Building anew

In October 2006 Energopol Południe signed a letter of intent regarding a merger with JW Construction. Energopol had planned to increase its capital by issuing 33.3 million shares at zł.36 each, and the zł.1.2 billion raised from the issue was to be allocated for the purchase of shares in JWC.

Once the future merger was announced, Energopol's shares skyrocketed from around zł.30 up to a high of zł.190. It seemed that the transaction was certain until just before Christmas when the broker, Dom Inwestycyjny BRE, said the transaction would be impossible to perform and that JWC would enter the Warsaw Stock Exchange on its own.

"JWC is far bigger than Energopol. I never looked at the agreement as a merger. [Energopol] was regarded as a means to enter the Warsaw bourse and its activity was only worth as much as JWC's registration on the WSE," says Piotr Her, an analyst from Raiffeisen Bank.

Share value and strategy

Energopol's share value instantly dropped by some 65 percent. But at the beginning of the year it began rising again and, at present, it stands at around zł.105. "Before the future merger was announced, Energopol's shares were worth some zł.25, now they're worth four times more," says Her. "Even if we take into account that the company was undervalued by 20-30 percent and its peers have grown by 25 percent in this period, Energopol's shares would grow to zł.40-50 in normal market conditions. In my opinion the management is trying to present a strategy which could justify the company's current price."

That new strategy has just been announced. Energopol wants to strengthen its position in its basic activities, such as road construction and hydro-technical work, as well as become a residential and industrial developer. The company also plans to acquire other construction firms. According to the strategy accepted by its supervisory board, Energopol will designate some zł.50-60 million for new investments.

"We will have to strengthen ourselves financially in order to carry out our strategy and complete the projects we have in the pipeline," says Lech Tomasz Tomkowski, president of Energopol Południe.

To this end, the company will issue over 8.8 million F-series shares. Tomkowski says the price of the shares will be close to their nominal value, estimated at some zł.4. Currently, the initial capital is divided into 2.22 million shares. A final decision on the issue will be made at the general shareholders' meeting on February 26. Once accepted, the new issue could bring the company some zł.35 million.

According to Piotr Robak, the chairman of the supervisory board, the issue will cover only part of the expenses. "The company has also prepared funds to finance the strategy," he says.

Real estate

Energopol plans to enter dynamically growing areas with high returns, such as real estate. Part of the money will be spent on the purchase of plots. The company wants to make use of growing demand in the industrial sector, a large influx of EU funds and the development of the residential market.

"We are currently negotiating plots in Upper Silesia and also in Warsaw," says Tomkowski. "We would like to launch construction work on one or perhaps two residential projects this year."

Tomkowski adds that the projects will be realized regardless of any cooperation with JWC, though cooperation is still probable. Despite the fact that the merger won't take place, according to the agreement Energopol had previously signed with JWC, half of the shares from JWC's IPO will be offered to Energopol's shareholders.

The company also wants to work on commercial developments. "We have a property in Czeladź, where we could construct a huge warehouse for a large logistics company. Initially, we wanted to sell the property, but now we seem to have a better idea of how to use it effectively," says Tomkowski.

Moderate chances

Raiffeisen's Her is less optimistic than Tomkowski and says that Energopol has little experience in the construction sector. "The key element here would be the location of plots the company wants to find and the amount of usable area they will be able to supply. So far the company's activity has been different. Perhaps they have acquired some know-how from JWC, but I see their chances as moderate," says Her.

But the company is by no means rejecting expansion in its current specializations. "We are not excluding acquisitions of companies specializing in road construction, water- and sewage-engineering systems and hydrotechnology. We are now in talks with a few companies," says Tomkowski.

Although he would not reveal their names, Tomkowski commented that they are located in Upper Silesia, where Energopol operates. The companies in question have turnover of a bit more than zł.100,000. The president added that Energopol plans to explore the Ukrainian market.

The new strategy should lead to far better results. In the first three quarters of 2006, Energopol's revenues reached zł.55.5 million, compared to zł.45.2 in the whole of 2005. The increase in net profit was even more significant. In 2005 it was just zł.300,000, compared to zł.4 million in Q1-3 2006. What will the final results for 2006 look like? Tomkowski says that according to calculations, they are good.

The company doesn't want to reveal its prognosis for 2007, however. "Our aim is to keep the current ROE from our own capital at not lower than 20 percent," says Marian Ber, deputy president of Energopol Południe.

Energopol Południe

CEO: Lech Tomasz Tomkowski

Strengths:

- High demand for services in the infrastructure and real-estate sectors

- Competences in road construction and engineering work

Weaknesses:

- A relatively small company

- Pressure on pay rises in the construction sector and fluctuating costs of building materials