cfa institute research challenge · negatively translated into digi’s financials. struggling to...

CFA Institute Research Challenge

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CFA Society in Romania

Babes-Bolyai University Cluj-Napoca

Figure 3

Key Numbers 2017E 2018E 2019E 2020E 2021E

Revenue (mn) 916,42 962,34 992,09 1.011,67 1.027,80

EBIDTA (mn) 286,43 327,80 325,90 338,27 354,07

EBIDTA Margin 30,61% 30,29% 30,08% 30,00% 30,36%

CAPEX (mn) 240 220 205 190 183

Net Debt (mn) 759,77 940,58 974,15 1025,88 1078,69

Debt/Equity 11,18 11,97 12,28 12,34 12,42

Figure 4

Source: Team Analysis & BSE

Source: Team Analysis & Company`s Financials

1

Figure 1. Market Data (RON)

Class B Shares

Closing Price (February 16, 2018) 36.45

52 weeks high 43.6

52 weeks low 30.3

Trading Volume (6mn) 2,828,870

Outstanding Shares (mn) 100

Market Cap. (mn) 3,645

P/E (Price to Earnings) 19.05

Source: BSE

Figure 2 Valuation Date

February 16, 2018

Methodology Weight Price

FCFF 30% 30.71

SOTP 70% 29.98

12m Target Price 30.20

Downside vs last close

-17.15%

Source: Team Analysis

HIGHLIGHTS

We issue a SELL recommendation on DIGI with a 1-year target price of RON 30.20 per class B share, representing a 17.15% downside from its February 16, 2018 closing price of RON 36.45. Our target price is derived by using a mix of the Free Cash Flow to Firm Model (“FCFF”) and the Sum-of-the-Parts (“SOTP”) approach based on Enterprise-Value-to-Sales multiple, attributing 30% and 70% weighting respectively to each methodology. Our recommendation is based on the following key drivers:

Increasing interest rates threaten DIGI’s cost of debt

Over the last quarters, Romania scored significant economic growth leaving in the shade other European Union (“EU”) economies. This performance impelled warnings from economists pointing to the need for monetary tightening. Recently, the National Bank of Romania (“NBR”) raised the reference interest rate to 2.25% and is expected to increase it further to avoid an economic turmoil. As DIGI has the highest Debt/Equity ratio compared to its Central and Eastern Europe (“CEE”) peers, interest rates evolution is highly important for DIGI’s financial health.

Over-the-top (“OTT”) players take over in a digital world

We live in a world shaped by technological advances. The number of customers using digital platforms as a means of communicating will skyrocket globally. Telecom operators can no longer control customer interface, and resume at being the pipe through which the Internet moves. DIGI is not an exception and it will inevitably enter in the race to either compete or partner with OTT players. Regardless of which solution will be chosen, it will be negatively translated into DIGI’s financials.

Struggling to preserve its price sensitive customer base

Our market study reveals that Romanian customers prefer DIGI solely due to its very low prices. This is a very expensive long-term strategy for any company, let alone a company that is as levered as DIGI. The time in which the company will start raising up its prices is not so far away. This will inevitably cause many customers to prefer other operators that provide better-quality services and loyalty promotional offers.

Poor ethical conduct reflects negatively on investor’s confidence

Although we don’t live in an Adam Smith’s economy and investors are not perfectly rational, still they are well-informed people. More than that, we, as human beings, are highly influenced by good stories. But when we find out that a company is involved in several litigations, its board of directors lacks independent members and the key person that is controlling the company has not ever made any public appearances nor do we know anything about his management principles, we will definitely reconsider our choice. This is the current situation of DIGI and unless it will make serious efforts to correct it, we do not view it as a trust worthy company.

SUMMARY DIGI Communications N.V. (“DIGI”) is a telecommunication services provider in Romania and Hungary and a mobile virtual network operator (“MVNO”) in Spain and Italy.

Source: BSE & Team Analysis

Name Board term Position in Group’s Board Other positions within the group

Zoltan Teszari 17 years President of Board of Directors Major Shareholder in RCS Management Sergiu Bulgac 1 year CEO CEO of RCS&RDS and RCS Management Valentin Popoviciu 1 year Executive Director Vice-President of RCS&RDS Sambor Ryszka 1 year Managing Director DIGI Hungary General Counsel of DIGI Hungary until 2013. Mariu Varzaru 5 years Managing Director DIGI Spain Finance Director until 2008 Bogdan Ciobotaru 1 year Independent non-Executive Non-executive member of RCS&RDS board Piotr Rymaszewski 1 year Independent non-Executive - Ioan Bendei - - Vice-President RCS&RDS Mihai Dinei - - Board member in RCS&RDS and RCS Management

Source: DIGI website & Team Analysis

62 %

ownership

DIGI

RCS Management(57,866,545 shares)

Zoltan Teszari(49,100 shares)

56.95 %

ownership

87.1 %

ownership Soure: DIGI IPO prospectus & Team Analysis

Figure 5

Figure 6: Shareholders Structure

Figure 7

Figure 8: Ultimate Beneficiary

Figure 9: Board of Directors

Source: BSE & Team Analysis

IPO DETAILS

Date May-17

Shares 23.9 mn

Stake 25.60%

Price range RON 38-56

Final Price RON 40

Market Cap: 1.156 mn

Source: DIGI IPO Prospectus

2

Market Cap. RON 3,645 mn

Common Stock 34,243,972 shares Institutional Owners

2,240,000 shares (float of 6.5%)

Top 7 SEB 2.69% Erste Group 0.86% East Capital AM 0.77% Conseq Finance 0.70% Raiffeisen Bank 0.42%

BUSINESS DESCRIPTION

DIGI is a limited liability telecommunication company incorporated under the laws of Netherlands and listed on the BSE. The company’s main operation carrier is the Romanian company RCS&RDS. DIGI provides a wide offer of services: pay TV, fixed and mobile broadband, fixed and mobile telecommunication and broadcast of their own channels through DIGI TV. The services are expanded on the company’s core markets, Romania and Hungary. Additionally, DIGI offers mobile services as an MVNO, to Romanian communities in Spain and Italy. The company achieved an organic growth by expanding its customer base through ascending RGUs, and inorganic growth through mergers and acquisitions performed in its core markets.

Freshly listed company

On May 16, 2017 the company went public on BSE offering 23,918,519 shares at a share offer price of RON 40. Since then the price had a downside of 11%. The most significant events during the last year were anticorruption investigation conducted by National Anticorruption Directorate, signing of a share purchase agreement for the acquisition of a Hungarian competitor, Invitel, admission of the Company’s Senior Secured Notes on Irish Stock Exchange.

SHAREHOLDERS STRUCTURE

The market capitalization of EUR 3,645 mn consists of 1 mn shares divided into Class A shares and Class B shares. This amounts to 34,243,972 common shares listed on BSE. Each Class A share accounts for ten voting rights and a Class B share for one. Concerning the dividend distribution, all shares are ranked with equal remuneration irrespective of the class or nominal value. The main shareholder, Zoltan Teszari, holds directly 3.5% of Class A shares and indirectly the rest of Class A shares, as major shareholder of RCS Management, whose holdings represent 62% of the economic interest in the Company.

COMPANY’S MANAGEMENT

The Board of Directors is chaired by the President, who founded the company. The Board consists of the CEO, an Executive Director and four Non-Executive Directors, out of whom two are the Managing Directors of DIGI Hungary and Spain respectively. Almost all the members have a financial background based on their studies and work experience. The corporate governance structure features two independent directors (less than 2/3 of the Board, as recommended by BSE Corporate Governance Code). RCS&RDS’ board consists of members from the Group’s board, and also Mihai Dinei and Ioan Bendei. The latter was indicted with criminal offenses for bribery and money laundering. All these mentioned above were included in our Corporate Governance Appraisal (Appendix 14).

CORPORATE GOVERNANCE

The Non-Executive Members are elected and distributed into two committees, Remuneration and Audit, which are both chaired by the President of the Board of Directors. Usually Board members are appointed for three years. The next General Meeting for the appointment of new members will take place in 2020. The director’s compensation is established relative to telecom industry practices and enriched with fringe benefits, Employee Stock Option plans and severance arrangements depending on the performance quantified by EBITDA margins and RGUs increase.

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Source: Statista & CFA Survey on Investors’ Expectations

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Source: DIGI IPO Prospect & Team Analysis

Figure 10: GDP Growth

Figure 11: GDP and its main components

Figure 12: Inflation

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3

INDUSTRY OVERVIEW

MACROECONOMICS: overheating economy

The booming EU economy has a positive impact on telecommunications industry, mainly driven by the GDP growth and an overall increase in final consumption expenditures. The current increase in households, in spite of population decrease, had a significant boost on telecom operators’ revenues. The picking up investments led to a better absorption of digitalization that ultimately elevated the sector penetration rate. However, the interest rate spikes will put a pressure on the cost of debt in this sector, mainly because telecom companies usually are highly levered.

Romania: unsustainable growth rate translates into weakening consumer confidence

Despite achieving a GDP growth over the EU’s CAGR of 2%, the NBR is unable to control inflation rate that will most likely weigh against consumer spending. Lower taxes might translate into missed fiscal targets and consequently into a risk of economic overheating as wages outpace productivity growth. NBR is chasing inflation with interest-rate hikes, aiming to stay ahead of any overheating, while growth surges on ballooning government spending.

Hungary: bright growth prospects

Hungarian economy experiences an increased CAGR of 0.9% in households and a GDP outperformance compared to EU. Investments growth, possible due to EU financing, is the main driver of the strong economic expansion, along with the favorable credit conditions and the decrease of business taxes. However, the increased inflation might harm competitiveness by blocking access to financing sources, providing an advantage for its more mature competitors acting on the market.

