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MARKET UPDATE

Poland | Telecom Services | Small & Mid Cap | 12-November-2014

Netia

In abeyance

We lift our FV to PLN 5.6 from PLN 5.4 and maintain a NEUTRAL

rating. We have included in Netia’s cash flow the PLN 145m gross

(PLN 0.42/sh) recently received from Orange Polska, but we cut

15E/16E EBITDA forecasts by 1%/3% to reflect weak KPIs and strong

RGU erosion in traditional Netia services, which do not look like

slowing down soon. As expected, the updated Strategy 2020 did

not herald any break-through: Netia will keep focusing on defending

its client base on its own network with further cross-selling and

upselling initiatives coupled with ongoing cost optimization. There

is a clear message from Netia’s new management that it will not

invest in network development, but instead separate B2B and B2C

infrastructure assets and seek more co-operation with mobile

operators, possibly preparing Netia for M&A in a spin-off scenario

based on B2B/B2C divisions, which in our view could unlock the

greatest value for shareholders. The increasing probability of a

potential M&A spin-off is the main story for Netia now. Apart from

that, the PLN 145m gross cash from OPL should support cash

distribution in 2015E and we estimate a DPS of PLN 0.42 (DY 7.5%).

Updated Strategy 2020 aims for spin-off and M&A: As expected, the updated

Strategy 2020 did not announce any major development. Netia will focus mainly on

monetizing the client base on its own network (incl. post-Aster) with some product

development: (1) in B2B, ICT services like cloud computing or data centres via

selective acquisitions and (2) in B2C, mobile services in co-operation with partners.

Additionally, Netia plans to separate all network assets into either B2C or B2B

segments. We were disappointed that Netia did not provide any quantification of this

strategy, like a targeted range in EBITDA margin, capex or FCF. Lack of a more

aggressive commercial market stance and a clear message of stopping investment

in network modernization after 2014, coupled with network separation into

B2B/B2C and co-operation with mobile operators, left us with the feeling that the

main idea behind the updated Strategy 2020 is to prepare Netia for long awaited

consolidation in a B2B/B2C spin-off scenario, which in our view could generate

more value for shareholders. We had previously flagged and described this in our last

report on 22nd

July 2014 titled “Quo Vadis”.

Settlement with Orange Polska: On 5th November Orange Polska (OPL) and Netia

settled all mutual claims through OPL agreeing to pay PLN 145m gross to Netia. OPL

will make an extra payment if the EC EUR 127m fine imposed on OPL for abusing

monopolistic position falls below EUR 112m. Netia has already commented that the

PLN 75m cash received from OPL has been used for debt restructuring. The question

is how Netia will use the remaining part of the cash. There are two possible options:

either an extra dividend (above the expected DPS PLN 0.42) or M&A in B2B. In our

view, each option is equally possible, especially in the light of the ongoing TK

Telekom process; as a result, we maintain our 15E DPS forecast PLN 0.42 (DY 7.5%).

Commercial offer on post-Aster network: In August, Netia launched a commercial

offer on post-Aster HFC network covering ca. 314k homes in Warsaw and ca. 106k

homes in Cracow. After ten weeks the RGU base totalled 9.5k: 4.3k internet, 3.6k

TV and 1.5k phone. Netia comments that ca. 80% of services are sold either in 2P or

3P. Assuming ca. 20% success ratio, avg ARPU of PLN 50, upsell ratio at 2x,

hypothetical yearly incremental revenues could amount to PLN 60m (3.5% of total)

and EBITDA of PLN 20-25m (5% of total).

NEUTRAL 1% upside

Fair Value PLN 5.60

Bloomberg ticker NET PW

Share Price PLN 5.54

Market Capitalisation PLN 1,927.37m

Free Float 100%

PLN m Y/E 31-Dec 2012A 2013A 2014E 2015E

Revenues 2121.4 1876.0 1680.7 1550.1

EBITDA 461.5 532.8 578.8 454.8

adj EBITDA 579.9 550.9 497.3 454.8

EBIT (21.0) 92.8 154.4 76.3

Net income (87.7) 46.3 104.2 44.0

adj Net income (29.3) 26.5 (12.2) 44.0

net debt 405.7 290.7 179.7 105.3

Y/E 31-Dec 2012A 2013A 2014E 2015E

EV/EBITDA 4.5 4.2 3.6 4.5

P/E (18.9) 41.6 18.5 43.8

adj P/E (56.6) 72.7 (157.4) 43.8

DY 0.0% 7.5% 7.6% 7.6%

net debt/EBITDA 0.9 0.5 0.3 0.2

ROE (3.8%) 2.1% 4.7% 2.1%

FCF Yield 16.8% 15.2% 17.5% 11.4%

adj. EBITDA margin 27.3% 29.4% 29.6% 29.3%

All share price data as at close on 10-Nov-2014

Source: BESI Research, Company Data, Bloomberg

85

90

95

100

105

110

115

120

Jan 2014 Apr 2014 Jul 2014 Oct 2014

NET PW vs WIG Index

Share Price Performance

Analysts Konrad Ksiezopolski +48 22 347 4074 kksiezopolski@espiritosantoib.pl Banco Espírito Santo de Investimento, S.A. – Warsaw Branch Poland 59 Zlota Street, 00-120 Warsaw

Page 2 of 15

Summary Financial Information

Valuation Metrics (Year end Dec) 2011 2012 2013 2014E 2015E 2016E

Rating NEUTRAL Recurrent P/E (x) 14.5 (56.6) 72.7 (157.4) 43.8 42.4Fair Value (PLN): 5.6 Reported P/E (x) 8.3 (18.9) 41.6 18.5 43.8 42.4

