Another Company Joins the Hungarian Stock Exchange

Published on: Portfolio.hu

Date: December 9, 2021, 09:00

Source: Portfolio.hu

 

When Did the Idea of a Stock Market Presence First Arise?

For us, the idea first emerged in 2016, when the T-category still existed on the Budapest Stock Exchange (BÉT). We initially aimed for that, so we started preparing the company, signing contracts with advisors who helped us through the process. As part of this, we transitioned our accounting and financial reports to IFRS standards.

At that time, we had everything in place for a successful stock market entry—our financials were in order, and our vision was solid. However, a decision was made to phase out the T-category and replace it with BÉT Xtend, which ultimately turned out to be a better fit for our company size and long-term vision.

Back then, we didn’t yet know exactly what Xtend would entail—what regulatory requirements would apply or how capital raising would work. By the time we submitted our documents, we had just missed the deadline for the T-category, while Xtend’s legal framework was not yet fully established.

This left us in a bit of a limbo, but it also provided two important opportunities.

First, we had time to fully transition to IFRS accounting, which we now understand and apply practically. Although IFRS is not a requirement for Xtend, investors appreciate it.

Second, over the past five years, we have matured as a company, allowing us to refine our business strategy and goals. We adjusted our approach, and now we can present a more market-oriented and stable operating model to the stock exchange.

In hindsight, it actually worked to our advantage that we didn’t succeed back then. I wouldn’t say there wasn’t a small sense of failure, but looking back, it was for the best. Now, however, we are fully prepared and determined to make this a success.

Why Do You Consider a Stock Market Presence Important?

 

The stock exchange offers numerous advantages. Until 2020, Épduferr operated as a construction and general contracting company, but we are now working towards being recognized as a diversified company with strong foundations in trading, manufacturing, general contracting, and real estate development.

Perhaps the most valuable aspect of being publicly listed is the visibility and transparency it provides, which is highly beneficial for our clients—primarily multinational companies like Spar, Tesco, and Mol. These corporations operate in highly regulated environments, where factors such as workplace safety and process management systems are critical.

Unlike residential construction companies, we focus on commercial and industrial facilities. Our clients prefer suppliers that operate in a similarly structured, transparent, and well-regulated manner.

From the stock market listing, I primarily expect that we will reach new clients we haven’t been able to connect with before. Additionally, the increased capital access will enable faster growth than organic expansion alone.

We plan to raise approximately 1 billion forints through a private placement, and we hope to complete this process successfully within the year, after which we intend to list on BÉT Xtend.

The ability to raise funds through the stock market is a more favorable option than other available financing methods. As the central bank has started raising interest rates, the financing environment is becoming less favorable for businesses.

Many companies rely heavily on bank loans to maintain operations, particularly for working capital financing. This is essential for covering supplier costs and providing advance payments. For a 4-5 billion forint annual revenue company, at least 10% of this must be available as working capital to ensure smooth project execution, supplier payments, and competitive contract negotiations.

What Can Be Said About the Private Placement Volume and Potential Investors?

Our goal is to raise approximately 1 billion forints through private placement. We will not sell existing shares but instead issue new ones, ensuring that the raised capital directly contributes to company growth.

We are moving toward a more diversified operational model, transforming Épduferr from a construction-focused company into a construction, trading, services, manufacturing, and soon real estate development company.

During investor discussions, some concerns were raised about the construction sector’s volatility—it experiences strong fluctuations, particularly in residential and office construction.

However, this concern primarily affects companies heavily dependent on large-scale residential projects or government-funded developments. When economic downturns occur, housing construction can slow dramatically, while in boom periods, it accelerates rapidly.

Currently, the housing market is thriving due to government incentives aimed at facilitating home purchases for families.

Our business model, however, focuses on serving multinational clients that require ongoing maintenance, renovation, and expansion of their industrial and commercial facilities.

Why Épduferr’s Market Position is More Stable Than Residential Developers

We believe our position is more stable compared to housing developers because we can rely on continuous demand from corporate clients.

This is especially true in the industrial sector. When the 2008 financial crisis hit, our business was largely unaffected, as we were already focused on industrial and commercial projects.