CABLE: room for expansion

According to ANCOM (National Regulatory Authority), the number of connections to the fixed internet increased by 4.4% in Romania in 2016 reaching a penetration rate of 52.9%. Compared to an average penetration rate of 83% in the EU, there is still space for further expansion on this business line in Romania. The fixed broadband coverage at the national level is 89% and it lags behind the member states of EU, which have an average of 98%. Romanian subscribers benefit from high connection speeds (over 100Mbps) in a proportion of 56% of fixed connections, compared to 9.1% and 11.4% in Germany and the UK, respectively. In contrast, Hungary lags behind in terms of fast connections, as only 46.2% of total internet subscriptions provide a speed accounted for cable internet subscriptions (the rest still using old technology).

TELEPHONY: the enlargement of mobile broadband

The degree of usage of fixed telephony in Romania is on a stable decrease of 15% in the total voice traffic from 2015 to 2016, mainly driven by change in consumers’ preferences. For the mobile telephony sector we notice an increase of 8% in the number of post-paid subscriptions in 2016, as costumers strike for flexibility in billing. The number of total messages sent decreased with 10%, which might be due to the increasing number of alternatives available on the market (WhatsApp, Viber, Messenger). The coverage level elevated to 84.2% in 2016, following the increased demand for data services. The 4G coverage in Romania is developing at a fast pace, doubling in the last year, from 2.7 mn connections in 2015 to 5.8 mn connections in 2016. However, a 33% coverage of total mobile internet connections puts it behind the EU average of 84%. In Hungary, the fixed line telephony increased slightly at a CAGR of 0.9% due to the fact that this service is included in the packages provided to the customers. The mobile broadband coverage is above the average of the EU level by 8%. 4G coverage is way ahead compared to Romania, covering 92% of connections. The number of active SIM cards divided by the population of Hungary is the lowest in EU, respectively 43% versus 84%. This might be due to the prices for mobile phone subscriptions, which are the highest in the region.

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SMSSource: Analysis Manson, 2016 OTTs Study, European Commission

Figure 14: Romanians Community

Figure 16: Volume of messages from mobile handsets

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ENTERTAINMENT: cutting the cord

A hot topic for the entertainment sub-sector is the “generational shift” which represents the cancelling of cable or satellite TV in favor of streaming or other options. Although with millennials rise, this trend will also be reflected in Romania, at this moment, traditional TV still has a high presence. Briefly, at the end of 2016, Romania had 7.3 mn TV subscribers, which represents an annual increase of 3% in 2016. According to ANCOM, 64% are connected through cable, 32.8% through DTH. Most of cable connections are made in urban zones, while the rural zones favor DTH connections. The Pay TV market in Hungary has an 85.1% penetration rate of TV services.

MVNOs: taking over saturated markets

Both Spain and Italy achieved a high level of market saturation, with penetration rates exceeding 100% since 2015, in terms of mobile telecommunication market. Despite large mobile user based and notable existing operators, the entrance of virtual operators is actively encouraged by the telecom regulators in order to exert pressure on prices.

REGULATIONS: heavy burden for telecom

In the aftermath of 2008 global downturn, there were several government measures and distress taxes aimed at shrinking the economic turmoil and compensating for the decrease in revenue to state budgets on core markets. In Romania a series of special taxes were introduced in 2014, of which only the tax on special construction accounted for 1% of gross book value of relevant assets. Even though it has been removed in January 2017, there is an elevated volatility in terms of fiscal decisions. This sector is heavily taxed by the Hungarian government, causing difficulties for companies to increase the prices of services offered and limiting consequently the availability of investment funds.

NEW TRENDS

SHAPING BUSINESS MODEL: more about content, less about voice

A rapid change in telecom industry and an uncertain financial outlook determine a new strategic direction, closer to feeding the data usage demand, and further from voice operations. The current operators are experiencing losses on fixed-line operations and analysts are forecasting a downturn for mobile operations too. Acquiring market share is supposed to go downside on telecom operator’s priority list shifting to the top, new business development.

CONSUMERS: continuously rising expectations

Network quality remains one of the most valued features of voice and data services, as resulted from the survey we conducted. However, according to the current trend of lowering costs, operators might consider models that involve sharing and outsourcing. Besides that, the customer’s interaction experience might shift towards fully digitalized customer’s services. According to client’s preferences, the reputation and reliability of the operator is crucial for the sales and services experiences.

OTT: the bit-pipe effect

The recent advent of OTT, such as Google, Apple, and Netflix transformed telecom operators into supporting players that solely provide network. This would mean that operators can no longer control customer interface, and resume at being the pipe through which the Internet moves. WhatsApp, Viber, and Apple’s iMessage already represent more than 80% of all messaging traffic, and Skype alone accounts for more than a third of all international voice traffic minutes. A potential solution to that would be a partnership between telecom operators and OTT. As a matter of fact, competitors of the Group on Romanian market, like UPC and Vodafone, already signed contracts with Netflix and HBO.

GROUP`S COMPETITORS AND THEIR MARKET SHARE

Source: Team Analysis & DIGI IPO

Figure 17: Fixed Broadband in Romania

Figure 18: Mobile Voice and Data in Romania

Figure 19: Pay TV in Romania

Figure 20: Fixed Broadband in Hungary

Figure 21: Pay TV in Hungary



Source: Team Analysis & Magyar Telekom Roadshow Presentation

Source: Team Analysis & Magyar Telekom Roadshow Presentation

5

MULTIPLAY: creative solution for a demanding market

For understanding customer behavior and requirements, operators offer packages of digital services providing cost efficiency for the client and market share for the operator. Furthermore, delivering appropriate content and access services on a single invoice is accordingly to billing customer’s expectations. The number of active subscribers consuming two or more services in Romania, increased at a CAGR of 8% since 2013. In Hungary we can notice a perfect inverse correlation between 4-play bundles subscriptions and 1-play ones.

COMPETITIVE POSITIONING

CONQUERING TERRITORY

In Romania the main sources of revenue come from mobile services, that represents an increasing segment with an annual growth rate of 8.48% in 2017 mainly from mobile voice, and data and slightly decreased by fixed-line telephony evolution. All together at the group level, Romania is contributing with 79% of total subscribers. Since the Group has re-launched its mobile services in Romania in 2014, it has acquired a 12% market share, compared to the top operator on this segment, Orange, that holds a 36% market share. The rapid growth is mainly due to the low pricing strategy that it adopted, consistent with consumer preferences. It has an efficient set-up: no legacy 2G, mobile towers located in vicinity of the dense fiber network which is ideal for a potential future 5G cell rollout.

MARKET LEADERSHIP

For both the Internet and TV, DIGI is the market leader due to its history of being the main cable operator, and having the most developed fiber network in the country. DIGI outperforms its main competitors with a 49% market share in TV services and fixed internet, specifically Telekom that holds 20% and 27% respectively and UPC with 18% and 12%, respectively. All of the used networks are nearly 100% owned by the company. Because their equipment is recently set up, they have a low maintenance CAPEX and there are no large scale upgrades required. Currently, DIGI is the main beneficiary from the market deregulation conducted by ANCOM as it is not imposed to share the infrastructure with its competitors, Orange and Vodafone.

CHALLENGER ON THE HUNGARIAN MARKET

Hungary contributes with a 12.4% revenue participation to the group revenue at the end of 2017. At the country level the main part of its RGUs come from Cable TV (30%) Fixed-line telephony (23%), and Fixed internet and data (28%). Despite the fact that DIGI is not a market leader in Hungary, it owns a significant market share of 25.1% on the Pay TV market and 15.8% on the Fixed internet and data market. The Group faces strong competition from the market leader, Magyar Telekom, which holds more than half of fixed-line subscriptions, due to its previous monopoly holding on this segment. Additional to that, Magyar Telecom holds 35% market share of fixed internet and data, followed by UPC that holds 22,1%, both exceeding the Group’s market share of 15.8%. In comparison with the Romanian market, where DIGI held a competitive advantage given by FTTH/FTTB infrastructure, on the Hungarian one, all top providers have invested in the next generation access infrastructure.

NETWORK ROLL-OUT THROUGH ACQUISITION

At the moment, DIGI signed a purchase agreement with Ilford Holding and Invitel Technocom, in order to buy shares representing ~100% of the share capital and voting rights of Invitel. According to the information provided by the company, after the acquisition will go through, DIGI`s market share will increase with 4.8% in the Pay TV market and with 9.4% in the Fixed internet and data market, the total expected market shares being 29.9% and 25.2%, respectively. Also the Group is expected to re-launch their mobile services by creating bundles for their customers, which will replicate the successful revenue growth witnessed in Romania in 2014. Spain and Italy total together 8.6% revenues at the group level. All revenues for these countries come from the mobile sector, where DIGI operates as a virtual network operator. It mainly targets large Romanian communities living there, which makes them less affected by the highly competitive and saturated markets.

0 2 4 6 8

DIGIAFKSWPL

MTELEKOMTELEC CP

TTKOMCPS PW

Source: Bloomberg & Team Analysis

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Coverage Quality

Others

Source: Survey, Appendix 18

EUR mn, except per share data

Business Lines

Revenue 2017E

EV/ Sales

EV

Entertainment Content

305.14 1.71 522.54

Cable and Satellite

316.77 1.48 469.92

Telecom Carrier

293.51 1.42 417.78

Total Enterprise Value 1405.24

Less: Minorities 5.07

Less: Net debt 759.77

Less: Litigation Loss 3

Market cap. Estimate 637.40

12m target market cap. estimate 756.92

Number of shares (mn) 100

Fair value/share (EUR) 7.57

Discount 15%

12m TP for Class B shares (EUR)

6.43

SOTP TP (RON ) 29.98

Last close (February 16, 2018) 36.45

Downside vs last close -17.76%

Figure 22: Debt/Equity

Figure 23: Why customers choose DIGI?

Figure 24: SOTP Valuation

Source: Team Analysis & Bloomberg

6

INVESTMENT SUMMARY

We issue a SELL recommendation on DIGI with a 1-year target price of RON 30.20 per class B share, representing a 17.15% downside from its February 16, 2018 closing price of RON 36.45. Our target price was derived by using a mix of the FCFF and the SOTP approach based on Enterprise-Value-to-Sales multiples, attributing 30% and 70% weighting respectively to each methodology. Our recommendation is based on the below key drivers.