EV / Sales (x) 1.6 1.0 1.2 1.3 1.3 1.45.54 EV / EBITDA (x) 4.3 4.5 4.2 3.6 4.5 4.81% EV / EBIT (x) 8.6 (98.5) 23.9 13.6 26.6 27.1

FCF Yield (%) 7.6% 16.8% 15.2% 17.5% 11.4% 9.9%5.4 Dividend yield (%) 0.0% 0.0% 7.5% 7.6% 7.6% 7.6%

4%

NET PW Key Ratios 2011 2012 2013 2014E 2015E 2016ENTIA.WA

EBITDA margin 37.8% 21.8% 28.4% 34.4% 29.3% 29.2%EBIT margin 18.7% -1.0% 4.9% 9.2% 4.9% 5.2%Capex / Revenue (x) 0.2 0.1 0.2 0.1 0.1 0.1

348 Capex / Depreciation (x) 0.9 0.5 0.6 0.5 0.5 0.61,927 Net Debt / EBITDA (x) 0.9 0.9 0.5 0.3 0.2 0.1

291 EBITDA / net interest (%) 17 8 12 15 13 130 ROE 9.9% -3.8% 2.1% 4.7% 2.1% 2.3%

2,218

P&L Summary (PLN m, unless stated) 2011 2012 2013 2014E 2015E 2016E

Revenue 1,619 2,121 1,876 1,681 1,550 1,423 % change 3.2% 31.0% -11.6% -10.4% -7.8% -8.2%

4Q14 results Feb-15 EBITDA 611 462 533 579 455 415 % change 4.3% -24.5% 15.4% 8.6% -21.4% -8.8% % margin 37.8% 21.8% 28.4% 34.4% 29.3% 29.2%adj EBITDA 408 580 551 497 455 415

adj EBITDA margin 25.2% 27.3% 29.4% 29.6% 29.3% 29.2%Konrad Księżopolski Depreciation & Amortisation (309) (482) (440) (424) (378) (341)+48 22 347 40 74 EBIT 303 (21) 93 154 76 73

% change 6% -107% -542% 66% -51% -4% % margin 18.7% -1.0% 4.9% 9.2% 4.9% 5.2%Associates 0 0 0 0 1 2Operating Profit 303 (21) 93 154 77 75Net Financials 15 (40) (28) (22) (22) (17)Other Pre-tax Income 0 0 0 0 1 2Pre-Tax Profit 317 (61) 64 133 54 56Income Tax Expense 68 27 18 28 10 11Discontinued Operations 0 0 0 0 0 0Minority Interests 0 0 0 0 0 0Net Income 249 (88) 46 104 44 46Recurrent Net Income 142 (29) 26 (12) 44 46

Reported EPS (PLN) 0.6 (0.2) 0.1 0.3 0.1 0.1Recurrent EPS (PLN) 0.4 (0.1) 0.1 (0.0) 0.1 0.1DPS (PLN) 0.0 0.0 0.4 0.4 0.4 0.4 Payout Ratio 0% 0% -155% 316% 140% 332%Shares in Issue (Less Treasury) (m) 389 389 389 348 348 348

Cash Flow Summary (PLN m) 2011 2012 2013 2014E 2015E 2016E

Net income 249 (88) 46 104 44 46D&A 309 482 440 424 378 341Change in Working Capital 11 (12) 36 (1) (0) (1)Other Operating Cash Flow (150) 159 53 12 0 0Operating Cash Flow 419 541 575 540 422 386Capital Expenditure (263) (263) (282) (202) (202) (195)Free Cash Flow 156 279 293 338 220 191Acquisitions & Disposals (810) (3) 3 0 0 0Dividend Paid to Shareholders 0 0 0 (146) (146) (146)Equity Raised / Bought Back 0 0 0 0 0 0Other Financing Cash Flow 636 (304) (327) (100) (50) (50)Net Cash Flow (18) (28) (31) 92 24 (5)

Balance Sheet Summary (PLN m) 2011 2012 2013 2014E 2015E 2016E

Cash & Equivalents 161 145 93 185 210 205Tangible Fixed Assets 2,184 2,066 1,957 1,734 1,557 1,411Goodwill & Intangibles 770 597 538 538 538 538Associates & Financial Investments 26 0 0 0 0 0Other Assets 407 424 349 441 426 410Total Assets 3,549 3,233 2,938 2,899 2,731 2,564Interest Bearing Debt 695 551 384 365 315 265Other Liabilities 354 386 349 325 309 293Total Liabilities 1,049 937 733 690 624 558Shareholders' Equity 2,500 2,296 2,205 2,209 2,107 2,006Minority Interests 0 0 0 0 0 0Total Equity 2,500 2,296 2,205 2,209 2,107 2,006

Net Debt 534 406 291 180 105 60Source: Company data, Reuters, Bloomberg, BESI Research for estimates.