In 2007, we transitioned into general contracting, deliberately targeting multinational clients. This decision proved to be the right move, as the housing market collapsed during the financial crisis.

At the time, building permits dropped to about one-tenth of their previous levels, and residential construction almost came to a halt. However, the industrial sector continued operating, albeit at a slightly reduced pace.

Since the industrial sector was the first to experience the downturn, we predicted it would also be the first to recover, pulling other sectors along with it.

This was a key reason we strategically entered the Mol Group’s supplier network—industrial facilities cannot shut down entirely. They require constant maintenance, renovations, and upgrades, as they must remain operational at all times.

Even during economic downturns, industrial investments may slow down, but they do not completely stop. This was enough for us to continue growing during the 2008-2012 crisis period.

A Cautious Yet Strategic Growth Approach

Throughout our expansion, we have been highly strategic about choosing clients that banks also consider financially stable, ensuring secure financing for our projects.

This selective approach has acted as a built-in safeguard, helping us maintain financial stability even in uncertain times.

Have You Followed the Preparation and Progress of Other Hungarian SMEs Entering the Stock Market?

We have primarily focused on companies listed on the BÉT Xtend market, which is one of the reasons we chose Navigator Investment as our advisor. They have the necessary experience to guide us through the process, which has been reassuring. Seeing companies smaller than ours successfully adapt to the regulated stock market environment gave us the confidence that we, too, could accomplish this. While we observe the larger publicly listed companies, comparisons are difficult due to differences in scale and business focus.

We have learned that, regardless of the industry, it is always beneficial to establish multiple revenue streams. Our goal has been to build a diversified business with three to four interrelated divisions that complement each other and create strong synergies while also serving independent markets. This is why we launched our steel trading and processing divisions this year.

We are no longer just a construction company—we have become a trading, service, and manufacturing company, and this will be even more evident in the coming years. In 2020, general contracting accounted for 90% of our revenue, but despite a 30% revenue growth this year, the share of general contracting has dropped to around 80-82%. This shift is due to the expansion of building materials trading and the launch of our steel trading division, which started in May 2021.

We built this business from scratch, starting with an empty office, hiring a team with over 20 years of industry experience, and forming a strong, skilled workforce. We expect 400 million forints in revenue from steel trading this year, which is an excellent result in just six months—and this does not even include internal company usage. For instance, we delivered 250 tons of reinforcing steel for the Eötvös Street project, worth approximately 70-80 million forints, generating significant savings for the company.

When we talk about synergies, these are the connections that enhance our company’s stability and create a longer value chain. For example, we are currently building fast food restaurants in Eger and Ózd, and the steel structures for these projects were manufactured by our own steel division. Rather than outsourcing to an external steel supplier, our general contracting division orders directly from our in-house steel plant, saving several percentage points in costs. Similarly, instead of buying materials from external suppliers, our steel plant sources raw materials from our own steel trading division, eliminating wholesale markup costs and further increasing our profitability.

This internal supply chain enables us to purchase steel at cost price, fabricate steel components in-house, deliver them directly to our construction sites, and eliminate subcontractor costs. The same synergy applies to our building materials trading division. We handle orders in bulk, allowing us to offer better pricing on small truckload orders while maintaining lower margins on large truckload sales. The steel trading division supplies materials to the building materials trading division at manufacturer prices, further increasing the overall profitability of our company.

Steel trading is not highly efficient unless paired with processing services. Simply buying and selling raw steel is not enough to compete effectively in today’s market. Many industries now expect additional services, such as cutting, bending, cleaning, and painting. For example, a customer might need steel but does not want the added hassle of outsourcing processing—this is where value-added services become crucial. The same trend is visible in retail markets, such as IKEA, where customers no longer just purchase furniture—they expect delivery, assembly, and even interior design assistance.

This applies to steel trading as well. A client might hesitate to place an order because they would still need to cut the steel to size, bend it, clean it, and paint it. By offering all of these services in-house, we eliminate those barriers to purchase, making our company the preferred choice for steel buyers.

