CFA Institute Research Challenge

Hosted in
CFA Society in Romania
Babes-Bolyai University
Cluj-Napoca
 SUMMARY HIGHLIGHTS
DIGI Communications N.V. (“DIGI”) is a We issue a SELL recommendation on DIGI with a 1-year target price of RON
telecommunication services provider in 30.20 per class B share, representing a 17.15% downside from its February 16,
Romania and Hungary and a mobile virtual 2018 closing price of RON 36.45. Our target price is derived by using a mix of
network operator (“MVNO”) in Spain and the Free Cash Flow to Firm Model (“FCFF”) and the Sum-of-the-Parts (“SOTP”)
Italy. approach based on Enterprise-Value-to-Sales multiple, attributing 30% and
Figure 1. Market Data Class B 70% weighting respectively to each methodology. Our recommendation is
based on the following key drivers:
(RON) Shares
Closing Price (February 16, 2018) 36.45 Increasing interest rates threaten DIGI’s cost of debt
52 weeks high 43.6 Over the last quarters, Romania scored significant economic growth leaving in
52 weeks low 30.3 the shade other European Union (“EU”) economies. This performance
Trading Volume (6mn) 2,828,870 impelled warnings from economists pointing to the need for monetary
tightening. Recently, the National Bank of Romania (“NBR”) raised the
Outstanding Shares (mn) 100
reference interest rate to 2.25% and is expected to increase it further to avoid
Market Cap. (mn) 3,645 an economic turmoil. As DIGI has the highest Debt/Equity ratio compared to
P/E (Price to Earnings) 19.05 its Central and Eastern Europe (“CEE”) peers, interest rates evolution is highly
Source: BSE important for DIGI’s financial health.
Over-the-top (“OTT”) players take over in a digital world

Figure 2 We live in a world shaped by technological advances. The number of

February 16, 2018 customers using digital platforms as a means of communicating will skyrocket
Valuation Date
globally. Telecom operators can no longer control customer interface, and
Methodology Weight Price
resume at being the pipe through which the Internet moves. DIGI is not an
FCFF 30% 30.71 exception and it will inevitably enter in the race to either compete or partner
SOTP 70% 29.98 with OTT players. Regardless of which solution will be chosen, it will be
12m Target Price 30.20 negatively translated into DIGI’s financials.
Downside vs last Struggling to preserve its price sensitive customer
-17.15%
close base
Source: Team Analysis
Our market study reveals that Romanian customers prefer
Figure 3 DIGI solely due to its very low prices. This is a very
Key Numbers 2017E 2018E 2019E 2020E 2021E expensive long-term strategy for any company, let alone a
Revenue (mn) 916,42 962,34 992,09 1.011,67 1.027,80 company that is as levered as DIGI. The time in which the
company will start raising up its prices is not so far away.
EBIDTA (mn) 286,43 327,80 325,90 338,27 354,07 This will inevitably cause many customers to prefer other
EBIDTA Margin 30,61% 30,29% 30,08% 30,00% 30,36% operators that provide better-quality services and loyalty
CAPEX (mn) 240 220 205 190 183 promotional offers.
Net Debt (mn) 759,77 940,58 974,15 1025,88 1078,69
Poor ethical conduct reflects negatively on investor’s
Debt/Equity 11,18 11,97 12,28 12,34 12,42 confidence
Source: Team Analysis & Company`s Financials
Although we don’t live in an Adam Smith’s economy and
Figure 4
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.