KEY INVESTMENT DRIVERS

PRESSURES ON THE COST OF DEBT: overheating economy and rising interest rates

Romania’s economy continues to grow at an accelerated pace, but the pro-cyclical fiscal policy and wages growth increase the risk of overheating, according to data from Fitch Ratings. Mugur Isarescu, the governor of the NBR declared in a press conference from February 8, 2018 that the reference interest rate was raised to 2.25% and is expected to further increase to avoid an economic turmoil. This is a key factor for DIGI’s financial soundness as it has the highest Debt/Equity ratio compared to its CEE peers (Figure 22). In a scenario of an increase in interest rates DIGI will face severe negative consequences both with respect to its cost of debt and the possibility to raise additional financing and get involved in future projects.

LOW PRICES: unsustainable long-term strategy

One of the main DIGI’s competitive advantages is its low prices. As our survey shows, 91% of respondents chose DIGI over other telecom providers in Romania because it offers very low-priced packages. Thus, the customer base that DIGI has gained so far is price sensitive and it is easy to lose if the tariffs will increase. Nonetheless, this scenario is quite probable as it is a known fact that a low price strategy is very expensive on the long run. Moreover, DIGI’s capital structure emphasizes its financial burden and the need to have a solid amount of cash inflows in order to face it.

DEFICIENT CORPORATE GOVERNANCE: turn-off for investors

We decided to add qualitative factors in our valuation model that are as important as numbers because when analyzing DIGI as a potential investment, the key people that run the company are the ones that actually put to work investors’ money. Investors need to trust the people that stay behind the company that they choose to invest in, meanwhile, the board of directors has to ensure that any potential conflict of interests will be avoided. As we have mentioned in the corporate governance section, at this point, DIGI faces important issues regarding its board of directors and management. Briefly, the board of directors does not have the required number of independent members. Almost all company`s voting power is concentrated in the hands of the ultimate shareholder, Zoltan Teszari. He holds directly and indirectly a 94.8% voting power. We quantified these factors by applying a discount to the fair share prices that we obtained in our models. Additionally, DIGI’s management has a questionable ethical conduct as it has been involved in numerous litigations which might cause not only cash outflows but also a reputation deficit. Regarding its most recent litigation investigated by the National Anticorruption Directorate, we included a litigation loss of EUR 3mn.

VALUATION

Our valuation generates a RON 30.20 target price, driven by 70% of the SOTP model based on multiple analysis price of RON 29.98 and 30% of FCFF model price of RON 30.71. The motivation for assigning 70% to SOTP comes from the fact that DIGI has a unique mix of business lines and in SOTP we assessed each business line in particular, considering multiples for each one of them. We find it more accurate to focus on each part and compare it to relevant peers per business line.


Free Cash Flow to Firm Valuation

EUR millions, except per share data

PV FCFF 211.75

Terminal Value 1206.09

Enterprise Value 1417.84

Net Debt 759.77

Minorities 5.07

Equity Value 653.00

Fair vale/share EUR 6.53

Discount* 15.00%

Fair value/Share (RON ) 25.86

12m TP for Class B shares (RON ) 30.71

Last close (February 16, 2018) 36.45


WACC (2017)

Risk-free rate 4.53%

Beta 1.87

Market risk premium 7.62%

Cost of Equity 18.75%

Interest expenses 47.8

Borrowings 732.7

Cost of Debt 6.52%

Debt % 80%

Equity % 20%

WACC 8.13%



Figure 25

Figure 26

Figure 27: Monte Carlo SOTP Simulation


Figure 28: Monte Carlo FCFF Simulation

7

SOTP ON ENTERPRISE-VALUE-TO-SALES MULTIPLE

The SOTP relative valuation of DIGI derives the Enterprise Value (“EV”) for the company’s three main business lines: Entertainment Content, Cable and Satellite, and Telecom Carrier using their estimated 2017 revenues and EV/Sales multiples. We used public comparable companies from CEE and Western Europe (“WE”) that have operating activities similar to the analyzed business line (Appendix 9). We motivate our choice of using EV/Sales multiples by the fact that it takes into account the company’s capital structure as opposed to other multiples and we can therefore compare DIGI to other peers regardless of the differences in debt held or issued. After weighting the EV of each business line in proportion with its revenues share/contribution and eliminating the intersegment revenues, we obtain a total EV of EUR 1,405mn. This implies a market capitalization estimate of EUR 637.40mn and a 12-month target market capitalization of EUR 756.92mn, based on DIGI’s return of equity of 18.75%. A 15% discount was applied for class B shares as well as low corporate governance transparency that we mentioned before and we arrive at a target price of RON 29.98/Class B shares (Figure 24).

INTRINSIC VALUATION – 5-YEAR FCFF MODEL

To capture company’s fundamentals, we employed the FCFF model. We chose this approach because DIGI is a highly levered company and we estimated that it will deliver a small but stable revenue growth in the future. The method consists of a two-stage growth model: specific year to year forecast up to 2021, followed by a stage of constant growth of 2.88%. Based on our FCFF analysis, the estimated price is RON 30.71 (Figure 25).

WEIGHTED AVERAGE COST OF CAPITAL

In order to obtain an accurate discount rate in our FCFF model, we estimated the weighted average cost of capital (“WACC”) for each year. The reasoning for this is to account for a changing macroeconomic and fiscal policy environment as well as company specifics regarding its capital structure and sources of financing. The 10-years Romania’s government bond (4.63% in 2017) was used as a proxy for the risk-free rate and is expected to increase in the following years. This increase is based on the fact that Romania is currently facing the risk of an overheating economy and the NBR is targeting inflation by rising interest rates. As a result, the company’s interest expenses are also expected to increase, leading to a higher Cost of Debt for the analyzed period, the latter being calculated as company’s projected Interest Expenses/Borrowings. We used the CAPM to estimate the Cost of Equity. For Beta we used the same peers as we had in the SOTP model and we arrived at average unlevered betas for each of the business line. The un-levered Beta for the overall company was calculated by weighting Betas of the business lines according to their revenues’ contribution and then it was re-levered with the company’s capital structure. We obtained a Beta of 1.87 (Appendix 10). The expected market risk premium was defined to be 7.62% (Damodaran), which led us to a 18.75% Cost of Equity in 2017. The target capital structure of 80% debt and 20% equity was used for the analyzed period. We obtained a WACC of 8.13% in 2017 (Figure 26). Please consult Appendix 11 for the comprehensive WACC calculations for the entire period.

TERMINAL VALUE

The terminal value was computed by using the terminal growth method. We assume that in perpetuity the company’s revenues will be driven by the GDP growth rate on each operating market by weighting them into DIGI’s current geographically revenue composition. We estimated GDP sustainable growth rates from 2022 onwards for Romania, Hungary, Spain, and Italy are: 3.28%, 2.2%, 1.68%, and 0.94% respectively. By weighting them, we obtain a GDP growth of 2.88% (Appendix 11).

MONTE CARLO SIMULATION

In order to understand the sensitivity of our valuation models to changes in our assumptions, we performed a Monte Carlo Simulation. This methodology simulates a range of possible outcomes for different factors that influence DIGI’s

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F

2018

F

2019

F

2020

F

2021

F

EBIDTA CapEx EBIDTA Margin


Figure 29: Cable

Figure 30: Entertainment

Figure 31: Telephony

Figure 32: OPEX

Figure 33: EBIDTA & CAPEX

8

estimated value. 1 million simulations were run both for SOTP and FCFF. The key factors taken into consideration for SOTP are the sector growth, the company’s net debt, and the cost of equity. The results of the simulation show a probability of 81% sustaining the SELL recommendation. The sensitivity analysis indicates that the most sensitive variable is the Entertainment sector growth, because DIGI mainly provides this type of services. When simulating the outcome of FCFF, we defined as random variables the terminal growth rates of GDP of each country (Romania, Hungary, Spain, and Italy) where DIGI operates and the net debt. These inputs lead to a 91% probability of obtaining a target price at least 10% downside. Our results reveal that the most sensitive variables are the evolution of net debt and the terminal growth rate of GDP in Romania, which is due to the fact that this is DIGI`s core market.

FINANCIAL ANALYSIS

REVENUES: powered by three-dimensional growth rate

As a growth company, DIGI generates its revenues on RGU and ARPU increase, meaning larger customer base and ascending revenue per customer. Besides these internal considerations, we believe that company’s revenue is dependent on industry evolution, mainly telecom revenues on each segment, and GDP growth in each region. For estimating future revenues, we weighted each of these three factors by the influence they exerted on past revenues. Cable and Pay TV had a positive evolution overall, and is expected to continue the trend in a slower pace, especially for Pay TV. On the Hungarian market, both revenue segments are supposed to accelerate after the Invitel acquisition due to potential synergies. Telephony had the most rapid growth in all regions except for Hungary, where we expect improvements starting from 2018 as the Group plans on re-launching their mobile services. In terms of ARPU, we notice a sharp decrease in 2014 and a quick recovery afterwards in the regions where DIGI acts as an MVNO. This was caused by the company’s strategy to deliver as many services as possible while maintaining EBITDA margin.

OPEX: towards minimal costs

Operating expenses are mainly composed of telephony expenses, salaries, and programming assets. Therefore, the operating profit depends directly on the number of connections and content acquired from providers. Other expenses held a significant 19% share from total OPEX in the nine months ending 2017, a 2 pp decrease from 2016. These expenses are related to own TV channels and network maintenance. We forecasted a continuing decreasing costs growth rate on all segments. Even though we expect salaries expenses to increase considering macroeconomic trends, we assume that number of connections will decrease following the current takeover of OTTs and maintenance expenses will lower along with infrastructure consolidation.

