Investment Presentation

Team Members:
Daniela CHILARI
Cristina NEGRU
Nicolae OTGON
Iurie RUSU

CFA Institute Research Challenge

Sector: Telecommunication Services
Market Cap: RON 3.645 bn SELL 52 weeks high: RON 43.60
52 weeks low: RON 30.30

16 Feb 2018 price

RON 36.45

TARGET PRICE
RON 30.20

Source: Team Analysis

Source: Bucharest Stock Exchange website

 Price
sensitive
Unsustainable low customer Operators become
prices strategy base just a data pipe
Over the top
players
take over

Low
SELL
investor
Deficient corporate confidence
Interest rates expected
governance to spike up
Increasing
cost of debt

Industry Overview
Business Description Corporate Governance Investment Summary Financial Analysis Investment Risks
 Digi IPO

On 16 May 2017 23,918,519 share

DIGI went public on BSE RON 40 per share

Downside of On 16 February 2017

8.87% since IPO RON 36.45 per share

Business Description
 Business Description Revenue split by Country

Romania 73%

1 Cable TV
Hungary

16%
2 DTH
Spain and Italy
916.5 mn €

11%
3 Fixed Internet
Revenue split by Product
Mobile
4 Mobile Telephony telecommunications
services
25% 24%
Fixed Internet and Data

26% Cable TV
5 Fixed Line Telephony Other Revenues 13%

Fixed-line telephony
4% DTH
Source: DIGI’s investors presentation 8%

Business Description
 Business Description Revenue split by Country

Romania 73%

1 Cable TV
Hungary

16%
2 DTH
Spain and Italy
916.5 mn €

11%
3 Fixed Internet
Revenue split by Product
Mobile
4 Mobile Telephony telecommunications
services
25% 24%
Fixed Internet and Data

26% Cable TV
5 Fixed Line Telephony Other Revenues 13%

Fixed-line telephony
4% DTH
Source: DIGI’s investors presentation 8%

Business Description
 Corporate Governance Appraisal

1/5 1/2

• Only 1/3 of the Board of Directors • The Executive Director of RCS&RDS

are independent
.
Overall Score has been accused of bribery and
money laundering
6/14
underperformance
• The major shareholder has 91% of the • The Group has not accounted for any
total company’s voting power provision for lawsuits

2/3 2/4

Source: Team Analysis

Corporate Governance
 Industry Trends

Becoming
Towards satisfying
data pipe for
data usage demand
transferring media

Need to satisfy Cost efficiency for clients

network quality Market share for Co.
demand

Industry Overview
Competitive Positioning
 Survey

62.9
Connection Problems
20.5
Percentage of respondents

91.4
Good Price
28.7

Digi Average

2.83
Loyalty Offers
3.14
Scale from 1 to 5
3.28
Coverage Level
3.91

Source: Team Survey

Industry Overview
Competitive Positioning
 Romanian Segment Outlook

Fixed Broadband Market Share TV Market Share

700 Revenues (EUR mn)

600

12% 500
13%

400
49% 49%
300

200
12%
100 18%
27% 20%
-
2013 2014 2015 2016 2017

Source: Team Analysis based on DIGI’s financials

Industry Overview
Competitive Positioning
 Romanian Mobile Network Position

Mobile Services Market Share Telecom operators: Price vs. Coverage

Digi
21% 5
Orange

Coverage Quality
12%
4 Vodafone
Telekom
3
36% 31%
2

1
1 2 3 4 5

Source: Team Analysis based on DIGI’s financials Source: Team Survey

Price (1 highest, 5 lowest)

Industry Overview
Competitive Positioning
 Hungarian Segment Outlook

Fixed Broadband Market Share TV Market Share

160 Revenues (EUR mn)

140
27%
120
38% 15% 29%
100

80
22% 14%
60
9% 40
16% 25%
20 5%
-
2013 2014 2015 2016 2017

Source: Team Analysis based on DIGI’s financials

Industry Overview
Competitive Positioning
 SELL 17.15% Downside

Valuation Summary

FCFF 30%
70%
RON TARGET SOTP
PRICE
30.71 per share
RON 30.20
RON
29.92 per share

Investment Summary
 Intrinsic Valuation

FCFF 30.71
RON / share
Terminal Value 1206.09
Enterprise Value 1417.84
Net Debt 759.77
Fair value/share 6.53
Discount 15%
Fair value/share 25.86
12m TP 30.71 WACC 8.13%
Computed Beta 1.87
Closing (16 Feb 2018) 36.45
Cost of Equity 18.75%
Downside -15.74% Cost of Debt 6.52%