Source: Team Analysis & BSE

1
 Figure 5 BUSINESS DESCRIPTION
IPO DETAILS DIGI is a limited liability telecommunication company incorporated under the
Date May-17 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
Shares 23.9 mn
TV, fixed and mobile broadband, fixed and mobile telecommunication and
Stake 25.60% broadcast of their own channels through DIGI TV. The services are expanded on
Price range RON 38-56 the company’s core markets, Romania and Hungary. Additionally, DIGI offers
Final Price RON 40 mobile services as an MVNO, to Romanian communities in Spain and Italy. The
company achieved an organic growth by expanding its customer base through
Market Cap: 1.156 mn
ascending RGUs, and inorganic growth through mergers and acquisitions
Source: DIGI IPO Prospectus performed in its core markets.
Figure 6: Shareholders Structure
Freshly listed company
On May 16, 2017 the company went public on BSE offering 23,918,519 shares at a
Nominal
Class B share offer price of RON 40. Since then the price had a downside of 11%. The most
Value
€ 0.01 Shares significant events during the last year were anticorruption investigation
34%
conducted by National Anticorruption Directorate, signing of a share purchase
Class A agreement for the acquisition of a Hungarian competitor, Invitel, admission of
shares the Company’s Senior Secured Notes on Irish Stock Exchange.
66%
SHAREHOLDERS STRUCTURE
Nominal
Value The market capitalization of EUR 3,645 mn consists of 1 mn shares divided into
€ 0.1 Class A shares and Class B shares. This amounts to 34,243,972 common shares
Class A shares Class B Shares listed on BSE. Each Class A share accounts for ten voting rights and a Class B share
Source: BSE & Team Analysis for one. Concerning the dividend distribution, all shares are ranked with equal
remuneration irrespective of the class or nominal value. The main shareholder,
Figure 7
Zoltan Teszari, holds directly 3.5% of Class A shares and indirectly the rest of Class
Market Cap. RON 3,645 mn
A shares, as major shareholder of RCS Management, whose holdings represent
Common Stock 34,243,972 shares 62% of the economic interest in the Company.
Institutional 2,240,000 shares (float of
Owners 6.5%) COMPANY’S MANAGEMENT
Top 7
The Board of Directors is chaired by the President, who founded the company.
SEB 2.69%
The Board consists of the CEO, an Executive Director and four Non-Executive
Erste Group 0.86%
Directors, out of whom two are the Managing Directors of DIGI Hungary and
East Capital AM 0.77%
Spain respectively. Almost all the members have a financial background based on
Conseq Finance 0.70%
their studies and work experience. The corporate governance structure features
Raiffeisen Bank 0.42%
two independent directors (less than 2/3 of the Board, as recommended by BSE
Source: BSE & Team Analysis
Corporate Governance Code). RCS&RDS’ board consists of members from the
Figure 8: Ultimate Beneficiary 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
DIGI were included in our Corporate Governance Appraisal (Appendix 14).
62 % 56.95 % CORPORATE GOVERNANCE
ownership ownership
The Non-Executive Members are elected and distributed into two committees,
Remuneration and Audit, which are both chaired by the President of the Board
RCS Management Zoltan Teszari of Directors. Usually Board members are appointed for three years. The next
(57,866,545 shares) (49,100 shares) General Meeting for the appointment of new members will take place in 2020.
87.1 % The director’s compensation is established relative to telecom industry practices
ownership and enriched with fringe benefits, Employee Stock Option plans and severance
Soure: DIGI IPO prospectus & Team Analysis arrangements depending on the performance quantified by EBITDA margins and
RGUs increase.
Figure 9: Board of Directors
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

2
 Figure 10: GDP Growth INDUSTRY OVERVIEW
6% MACROECONOMICS: overheating economy

4% The booming EU economy has a positive impact on telecommunications industry,

mainly driven by the GDP growth and an overall increase in final consumption
2% expenditures. The current increase in households, in spite of population decrease,
had a significant boost on telecom operators’ revenues. The picking up
0% investments led to a better absorption of digitalization that ultimately elevated
the sector penetration rate. However, the interest rate spikes will put a pressure
-2%
on the cost of debt in this sector, mainly because telecom companies usually are
-4% highly levered.
GDP RO GDP HU
GDP ES GDP IT Romania: unsustainable growth rate translates into weakening consumer
Source: Statista & Team Analysis confidence
Figure 11: GDP and its main components Despite achieving a GDP growth over the EU’s CAGR of 2%, the NBR is unable to
16,000,000 control inflation rate that will most likely weigh against consumer spending.
14,000,000 Lower taxes might translate into missed fiscal targets and consequently into a risk
12,000,000 of economic overheating as wages outpace productivity growth. NBR is chasing
10,000,000
inflation with interest-rate hikes, aiming to stay ahead of any overheating, while
growth surges on ballooning government spending.
8,000,000
6,000,000 Hungary: bright growth prospects
4,000,000
Hungarian economy experiences an increased CAGR of 0.9% in households and
2,000,000
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
2012 2013 2014 2015 2016 2017E
favorable credit conditions and the decrease of business taxes. However, the
Capital Formation EU
increased inflation might harm competitiveness by blocking access to financing
Consumption EU
sources, providing an advantage for its more mature competitors acting on the
Source: Eurostat & Team Analysis
market.
Figure 12: Inflation CABLE: room for expansion
8% According to ANCOM (National Regulatory Authority), the number of
6% 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
4%
the EU, there is still space for further expansion on this business line in Romania.
2% The fixed broadband coverage at the national level is 89% and it lags behind the
0% member states of EU, which have an average of 98%. Romanian subscribers
2012 2013 2014 2015 2016 2017E 2018E benefit from high connection speeds (over 100Mbps) in a proportion of 56% of
-2% fixed connections, compared to 9.1% and 11.4% in Germany and the UK,
RO HU 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
Source: Statista & CFA Survey on Investors’ Expectations internet subscriptions (the rest still using old technology).
TELEPHONY: the enlargement of mobile broadband
Figure 13: Penetration Rates (2017Y) The degree of usage of fixed telephony in Romania is on a stable decrease of 15%
160% 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
140%
number of post-paid subscriptions in 2016, as costumers strike for flexibility in
120% billing. The number of total messages sent decreased with 10%, which might be
100%
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
80% increased demand for data services. The 4G coverage in Romania is developing at
60% 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
40%
connections puts it behind the EU average of 84%.
20% 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.
0%
Mobile Internet Pay TV
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
Romania Hungary number of active SIM cards divided by the population of Hungary is the lowest in
Source: DIGI IPO Prospect & Team Analysis
EU, respectively 43% versus 84%. This might be due to the prices for mobile
phone subscriptions, which are the highest in the region.