CAPEX: investing in big data

DIGI is currently pursuing an ambitious growth strategy that required them to undertake substantial capital expenditures. This mainly includes expansion of their fiber optic network and mobile network on core markets, acquisition of content rights and licenses and network equipment. The 11.11% increase in CAPEX from 2016 to 2017 will be followed by a constant decrease as the Group aims to a minimizing cost strategy, as declared in their latest presentation.

EARNINGS: targeting EBITDA, the standard assessment in telecom

Since 2013, when the EBITDA margin recorded the highest level of 41.62%, it has decreased to a value around 30%, impacted by the loss resulted from electricity supply activities. We forecasted constant evolution, in line with the company’s strategy, that targets this indicator, as well as other peers in this industry. We can notice through a relative comparison that the Group’s margin outperforms the industry median of 22.22% (Appendix 8).

SOURCES OF FUNDING: running on operating fuel

The company is positive about generating funds from operating cash flows in order to cover their current liabilities, based on its successful historical growth and discretionary nature of their investment activities. The gross fixed turnover

E

E

E

E

E

E

E

E

E

E

E

E

E

E

E

ROE55,53%

Equity multiplier3,31

Tax Burden

0,75

Interest Burden0,38

Financial Leverage11,5

Asset turnover ratio0,68

Net margin18%

ROE DECOMPOSITION (2017Y)

0

500

1000

1500

2000

2012

2013

2014

2015

2016

e20

17

e20

18

e20

19

e20

20

e20

21

Equity Short Term Debt Long Term Debt

Source: Team Analysis & DIGI Financial Reports

IndustryRivalry

Threat ofnew

entrants

Threat ofSubstitutes

Bargainingpower ofbuyers

Bargainingpower ofsuppliers

OVERALL Cable

Entertainment Telephony


-20%

0%

20%

40%

60%

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

ROA ROE

Source: Team Analysis & DIGI Financial Reports

Figure 34: Capital Structure

Figure 35: ROA & ROE

Figure 36: Porter Analysis

Figure 37: Currency versus EUR (Base=100 on April 1, 2012)

Source: NBR & MNB & ECB

9

of 1.03 in 2017 is a good sign of operational outperformance relative to the European industry. However, we notice that their current ratio is below the industry median and the high amount of leverage might affect the firm’s ability to fund its working capital (Appendix 4).

CAPITAL STRUCTURE: worrying signals of over-leverage

The company’s capital structure was constituted of 10% of equity until 2016, when it plunged down to 3.4%, mainly because of heavily dividend distribution. The management decided to remunerate the shareholders with both the profit obtained that year, and the reserves that decreased considerably in 2016 by 75%. Long-term debt increased as a share of capital structure, as an effect of the additional senior facilities contracted, and the 2016 issue of bonds that were listed in 2016 on Irish Stock Exchange. Furthermore, DIGI obtained a Bridge Loan this year of EUR 350 mn with the maturity date in 2023. Creditors imposed covenants mostly based on long-term debt to EBITDA, and currently the firm’s ratio is within the allowed range. However, the debt to equity ratio is considerably larger than industry’s median, which we consider a concern for company’s solvability.

PERFORMANCE: what’s in it for shareholders

ROA demonstrates effective management of assets, as company’s ratio is higher than the industry’s average. We assume a healthy constant evolution in the future for ROA. Nevertheless, in what concerns ROE, we believe that this ratio is not offering relevant information about company’s performance because of its outstanding volatility. We applied DuPont analysis on this indicator and the driver of ROE’s evolution stands to be the financial leverage ratio. The highly levered capital structure outweighs equity and gives the illusion of a higher ROE. Furthermore, tax and interest burden are contributing to the high borrowing cost, which discloses the fact that we are dealing with a risky company.

INVESTMENT RISKS

BUSINESS RISKS: Regulation eroding key competitive advantages

The telecom industry is highly regulated, and one of the risks DIGI is intensively exposed to, is the obligation to open its infrastructure to their competitors. The main mobile market players, Orange and Vodafone, have already opened their networks to each other. If ANCOM will impose this as a mandatory condition, DIGI might lose their competitive advantage, specifically their fiber optic infrastructure. Taking into consideration the large market share of almost 50% that DIGI holds on broadband and pay TV, the company might be subject to additional restrictions in the future from the national authority. Moreover, the recent regulations concerning the roaming surcharges are overloading the company’s expenditures as ANCOM might prohibit DIGI mobile to charge an additional price for this particular service.

OTT’s takeover

DIGI faces increasing competition due to elevated consumer engagement with alternative communications services like WhatsApp, Skype, Facebook Messenger and entertainment content like Netflix, Google Play or Apple TV. These OTTs players have already gained the costumer focus as both messaging and voice operations have diminished due to customers preferring online environment.

80.00%85.00%90.00%95.00%

100.00%105.00%110.00%115.00%120.00%125.00%130.00%

USD HUF RON

E

E

E

E

E

E

E

E

E

E

-1%

0%

1%

2%

3%

4%

5%

6%

2012 2013 2014 2015 2016 2017

EURIBOR ROBOR


Source: NBR & IMF

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

4.0%

4.5%

2012 2013 2014 2015 2016 2017

RO HU

Source: Eurostat

Figure 38: Interest Rates

Figure 39: Public Deficit (% of GDP)

Figure 40: Risk Matrix

10

FINANCIAL RISKS

Currency Risk

As a multinational holding company, DIGI operates in three different currencies, the most important ones suffering from significant volatility. Additionally, the company acquires its content from its providers in a fourth different currency, USD, and a potential depreciation of their principal operation currencies relative to USD could affect the business. However, management did not establish any hedging strategies against currency risk, counting on their natural buffering, which has caused a significant loss of EUR 3.9 mn at the end of 2016 and it is anticipated to affect the balance sheet in the future as well.

Interest Rate Risk

Considering the anticipated increase of ROBOR, as a government measure to control inflation spikes, and highly leveraged nature of the business, the company might face the risk of not being able to repay its debt. This might consequently affect the current process of infrastructure development and the overall solvability of the company.

REPUTATIONAL RISKS

If previous categories of risks are generally affecting the whole industry of telecommunications services, the reputational risk is particular for this company and we give more importance to its impact. A lot of lawsuits and litigations affected DIGI, mainly because it is a strong player on the market. Companies like Antena Group or Electrica Distributie condemned the company as being abusive of its dominant position on the market, or felt their activity as a threat to their own business. Furthermore, there are some accusations (e.g. failure to comply with labor legislation, caused by a work accident that led to the death of an employee, criminal offenses to one of the members of the Board) which increase the probability that the damaged reputation impacts negatively the stock price. The Group does not consider the risk mentioned above as likely to happen, and consequently, provisions have not been consisted. Therefore, DIGI has zero coverage against this risk.

MARKET RISKS

It is necessary to mention that the markets, where the Group runs its business, are deeply correlated with the macroeconomic environment of EU, which has a downside evolution due to notorious events like Brexit and consumers losing their trust in the power of the union. This can have negative outcomes like high unemployment, which will ultimately lead to low collection costs, as customers will be less capable to pay their bills.

FISCAL RISK

Fiscal uncertainty, translated into an increased real estate taxation and an extension of social security taxes’ scope, could affect consumer’s available income. Considering the high level of public deficit, the authorities could try to impose extra taxation to compensate for missed fiscal targets. The volatility of fiscal decision-taking process and the instability within government might have serious repercussions on company’s business.

OPERATIONAL RISKS

Many operations concerning broadband depend on the content supplied by international providers and the failure to renew the leases with them might result in higher churn rates due to customer’s dissatisfaction. Besides being involved in the development of the fiber optic infrastructure, which required withdrawal from credit facilities, DIGI is about to acquire an important player on Hungary market, Invitel. This acquisition will increase the financial leverage, which can affect the company’s solvability. The latest innovative path that DIGI decided to follow is the energy supply facility. This new direction intensifies the intricate nature of the business and contributes to one more risk, the increase of cost of energy supply due to its current high volatility that has already affected EBITDA in the first quarter of 2017 with EUR 7 mn.

11

Appendix 1: Glossary ANCOM – National Authority for Management and Regulation in Communications of Romania ARPU – Average Revenue Per User BSE – Bucharest Stock Exchange CAGR – Compound Annual Growth Rate CAPEX – Capital Expenditure CEO – Chief Executive Officer DESI – The Digital Economy and Society Index DTH – Direct To the Home EBIDTA – Earnings Before Interest, Depreciation, Taxes and Amortization EU –European Union EURIBOR – Euro Interbank Offer Rate ESO – Employees stock option plan FTTB – Fiber To The Building FTTH- Fiber To The Home GDP – Gross Domestic Product IPO – Initial Public Offer JD – Juris Doctor MBA – Master of Business Administration MNB – Magyar National Bank MVNO – Mobile Virtual Network Operator OPEX – Operational Expenses OTT – Other the Top Players RCS & RDS – Romanian Cable Systems & Romanian Data Systems RGU – Revenue Generating Unit ROBOR – Romanian Interbank Offer Rate SIM – Subscriber identity module UK – United Kingdom Revenue Generating Unit (RGU) - an individual service subscriber who generates recurring revenue for a company. RGU figures are often used to calculate average revenue per user. Average Revenue Per User (ARPU) - represent a measure of how much income a business generates, given the size of its customer base. The metric is calculated simply by diving the organization’s annual revenue by the number of people using the company services. CapEx – funds used by a company to acquire, upgrade and maintain physical assets such as property, industrial buildings or equipment. The greater the capital expenditure for a firm, the lower the amount of cash available to the equity shareholders after all expenses. Churn rate – the rate at which customers stop subscribing to a service Fiber To The Home (FTTH) – a form of fiber-optic communication delivery that reaches the living/working space. This kind of point-to-point Ethernet architecture is capable of delivering triple-pay services over fiber network directly from the operator’s central office. Fiber To The Building (FTTB) – represent the fiber which reaches the boundary of the building with the final connection to the individual living space being made via alternative means. Direct To Home (DTH) television is defined as the reception of satellite programming with a personal dish in an individual home. EBIDTA is essentially net income with interest, taxes, depreciation and amortization added back to it. Enterprise Value to Sales (EV/Sales) is a valuation measure that gives investors a quantifiable metric of how much it costs to purchase the company’s sales. Other The Top player (OTT) refers to online services which could substitute in some degree traditional media and telecom services.