Adjustments for Associates & Minorities (PLN m)

Netia

Share Price (10/11/2014, PLN):Upside / Downside potential

Previous Fair Value (PLN):

% change to fair value

BloombergReuters

Shares in Issue (Less Treasury)(m)Market Cap (PLN m)end 2013 Net Debt (PLN m)

Revenues Breakdown (2013)

Revenues Growth

Shareholders structure, July 2014

Enterprise Value (PLN m)

Forthcoming Catalysts

ES Equity Research Analyst

kksiezopolski@espiritosantoib.pl

fixed-voice

43%

internet

39%

TV/mobile

4%

wholesale

6%

interconnect

4%other

4%

3.2%

31.0%

-11.6% -10.4%-7.8% -8.2%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

2011 2012 2013 2014E 2015E 2016E

PZU OFE, 5.5%

ING OFE, 9.6%

SISU Capital,

12.7%

Aviva OFE, 5.8%

FIP, 10.0%

Mennica Polska,

15.9%

Navicorp Trust Polska,

5.0%

Others, 35.4%

Page 3 of 15

Strategy 2020 only with slight face-lifting

Following 3Q14 results, Netia’s new management presented an updated

Strategy 2020 which, as expected, did not herald any major development. Netia

will focus mainly on monetizing its client base on its own network (incl. post-

Aster) with some product development: (1) in B2B, ICT services like cloud

computing or data centres via selective acquisitions and (2) in B2C, through

mobile services in co-operation with partners. Additionally, Netia plans to divide

all network assets into either B2C or B2B segments. We were disappointed that

Netia did not provide any quantification of this strategy, like a targeted range in

EBITDA margin, capex or FCF.

Lack of a more aggressive commercial market stance and a clear message to stop

investing in network modernization after 2014, coupled with network separation

into B2B/B2C and co-operation with mobile operators, left us with the feeling

that the main idea behind update Strategy 2020 is to prepare Netia for long-

awaited consolidation in a B2B/B2C spin-off, which in our view could generate

more value for shareholders and was what we had already flagged and

described in our last report on 22nd July 2014 titled “Quo Vadis” (click link here

for report download). Netia plans to intensify product bundling, also through

mobile services which it does not possess. It means that Netia will need to

intensify co-operation with mobile operators. Among all existing operators we

would pick two as most likely candidates for closer co-operation. The first

natural choice is of course P4, which currently provides mobile voice services

for Netia. The second would be Polkomtel or in general the Cyfrowy Polsat

group. Separation of infrastructure assets into B2C and B2B, together with a

stronger push towards cross-selling mobile services to the existing client base,

starts to look to us as preparation for closer co-operation, maybe even though

M&A. As we pointed out in the last report on Cyfrowy Polsat, the only important

telco/media asset that Cyfrowy Polsat group lacks and will need in the future is,

in our view, a fixed-line telco asset that would enable it to offer a 5P service

pack and additionally transfer part of data traffic from a mobile network.

Strategy 2020 update

The main assumptions of updated Strategy 2020 are: (1) delivering business

customers integrated tele informatics solutions based on data transmission and

data centres; (2) offering residential customers bundled services based on

multimedia platforms in own network and (3) infrastructure and network assets

dedicated to business and residential market segments.

In B2C Netia wants to: (1) concentrate on intensive retention activities within the

existing customer base at relatively lower customer service cost; (2) acquisition

of customers in own network and optimization of an average subscriber

acquisition cost through more optimal cost-mix between the sales channels; (3)

maximize own network value, without further intense modernization, through

increased penetration of TV-bundled service offerings (2P/3P) and use of mobile

solutions in retention activities (targeted level of services per customer in the

segment: 2.0x); (4) increased penetration of services in own network thanks to

geo-marketing and (5) search for an optimal operating cost model for the

residential market segment.

In B2B Netia wants to: (1) stabilize revenues in the short term and increase the

scale of operations in the long term through changes to the structure of the

product portfolio including, among others, lowering exposure to voice services;

(2) speed up growth in the ‘new data’ and ICT segments by developing data

centers and cloud computing services, including potential selective acquisitions

of competences and/or infrastructure in this area; (3) enter into partnerships in

convergent services aimed at offering a full scale of telecommunications and

data transmission services; (4) use market potential in wholesale services

through full utilization of own network infrastructure; (5) reorganize sales force

Page 4 of 15

and sales processes operating model and (6) search for an optimal operating

cost model for the business market segment.

Within its Strategy 2020 Netia intends to separate all network assets into B2C

and B2B segments while simultaneously simplifying and modernizing selected

network systems, with the aim of reducing the cost of network maintenance.

Furthermore, IT systems are to be optimized, with a particular focus on

processes directly supporting commercial activities of the B2C and B2B

business segments.

Execution of Strategy 2020 is expected to facilitate higher cost efficiency in

managing the operating segments, full identification of assets, costs and

investment outlays within B2C and B2B divisions, and increased strategic

potential of single components of the Netia Group, depending on the Polish

market developments and consolidation scenarios.

Dividend policy remains unchanged which means that Netia will be able to pay

out PLN 146m in dividends or DPS PLN 0.42, DY 7.5%, with a potential increase

in following years depending on the cash position.

Settlement with Orange Polska

On 5th

November Orange Polska and Netia signed an agreement in which they

settled all mutual claims related to co-operation in the telecom market. As a

result, Orange paid PLN 145m gross to Netia. Based on the accord signed, the

companies dropped mutual financial and other claims, and pledged to take

steps to conclude any related court proceedings. Orange Polska will also make

an extra payment to Netia in the event that a fine to be imposed by the

European Commission on Orange falls below EUR 112m where the base fine

currently amounts to EUR 127m. The extra payment will amount either to 45%

of the difference between EUR 112m and the actual fine of EUR 127m, or a

maximum extra payment of EUR 50.4m, should the fine be fully annulled.

The legal dispute on mutual claims between Orange Polska and Netia has

lasted for many years. Hence, its final clearance was a surprise for the market.