3
 Figure 14: Romanians Community ENTERTAINMENT: cutting the cord
1,200,000 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
1,000,000 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
800,000 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,
600,000
32.8% through DTH. Most of cable connections are made in urban zones, while
400,000 the rural zones favor DTH connections. The Pay TV market in Hungary has an
85.1% penetration rate of TV services.
200,000
MVNOs: taking over saturated markets
- Both Spain and Italy achieved a high level of market saturation, with penetration
2012 2013 2014 2015 2016 2017 rates exceeding 100% since 2015, in terms of mobile telecommunication market.
Despite large mobile user based and notable existing operators, the entrance of
Italy Spain virtual operators is actively encouraged by the telecom regulators in order to exert
Source: Institute of Statistics of Spain and Italy pressure on prices.
REGULATIONS: heavy burden for telecom
Figure 15: Telecom Operators: Price vs
In the aftermath of 2008 global downturn, there were several government
Coverage
measures and distress taxes aimed at shrinking the economic turmoil and
5 0-worst compensating for the decrease in revenue to state budgets on core markets. In
5-best
Coverage Quality

Romania a series of special taxes were introduced in 2014, of which only the tax
4 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
3 terms of fiscal decisions. This sector is heavily taxed by the Hungarian
government, causing difficulties for companies to increase the prices of services
2 offered and limiting consequently the availability of investment funds.

1
NEW TRENDS
1 2 3 Price 4 5 SHAPING BUSINESS MODEL: more about content, less about voice

Digi Orange Vodafone Telekom A rapid change in telecom industry and an uncertain financial outlook determine
Source: Team Analysis, Survey, Appendix 18
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.
Figure 16: Volume of messages from Acquiring market share is supposed to go downside on telecom operator’s priority
mobile handsets list shifting to the top, new business development.
90
CONSUMERS: continuously rising expectations
80
Network quality remains one of the most valued features of voice and data
70 services, as resulted from the survey we conducted. However, according to the
Messages sent (trillions)

current trend of lowering costs, operators might consider models that involve
60 sharing and outsourcing. Besides that, the customer’s interaction experience
might shift towards fully digitalized customer’s services. According to client’s
50
preferences, the reputation and reliability of the operator is crucial for the sales
40 and services experiences.

30 OTT: the bit-pipe effect

The recent advent of OTT, such as Google, Apple, and Netflix transformed
20
telecom operators into supporting players that solely provide network. This
10 would mean that operators can no longer control customer interface, and resume
at being the pipe through which the Internet moves. WhatsApp, Viber, and
0 Apple’s iMessage already represent more than 80% of all messaging traffic, and
2018E
2010

2014

2016
2011
2012
2013

2015

2017

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
OTT IP messages operators and OTT. As a matter of fact, competitors of the Group on Romanian
Operator IP messages market, like UPC and Vodafone, already signed contracts with Netflix and HBO.
SMS
Source: Analysis Manson, 2016 OTTs Study, European
Commission
4

GROUP`S COMPETITORS AND THEIR
MARKET SHARE
Figure 17: Fixed Broadband in Romania
Source: Team Analysis & DIGI IPO
Figure 18: Mobile Voice and Data in Romania
Source: Team Analysis & DIGI IPO
Figure 19: Pay TV in Romania
Source: Team Analysis & DIGI IPO
Figure 20: Fixed Broadband in Hungary
Source: Team Analysis & Magyar Telekom Roadshow
Presentation
Figure 21: Pay TV in Hungary
Source: Team Analysis & Magyar Telekom Roadshow
Presentation
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.
5
 Figure 22: Debt/Equity
INVESTMENT SUMMARY
CPS PW
TTKOM We issue a SELL recommendation on DIGI with a 1-year target price of RON 30.20
TELEC CP per class B share, representing a 17.15% downside from its February 16, 2018 closing
MTELEKOM price of RON 36.45. Our target price was derived by using a mix of the FCFF and
WPL the SOTP approach based on Enterprise-Value-to-Sales multiples, attributing
AFKS 30% and 70% weighting respectively to each methodology. Our recommendation
DIGI is based on the below key drivers.

0 2 4 6 8
Source: Bloomberg & Team Analysis KEY INVESTMENT DRIVERS
PRESSURES ON THE COST OF DEBT: overheating economy and rising interest
Figure 23: Why customers choose DIGI? rates
Others
Romania’s economy continues to grow at an accelerated pace, but the pro-cyclical
Coverage fiscal policy and wages growth increase the risk of overheating, according to data
Quality
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
Payment
key factor for DIGI’s financial soundness as it has the highest Debt/Equity ratio
Method
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
Price
and the possibility to raise additional financing and get involved in future
projects.