12

Appendix 2: Balance Sheet

In millions EUR 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E

Assets

Cash and cash equivalents 12.6 50.2 54.3 49.7 14.6 16.1 20.6 24.6 29.0 32.0

Program assets and inventories

66.6 50.5 39.6 42.7 48.9 45.1 58.4 61.9 64.4 66.9

Other current assets 101.2 98.1 121.3 100.9 135.1 123.2 124.0 129.2 130.4 134.0

Property, plant and equipment

652.8 624.7 643.1 674.7 826.0 878.2 1004.0 1054.2 1106.9 1162.3

Intangible assets 169.7 168.7 199.7 205.1 206.8 215.0 264.0 274.5 285.5 296.9

Other non-current assets 35.9 41.0 53.4 54.2 8.0 52.1 52.7 52.9 52.7 52.5

Total assets 1038.8 1033.2 1111.4 1127.3 1239.5 1329.7 1523.7 1597.3 1668.9 1744.6

Liabilities

Short term loans and borrowings

158.6 11.5 45.7 63.1 44.0 75.0 51.1 53.7 56.4 63.2

Financial liabilities 48.7 44.2 49.7 30.8 32.5 23.7 18.0 17.5 17.1 16.5

Other short term liabilities 207.6 174.7 217.2 271.1 374.0 400.2 410.2 437.4 446.1 458.9

Long term loans and borrowings

468.5 638.9 652.7 624.9 665.5 657.7 869.4 902.8 953.9 1007.5

Other long term liabilities 48.7 43.1 38.8 34.6 80.9 64.0 57.5 65.7 70.4 68.6

Total liabilities 932.1 912.4 1004.1 1024.5 1196.9 1220.6 1406.2 1477.0 1543.9 1614.6

Equity

Share capital 0.1 0.1 0.1 0.1 0.1 6.9 6.9 6.9 6.9 6.9

Share premium 8.2 8.2 8.2 8.2 8.2 3.1 3.1 3.1 3.1 3.1

Treasury shares -16.7 -16.7 -16.7 -16.7 -16.7 -13.9 -13.9 -13.9 -13.9 -13.9

Reserves 74.4 54.1 45.3 31.6 9.1 46.0 44.4 45.0 46.2 46.6

Retained earnings 37.2 71.7 68.2 77.4 40.5 62.0 72.2 74.7 78.4 82.9

Non-controlling interest 3.5 3.4 2.2 2.2 1.4 5.1 4.8 4.6 4.4 4.5

Total Equity 106.7 120.8 107.3 102.8 42.6 109.2 117.5 120.3 125.1 130.0

Total liabilities and equity 1038.8 1033.2 1111.4 1127.3 1239.5 1329.7 1523.7 1597.4 1669.0 1744.6


13

Appendix 3: Income Statement

In millions EUR€ 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E

Revenue

Romania 402.4 417.8 469.8 541.8 612.7 654.4 677.7 695.4 710.1 724.2

Cable 135.8 148.9 200.8 223.7 251.2 254.1 255.9 255.7 255.5 255.1

Entertainment 194.3 198.0 198.8 207.6 214.4 223.8 231.5 239.0 245.5 252.0

Telephony 72.3 70.9 70.2 110.5 147.1 176.5 190.4 200.6 209.1 217.1

Hungary 116.4 119.0 119.1 125.9 137.9 151.7 161.0 166.2 167.7 168.0

Cable 33.6 38.6 43.9 50.5 57.5 62.7 67.5 70.3 70.4 69.4

Entertainment 71.8 68.6 65.3 67.1 72.4 81.8 85.6 87.3 88.8 90.3

Telephony 11.0 11.8 9.9 8.3 8.0 7.2 7.8 8.6 8.5 8.3

Spain and Italy 55.8 54.8 58.4 80.8 91.7 109.8 123.1 130.0 133.4 135.1

Telephony 55.8 54.8 58.4 80.8 91.7 109.8 123.1 130.0 133.4 135.1

Other revenue/income 55.6 74.8 24.0 25.3 -0.2 3.0 2.5 2.1 1.8 1.5

Eliminations of intersegment rev. -5.5 -4.8 -2.2 -2.7 -4.8 -4.2 -4.5 -4.9 -5.3 -5.7

Total Revenue 630.2 666.4 671.3 773.8 842.1 918.9 964.3 993.7 1013.0 1028.8

Operating expenses

Romania -215.8 -221.2 -291.4 -362.2 -413.4 -446.5 -468.8 -482.9 -492.5 -497.4

Hungary -82.4 -74.3 -72.3 -76.5 -86.5 -92.6 -97.2 -101.1 -103.1 -104.1

Spain and Italy -65.0 -60.1 -66.6 -75.8 -84.6 -99.4 -106.9 -111.4 -113.8 -115.2

Depreciation, amort. and impair. -211.6 -208.3 -192.1 -187.9 -176.4 -166.3 -191.3 -197.0 -204.9 -211.0

Other operating expenses -20.5 -12.1 0.0 -1.0 -7.0 -2.8 -4.0 -3.0 -3.0 -2.0

Eliminations of intersegment exp. 5.5 4.8 2.2 2.7 4.8 4.2 4.5 4.9 5.3 5.7

Total operating expenses -595.3 -576.0 -622.4 -703.4 -767.9 -807.5 -868.1 -895.3 -917.3 -929.8

Operating profit 34.9 90.4 48.9 70.4 74.2 111.4 96.2 98.4 95.6 99.0

Finance income 0.8 7.4 0.8 9.9 45.3 20.0 21.1 27.3 35.5 40.2

Finance expenses -52.8 -70.2 -61.1 -70.8 -101.5 -56.0 -62.3 -72.6 -85.2 -102.3

Profit/(Loss) before taxation -17.1 27.6 -11.4 9.5 18.0 75.4 55.0 53.1 46.0 36.9

Income tax expense/(benefit) 0.8 -7.5 5.1 -5.4 -11.3 -17.6 -7.9 -6.6 -7.4 -5.9

Net Profit/(Loss) -16.3 20.1 -6.3 4.1 6.7 57.8 47.1 46.5 38.6 31.0

In millions EUR 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E

Cash flows from operations before working capital changes

254.0 271.0 232.0 237.2 266.6 219.4 267.8 284.1 321.4 324.5

Cash flows from changes in working capital

-30.5 -18.9 -5.7 4.2 -11.3 14.5 8.5 16.0 0.3 3.0

Cash flows from operations 223.5 252.1 226.3 241.4 255.3 267.7 276.3 300.1 321.7 327.5

Interest paid -38.5 -29.6 -46.7 -44.2 -44.0 -47.8 -57.8 -65.1 -74.9 -79.0

Income tax paid -5.5 -15.3 -4.6 -5.1 -7.8 -9.2 -7.5 -5.9 -3.1 -2.2

Cash flow from operating activities 179.5 207.2 175.0 192.1 203.5 210.7 211.1 229.1 243.7 246.3

Cash flow used in investing activities -274.5 -174.6 -204.4 -171.6 -216.0 -235.8 -255.8 -273.8 -289.8 -303.8

Cash flows from financing activities 30.5 5.8 33.6 -25.7 -21.8 -17.2 200.0 -27.0 -30.0 -33.0

Net increase (decrease) in cash and cash equivalents

-64.5 38.4 4.1 -5.2 -34.2 1.5 4.5 4.0 4.4 3.0

Cash and cash equivalents at the beginning of the period

75.2 12.6 50.2 54.3 -49.7 14.6 16.1 20.6 24.6 29.0

Effect of exchange rate fluctuation on cash and cash equivalent held

1.9 -0.7 - 0.5 -0.8 - - - - -

Cash and cash equivalents at the closing of the period

12.6 50.2 54.3 49.7 14.6 16.1 20.6 24.6 29.0 32.0

Basic Financials 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E

Liquidity Analysis

Current Ratio 0.43 0.86 0.69 0.53 0.44 0.37 0.42 0.42 0.43 0.43

Quick Ratio 0.27 0.62 0.56 0.41 0.33 0.28 0.30 0.30 0.31 0.31

Profitability Analysis

Net Profit Margin -2.59% 3.20% -0.95% 0.54% 0.79% 6.31% 4.89% 4.69% 3.82% 3.02%

ROA -1.57% 1.95% -0.57% 0.36% 0.54% 4.35% 3.09% 2.91% 2.31% 1.78%

Activity Analysis

Fixed Asset Turnover 1.43 1.51 1.47 1.55 1.30 1.29 1.18 1.16 1.12 1.08

Credit Analysis

Net Leverage ratio 2.54 2.32 2.84 2.74 2.93 2.71 3.23 3.26 3.38 3.46

Net interest expense 38.5 29.6 46.7 44.2 44.0 47.8 57.8 65.1 74.9 79.0

Interest coverage ratio 6.40 8.82 4.94 5.39 5.87 5.87 5.04 4.58 4.05 3.95

Financial leverage ratio

9.74 8.55 10.36 10.97 29.10 12.18 12.97 13.28 13.34 13.42



14

Appendix 4: Cash Flow

E E E E

E E E E E E



Source: Team Analysis Source: Team Analysis

15

Appendix 5: DuPont Analysis Components 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E

Tax Burden 95.3% 72.8% 55.3% 43.2% 37.2% 76.7% 85.7% 87.6% 84.0% 84.0%

Interest Burden -48.9% 30.5% -23.3% 13.5% 24.3% 67.7% 57.1% 53.9% 48.1% 37.3%

Return to Sales 5.5% 14.4% 7.4% 9.4% 8.8% 12.2% 10.0% 9.9% 9.5% 9.6%

Asset Turnover 60.6% 60.7% 59.5% 66.8% 68.0% 68.9% 63.2% 62.1% 60.6% 58.9%

Leverage ratio 10.07 8.80 10.57 11.21 30.08 12.78 13.52 13.80 13.83 13.90

ROE -15.8% 17.1% -6.0% 4.1% 16.3% 55.5% 41.8% 40.2% 32.0% 24.7%

Appendix 6: Equity and Liability Structure 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E