The cash payment of PLN 117m net, PLN 0.33/share represents ca. 6% of Netia

market cap or 40% of exp adj OpFCF in 2014. We see also further implications

of that clearance which can be seen indirectly in the extra payment for Netia

linked with an EU fine. One of the main reasons why the EC imposed a EUR

127m fine on Orange Polska was for its abusing monopolistic position against

smaller market players and altnets, mainly Netia as it is the biggest altnet in

Poland. We would assume that settlement of mutual claims between Orange

Polska and Netia could potentially positively impact assessment of the EC fine

of EUR 127m by the Court visibly increasing chances for its reduction. This is

why both parties, OPL and NET, included this formula in the agreement.

Additionally, settlement of mutual claims and hypothetical change in

negotiation talks/argument between OPL and the Court should most probably

prolong the whole process.

Netia already commented that PLN 75m cash received from Orange Polska

has been used for debt restructuring. The question is how Netia will use the

remaining part of cash. There are two possible options: either extra dividend

(above our expected level of DPS PLN 0.42) or M&A in B2B. In our view, each

option is equally possible especially in the light of ongoing TK Telekom

process and, as a result, we maintain our 2015E DPS forecast at PLN 0.42, DY

7.5%.

Commercial offer on post-Aster HFC network

In August, Netia launched a commercial offer on the post-Aster HFC (hybrid

fibre-coaxial, a type of broadband network) network which covers ca. 314k HP

(homes passed) in Warsaw and ca. 106k HP in Cracow. During August, the

offer was available to ca. 175k HP in Warsaw and 40k HP in Cracow. In

September–November, the offer is available to ca. 200k HP in Warsaw and

50k HP in Cracow. The full coverage available for commercial offer will be

Page 5 of 15

ready in December. After ten weeks of sale, total RGU base amounted to 9.5k

where 4.3k pertained to internet, 3.6k to TV and 1.5k to phone. Netia

comments that ca. 80% of services are sold either in 2P or 3P.

The pricing on the HFC post-Aster network varies from PLN 39.9-69.9/month

for 2P (TV + internet) depending on TV content and mainly internet speed. 3P

(internet + TV + phone) pricing varies from PLN 44.9-99.9/month depending

on internet speed, TV content and phone package. Having in mind the high

scope of post-Aster network coverage and comparable quality to CATV

offerings, we think that it is an important element in the Netia valuation model,

as its commercial success could in the future at least partially offset losses on

wholesale access (BSA/WLR/LLU) or fixed-voice. Assuming a ca. 20% success

ratio on post-Aster HFC network, there is potential for Netia to increase its

unique client base by ca. 80k. When assuming an upsell ratio of 2x, there is

potential to increase the RGU base by 160k, which is ca. 7% of the current base

of 2.360k. If we assume an average ARPU from post-Aster client base at PLN

60/month, the hypothetical yearly incremental revenues could amount to PLN

60m (3.5% of total) and EBITDA of PLN 20-25m (5% of total).

Figure 1 Netia – post-Aster net adds based on service Figure 2 Netia – post-Aster net adds based on multiplay

Source: BESI Research, Company Data Source: BESI Research, Company Data

Based on the data provided by Netia we prepared an analysis of the structure

of net adds on the HFC post-Aster network. Our base assumption is that

internet is a base and primary service, on which the client upsells either to 2P

or 3P by adding TV and phone services. We also assume that the 2P pack

composes of only internet + TV not internet + phone. Phone is only a part of

the 3P pack. With a commercial offer available currently on ca. 70% of post-

Aster network, Netia is able to add ca. 1k RGU and 0.5k unique clients per

week. Our analysis shows that 2P is the most popular pack with a stable ca.

50% share in net adds, followed by 3P of ca. 35% and 1P of ca. 15%.

Figure 3 Netia – post-Aster network – multiplay pack structure Figure 4 Netia –post-Aster network - % of upsell to TV and phone

Source: BESI Research, Company Data Source: BESI Research, Company Data

Our estimated upsell ratio on post-Aster network (RGU/unique client) is ca.

2.2x and is stable. Based on our calculations, around 84% of internet clients

0

100

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1W 2W 3W 4W 5W 6W 7W 8W 9W 10W

3P 2P 1P

0

200

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1,000

1,200

1,400

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1W 2W 3W 4W 5W 6W 7W 8W 9W 10W

phone TV internet

0.0

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0%

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50%

60%

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1W 2W 3W 4W 5W 6W 7W 8W 9W 10W SUM

3P 2P 1P upsell ratio

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1W 2W 3W 4W 5W 6W 7W 8W 9W 10W SUM

% of TV % of phone

Page 6 of 15

upsell to TV and 36% upsell to fixed-voice. What is more important, those

figures are so far stable (after 10 weeks since launch of the commercial offer).

3Q14 results – rear view

Key highlights:

3Q14 KPI - In fixed-broadband – net adds reached -20k vs exp -15k with

ARPU at PLN 56 (flat qoq); the bulk of client base erosion happened in

regulated access BSA & LLU of -11.5k and -6.1k respectively. In fixed-

voice net adds reached -42.4k vs exp -38.8k, where -33.7k and -2.6k

pertained to regulated access WLR and LLU. ARPU reached PLN 39 vs

PLN 40 in 2Q14. In TV, net adds reached +5k (in line with exp)

supported by recent launch of commercial offer on post-Aster HFC

network with ARPU of PLN 37 (flat qoq). In mobile internet, net adds

reached -0.4k vs exp -1.4k, while in mobile voice of -4.4k vs exp -5k.