Source: Survey, Appendix 18 LOW PRICES: unsustainable long-term strategy

One of the main DIGI’s competitive advantages is its low prices. As our survey
Figure 24: SOTP Valuation shows, 91% of respondents chose DIGI over other telecom providers in Romania
EUR mn, except per share data because it offers very low-priced packages. Thus, the customer base that DIGI has
Business Revenue EV/ EV gained so far is price sensitive and it is easy to lose if the tariffs will increase.
Lines 2017E Sales 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
Entertainment emphasizes its financial burden and the need to have a solid amount of cash
305.14 1.71 522.54
Content inflows in order to face it.
Cable and DEFICIENT CORPORATE GOVERNANCE: turn-off for investors
316.77 1.48 469.92
Satellite
We decided to add qualitative factors in our valuation model that are as
Telecom
293.51 1.42 417.78 important as numbers because when analyzing DIGI as a potential investment,
Carrier
the key people that run the company are the ones that actually put to work
Total Enterprise Value 1405.24 investors’ money. Investors need to trust the people that stay behind the company
Less: Minorities 5.07 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
Less: Net debt 759.77
corporate governance section, at this point, DIGI faces important issues regarding
Less: Litigation Loss 3 its board of directors and management. Briefly, the board of directors does not
Market cap. Estimate 637.40 have the required number of independent members. Almost all company`s voting
12m target market cap. estimate 756.92 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
Number of shares (mn) 100 factors by applying a discount to the fair share prices that we obtained in our
Fair value/share (EUR) 7.57 models. Additionally, DIGI’s management has a questionable ethical conduct as
Discount 15% it has been involved in numerous litigations which might cause not only cash
outflows but also a reputation deficit. Regarding its most recent litigation
12m TP for Class investigated by the National Anticorruption Directorate, we included a litigation
6.43
B shares (EUR) loss of EUR 3mn.
SOTP TP (RON ) 29.98 VALUATION
Last close (February 16, 2018) 36.45
Our valuation generates a RON 30.20 target price, driven by 70% of the SOTP
Downside vs last close -17.76% 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
Source: Team Analysis & Bloomberg
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.

6
 Figure 25 SOTP ON ENTERPRISE-VALUE-TO-SALES MULTIPLE
Free Cash Flow to Firm Valuation The SOTP relative valuation of DIGI derives the Enterprise Value (“EV”) for the
EUR millions, except per share data company’s three main business lines: Entertainment Content, Cable and Satellite,
PV FCFF 211.75 and Telecom Carrier using their estimated 2017 revenues and EV/Sales multiples.
Terminal Value 1206.09 We used public comparable companies from CEE and Western Europe (“WE”)
Enterprise Value 1417.84 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
Net Debt 759.77
account the company’s capital structure as opposed to other multiples and we can
Minorities 5.07 therefore compare DIGI to other peers regardless of the differences in debt held
Equity Value 653.00 or issued. After weighting the EV of each business line in proportion with its
Fair vale/share EUR 6.53 revenues share/contribution and eliminating the intersegment revenues, we
Discount* 15.00% obtain a total EV of EUR 1,405mn. This implies a market capitalization estimate
Fair value/Share (RON ) 25.86 of EUR 637.40mn and a 12-month target market capitalization of EUR 756.92mn,
12m TP for Class B shares (RON ) 30.71 based on DIGI’s return of equity of 18.75%. A 15% discount was applied for class B
Last close (February 16, 2018) 36.45 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).
Downside vs last close -15.74%
Source: Team Analysis INTRINSIC VALUATION – 5-YEAR FCFF MODEL
To capture company’s fundamentals, we employed the FCFF model. We chose
Figure 26 this approach because DIGI is a highly levered company and we estimated that it
WACC (2017) will deliver a small but stable revenue growth in the future. The method consists
Risk-free rate 4.53% of a two-stage growth model: specific year to year forecast up to 2021, followed by
Beta 1.87 a stage of constant growth of 2.88%. Based on our FCFF analysis, the estimated
Market risk premium 7.62% price is RON 30.71 (Figure 25).
Cost of Equity 18.75% WEIGHTED AVERAGE COST OF CAPITAL
Interest expenses 47.8
In order to obtain an accurate discount rate in our FCFF model, we estimated the
Borrowings 732.7 weighted average cost of capital (“WACC”) for each year. The reasoning for this
Cost of Debt 6.52% is to account for a changing macroeconomic and fiscal policy environment as well
Debt % 80% as company specifics regarding its capital structure and sources of financing. The
Equity % 20% 10-years Romania’s government bond (4.63% in 2017) was used as a proxy for the
WACC 8.13% risk-free rate and is expected to increase in the following years. This increase is
Source: Team Analysis 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
Figure 27: Monte Carlo SOTP Simulation 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.
Source: Team Analysis TERMINAL VALUE
The terminal value was computed by using the terminal growth method. We
Figure 28: Monte Carlo FCFF Simulation
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
Source: Team Analysis

7
 Figure 29: Cable estimated value. 1 million simulations were run both for SOTP and FCFF. The key
4000 10 factors taken into consideration for SOTP are the sector growth, the company’s
thousands RGUs