Equity 106.7 120.8 107.3 102.8 42.6 109.2 117.5 120.3 125.1 130.0

Short Term Liabilities 517.2 682.0 691.5 659.5 746.4 721.7 926.9 968.5 1024.4 1076.0

Long Term Liabilities 414.9 230.4 312.6 365.0 450.5 498.9 479.3 508.5 519.5 538.6

Total Debt 932.1 912.4 1004.1 1024.5 1196.9 1220.6 1406.2 1477.0 1543.9 1614.6

D/E 8.74 7.55 9.36 9.97 28.10 11.18 11.97 12.28 12.34 12.42

-50.00%

0.00%

50.00%

100.00%

150.00%

200.00%

2012 2013 2014 2015 2016 2017 2018 2019 2020

DuPont Analysis

Return on equity Tax Burden Interest Burden

Return to Sales Asset Turnover Leverage ratio (log)

8%

92%

Capital Structure 2017

Equity Debt

95 93 60

150

-

350

13% 12%

8%

20%

0%

47%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2018 2019 2020 2021 2022 2023

-

50

100

150

200

250

300

350

400

Debt Maturity

Total % of Total

Macroeconomical environmentInternal metrics of

performance in telecom

Expansion of product scope, RGU

Average revenue generating unit, ARPU

Telecom Industry Performance in UE

One factor that we consider correlated with revenue evolution is GDP. For the purpose of forecasting revenues, we used growth rates of GDP for every country DIGI carries its operations and weighted it with depending on the correlation between GDP of each country and DIGI’s revenues on each markets and business lines.

The next factor that we find extremely important is internal performance of the company. In telecom industry the most popular metrics are RGU, revenue generating unit, and ARPU, average revenue per unit. We forecast these indicators using a geometrical average growth of past performance and calculate growth rates of each of them relative to business lines and geographical regions. We consider the growth rate of internal performance the sum between these two factors. Afterwards, we weighted this factor according to the correlation with company’s revenues, which we consider equal to one, meaning perfectly correlated. The third factor is industry revenues relative to each business line and region. We considered the median of peer’s revenues from CEE and WE and weighted it similar to the other factors, depending on correlations computed between industry’s revenues and DIGI’s revenues. For Romania and Hungary, we used industry revenues as 85% share of CEE peers and 15% share of WE peers.



16

Appendix 7: Growth Rate

Growth rates

2017E 2018E 2019E 2020E 2021E Cable

RO 1.15% 0.72% -0.07% -0.10% -0.15% HU 1.53% 7.76% 4.13% 0.17% -1.49%

Entertainment RO 4.40% 3.41% 3.27% 2.69% 2.67%

HU 6.45% 4.68% 1.95% 1.67% 1.70% Telephony

RO 8.48% 7.84% 5.37% 4.27% 3.80%

HU -4.20% 8.68% 9.62% -1.03% -2.16% ES 13.44% 11.89% 4.17% 1.86% 1.15% IT 38.55% 13.45% 13.98% 6.34% 2.04%

Correlation(GDP. DIGI’S revenues)

Cable Entertainment Telephony

RO 0.9227 0.8817 0.7691

HU 0.4269 -0.3474 -0.4450

ES 0.7630

IT 0.5675

Correlation(Industry revenues, DIGI’S Revenues)

Cable Entertainment Telephony

RO -0.9697 0.4696 0.7216

HU -0.9067 0.7702 -0.8939

ES 0.5544

IT 0.2676

0%

50%

100%

150%

200%

0%

2%

4%

6%

8%

10%

2013 2014 2015 2016 2017

Relationship between GDP and revenues in Romania

GDP Cable Entertainment Telephony

0%

20%

40%

60%

80%

100%

120%

140%

160%

-2%

-1%

0%

1%

2%

3%

4%

2013 2014 2015 2016 2017

Relationship between GDP and revenues in Spain

GDP Telephony

-20%

-10%

0%

10%

20%

2013 2014 2015 2016 2017

Relationship between GDP and revenues in Hungary

GDP Cable

Entertainment Telephony

0%

50%

100%

150%

200%

250%

-2%

-1%

0%

1%

2%

2013 2014 2015 2016 2017

Relationship between GDP and revenues in Italy

GDP Telephony

E

E

E E







Note: The telephony variable was projected on the secondary axis, on graphs for Romania, Spain, and Italy 17

RGUs growth rates

2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E

Cable

RO 7.54% 8.97% 7.74% 7.03% 7.04% 5.13% 3.59% 3.50% 3.30%

HU 9.30% 5.47% 10.09% 12.04% 9.58% 29.10% 16.60% 3.85% 1.07%

Entertainment

RO -0.21% 1.59% 2.50% 2.91% 3.11% 2.38% 2.16% 1.00% 0.74%

HU -1.06% -0.54% 1.89% 3.31% 2.95% 8.99% 0.94% 1.12% 1.04%

Telephony

RO -1.00% 7.63% 17.06% 10.22% 2.70% 5.36% 3.21% 0.92% 0.24%

HU 7.67% 3.56% 7.19% 7.00% 6.08% 48.07% 25.31% 0.83% -0.76%

ES 48.38% 48.42% 20.49% -17.14% 47.13% 29.45% 11.00% 5.00% 3.00%

IT 25.00% -15.00% 29.41% 30.30% 90.70% 32.08% 33.50% 16.00% 5.00%

ARPUs Growth rates

2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E

Cable and Satellite

RO -1.33% 0.39% -1.54% -1.75% -0.99% 0.60% -0.20% 0.40% 0.40%

HU -4.08% -2.58% 1.59% 1.30% 1.57% 1.85% 3.11% 3.28% 0.88%

Entertainment

RO 0.12% 0.12% 1.96% 0.80% 1.13% 0.50% 0.99% 0.90% 1.09%

HU -3.40% -2.92% 0.73% 4.08% 11.31% 0.17% 0.43% -0.54% -0.39%

Telephony

RO -4.85% -1.62% 46.99% 18.19% 14.40% 10.72% 5.20% 4.31% 3.41%

HU -3.23% -20.52% -20.54% -9.92% -10.34% -11.54% 13.80% 4.53% 2.45%

ES -28.93% -23.50% 30.37% 3.39% -9.33% 4.09% -1.09% -2.19% -2.19%

IT -31.16% -21.62% 49.62% -3.46% -0.92% -1.01% -1.01% -1.53% -0.59%



18

Appendix 8: Peer Details

Peer Name Financial Leverage

Current Ration

Gross Fixed Asset

Turnover

EBITDA to Net Sales

ROA ROE EBITDA

Sector Median 2.76 1.03 1.04 22.22 2.77% 7.63% 20.705.529

DIGI COMMUNICATIONS NV 11.78 0.41 1.29 34.00 4.35% 55.53% 80.503.000

UNITED INTERNET AG-REG SHARE

2.12 0.52 52.94 12.08% 27.86% 558.113.024

HELLENIC TELECOMMUN ORGANIZA

3.07 0.87 32.02 1.87% 5.79% 317.400.000

PROXIMUS 2.94 0.78 31.99 6.09% 18.00% 468.000.000

TELEKOM AUSTRIA AG 3.28 0.99 0.37 24.88 4.42% 12.48% 288.448.000

TDC A/S 2.82 0.36 0.48 35.33 2.44% 5.63% 239.551.110

MILLICOM INTL CELLULAR S.A.