Adj EBITDA of PLN 120m, while Reported EBITDA came at PLN 109.5m

burdened by PLN 6.9m restructuring costs, PLN 1.6m Netia Lajt costs,

or PLN 1.7m cost related with New Netia integration.

2014 Guidance - Netia maintains its full year 2014 guidance assuming

revenue at PLN 1,675m, adj EBITDA at PLN 505m and adj EBIT at PLN

75m. adj OpFCF is expected at PLN 290m and adjusted capex is

expected at PLN 215m. The guidance excludes the impact of one-off

integration costs and one-off integration capital investments.

Netia Lajt - Netia will continue cost cutting program focusing on

savings from reducing senior management layers, simplifying the

organization, cutting office space and limiting discretionary spending.

Netia Lajt is targeting PLN 50m of full year incremental savings during

2015 versus the 2Q14 cost base.

Netia expects to increase margins in 4Q14 from cost cutting measures

and marketing expenses, as Netia does not plan to be as aggressive

on the marketing front in 4Q14 as usual in 4Q. Management is working

on a new cost organization mode, which will be implemented by the

end of the year,

4Q14 one-offs – 4Q14 will bring quite a lot of one-offs, which will be

material for the P&L, the CFO indicated. Some one-offs, such as

potential write-offs, will result from the ongoing review of the

network which accompanies the allocation of network resources

during the split of B2B from B2C networks. The value of potential

negative one-offs has not been disclosed. Netia will recognize a PLN

145m positive one-off related to the settlement signed with Orange

Polska,

Use of cash from Orange Polska settlement - Netia has already

received the PLN 145m in settlement funds and has already put a

portion to cover a reduction in the size of a credit facility. Asked

whether part of the cash received could flow into sweetening the

dividend, the CEO did not answer and referred to shareholders,

Network upgrade - Netia plans no additional network upgrades

beyond 2014. At end year the NGA network should cover 1.71m

households. The firm would rather concentrate on increasing

penetration of its existing assets before embarking upon new

upgrade initiatives,

ICT segment development - Netia is mulling "selective acquisitions" of

competence and infrastructure in order to make ICT services available

to customers in 2015, probably in 2H15. The management refused to

comment on whether it is involved in any due diligence processes of

ICT firms, nor on the scale of potential transactions,

Page 7 of 15

Pricing in deregulated municipalities – CEO said that Netia has been

quite aggressive in pricing already on this area and the competitive

ball is in the court of rival Orange Polska now,

Guidance – Netia will provide more detailed guidance of financial

goals in a new strategy once it completes the network split into B2B

and B2C segments. This might happen after 4Q14 results, but no

guarantee, CEO said.

Figure 5 Netia – quarterly results

Source: BESI Research, Company Data

Overall, the picture has not changed, and the most interesting question

remains open – is Netia preparing for M&A, being a target. In our view, the

rather defensive strategy presented by the management (without extra capex

on further network development) combined with a clear indication to split

B2C and B2B segments and start alliances with ICT and mobile operators

could realize this thesis. Of course, it is only our analysis of some elements

which is not supported by any tangible comments or facts.

Figure 6 Netia – quarterly KPI

Source: BESI Research, Company Data

Different M&A scenarios depending on type of investor

Netia could be an attractive target for a strategic investor, which might

benefit from post-acquisition synergies. However, its attractiveness increases

in a spin-off scenario, for in our opinion Netia as it is now is not an altnet that

would fit well with any of the potential strategic investors that we can identify,

but instead could well appeal after separation into its B2B and B2C segments.

In our view, the best way to capture potential M&A value for Netia as a target

is through a SOTP valuation in two different spin-off scenarios. First, we believe

a spin-off of B2C and B2B segments, with B2B keeping the telco infrastructure,

would be a very attractive asset for further resale on the market; this scenario

is most frequently discussed by the market in the context of a Netia spin-off,

but it is not the only one.

The second scenario assumes Netia is divided into three revenue generating

units: B2C, B2B and network infrastructure. In such a scenario, both B2C and

B2B would need to lease the telco network from Netia’s infrastructure asset.

We presented full and detailed analysis of SOTP valuations based on two

different spin-off scenarios for M&A purposes in our last report on Netia, “Quo

Vadis” on 22nd

July 2014 (click link here for report download)

(PLN m) 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 % YoY Cons BESI exp