ARPU per month

3000 8 net debt, and the cost of equity. The results of the simulation show a probability
6 of 81% sustaining the SELL recommendation. The sensitivity analysis indicates
2000
4 that the most sensitive variable is the Entertainment sector growth, because DIGI
1000 2 mainly provides this type of services. When simulating the outcome of FCFF, we
0 0 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
RO HU RO HU
net debt and the terminal growth rate of GDP in Romania, which is due to the
Source: Team analysis
fact that this is DIGI`s core market.
Figure 30: Entertainment
FINANCIAL ANALYSIS
5000 20
ARPU per month
4000 REVENUES: powered by three-dimensional growth rate
15
3000 As a growth company, DIGI generates its revenues on RGU and ARPU increase,
10
thousans RGUs

2000 meaning larger customer base and ascending revenue per customer. Besides these
1000 5
internal considerations, we believe that company’s revenue is dependent on
0 0
industry evolution, mainly telecom revenues on each segment, and GDP growth
e2021E
e2020E
e2019E
e2017E
e2018E
2012

2015
2013
2014

2016

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
RO HU RO HU 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
Source: Team Analysis
supposed to accelerate after the Invitel acquisition due to potential synergies.
Figure 31: Telephony 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
8000
their mobile services. In terms of ARPU, we notice a sharp decrease in 2014 and a
thousand RGUs

6000
quick recovery afterwards in the regions where DIGI acts as an MVNO. This was
4000 caused by the company’s strategy to deliver as many services as possible while
2000 maintaining EBITDA margin.
0
OPEX: towards minimal costs
e2020E
e2021E
e2019E
e2018E
e2017E
2012
2013
2014
2015
2016

Operating expenses are mainly composed of telephony expenses, salaries, and

programming assets. Therefore, the operating profit depends directly on the
RO HU ES IT number of connections and content acquired from providers. Other expenses
Source: Team Analysis 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
Figure 32: OPEX network maintenance. We forecasted a continuing decreasing costs growth rate
Other on all segments. Even though we expect salaries expenses to increase considering
expenses Telephony macroeconomic trends, we assume that number of connections will decrease
19% expenses
19% following the current takeover of OTTs and maintenance expenses will lower
along with infrastructure consolidation.
Cost of Salaries
goods and CAPEX: investing in big data
sold related
5% taxes
DIGI is currently pursuing an ambitious growth strategy that required them to
18% undertake substantial capital expenditures. This mainly includes expansion of
their fiber optic network and mobile network on core markets, acquisition of
Rentals
7% content rights and licenses and network equipment. The 11.11% increase in CAPEX
Depreciation from 2016 to 2017 will be followed by a constant decrease as the Group aims to a
Programming expenses 11% 12% minimizing cost strategy, as declared in their latest presentation.
Source: Team Analysis EARNINGS: targeting EBITDA, the standard assessment in telecom

Figure 33: EBIDTA & CAPEX 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
400.0 50% supply activities. We forecasted constant evolution, in line with the company’s
300.0 40% strategy, that targets this indicator, as well as other peers in this industry. We can
30% notice through a relative comparison that the Group’s margin outperforms the
200.0
20% industry median of 22.22% (Appendix 8).
100.0 10% SOURCES OF FUNDING: running on operating fuel
0.0 0%
The company is positive about generating funds from operating cash flows in
E
E
E

E
E
2021F
2013
2014
2015
2012

2016

2019F
2017F
2018F

2020F

order to cover their current liabilities, based on its successful historical growth
EBIDTA CapEx EBIDTA Margin
and discretionary nature of their investment activities. The gross fixed turnover

Source: Team Analysis

8
 Figure 34: Capital Structure 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
Equity Short Term Debt Long Term Debt industry median and the high amount of leverage might affect the firm’s ability
2000 to fund its working capital (Appendix 4).
1500 CAPITAL STRUCTURE: worrying signals of over-leverage

1000 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
500 management decided to remunerate the shareholders with both the profit
obtained that year, and the reserves that decreased considerably in 2016 by 75%.
0

e2020E
e2021E
e2018E Long-term debt increased as a share of capital structure, as an effect of the

e2019E
e2017E
2013
2014
2015
2016
2012

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
Source: Team Analysis & DIGI Financial Reports
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
Figure 35: ROA & ROE
60%
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.
40% PERFORMANCE: what’s in it for shareholders
ROA demonstrates effective management of assets, as company’s ratio is higher
20% 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
0% offering relevant information about company’s performance because of its
2021E
2019E
2017E
2018E

2020E
2014

2016
2012
2013

2015

outstanding volatility. We applied DuPont analysis on this indicator and the

-20% 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.
ROA ROE Furthermore, tax and interest burden are contributing to the high borrowing cost,
Source: Team Analysis & DIGI Financial Reports which discloses the fact that we are dealing with a risky company.
Figure 36: Porter Analysis
Industry ROE DECOMPOSITION (2017Y) Tax Burden
Rivalry 0,75
Equity multiplier
3,31
Bargaining Threat of Interest Burden
power of new 0,38
suppliers entrants ROE Asset turnover ratio
55,53% 0,68

