems
Nano Cap in Poland
Small margins but good ROE
Defensive normally but not in todays environment
Serial acquirer and consolidator.
P/E normalised under 10
Exchange: Warsaw
Price: 9 pln
Market cap: 15 million USD.
This nano cap is in a growth and defensive industry but with low margins, the distribution industry.
It has been able to grow earnings at nearly 10% CAGR over 15 years...until the recent decreases.
Covid gave the company a boost and the recent reduction of inflation is giving the company a harder time.
This company is quite known in Spanish small caps circles and the idea originated from two small cap investors, Marc and Rodri. It is Delko in Poland.
History.
Business Overview
Market
Recent Results
Capital Returns
Strategy
Management
Valuation
Conclusion
Like Marc said in his article from a few years ago, studying Delko is like exploring a jungle. It was tough. I hated it at first and towards the end I got excited to unwrap the mysteries.
A Jungle of non translatable XHTML documents, of non detailed reports and brief commentaries. A Jungle of non updated websites and Actual reports.
You have the worst document format XHTML of the whole world, which does not work in translators, and you have 10 links for one annual report, and 10 untranslatable format links. The Polish stock exchange is working very badly to promote it’s stock market.
Look at this. And not one PDF link.
Anyway, let’s start.
It is interesting to review Delko and to look at the perspectives now.
History (from introduction document)
DELKO is a nationwide distributor of household chemicals and cosmetics. The company was established in December 1994 in Śrem. The founders were 28 people, including 14 wholesalers' representatives and 10 other people associated with the chemical and cosmetics industry.
The motive for establishing the company was the idea of creating a nationwide distribution system for the chemical and cosmetics industry, which, using its purchasing potential and the resulting elements of competitive advantage, could become a significant entity on the domestic market.
For thirteen years of business activity, DELKO has systematically gained greater importance on the traditional market of distribution of household chemicals, personal hygiene and cosmetics. The company ended each financial year with positive financial results. With each year of operation, it increased its turnover.
Today, DELKO is the only network operator in its industry, providing suppliers with distribution of products throughout Poland.
2002-2015 - purchase of wholesalers in: Ostrowiec Świętokrzyski, Mrągowo, Białystok, Kielce, Olsztyn, Warsaw, Łomża, Kraków, Wrocław, Stargard and Łódź;
2011 – establishment of its own company Blue STOP Sp. z oo developing a network of franchise drugstores in Poland;
2017 – purchase of 100% shares in RHS Sp. z oo Wieluń – a chain of Sedal grocery stores and a food wholesaler;
2019 – purchase of 100% shares – AVITA grocery store chain in Kraków;
2019 – purchase of 100% shares in Słoneczko SA – a chain of grocery stores in Zielona Góra;
2019 – purchase of 50% shares in A&K HURT – MARKET Sp. z oo – a chain of grocery supermarkets in Mielec;
01.2020 – merger of Nasze Sklepy AVITA Sp. z oo and Blue STOP Sp. z oo – the company Polskie Sklepy Franczyzowe Sp. z oo was established, which became the operator for retail chains;
06.2020 – Delko acquires the Delta food wholesaler based in Zielona Góra;
07.2020 – Delko acquires 100% of the capital of PH Waldi based in Komorniki near Poznań (household chemicals wholesaler).
Since 2020, the acquisitions have been paused. There was covid so a lot of efforts to provide volume operationally, as well as the inflation wave which increased cost of debt (polish interest rates) and the debt was high. They have reduced the debt to a low level, with 0.5 times EBITDA or less depending if you take annualised EBITDA or the last quarterly EBITDA as a reference.
Business overview
Wholesale of chemical products and household and personal goods (cosmetics and toilet articles),
Retail sale of cosmetics, hygiene products and household chemicals,
Retail sale of food products,
Wholesale of food products,
Retail sale of pet supplies,
Wholesale of pet supplies,
Industrial products accounted for 77.8% and food and other products for 22.2% of sales.
Wholesale is 75% of the business and direct retail is therefore 25%, but this fluctuates a lot (we will cover this later).
The group is decentralised, allowing the subsidiaries to be more agile and entrepreneurial. However, this comes with less efficiency opportunities.
The company has a constant high ROE in the 20s, but this is down in 2024 due to the lower net margin.
Delko has a growing dividend. But for 2024, the dividend is lower at 0,57 pln compared to .80 in good times of 2021. (2023 was corresponding to a year and half because the company changed calendar dates and ran a transitory reporting calendar year of 1.5 years.. It’s a bit crazy)
Wholesale
The wholesale business covers independent small shops and is done by many subsidiaries bought over the years.
Delko distributes brands from companies like L’Oreal, P&G, Unilever, as well as food brands. The clients are mostly small independent stores.
Delko also offers branded items. See the Branded items
Overall, No customer has a concentration of over 10% of revenues.
This is a simple business.
Retail
retail is a collection of mixed bag formats, some formed by grouping independent stores into a locally based new brand to resist national or international competition.
Delko owns a set of supermarkets directly, and franchises.
But the business of retail is mostly focused on the Franchises, which are growing very fast in numbers:
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