Revenues 491 477 457 451 434 422 413 -10% 415 413

fixed-voice 215 206 198 190 181 171 163 -18% 167

fixed-broadband 184 182 180 179 175 173 170 -5% 174

interconnect 25 22 20 19 18 17 17 -14% 17

wholesale 30 30 23 24 24 25 24 5% 17

others 37 38 37 38 36 36 39 6% 38

EBITDA 139 136 142 115 126 120 109 -23% 117 109

EBITDA margin 28.3% 28.6% 31.2% 25.6% 29.0% 28.4% 26.5% 26.5%

adj EBITDA 142 141 144 124 134 125 120 -17% 114

adj EBITDA margin 28.9% 29.4% 31.5% 27.6% 31.0% 29.6% 29.1% 27.7%

D&A -111 -110 -110 -109 -105 -106 117 -207% -106

EBIT 27 26 33 6 21 14 3 -91% 12 3

EBIT margin 5.6% 5.5% 7.2% 1.4% 4.8% 3.4% 0.8% 0.8%

Net income 13 9 14 10 11 8 -4 -131% 5 -2

Net profit margin 2.7% 1.8% 3.1% 2.3% 2.5% 2.0% -1.1% -0.5%

Netia - KPI 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 YoY QoQ

Broadband client base 866 860 854 849 837 826 806 -48 -20

Fixed-voice client base 1,595 1,551 1,519 1,489 1,451 1,415 1,372 -147 -42

TV client base 91 101 111 120 127 129 134 23 5

Mobile internet client base 29 29 28 26 25 22 21 -7 0

Mobile voice client base 56 52 47 42 37 32 28 -19 -4

RGU 2,638 2,592 2,560 2,526 2,477 2,424 2,361 -199 -62

ARPU - internet (PLN/month) 56 56 56 56 55 56 56 0% 0%

ARPU - f ixed-voice (PLN/month) 43 42 43 42 41 40 39 -9% -3%

Page 8 of 15

Financial forecasts

Changes to estimates

Figure 7 Netia – changes to estimates

Source: BESI Research for estimates

ESIBR vs Bloomberg consensus

Figure 8 ESIBR vs BBG

Source: BESI Research for estimates, Company Data, Bloomberg

Valuation summary

We value Netia using the average of three methods: DCF, DDM and peer

multiples (14E&15E&16E EV/EBITDA), with each method having an equal

weight of 33%. Using a DCF, we derive a fair value of PLN 5.6; using a peer

comparison we arrive at PLN 7.1 while based on DDM we arrive at PLN 4.4.

Our fair value is PLN 5.6, implying 1% upside potential to the current share

price.