Financial Leverage
11,5
Bargaining Net margin
Threat of 18%
power of
Substitutes
buyers

INVESTMENT RISKS
OVERALL Cable
BUSINESS RISKS: Regulation eroding key competitive advantages
Entertainment Telephony
The telecom industry is highly regulated, and one of the risks DIGI is intensively
Source: Team Analysis exposed to, is the obligation to open its infrastructure to their competitors. The
Figure 37: Currency versus EUR main mobile market players, Orange and Vodafone, have already opened their
(Base=100 on April 1, 2012) networks to each other. If ANCOM will impose this as a mandatory condition,
130.00% DIGI might lose their competitive advantage, specifically their fiber optic
125.00% infrastructure. Taking into consideration the large market share of almost 50%
120.00% that DIGI holds on broadband and pay TV, the company might be subject to
115.00% additional restrictions in the future from the national authority. Moreover, the
110.00%
recent regulations concerning the roaming surcharges are overloading the
105.00%
100.00% company’s expenditures as ANCOM might prohibit DIGI mobile to charge an
95.00% additional price for this particular service.
90.00%
85.00%
OTT’s takeover
80.00% 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
USD HUF RON
operations have diminished due to customers preferring online environment.
Source: NBR & MNB & ECB

9
 FINANCIAL RISKS
Figure 38: Interest Rates
Currency Risk
6%
5% As a multinational holding company, DIGI operates in three different currencies,
the most important ones suffering from significant volatility. Additionally, the
4%
company acquires its content from its providers in a fourth different currency,
3%
USD, and a potential depreciation of their principal operation currencies relative
2% to USD could affect the business. However, management did not establish any
1% hedging strategies against currency risk, counting on their natural buffering,
0% which has caused a significant loss of EUR 3.9 mn at the end of 2016 and it is
-1% 2012 2013 2014 2015 2016 2017 anticipated to affect the balance sheet in the future as well.

EURIBOR ROBOR
Interest Rate Risk
Source: NBR & IMF 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
Figure 39: Public Deficit (% of GDP)
If previous categories of risks are generally affecting the whole industry of
4.5% telecommunications services, the reputational risk is particular for this company
4.0% and we give more importance to its impact. A lot of lawsuits and litigations
3.5% 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
3.0%
of its dominant position on the market, or felt their activity as a threat to their
2.5%
own business. Furthermore, there are some accusations (e.g. failure to comply
2.0% with labor legislation, caused by a work accident that led to the death of an
1.5% employee, criminal offenses to one of the members of the Board) which increase
1.0% the probability that the damaged reputation impacts negatively the stock price.
0.5% The Group does not consider the risk mentioned above as likely to happen, and
0.0% consequently, provisions have not been consisted. Therefore, DIGI has zero
2012 2013 2014 2015 2016 2017 coverage against this risk.

RO
Source: Eurostat
Figure 40: Risk Matrix
Source: Team Analysis
HU
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.

10
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.

11
 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
66.6 50.5 39.6 42.7 48.9 45.1 58.4 61.9 64.4 66.9
inventories
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
652.8 624.7 643.1 674.7 826.0 878.2 1004.0 1054.2 1106.9 1162.3
equipment
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
158.6 11.5 45.7 63.1 44.0 75.0 51.1 53.7 56.4 63.2
borrowings
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
468.5 638.9 652.7 624.9 665.5 657.7 869.4 902.8 953.9 1007.5
borrowings
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
Source: Team Analysis

12
 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

Source: Team Analysis

13
 Appendix 4: Cash Flow
In millions EUR 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E
Cash flows from operations before
254.0 271.0 232.0 237.2 266.6 219.4 267.8 284.1 321.4 324.5
working capital changes
Cash flows from changes in working
-30.5 -18.9 -5.7 4.2 -11.3 14.5 8.5 16.0 0.3 3.0
capital
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
-64.5 38.4 4.1 -5.2 -34.2 1.5 4.5 4.0 4.4 3.0
cash equivalents
Cash and cash equivalents at the
75.2 12.6 50.2 54.3 -49.7 14.6 16.1 20.6 24.6 29.0
beginning of the period
Effect of exchange rate fluctuation on
1.9 -0.7 - 0.5 -0.8 - - - - -
cash and cash equivalent held
Cash and cash equivalents at the
12.6 50.2 54.3 49.7 14.6 16.1 20.6 24.6 29.0 32.0
closing of the period
Source: Team Analysis

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
9.74 8.55 10.36 10.97 29.10 12.18 12.97 13.28 13.34 13.42
ratio
Source: Team Analysis

14
 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%
Source: Team Analysis
DuPont Analysis
200.00%

150.00%

100.00%

50.00%

0.00%
2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E
-50.00%

Return on equity Tax Burden Interest Burden

Return to Sales Asset Turnover Leverage ratio (log)

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
Source: Team Analysis
Capital Structure 2017
Debt Maturity
400 50%
8% 350
350 45%
47% 40%
300
35%
250 30%
200 25%
150
150 20%
95 93 20% 15%
100 60
13% 12% 10%
92% 50 0%
8% - 5%
- 0%
2018E 2019E 2020E 2021E 2022E 2023E
Equity Debt
Total % of Total
Source: Team Analysis Source: Team Analysis

15
 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%
Source: Team Analysis

Internal metrics of Telecom Industry

Macroeconomical environment performance in telecom Performance in UE

Average revenue Expansion of product

generating unit, ARPU scope, RGU

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.