3.17 0.88 0.60 36.95 0.89% 2.71% 335.409.134

FREENET AG 3.18 1.11 12.62 7.58% 24.00% 111.095.000

ILIAD SA 2.67 0.36 35.43 5.68% 14.68% 872.915.968

TELE2 AB-B SHS 2.32 1.94 22.22 1.07% 2.40% 150.745.534

TELEFONICA DEUTSCHLAND HOLDI

1.70 0.65 24.11 -2.23% -3.67% 446.000.000

0.00

5.00

10.00

15.00

20.00

25.00

30.00

35.00

FinancialLeverage

Current Ration Gross FixedAsset Turnover

EBITDA to NetSales

INDUSTRY COMPARABILITY ANALYSIS

DIGI COMMUNICATIONS NV Sector Median

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

60.00%

ROA ROE

PERFORMANCE RATIOS

DIGI COMMUNICATIONS NV Sector Median

Ticker Name Country EV/Sales

SKY LN SKY PLC GB 1.80

DKSH SW DKSH HOLDING AG CH 0.47

TFI FP TELEVISION FRANCAISE (T.F.1) FR 1.05

SAA1V FH SANOMA OYJ FI 1.65

MTSS RM MOBILE TELESYSTEMS PJSC RU 1.84

AFKS RM SISTEMA PJSC FC RU 0.92

RTKM RM ROSTELECOM PJSC RU 0.92

PLY PW PLAY COMMUNICATIONS SA PL 2.20

PROX BB PROXIMUS BE 1.96

MMB FP LAGARDERE SCA FR 0.71

TCH FP TECHNICOLOR - REGR FR 0.46

PUB FP PUBLICIS GROUPE FR 1.53

MS IM MEDIASET SPA IT 1.60

RTL LX RTL GROUP LU 1.84

DOHOL TI DOGAN SIRKETLER GRUBU HLDGS TR 0.49

MTELEKOM HB MAGYAR TELEKOM TELECOMMUNICA HU 1.50

TCELL TI TURKCELL ILETISIM HIZMET AS TR 2.16

OPL PW ORANGE POLSKA SA PL 1.29

AGO PW AGORA SA PL 0.57

TTKOM TI TURK TELEKOMUNIKASYON AS TR 1.80

ATG PW ATM GRUPA SA PL 2.18

TLSG SV TELEKOM SLOVENIJE DD SI 1.18

NET PW NETIA SA PL 1.56

HTRA CZ HRVATSKI TELEKOM DD HR 1.36

CPS PW CYFROWY POLSAT SA PL 2.60

MFON RM MEGAFON PJSC RU 1.69

MTSS RM MOBILE TELESYSTEMS PJSC RU 1.84

HTO GA HELLENIC TELECOMMUN ORGANIZA GR 1.83

TKA AV TELEKOM AUSTRIA AG AT 1.85

MIICF US MILLICOM INTL CELLULAR S.A. LU 1.70

FNTN GR FREENET AG DE 1.59

O2D GR TELEFONICA DEUTSCHLAND DE 1.90

Cable WE Median: 1.35 Mean: 1.24

Business Line CEE WE Final EV/Sales

Telecom 1.69 1.83 1.71

Cable 1.51 1.35 1.48

Entertainment 1.40 1.57 1.42


19

Appendix 9: EV to Sales

Cable CEE Median: 1.51 Mean: 1.54

Entertainment WE Median: 1.57

Mean: 1.35

Entertainment CEE Median: 1.40

Mean: 1.30

Telecom CEE Median: 1.69

Mean: 1.77

Telecom WE Median: 1.81 Mean: 1.77

For obtaining an accurate EV/Sales multiple for DIGI, we identified relevant peers per each business line from WE and CEE. The peers were selected after a careful analysis of their operating activities to be similar to the specific business line and also a revenue proximity was taken into account. The median values of EV/Sales per business line and geographical region was computed. Afterwards, the final EV/Sales was obtained by weighting CEE with 85% and WE with 15%. We chose these weights because we estimate a target revenue proportion of CEE and WE to be 85% and 15% respectively (possible expansion on Western markets as MNVO players, raising tariffs on the existing WE markets).

Beta unlevered Debt/Equity Effective Tax rate Beta relevered

0.46 594% 48% 1.87


20

Appendix 10: Beta Calculations

Ticker Name Country Beta D/E Effective Tax Rate

Unlevered Beta

UTDI GR UNITED INTERNET AG-REG SHARE DE 0.74 48.95% 11.90% 0.52

SKY LN SKY PLC GB 0.58 214.57% 7.25% 0.19

PSM GR PROSIEBENSAT.1 MEDIA SE DE 0.84 327.79% 3.79% 0.20

DKSH SW DKSH HOLDING AG CH 1.38 6.68% 28.83% 1.32

ITV LN ITV PLC GB 0.43 254.09% 20.46% 0.14

TFI FP TELEVISION FRANCAISE (T.F.1) FR 1.20 16.47% 27.20% 1.07

SAA1V FH SANOMA OYJ FI 1.24 102.00% 25.24% 0.70

DEC FP JCDECAUX SA FR 1.14 60.33% 35.63% 0.82

SPR GR AXEL SPRINGER SE DE 0.72 58.96% 42.65% 0.54

TEL2B SS TELE2 AB-B SHS SE 0.71 72.77% 26.96% 0.47

MTSS RM MOBILE TELESYSTEMS PJSC RU 0.81 229.88% 23.42% 0.29

AFKS RM SISTEMA PJSC FC RU 0.99 301.28% 32.02% 0.32

RTKM RM ROSTELECOM PJSC RU 0.67 82.52% 23.54% 0.41

WPL PW WIRTUALNA POLSKA HOLDING SA PL 0.74 51.94% 22.87% 0.53

PROX BB PROXIMUS BE 0.82 75.01% 30.48% 0.54

MMB FP LAGARDERE SCA FR 0.82 133.63% 27.87% 0.42

PUB FP PUBLICIS GROUPE FR 0.83 55.84% 27.76% 0.59

RTL LX RTL GROUP LU 0.59 38.83% 31.25% 0.47

MTELEKOM HB MAGYAR TELEKOM TELECOMMUNICA HU 0.52 61.20% 21.54% 0.35

TCELL TI TURKCELL ILETISIM HIZMET AS TR 1.21 80.09% 20.76% 0.74

TELEC CP O2 CZECH REPUBLIC AS CZ 0.79 67.76% 20.76% 0.51

OPL PW ORANGE POLSKA SA PL 0.99 70.47% 30.00% 0.66

AGO PW AGORA SA PL -0.12 8.65% 76.56% -0.11

TTKOM TI TURK TELEKOMUNIKASYON AS TR 1.05 331.24% 35.38% 0.34

YNDX US YANDEX NV-A RU 1.27 20.28% 50.61% 1.15

ATG PW ATM GRUPA SA PL 0.57 10.21% 18.94% 0.52

NET PW NETIA SA PL 0.62 17.53% 28.45% 0.55

HTRA CZ HRVATSKI TELEKOM DD HR 0.25 2.75% 18.25% 0.25

CPS PW CYFROWY POLSAT SA PL 0.50 95.49% 18.75% 0.28

MFON RM MEGAFON PJSC RU 0.75 163.80% 22.53% 0.33

HTO GA HELLENIC TELECOMMUN ORGANIZA GR 0.84 73.16% 47.32% 0.61

TKA AV TELEKOM AUSTRIA AG AT 0.70 86.21% 8.64% 0.39

TDC DC TDC A/S DK 1.17 87.12% 48.54% 0.81

MIICF US MILLICOM INTL CELLULAR S.A. LU 1.15 135.58% 97.73% 1.12

FNTN GR FREENET AG DE 0.71 120.68% 2.72% 0.33

ILD FP ILIAD SA FR 0.79 60.12% 39.35% 0.58

Cable WE Median: 0.53 Mean: 0.60

Cable CEE Median: 0.37 Mean: 0.39

Entertainment WE

Median: 0.50 Mean: 0.50

Entertainment CEE

Median: 0.43 Mean: 0.41

Telecom CEE Median: 0.43

Mean: 0.51

Telecom WE Median: 0.59 Mean: 0.64

Business Lines CEE WE Beta Weights

Telecom 0.51 0.64 0.53 35%

Cable 0.39 0.60 0.42 35%

Entertainment 0.41 0.50 0.43 30%

GDP Growth Weights GDP x W

Romania 3.28% 72% 2.36%

Hungary 2.20% 16% 0.35%

Spain 1.68% 10% 0.17%

Italy 0.94% 2% 0.02%

2.88%


21

Appendix 11: WACC & FCFF WACC 2017E 2018E 2019E 2020E 2021E

Risk free rate 4.53% 4.80% 5.00% 5.20% 5.50%

Beta 1.87 1.87 1.87 1.87 1.87

Market risk premium 7.62% 7.62% 7.62% 7.62% 7.62%

Cost of Equity 18.75% 19.03% 19.23% 19.43% 19.73%

Interest expenses 47.8 57.8 65.1 74.9 79

Borrowings 732.67 920.48 956.45 1010.30 1070.63

Cost of Debt 6.52% 6.28% 6.81% 7.41% 7.38%

Tc 16% 16% 16% 16% 16%

Debt % 80% 80% 80% 80% 80%

Equity % 20% 20% 20% 20% 20%

WACC 8.13% 8.03% 8.42% 8.87% 8.90%

FCFF 2017E 2018E 2019E 2020E 2021E

EBITDA 281 291 298 304 312

EBITDA Margin 29.9% 29.6% 29.2% 28.9% 29.2%

D&A 166 191 197 205 211

EBIT 114 100 101 99 101

EBIT Margin 12.2% 10.2% 9.9% 9.4% 9.4%

Tax rate 16% 16% 16% 16% 16%

EBIT x (1-Tax rate) 96 84 85 83 85

CapEx 240 220 205 190 183

WCInv 315 310.03 296.82 278.23 264.74

Change in WC 41.2 4.5 13.2 18.6 13.5

Litigation loss 3

FCFF 18.95 47.98 63.91 79.09 99.34

Discount factor 1 0.93 0.85 0.78 0.71

PV of FCFF -18.95 44.41 54.37 61.30 70.62

Equity Value Structure

PV 2017-2021 211.8

TV Growth Rate 2.9%

PV of TV 1206.1

Enterprise Value 1417.9

Net Debt 759.8

Minorities 5.1

Equity Value 653

Fair Value/Share EUR 6.53

Discount for class B shares 15%

12m Price RON 30.71


0.00% 5.00% 10.00% 15.00%20.00%25.00%30.00%35.00%

Entertainment Sector

Cable&Satelite Sector

Net Debt

Telecom Sector

Cost of Equity

Exchange Rate

Minor Share Holders

Sensitivity Analysis - SOTP

0.00% 10.00% 20.00% 30.00% 40.00% 50.00% 60.00%

Net Debt

GDP RO

GDP HU

GDP ES

Minor Share Holders

GDP IT

Sensitivity Analysis - FCFF



22

Appendix 12: Monte Carlo Simulation We performed a Monte Carlo Simulation (1 million trials) to analyze the impact of variations in key drivers for the 12-month target price. Given that we employed two different models in order to achieve a target price. we ran the simulation both for SOTP and FCFF. For SOTP. we considered as key factors: the sector growth. the company’s net debt. and the cost of equity. The results of the simulation show a probability of 81% supporting the SELL recommendation.

For FCFF. we assumed changes in the terminal growth rates of GDP of each country (Romania. Hungary. Spain. and Italy) where DIGI operates and the net debt. After we executed the simulation. we obtained a 91% probability of achieving a target price above 10% downside. reinforcing therefore our SELL decision.