DCF

Figure 9 Netia – DCF

Source: Company data, BESI Research for estimates

Sensitivity analysis

Figure 10 Netia – sensitivity table – WACC vs TGR

Source: BESI Research for estimates

(PLN m) New Old % diff New Old % diff New Old % diff

Revenues 1,681 1,697 -1% 1,550 1,573 -1% 1,423 1,455 -2%

EBITDA 579 494 17% 455 458 -1% 415 428 -3%

EBIT 154 69 124% 76 79 -3% 73 83 -12%

Net profit 104 36 190% 44 44 0% 46 53 -14%

2014E 2015E 2016E

(PLN m) ESIBR BBG % diff ESIBR BBG % diff ESIBR BBG % diff

Revenues 1,681 1,705 -1% 1,550 1,620 -4% 1,423 1,554 -8%

EBITDA 579 490 18% 455 459 -1% 415 439 -6%

EBIT 154 68 128% 76 75 2% 73 86 -15%

Net income -12 37 -133% 44 47 -6% 46 58 -21%

2014E 2015E 2016E

DCF Valuation

2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E >2023

EBIT 154 76 73 72 71 70 71 77 86 96 77

Tax rate 19% 19% 19% 19% 19% 19% 19% 19% 19% 19% 19%

NOPAT 125 62 59 58 57 57 58 63 70 78 63

Depreciation 424 378 341 311 288 269 253 242 233 226

CAPEX -202 -202 -195 -197 -196 -195 -196 -199 -199 -200

Change of WC -1 0 -1 0 0 0 0 0 0 0

FCF 347 238 205 172 149 130 115 105 104 104 63

FCF change 32.9% -31.3% -13.8% -16.1% -13.5% -12.9% -11.4% -8.6% -1.4% 0.1% 0.0%

WACC Calculation

debt/equity 12.6% 11.5% 10.3% 9.0% 9.4% 9.9% 10.2% 10.6% 11.0% 11.5% 10.6%

risk free rate 3.2% 3.2% 3.2% 3.2% 3.2% 3.2% 3.2% 3.2% 3.2% 3.2% 3.2%

credit premium 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5%

market premium 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%

beta 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0

cost of debt 3.8% 3.8% 3.8% 3.8% 3.8% 3.8% 3.8% 3.8% 3.8% 3.8% 3.8%

cost of equity 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2% 8.2%

WACC 7.6% 7.7% 7.7% 7.8% 7.8% 7.8% 7.8% 7.7% 7.7% 7.7% 7.7%

PV (FCF) 343 219 175 136 109 88 73 62 57 53

PV (FCF) 1,819

PV (RV) 411

net debt, end 2013 291

Valuation (PLN m) 1,939

# of shares (PLN m) 348

Fair value/Share 5.6

Sensitivity Table

WACC WACC

5.6 6% 7% 8% 9% 10% 6% 7% 8% 9% 10%

-2% 5.6 5.4 5.3 5.2 5.2 -2% 0% -3% -5% -6% -8%

TGR -1% 5.7 5.6 5.4 5.3 5.2 -1% 3% 0% -3% -5% -6%

0% 6.0 5.7 5.6 5.4 5.3 0% 7% 3% 0% -2% -4%

1% 6.3 6.0 5.8 5.6 5.4 1% 14% 8% 3% 0% -2%

2% 6.9 6.4 6.0 5.8 5.6 2% 24% 14% 8% 4% 0%

Page 9 of 15

Peer valuation

Figure 11 Netia - peer valuation, as of 10/11/2014

Source: BESI Research for estimates, Bloomberg

FINANCIALS

Income Statement

Figure 12 Netia – P&L

Source: Company data, BESI Research for estimates

Company Rating Share Fair %age

Price Value Upside 2014E 2015E 2016E 2014E 2015E 2016E

Belgacom SELL 29.75 10.40 -65.0% 5.0% 5.0% 5.0% 7.2 7.8 8.2

BT Group BUY 3.74 4.55 21.5% 3.4% 3.9% 4.4% 6.4 6.2 6.1

CWC BUY 0.46 0.68 48.0% 5.1% 5.1% 5.1% 6.1 5.7 5.4

Deutsche Telekom SELL 12.25 10.00 -18.3% 4.1% 4.1% 4.5% 6.0 5.9 5.8

Hellenic Telecom NEUTRAL 8.89 11.50 29.4% 5.6% 8.3% 9.4% 4.2 4.5 4.6

KPN SELL 2.55 2.15 -15.7% 2.8% 3.9% 5.9% 4.9 5.6 5.7

Orange SELL 12.47 9.15 -26.6% 4.9% 4.9% 4.9% 5.0 5.2 5.3

TDC BUY 45.31 69.00 52.3% 8.2% 8.2% 8.2% 5.8 5.8 5.9

Telecom Italia BUY 0.85 1.00 17.0% 1.2% 1.2% 2.4% 4.8 4.9 4.9

Telefonica SELL 12.00 10.00 -16.6% 6.3% 6.3% 6.3% 6.1 5.9 5.8

Telekom Austria NEUTRAL 5.58 7.15 28.2% 0.9% 0.9% 0.9% 5.4 5.5 5.6

Telenor NEUTRAL 150.00 128.00 -14.7% 5.0% 5.3% 5.7% 6.3 6.2 6.0

TeliaSonera SELL 51.10 36.00 -29.5% 5.9% 6.1% 6.3% 6.8 6.4 6.3

Vodafone SELL 2.08 1.70 -18.2% 5.6% 5.8% 6.0% 6.6 6.3 5.9

Magyar Telekom NEUTRAL 345.0 370.0 7.2% 0.0% 0.0% 8.7% 4.7 4.5 4.4

Netia NEUTRAL 5.5 5.6 1.1% 7.6% 7.6% 7.6% 3.6 4.5 4.8

O2 CR NEUTRAL 238.0 304.0 27.7% 7.6% 6.5% 6.0% 4.3 4.3 4.2

Orange Polska BUY 9.9 10.8 8.9% 5.0% 5.0% 7.0% 4.6 5.2 5.2

Median 5.0% 5.0% 5.9% 5.6 5.6 5.6

Premium (+) / Discount (-) 52% 50% 28% -35% -21% -15%

Valuation (PLN m) 2,466

Value/share (PLN) 7.1

Dividend yield EV/EBITDA

Netia - P&L (PLN m) 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E

Revenues 1,506 1,569 1,619 2 , 121 1,876 1,681 1,550 1,423 1,312

% YoY change 35% 4% 3% 31% -12% -10% -8% -8% -8%

o/w fixed-voice 743 742 737 948 809 680 605 520 449

o/w broadband 520 580 604 766 725 689 646 608 576

o/w others 242 248 277 407 342 313 299 294 288

Total OPEX -1,517 -1,531 -1,553 -2,084 -1,803 -1,643 -1,474 -1,349 -1,241

% YoY change 22% 1% 1% 34% -13% -9% -10% -8% -8%

other opex 26 248 237 -58 20 116 0 0 0

EBIT 15 286 303 -21 93 154 76 73 72

% YoY change -113% 1864% 6% -107% -542% 66% -51% -4% -2%

% EBIT margin 1.0% 18.2% 18.7% -1.0% 4.9% 9.2% 4.9% 5.2% 5.5%

Depreciation -299 -301 -309 -482 -440 -424 -378 -341 -311

EBITDA 313 586 611 462 533 579 455 415 383

% adj EBITDA margin 20.2% 22.9% 25.2% 27.3% 29.4% 29.6% 29.3% 29.2% 29.2%

Financial income/(expense), net -13 3 15 -40 -28 -22 -22 -17 -14

Profit before tax 1 289 317 -61 64 133 54 56 58

Income tax -88 25 68 27 18 28 10 11 11

effective tax rate -6215% 9% 22% -44% 28% 21% 19% 19% 19%

Net income 89 264 249 -88 46 104 44 46 47

% YoY change -61% 197% -6% -135% -153% 125% -58% 4% 4%

% net margin 5.9% 16.8% 15.4% -4.1% 2.5% 6.2% 2.8% 3.2% 3.6%

Recurrent Net Income -7 56 142 -29 26 -12 44 46 47

% YoY change -94% -867% 156% -121% -190% -146% -459% 4% 4%

EPS (PLN) 0.2 0.7 0.6 -0.2 0.1 0.3 0.1 0. 1 0. 1

% YoY change -61% 197% -6% -135% -153% 152% -58% 4% 4%

Recurrent EPS (PLN) 0.0 0.1 0.4 -0. 1 0. 1 0.0 0.1 0. 1 0. 1

% YoY change -94% -867% 156% -121% -190% -152% -459% 4% 4%

Page 10 of 15

Operating data

Figure 13 Netia – operating data

Source: Company data, BESI Research for estimates

Profitability ratios

Figure 14 Netia – profitability ratios

Source: Company data, BESI Research for estimates

Balance sheet

Figure 15 Netia – balance sheet

Source: Company data, BESI Research for estimates

Operating data 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E

fixed-broadband client base (in 000) 560 690 912 875 849 795 757 721 690

fixed-voice client base (in 000) 1,136 1,219 1,745 1,644 1,489 1,338 1,197 1,062 946