Correlation(GDP. DIGI’S revenues) Correlation(Industry revenues, DIGI’S Revenues)

Cable Entertainment Telephony Cable Entertainment Telephony
RO 0.9227 0.8817 0.7691 RO -0.9697 0.4696 0.7216
HU 0.4269 -0.3474 -0.4450 HU -0.9067 0.7702 -0.8939
ES 0.7630 ES 0.5544
IT 0.5675 IT 0.2676
Source: Team Analysis Source: Team Analysis

16
 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%
Source: Team Analysis

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%
Source: Team Analysis

Relationship between GDP and revenues in Relationship between GDP and revenues in Spain
Romania 4% 160%
140%
3%
10% 200% 120%
8% 2%
150% 100%
6% 1% 80%
100%
4% 60%
50% 0%
2% 40%
2013 2014 2015 2016 2017E
0% 0% -1%
20%
2013 2014 2015 2016 2017E
-2% 0%
GDP Cable Entertainment Telephony
Source: Team Analysis GDP Telephony
Source: Team Analysis

Relationship between GDP and revenues in Relationship between GDP and revenues in Italy
Hungary
2% 250%
20%
200%
10% 1%

0% 150%
2013 2014 2015 2016 2017E 0%
-10% 2013 2014 2015 2016 2017E 100%

-20% -1%
50%

GDP Cable -2% 0%

Entertainment Telephony
GDP Telephony
Source: Team Analysis Source: Team Analysis

Note: The telephony variable was projected on the secondary axis, on graphs for Romania, Spain, and Italy 17
 Appendix 8: Peer Details
Gross Fixed
Financial Current EBITDA to
Peer Name Asset ROA ROE EBITDA
Leverage Ration Net Sales
Turnover
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
2.12 0.52 52.94 12.08% 27.86% 558.113.024
SHARE
HELLENIC TELECOMMUN
3.07 0.87 32.02 1.87% 5.79% 317.400.000
ORGANIZA
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
3.17 0.88 0.60 36.95 0.89% 2.71% 335.409.134
S.A.
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
1.70 0.65 24.11 -2.23% -3.67% 446.000.000
HOLDI
Source: Team Analysis

INDUSTRY COMPARABILITY ANALYSIS PERFORMANCE RATIOS

35.00 60.00%
30.00
50.00%
25.00
40.00%
20.00
15.00 30.00%
10.00 20.00%
5.00
10.00%
0.00
Financial Current Ration Gross Fixed EBITDA to Net 0.00%
Leverage Asset Turnover Sales ROA ROE

DIGI COMMUNICATIONS NV Sector Median DIGI COMMUNICATIONS NV Sector Median

Source: Team Analysis Source: Team Analysis

18
 Appendix 9: EV to Sales
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).

Ticker Name Country EV/Sales

SKY LN SKY PLC GB 1.80
Cable WE DKSH SW DKSH HOLDING AG CH 0.47
Median: 1.35
Mean: 1.24 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
Cable CEE 0.92
AFKS RM SISTEMA PJSC FC RU
Median: 1.51
Mean: 1.54 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
Entertainment WE
TCH FP TECHNICOLOR - REGR FR 0.46
Median: 1.57
Mean: 1.35 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
Entertainment CEE TCELL TI TURKCELL ILETISIM HIZMET AS TR 2.16
Median: 1.40
OPL PW ORANGE POLSKA SA PL 1.29
Mean: 1.30
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
Telecom CEE NET PW NETIA SA PL 1.56
Median: 1.69 1.36
HTRA CZ HRVATSKI TELEKOM DD HR
Mean: 1.77
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
Telecom WE TKA AV TELEKOM AUSTRIA AG AT 1.85
Median: 1.81 MIICF US MILLICOM INTL CELLULAR S.A. LU 1.70
Mean: 1.77 FNTN GR FREENET AG DE 1.59
O2D GR TELEFONICA DEUTSCHLAND DE 1.90