Simulations Stats SOTP Simulation Stats FCFF

Trials 1000000 Trials 1000000

Base Case 29.98 Base Case 30.92

Mean 28.95 Mean 29.87

Median 28.96 Median 29.93

Standard Deviation 4.41 Standard Deviation 1.50


23

Appendix 13: Shareholder Structure

100%

control 56.95 %

ownership

87.1 % ownership

DIGI

Class A shares (66% of total)

RCS Management(57,866,545 shares)

Zoltan Teszari(49,100 shares)

Class B shares (34% of total)

Institutional Shareholders

(6.5% of total shares)

Other Shareholders(29.5% of total

shares)

Legend

direct control

indirect control

ownership

administrator

Administrator

in other 42

companies

Non-Executive Director

Managing Director of DIGI Hungary

Non-Executive Director

Managing Director of DIGI Spain

Independent Non-executive

Director

Independent Non-executive

Director

Executive Director

CEO

President of the Board

DIGI’S Board of Directors

RCS Management

Zoltan TeszariDIGI Group

Sergiu Bulgac

Valentin Popoviciu

Bogdan Ciobotaru

Piort Rymaszewski

Marius Varzariu

Sambor Ryszka

Ioan Bendei

Mihai Dinei

RCS&RDS

Senior Management of RCS&RDS

Smaranda Streanga co- Chief Financial Officer

Dan Ionita co- Chief Financial Officer

Silviu Georgescu Chief Technical Officer

Emil Grecu Technical Officer

Emil Jugaru Head of Sales

Dragos Spataru Head of Fixed Telephony and Mobile Communications Division

Ovidiu Bejan Commercial Director for Mobile Communications

Mihaela Toroman Accounts Manager and Treasurer

Florin Ungureanu Managing Director of Digi Hungary

Dragos Chivu Managing Director of Digi Italy

Source: Team Analysis. Every principle followed by the Group accounts for one point and the overall score is the sum of obtained points divided to the total principles required to be followed by Corporate Governance as stated in Corporate Governance Topic, CFA INSTITUTE Program Curriculum 2016, Level II, Volume 3.

24

Appendix 14: Governance Appraisal CORPORATE GOVERNANCE PRINCIPLES THE GROUP

BOARD STRUCTURE 1/5

The Board should be composed of at least a majority of independent members;

Former employment with the company indicates lack of independence;

Separated positions for the chief executive and chairman of the board;

Personal relationships and affiliations should be avoided;

Directors should not serve on more than four Boards of public companies in addition to the Board;

Corporate governance best practices support annual election of directors as being in the best interest of investors;

The group has only two independent members in the Board of Directors out of. less than recommended;

The Company does not comply with 12 principles from Dutch Corporate Governance Code.

Almost all board members have had previously management positions within the group (Sergiu Bulgac was CEO at RCS&RDS and Valentin Popoviciu has been Business Development Manager in RCS&RDS);

The CEO is Sergiu Bulgac. and the Chairman of the Board is Zoltan Teszari.

The directors are elected for 3 years and the next election will be held in 2020;

QUALIFICATIONS OF THE BOARD 1/2

The Board seeks members from diverse professional and personal backgrounds who combine a broad spectrum of experience;

The members should possess a reputation for integrity and not impair the Group’s reputation;

The members of the Board have relevant financial background;

The Vice-President and Executive Director of RCS&RDS has been accused of bribery and money laundering. This might cause damage to the reputation of the company and consequently the stock price. directly affecting the shareholders;

COMMITEES 2/3

The Board will have at all times an Audit Committee. a Compensation Committee and a Corporate Governance Committee;

Committees will consist solely of independent directors satisfying applicable legal. regulatory and stock exchange requirements;

Compensation should include incentives to meet and exceed corporate long-term goals;

The Board appoints two committees. Audit and Compensation;

Committees consists of Non-Executive Directors. half of which are independent. in line with Dutch regulations;

All directors are entitled to fixed compensations of EUR 100.000 and may receive grant sunder stock-option plans related to the performance of the Group;

DISCLOSURE OF INFORMATION 2/4

Companies must supply a statement of their corporate governance policies on their website or as part of investor information packets;

Provide good quality financial reporting through adequate provisions for lawsuits and other contingencies;

Minimal use of off-balance sheet in financial statements;

The investor should be made aware of insider transactions that are not fully disclosing the effects on the company;

DIGI has a section called Corporate Governance on their website which encloses relevant documents regarding their policies. However. there is no information regarding Corporate Social Responsibility;

The Group has not accounted for any provision for lawsuits;

DIGI did not make any use of off-balance sheet items;

The company’s website discloses detailed policy on insider trading;

OVERAL SCORE 6/14 42.86% achievement

* We computed level of risks for each business line, C-Cable, E-entertainment, and T-telephony, relative to Porter’s 5 forces, 0 being risk free and 1 being the riskier. ** We assigned points depending on the number of positive and negative forces. We left blank spaces where the force did not have impact on a given business line. *** The overall score was computed by equally weighting each business line scores.

Source: Team Analysis 25

Appendix 15: Porter`s Analysis

Porter’s 5 forces C E T ALL

Competition 0.25 0.25 0.25

0.25

Competitive advantage achieved through development of infrastructure

+ + +

Low prices business model + + + The main competitors have mother companies that serve as a backup in

times of crisis - - -

Acquisition of INVITEL in Hungary will increase market share + + +

New Entrants 0.1 0.2 0.3 0.2

Entry barriers as every current provider has an already developed infrastructure

+ +

There is little possibility for product differentiation +

The business is expensive + +

There is little customer loyalty ( from survey) +

Substitutes 0.1 0.5 0.5 0.37 Threat of alternative providers of content like Netflix and voice like WhatsApp

- -

Multi-play packages + + +

Buyers 0.66 0.33 1 0.67 Price Sensitivity - - -

Multiple Telecom operators - Low switching cost - -

Suppliers 0.1 0.8 0.8 0.57 Big dependence on certain content providers (or connections provider) - -

DIGI has their own fiber +

Industry Rivalry

Threat of new entrants

Threat of SubstitutesBargaining power of

buyers

Bargaining power ofsuppliers

OVERALL Cable Entertainment Telephony



26

Appendix 16: SWOT Analysis

Appendix 17: Risk Matrix


27

Appendix 18: Survey

Source: Team Analysis & Netograf & DIGI Website

28

Appendix 19: Internet Coverage and Speed

.

Legend:

Digi Mobil 3G Data Coverage

Digi Mobil 4G 2600MHz Coverage

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

2012 2013 2014 2015 2016 2017

Capital Formation RO Consumption RO GDP RO

74%

79%

84%

89%

94%

99%

104%

5/16/2017 6/16/2017 7/16/2017 8/16/2017 9/16/2017 10/16/2017 11/16/2017 12/16/2017 1/16/2018 2/16/2018

DAILY AVERAGE RETURN

DIGI BET

E

E E

E E E E E E E E E E

Source: Eurostat & Team Analysis & BSE 29

Appendix 20: Macroeconomic and Financial Context

0

5

10

15

20

25

2012 2013 2014 2015 2016 2017

MIL

LIO

NS

Population RO Population HU

-

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

2012 2013 2014 2015 2016 2017

Consumption HU GDP HU Capital Formation HU

30

Appendix 21: References DIGI’s Material and Resources

http://www.digi-communications.ro DIGI Communications N.V Official Website

DIGI Communications N.V. IPO Prospectus, 2017.

DIGI Communications N.V Secured notes due in 2023 Prospectus, 2016

Company, quarterly, annual, and current reports. DIGI Communication N.V Official Website. Articles and Publications

Magyar telekom roadshow presentions 2nd quarter 2017, Magyar Telekom Official Website, www.telecom.hu

CFA Romania Macroeconomic Confidence Index, December 2017, CFA Society Romania Official Website, www.cfasociety.org/romania

CFA Book Level 1, Financial Statement Analysis, 2018.

CFA Book Level 2, Volume 3&4 , Valuation and Corporate Governance Chapters,2016.

Fitch Ratings, Romania - Full Rating Report, January 19. 2018

Metric Transformations in Telecommunications, ey.com/Publication, 2015

Over-the-Top players (OTTs), IMCO Committee, European Parliament, 2016.

https://www.mckinsey.com/industries/telecommunications , McKinsey&Company Telecommunications insights, January 2018

National Bank of Romania, Mugur Isarescu. Press conference from February 9, 2018 Data sources

www.bnr.ro, National Bank of Romania Official Website

www.imf.org International Monetary Fund Official Website

www.statista.com, The portal for statistics

www.ec.europa.eu/Eurostat, Eurostat Official Website

www.mnb.hu/eu, Magyar National Bank

www.ecb.europa.eu, European Central Bank Official Website

www.ancom.org.ro, National Authority for Telecommunication Industry Administration and Regulation Official Website

www.bvb.ro, Bucharest Stock Exchange Market Official Website

www.ine.es/en/welcome.shtml , Spanish Statistical Office Official Website

www.istat.it/en/, Italian National Institutes of Statistics Official Website

Bloomberg data

www.pages.stern.nyu.edu/~adamodar/ , Current Data, last update 5th January 2018

www.markets.ft.com/data/equities/tearsheet/profile?s=DIGI:BUH 16.02.2018

www.netograf.ro, Test Your Internet Service, website by ANCOM

http://www.digi-communications.ro/

http://www.digi-communications.ro/en/investor-relations/shares/current-reports/digi-current-report-invitel-acquisition

http://www.digi-communications.ro/en/investor-relations/shares/current-reports/digi-current-report-invitel-acquisition

http://www.cfasociety.org/romania

https://www.mckinsey.com/industries/telecommunications

http://www.bnr.ro/

http://www.imf.org/

http://www.statista.com/

http://www.ec.europa.eu/Eurostat

http://www.mnb.hu/eu

http://www.ecb.europa.eu/

http://www.ancom.org.ro/

http://www.bvb.ro/

http://www.ine.es/en/welcome.shtml

http://www.istat.it/en/

http://pages.stern.nyu.edu/~adamodar/

http://www.markets.ft.com/data/equities/tearsheet/profile?s=DIGI:BUH

http://www.netograf.ro/

Disclosures: Ownership and material conflicts of interest:

The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation:

Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director:

The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company. Market making:

The author(s) does not act as a market maker in the subject company’s securities. Disclaimer:

The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Society of Romania, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.

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