In 2020, we decided to launch a major development program to prepare ourselves for providing additional industrial processing services locally and to begin acquiring the necessary equipment for manufacturing semi-finished and finished components, which would complement and strengthen our steel trading division. From this point forward, Épduferr is no longer just a construction company but rather a construction, trading, service, and manufacturing company that will soon enter real estate development as well. We secured approximately 200 million forints in funding through two grant applications, which enabled us to undertake a 350-million-forint capacity expansion investment. Nearly all of these funds have been and will continue to be used to acquire equipment necessary for steel processing. Some of the machinery has already arrived at our facility, while the rest is expected in the spring. We are investing in high-end machines to handle precision-intensive tasks, which will allow us to expand our customer base.

Beyond simply enabling us to trade, these developments open up even more opportunities. Our building materials trading business operates effectively within a 20-25 km radius, but expanding beyond that becomes difficult due to competition with other suppliers. However, our general contracting division has been operating nationwide for nearly 14 years, and our steel trading business also has a national reach. The ability to manufacture semi-finished and finished components for both domestic and export markets makes the company internationally competitive. This is extremely important to us because it ensures stability and provides further expansion opportunities.

Regarding the financial support for stock market preparation, designated advisors, or the BÉT Mentor Program, I wouldn’t say that if BÉT had not provided support, we wouldn’t have pursued this path, but their backing has a signaling effect for us. When they say that our business model is market-ready, it reinforces our own confidence in the plan. Without their support, we might have reconsidered our efforts, postponed the move by a year, or fine-tuned our strategy further to better understand what could make our story truly attractive to investors. However, we are pleased that they see our business plan as a viable one.

Péter Nagy added that BÉT first met with Épduferr and its selected advisor in the summer of 2021. When evaluating companies entering the BÉT Xtend market, they do not primarily focus on numerical criteria, as the exchange includes both smaller and larger businesses in terms of revenue. Instead, they assess how prepared a company is for capital market participation, its growth ambitions, its long-term vision, and the commitment of its management and ownership. Over the summer, it became clear that Épduferr is a company capable of meeting the requirements of the public capital market.

Épduferr has leveraged multiple opportunities on its journey toward stock market entry. It was included in the BÉT50 publication, which now features around 300 outstanding Hungarian companies that are considered stock market-ready. Additionally, the company secured financial support through the BÉT Mentor Program, which helps cover the costs of stock market preparation. The third milestone was the BÉT Xmatch event, where the company made its debut at the end of November. Milán Palkovics delivered a strategic presentation to an audience of corporate representatives and investors interested in capital markets and financing.

Where Did the Company Need the Most Guidance on the Path to the Stock Exchange?

According to Zsolt Horváth, they have gained considerable experience with companies entering the BÉT Xtend market. Since its inception, Navigator Investment has played a key role as a designated advisor, initially working alongside Random Capital and then independently since July 2021. Their past projects include DMKER and Gloster stock market listings, as well as two private placements, with Gloster’s offering being significantly oversubscribed even during the pandemic. They are also currently working with Megakrán as a designated advisor.

When they first connected with Milán Palkovics and Épduferr, after the initial discussions, it became clear that the company already had two key ingredients for success on Xtend: a committed, charismatic leader/owner and a clear strategy. The company knew how it wanted to present itself to potential investors, what the raised capital would be used for, and what kind of growth trajectory it could realistically achieve.

The company’s first attempt at a stock market listing in 2016 had already aligned its operations with stock exchange expectations. Épduferr had transitioned to IFRS accounting, implemented detailed financial reporting, and established a complex enterprise management system. Moreover, they had selected a solution tailored to their core business, which not only provided accounting and controlling data but also assisted in project tracking.

From the beginning, Épduferr had a well-structured corporate framework and management system, making it fundamentally stock market-ready and well-suited for entry into the BÉT Xtend market.

