Asseco Poland thesis playing out

Asseco Update

I wrote about Asseco Poland earlier this year, you can find the post here. I started building a position in Asseco at 136 PLN and after adding to the position a few times, I averaged up to a cost basis of 156 PLN. The stock currently sits at 224 PLN (+ 40%.) and I have no complaints. There has been chatter about Ai disrupting businesses such as Asseco and other vertical software businesses but I think this is overblown. ¹

The basic thesis was that TSS, a subsidiary of Topicus, was making a series of strategic investments in Asseco and would be influencing management and providing a new framework for m&a and operational discipline as TSS board members join Asseco. Topicus and Constellation are well known for tight metrics on returns on invested capital (ROIC), customer retention, and tracking cash conversion. A similar investor-centric management culture will likely be shared with Asseco.

So far, everything is going smoothly. As of October 1, TSS (Topicus) made its second and final investment in Asseco and now owns 24.84%.

More importantly, the closing of the second investment triggered the shareholder agreement. The shareholder agreement outlines a plan to optimize Asseco and create accountability to shareholders.

The key aspects to the agreement are as follows:

1. TSS representation on Asseco’s board consisting of 3 members.

2. A new framework for M&A.

3. New CEO Rafał Kozłowski.

4. TSS general meeting influence on matters such as dividend policy and management incentives.

5. Various ambitious financial and business goals.

On October 2, TSS CEO Ramon Zanders kicked off shareholder expectations with an open letter to Asseco shareholders, assuring them that TSS would be doing what it promised. The letter emphasized “support for managers who build durable value for customer and shareholders”.

It also emphasized aligning management with shareholders through equity ownership funded by cash bonuses— a strategy right out of the Constellation-Topicus playbook.

To really force accountability to shareholders, TSS also proposed a one-off management alignment program. Funded by treasury shares and buybacks, Adam Góral would be granted 3% of Asseco shares as he leads the board of directors and key senior managers would be allocated 1.5% of Asseco shares.

TSS also outlines how future value will be created for Asseco shareholders;

1. Margin expansion.

2. Growth in annual recurring revenue ARR.

3. Disciplined capital allocation.

There will be a full proposal with details ahead of the shareholder vote.

Financial and business updates

While Asseco has been active in m&a (13 acquisitions YTD) and implementing some changes already this year, the most recent financial update hardly reflects the full involvement of TSS since the shareholder agreement wasn’t actually in force until October 1. Asseco’s best days lie ahead as improved governance, more disciplined capital allocation and better access to resources for scaling are realized.

There have already been some improvements year-over-year. In the second quarter, gross and operating margins grew by 3% and 8% respectively. Revenue was up 8% and operating profit grew by 13%. Non-IFRS operating margin was up 0.09% from 11.6% to 12.5%. On the bottom line, there were some financial expenses from interest and foreign exchange that off set net margin, but all-in-all the company is heading in the right direction.

What to expect going forward

Constellation (CSU) pioneered a management culture that is obsessed with shareholder accountability and value creation. This culture has been shared with subsidiaries such as Topicus and TSS, and now Asseco. There are a few things that could potentially play out going forward.

1. Capital allocation discipline: They could possibly implement IRR/hurdle rates similar to CSU, post-mortem reviews and ROIC tracking for acquisitions. There could be a slow down in lower-ROIC offers in favor of smaller, high-margin software assets.

2. Benchmarking: Another key feature of Constellations strategy is benchmarking for customer retention, NRR (net revenue retention), cash conversion, ROIC, and employee efficiency.

3. Knowledge sharing: Constellation (CSU) and Topicus (TOI) have an informal internal knowledge sharing network where subsidiaries share best practices, benchmarks, and problem-solving frameworks for things such as customer retention, post-acquisition integration, and talent development. Asseco could benefit greatly from having access to this pool of resources.

4. Emphasize recurring revenue over project revenue: Asseco has lower margins compared to Topicus another VMS players because 18% of revenue comes from low margin non-recurring sales such as hardware and customized project implementations. These are often necessary for winning large “tailor-made” contracts and customer retention. However, the group’s long-term strategic direction is focused more on recurring, high-margin revenue streams. TSS will likely double down on this and may even push them into the vertical software market. Or alternatively, Asseco could potentially do something similar to what IBM and Kyndryl did in 2021— a spin-off separating the lower-margin IT infrastructure business from its higher-margin software and cloud units. This is pure speculation though.

5. Decentralization and accountability: Asseco is already a decentralized “federation” of companies. TSS could formally adopt the CSU decentralization playbook where each individual subsidiary becomes a disciplined autonomous unit that tracks cash flows and returns on capital.

Can it still work from here?

Now that the stock is up 150% over the last year, can it still work? I think so.

Asseco currently sits at about 6.8x 2025’s estimated non-IFRS EBITDA which is dirt cheap by American standards. However, Polish companies tend to trade a bit lower and Asseco is still a reletivly slow growing IT business as of today. It isn’t an awful business by any measure, but the ideal situation would be if the narrative goes from “European IT company” to “disciplined per-share value creator.” If this happens, in a bull case, I think the company could be valued a few turns higher at 8x-10x. Note: Asseco reports non-IFRS EBITDA (adjusted EBITDA) which adjusts for the cost of amortization of intangible assets recognized in purchase price allocation.

Assumptions

1. Growth of 6% - 9%—in line with my previous estimate.

2. Multiple of 6.5x - 8.5x—slight upward revision now that the final TSS investment has closed and there is confirmation of board representation.

3. Adj. EBITDA margin of 16% - 19% —slight upward revision, again, reflecting confidence from shareholder agreement now in force.

4. 80.5 million diluted shares.

Final thoughts

This is not bad at all. It’s not as compelling as when I first wrote about the company in March, but regardless, I have been adding and am considering adding more.

Markets are currently very richly valued, and although I’ve been a net buyer of stocks recently, I have also trimmed/sold a few positions and tried to shore up some cash. I don’t know when the tide will turn, but in the mean time, I’m still looking for deals on great companies.

Thanks for reading.

Disclaimer: Nothing I say should be taken as financial advice. None of my financial models should be taken as buy or sell signals. Please consult a financial advisor before buying or selling any securities.

Full disclosure: I am an $ACP.WA shareholder at the time this was written

1. Asseco, Topicus, Lumine, and Constellation are all quality software companies, but there is something interesting happening between them. Asseco is largely an ERP provider, which, from what I understand, has a higher disruption risk due to lower code complexity and lower customization, which implies it could be easier for AI to build similar software. The other three names are vertical software providers, which have a higher degree of complexity and customization and lower risk of disruption. The strange thing is that Asseco is the only name that has not been beaten down. This is probably due to Asseco’s lower valuation and future growth/margin prospects. This is the only rational explanation I can come up with. Regardless, I don’t think disruption is on the table for a while. Asseco also has various other ways of retaining customers with their custom “tailor made” IT solutions.