East Capital New Europe

On the macro front, we observed inflation in CEE in the range of 2-5% during the quarter. Central banks continued their easing, with Hungary and Czechia both cutting 50bps. There were no rate cuts, as expected, in Poland, with the Central Bank governor hinting at the end of 1Q or 2Q’25 as probable for the next rate cut. Moreover, we have seen mixed readings for 2Q’24 GDP in the region, with Czechia up 0.4% YoY - slightly below expectations, Hungary up 1.3% YoY - also below expectations, and Poland up 3.2% YoY, which was above expectations and the strongest read in the EU. 

The key contributor to the quarterly relative performance was Poland, where we generated 100bps of alpha, with our holdings outperforming the benchmark, which was down 4% during the period. During the quarter, we saw a broad-based correction among almost all blue chips, with stock prices down 3-12%. We believe some investors might have taken some profits after a strong run over the last 12-15 months, but there might also have been some preparation in the portfolios, especially closer to the end of the quarter, in anticipation of Zabka, the biggest convenience retailer in Poland, starting its IPO process, with a USD 1.5bn potential offer size. 

Looking at our holdings, the star of the quarter was CCC, with an almost 49% return and 67bps alpha. The company is one of the most impressive recent turnaround stories in Poland, and the addition of licenced brands improved the product mix and boosted margins. We still see room for positive surprises on the results front in the coming quarters, assuming execution is flawless. The stock is trading at 6.9x EV/EBITDA’25, with 26% YoY EBITDA growth. Staying within the consumer sector, we saw nice outperformance from two of our holdings - InPost and Shoper - with a 6% and 11% stock price increase, respectively. We still like both stocks, with InPost offering exposure to Polish e-commerce and scaling up in international markets (UK and France) and trading at 9.9x EV/EBITDA’25, with a 21% YoY EBITDA growth. In the case of Shoper, we like the exposure to mid and small merchants that stand to benefit from further improvements in Polish consumers. The stock trades at 14.5x EV/EBITDA’25, with 34% YoY EBITDA growth. We also benefitted from not owning some of the companies that we find too expensive and/or too risky (Santander PL, Dino Polska, Budimex), which lost 10-12% during the period and helped us generate 44bps of alpha. We continue to follow those companies and are waiting for better price levels and/or momentum.

On a less positive note, the worst alpha attributors in Poland were two video game developers: 11 bit studios and CD Projekt. In the case of 11bit studios, the launch of the widely expected-anticipated “Frostpunk 2” was significantly below expectations, with the numbers of concurrent players, and volumes sold over the first three days, underdelivering. This goes to show that the video game sector is even more competitive and is becoming more and more difficult to get players’/customers’ attention. We have decided to sell out of the position as we believe expectations regarding future games also need to be revised downward. The stock was almost 50% down in the quarter. The second stock, CD Projekt, gained over 31% in the quarter on the back of rising excitement on potential news flows regarding the latest game from the Witcher universe. We do not own the name and were surprised the market had already started pricing in the next game, especially taking into consideration that the launch may be in 2026 or even 2027.

Our Greek holdings returned 11.3%, adding 54 bps alpha, with the standout performer being Titan Cement, which surged by 26.6%. The company has plans to list its US operations—accounting for 60% of EBITDA—on a US stock exchange, where cement producers have valuations of up to double those in Europe. This success has created a positive feedback loop, pushing Titan Cement’s market capitalisation above USD 2.4 billion, qualifying it for inclusion in the MSCI standard index for Greece.

In Austria, we saw 32bps of positive alpha from Erste Bank, which posted more than a 14% stock price increase during the quarter on the back of solid 2Q numbers and an increased dividend payout. We still like the bank, which we believe is of a high standard, with an undemanding valuation of P/E 6.4x, P/B 0.9x, ROE 15% for 2025, offering almost 9% shareholder remuneration (dividend plus share buyback).

The worst attributor in the period was Turkey, which deducted 50bps of alpha. The market was pressured by challenging quarterly financial reports stemming from a new hyperinflation accounting standard, high interest rates squeezing corporate profitability, retail investors shifting to deposits for better returns, and escalating tensions in the Middle East. Although we were aware of these risks, the speed of the market's decline came as a surprise. On a positive note, these negative trends may be temporary; the first interest rate cuts are anticipated in Q4 2024 or Q1 2025, which should bolster EPS growth. Additionally, as inflation decreases from 49% in September into the 30s by Q1 2025, the effects of hyperinflation accounting on financials should lessen, while the Middle Eastern tensions and retail investor shifts are unlikely to impact fundamental company performance. Even though September inflation has disappointed the forecasters, given the central bank's hawkish stance, the disinflation thesis remains intact, having only drifted, not derailed. Given that market forces and macroeconomic conditions are just as important drivers of stock performance, we have adjusted our portfolio to favour more defensive inflation-proof positions, such as Enerjisa, and highly-discounted opportunities like the compounding SaaS company, Logo Yazilim.

We also lost 38bps in Kazakhstan, primarily due to the performance of our largest holding in the country, Kaspi, which dropped 16.6% due to a short selling report that accused the company of having high (and undisclosed) exposure to Russia, as well as having facilitated money laundering. Most of the claims were demonstrably false, and we added a small position when the stock was close to its bottom. The stock is up 4.5% compared to our purchase price. Kaspi continues to grow earnings by more than 25% annually, and remains an attractive investment with a forward P/E of 7.5x.

The other negative attributor in the quarter was Czechia, where we lost 27bps. We do not own any stock in the country, and we saw 3-13% price increases in all three benchmark stocks: CEZ, Komercni and Moneta. We remain sceptical about the stocks, as in the case of CEZ we do not currently see room for significant dividend payouts on the back of the windfall tax still being in place, while we find the current dividend yield of 5% unattractive. In the case of banks, we believe their valuations of 10-12x P/E, and 1.2-1.7x P/B are not very appealing, considering ROEs of 12-14%, and we prefer banking exposure in other countries. We lost 21bps in Slovenia, mostly on Krka - which we don’t own - recording a 7% stock price increase during the quarter. It’s a good-quality company, with mid-to-high single-digit EBITDA growth and 6% dividend yield, which should be growing steadily. But at its current valuation of 6.9x EV/EBITDA and 12x P/E for 2025, we don’t find it particularly attractive and prefer Hungarian Richter as a healthcare exposure.

We remain optimistic and continue to look for the best selection of high-quality stocks, demonstrating growth and strong balance sheets. We continue to like the Polish and Hungarian markets, with valuations still at attractive levels (e.g. Poland 1Y FW P/E of 9.2x, 15% discount on 5Y average, Hungary at 5.7x P/E, 37% discount on 5Y average). On the other hand, East Capital New Europe fund is trading at an undemanding 8.6x P/E for 2024, offering a 4% dividend yield. We believe a potential end to the Russia/Ukraine conflict would further lower risk premiums/yields and support equities in the region.

Performance in USD net of fees.

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