Source: Team Analysis based on DIGI`s financials and team’s forecast from 2017 onwards

Investment Summary
 Sum-of-the-Parts Based on
Multiples

SOTP on EV/SALES

85% CEE
Entertainment 1.71x
Cable 1.48x
Telecom 1.42x
29.98
RON/share
EV 1405.24
12m TP 29.98

15% WE

Downside -17.76%

Source: Team Analysis and Bloomberg data

Investment Summary
 Monte Carlo
Sensitivity Analysis - SOTP

Minor Share Holders

Exchange Rate
Cost of Equity
Telecom Sector
Net Debt
Cable&Satelite Sector
Entertainment Sector

0% 5% 10% 15% 20% 25% 30% 35%

Sensitivity Analysis - FCFF

GDP IT

Minor Share Holders

GDP ES

GDP HU

GDP RO

Net Debt

0% 10% 20% 30% 40% 50% 60%

Source: Team Analysis

Investment Summary
 Growth Rate Computation

Revenue Generating Unit RGU

&
ARPU Average Revenue Per Unit

Revenue
Growth
Rates
Industry
RO
GDP evolution
HU

IT
ES

Financial Analysis
 Forecasted Revenue Growth Rates (RO)
8%

6%

4%

2%

0%
2017e 2018e 2019e 2020e 2021e

-2%

Cable Internet Entertainment Telephony

Source: Team Estimations

Financial Analysis
 Forecasted Revenue Growth Rates (HU)
9%

7%

5%

3%

1%

-1% 2017e 2018e 2019e 2020e 2021e

-3%

-5%

Cable Internet Entertainment Telephony

Source: Team Estimations

Financial Analysis
 Expenses Analysis
OPEX

Other expenses Telephony expenses

CAPEX and EBIDTA Evolution
19% 19% 350 45%

40%
300
35%
250
30%
Utilities 4%

EUR mn
200 25%

Pension fund 150 20%

contributions Salaries and
5% related taxes 15%
100
18% 10%
Cost of goods
50
sold 5%
5%
0 0%
Rentals 2013 2014 2015 2016 2017
7% EBIDTA CAPEX EBIDTA Margin

Depreciation
Programming
12%
expenses 11%

Source: Team Analysis based on DIGI’s financials

Financial Analysis
 Debt Analysis

400 50%
Capital Structure 350 Consolidated Debt Evolution
350 Loans Maturity 45%
780
40%
300 47% 760
8% 35%
740
250 30%
EUR mn

Equity 720
200 25% 700

EUR mn
150
Debt 150 20% 680
95 93 15% 660
100 20%
92%
60 10% 640
50 13% 12% 620
0% 5%
8%
- 600
- 0%
2018 2019 2020 2021 2022 2023 580
2013 2014 2015 2016 2017
Source: Team Analysis based on DIGI’s financials Total % of Total

Financial Analysis
 Risk Assessment

Ascending risk
Business
Fiscal
Reputational

Financial

Operational

Source: Team Analysis

Investment Risks
 Risk Contributors

National Telecom The government

Regulator might increases taxation as
target DIGI for an effect to high
dominant position public deficit
on the market

ANCOM Government

In 2015, DIGI lost Content Senior management In 2017 a series of

their license to criminal offenses
Providers
broadcast UEFA have been
Champions League indicted to a
to Telekom senior manager

Investment Risks
 Increasing
cost of debt
16 Feb 2018 price
Over the top RON 36.45 per share
players
take over
FCFF SOTP SELL
Low
investor
confidence TARGET PRICE
30% 70% Price RON 30.20 per share
sensitive
customer
base

17.15% Downside