The most critical aspect of a stock market listing is always preparation. The process of going public places the greatest emphasis on ensuring that the timeline is clear to all stakeholders, that tasks are well-defined, and that the schedule is adhered to as closely as possible. If everything goes according to plan, the private placement will take place in mid-December, followed by registration, listing, and the first trading day. Given the holiday season, trading in the company’s shares is expected to begin in January or February. This is a tight schedule, which indicates that Épduferr was already in a well-prepared state before embarking on this process. Normally, a company’s journey from initial planning to listing on Xtend takes eight to nine months.

One of the main challenges is ensuring that the company is ready for public and stock market operations. It must transition from private to public-facing operations and see this change not as a burden but as a key aspect of better corporate governance. This is often a delicate process, but we emphasize that while it requires extra effort, it also presents significant opportunities—especially in terms of strengthening communication with capital market players.

How Does This Process Differ from Other Companies Listing on Xtend?

Each case is unique, as the timeline depends on the size and organizational maturity of the company, the selected advisory firm, and—most importantly—the determination of the company itself. The fastest listings take around six months, while a more relaxed approach can stretch beyond a year. If a company is well-prepared and committed, it can complete the process within six to seven months. Naturally, the company’s day-to-day operations also influence the timeline, and the stock exchange is flexible in accommodating requests for schedule adjustments.

Will There Be More Stock Market Listings on BÉT This Year?

Interest in the Xtend market remains strong. Over the years, the number of companies listed on Xtend has steadily grown, with businesses from various sectors—including IT, construction, renewable energy, and real estate development—joining the market. This expansion signals to other SMEs that the stock exchange is a viable financing alternative to traditional methods.

We expect a steady stream of new companies entering Xtend, as we have been working since its launch to build a vibrant, dynamic market. Initially, there was skepticism about whether these companies would succeed, but their performance has been impressive. The valuation and trading volume of Xtend-listed firms have attracted private investors and speculators, increasing market activity. Recent trading statistics show that nearly every day, there are millions of forints in trading volume on Xtend-listed companies. As these companies continue to grow and report strong results, this trend is expected to accelerate.

Does Épduferr Plan to Issue Shares or Bonds in the Near Future?

For now, our priority is to complete the capital increase, after which we will be in a better position to outline our future plans. We have already had preliminary discussions about a potential bond issuance.

One of our key strategic goals is to expand into real estate development, leveraging the strong synergies within our company. Our short- and medium-term plans focus on launching our own real estate development projects. Unlike large-scale residential complexes, we aim to target the premium segment, building smaller, high-end properties.

How Épduferr’s Structure Gives It an Advantage in Real Estate Development

Our value chain allows us to retain a significant portion of the profits that would typically go to external contractors.

1. Real estate development: We control the project, ensuring that we don’t have to rely on external developers.

2. General contracting: We already have the in-house expertise to execute construction projects.

3. Building materials trading: We source materials internally, eliminating supplier markups.

4. Steel structure manufacturing and trading: We produce and supply steel components within the company.

5. Design and planning: We have completed projects from design to turnkey handover, including highly complex buildings beyond premium residential developments.

This end-to-end integration allows us to achieve significantly higher profitability than a traditional real estate developer, which typically targets 25-30% margins. Thanks to our unique business model, we can add another 15-20% in savings and profits, giving us greater financial flexibility.

Funding Challenges in Real Estate Development

However, real estate development is highly capital-intensive. Acquiring a premium development site can cost 300-500 million forints. Our current financial structure does not allow us to allocate such a large amount for land acquisition, followed by months of design and permitting before pre-sales can begin.

The current capital raise is not primarily intended for real estate development but rather for strengthening our existing operations. While real estate development could become our most profitable division, we first need to secure additional capital to scale our steel trading and processing businesses.

1. Steel Trading: We need significant working capital to build a robust inventory, which is the foundation of successful trading.

2. Steel Processing: We have acquired machines, but we still need to increase raw material stocks to begin large-scale production.

3. General Contracting: We aim to make our contracting operations more efficient and profitable.

This 1 billion forint capital raise will support these objectives, allowing us to optimize procurement, negotiate better supplier contracts, and possibly renegotiate bank loan terms for improved interest rates.

A future capital raise could then finance our entry into real estate development. If this capital increase exceeds expectations, we may even accelerate our expansion into this sector.