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
Source: Team Analysis

19
 Appendix 10: Beta Calculations
Effective Unlevered
Ticker Name Country Beta D/E
Tax Rate 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
Cable WE
Median: 0.53 ITV LN ITV PLC GB 0.43 254.09% 20.46% 0.14
Mean: 0.60 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
Cable CEE
AFKS RM SISTEMA PJSC FC RU 0.99 301.28% 32.02% 0.32
Median: 0.37
Mean: 0.39 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
Entertainment
WE MMB FP LAGARDERE SCA FR 0.82 133.63% 27.87% 0.42
Median: 0.50
PUB FP PUBLICIS GROUPE FR 0.83 55.84% 27.76% 0.59
Mean: 0.50
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
Entertainment
CEE TELEC CP O2 CZECH REPUBLIC AS CZ 0.79 67.76% 20.76% 0.51
Median: 0.43 OPL PW ORANGE POLSKA SA PL 0.99 70.47% 30.00% 0.66
Mean: 0.41
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
Telecom CEE
Median: 0.43 NET PW NETIA SA PL 0.62 17.53% 28.45% 0.55
Mean: 0.51 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
Telecom WE 87.12% 48.54%
Median: 0.59
TDC DC TDC A/S DK 1.17 0.81
Mean: 0.64 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

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%

Beta unlevered Debt/Equity Effective Tax rate Beta relevered

0.46 594% 48% 1.87
Source: Team Analysis

20
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
GDP Growth Weights GDP x W
Romania 3.28% 72% 2.36%
Net Debt 759.8 Hungary 2.20% 16% 0.35%
Minorities 5.1 Spain 1.68% 10% 0.17%
Equity Value 653 Italy 0.94% 2% 0.02%
2.88%
Fair Value/Share EUR 6.53
Discount for class B shares 15%
12m Price RON 30.71

Downside vs last close -15.74%

Source: Team Analysis

21
 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.

Sensitivity Analysis - SOTP

Minor Share Holders

Exchange Rate

Cost of Equity

Telecom Sector

Net Debt

Cable&Satelite Sector

Entertainment Sector

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

Source: Team Analysis

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.

Sensitivity Analysis - FCFF

GDP IT

Minor Share Holders

GDP ES

GDP HU

GDP RO

Net Debt

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

Source: Team Analysis

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

22
 Appendix 13: Shareholder Structure

DIGI

Class A shares Class B shares

(66% of total) (34% of total)
Institutional
Shareholders
(6.5% of total shares)
100% Legend
control 56.95 % Other Shareholders
direct control
ownership (29.5% of total
indirect control
shares)
RCS Management Zoltan Teszari ownership
(57,866,545 shares) (49,100 shares) administrator

87.1 % ownership

RCS
Management
DIGI’S Board of Directors

Administrator
Zoltan Teszari President of the Board
in other 42 DIGI Group
companies

RCS&RDS Sergiu Bulgac CEO

Valentin Popoviciu Executive Director

Ioan Bendei

Mihai Dinei
Independent Non-executive
Bogdan Ciobotaru
Director

Senior Management of RCS&RDS

Smaranda Streanga co- Chief Financial Officer Piort Rymaszewski Independent Non-executive
Director
Dan Ionita co- Chief Financial Officer
Silviu Georgescu Chief Technical Officer
Marius Varzariu Non-Executive Director
Emil Grecu Technical Officer Managing Director of DIGI Spain
Emil Jugaru Head of Sales
Dragos Spataru Head of Fixed Telephony and Mobile Non-Executive Director
Communications Division Sambor Ryszka
Managing Director of DIGI Hungary
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

23
Appendix 14: Governance Appraisal
CORPORATE GOVERNANCE PRINCIPLES
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;
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;
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;
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;
 OVERAL SCORE 6/14
42.86% achievement
THE GROUP
 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;
 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;
 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;
 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;

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 15: Porter`s Analysis

Industry Rivalry

Bargaining power of
Threat of new entrants
suppliers

Bargaining power of
Threat of Substitutes
buyers
OVERALL Cable Entertainment Telephony

Porter’s 5 forces C E T ALL

Competition 0.25 0.25 0.2 0.25
5
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 +
* 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 16: SWOT Analysis

Source: Team Analysis

Appendix 17: Risk Matrix

Source: Team Analysis

26
Appendix 18: Survey

Source: Team Analysis

27
 Appendix 19: Internet Coverage and Speed

Legend:

Digi Mobil 3G Data Coverage

Digi Mobil 4G 2600MHz Coverage

Source: Team Analysis & Netograf & DIGI Website

28
 Appendix 20: Macroeconomic and Financial
Context
25

MILLIONS 20

15

10

0
2012 2013 2014 2015 2016 2017 E

Population RO Population HU

200,000 200,000
180,000 180,000
160,000 160,000
140,000 140,000
120,000 120,000
100,000 100,000
80,000 80,000
60,000 60,000
40,000 40,000
20,000 20,000
- -
2012 2013 2014 2015 2016 2017E 2012 2013 2014 2015 2016 2017E

Capital Formation RO Consumption RO GDP RO Consumption HU GDP HU Capital Formation HU

DAILY AVERAGE RETURN

104%

99%

94%

89%

84%

79%

74%
5/16/2017E 6/16/2017E 7/16/2017E 8/16/2017E 9/16/2017E 10/16/2017E 11/16/2017E 12/16/2017E 1/16/2018E 2/16/2018E

DIGI BET

Source: Eurostat & Team Analysis & BSE

29
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

30
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.

CFA Institute Research Challenge