TV client base (in 000) n/a n/a 51 79 120 144 194 224 244

mobile broadband client base (in 000) n/a n/a 30 30 26 20 13 6 -1

mobile voice client base (in 000) n/a n/a 52 60 42 23 8 3 3

RGU (in 000) 1,718 1,909 2,789 2,688 2,526 2,319 2,169 2,015 1,882

ARPU - internet (PLN/month) 59 54 52 57 56 56 55 55 55

ARPU - fixed-voice (PLN/month) 55 52 50 47 43 41 39 38 37

ARPU - TV (PLN/month) n/a n/a 38 43 38 37 37 38 38

ARPU - mobile-internet (PLN/month) n/a n/a 28 27 27 28 28 28 28

ARPU - mobile-voice (PLN/month) n/a n/a 29 26 28 28 27 27 27

Profitabil ity Ratios 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E

EBITDA margin 20.8% 37.4% 37.8% 21.8% 28.4% 34.4% 29.3% 29.2% 29.2%

EBIT margin 1.0% 18.2% 18.7% -1.0% 4.9% 9.2% 4.9% 5.2% 5.5%

Net margin 5.9% 16.8% 15.4% -4.1% 2.5% 6.2% 2.8% 3.2% 3.6%

Effective Income Tax Rate n.a. 8.6% 21.6% -44.0% 28.1% 21.4% 19.0% 19.0% 19.0%

ROA 3.8% 10.3% 7.0% -2.7% 1.6% 3.6% 1.6% 1.8% 2.0%

ROCE (EBIT / Capital Employed) 0.7% 12.4% 12.1% -0.9% 4.3% 7.1% 3.7% 3.7% 3.8%

ROE 4.4% 11.5% 9.9% -3.8% 2.1% 4.7% 2.1% 2.3% 2.5%

Netia - Balance sheet (PLN m) 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E

Total fixed assets 1,898 1,974 3,103 2,777 2 ,621 2 ,513 2 ,336 2,190 2,075

PP & E, net 1,385 1,476 2,184 2,066 1,957 1,734 1,557 1,411 1,296

Intangibles and goodwill 389 389 770 597 538 538 538 538 538

Other fixed assets 124 109 149 113 126 241 241 241 241

Total current assets 443 595 447 456 317 386 394 374 326

Inventory 3 11 5 2 3 2 2 2 2

Trade and other receivables 174 198 250 249 196 176 162 149 137

Other current assets 20 38 30 60 25 22 20 19 17

Cash and equivalents 246 347 161 145 93 185 210 205 170

Total assets 2 ,341 2 ,569 3,549 3,233 2,938 2,899 2,731 2 ,564 2,402

Total stockholders equity 2 ,025 2,298 2,500 2,296 2,205 2,209 2,107 2 ,006 1,907

Including minority interest 0 0 0 0 0 0 0 0 0

Long-term l iabil ities 15 27 549 451 317 244 194 144 94

Long-term debt 0 0 515 384 257 184 134 84 34

Other long-term liabilities 15 27 35 67 60 60 60 60 60

Short-Term Liabil ities 301 244 500 486 416 446 430 414 401

Accounts payable 256 207 262 260 232 208 191 176 162

Short-term debt 0 0 181 166 127 181 181 181 181

Other short-term liabilities 45 37 57 59 58 58 58 58 58

Total equity & l iabil ities 2 ,341 2 ,569 3,549 3,233 2,938 2,899 2,731 2 ,564 2,402

BVPS (PLN) 5.2 5.9 6.4 5.9 5.7 6.3 6. 1 5 .8 5.5

Page 11 of 15

Cash Flow

Figure 16 Netia – Cash Flow

Source: Company data, BESI Research for estimates

Figure 17 RGU base Figure 18 RGU - structure

Source: Company data, BESI Research for estimates Source: Company data, BESI Research for estimates

Figure 19 TV client base Figure 20 Blended ARPU

Source: Company data, BESI Research for estimates Source: Company data, BESI Research for estimates

Netia - Cash Flow (PLN m) 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E

Net income 89 264 249 -88 46 104 44 46 47

Depreciation and Amortization 299 301 309 482 440 424 378 341 311

Change in Net Working Capital -22 -21 11 -12 36 -1 0 -1 0

Other -65 -254 -150 159 53 12 0 0 0

Cash Flow from Operations 300 289 419 541 575 540 422 386 358

Capital Expenditures -238 -193 -263 -263 -282 -202 -202 -195 -197

Other -66 -96 -810 -3 3 0 0 0 0

Cash Flow from Investing Activities -303 -289 -1,073 -266 -279 -202 -202 -195 -197

Change in Debt -3 -7 694 -187 -132 -100 -50 -50 -50

Issue of shares 0 0 0 0 0 0 0 0 0

Dividends paid 0 0 0 0 0 -146 -146 -146 -146

Other -4 -1 -59 -116 -195 0 0 0 0

Cash Flow from Financing Activities -7 -8 636 -304 -327 -246 -196 -196 -196

Beginning cash 206 181 173 155 124 93 185 210 205

Increase/(decrease) in cash -11 -8 -18 -28 -31 92 24 -5 -35

Ending cash 196 173 155 128 93 185 210 205 170

DPS (PLN) 0.00 0.00 0.00 0.00 0.35 0.42 0.42 0.42 0.42

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

mobile voice mobile internet TV fixed-voice fixed-broadband

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2008 2009 2010 2011 2012 2013 2014E 2015E 2016E

mobile voice mobile internet TV fixed-voice fixed-broadband

0

50,000

100,000

150,000

200,000

250,000

300,000

2011 2012 2013 2014E 2015E 2016E 2017E

0

10

20

30

40

50

60

70

80

90

100

2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E

Series1 Series2 Series3 Series4 Series5

Page 12 of 15

Figure 21 Netia – fixed-broadband client base Figure 22 Netia – fixed-voice client base

Source: Company data, BESI Research for estimates Source: Company data, BESI Research for estimates

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E 0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

1,800,000

2,000,000

2007 2008 2009 2010 2011 2012 2013 2014E 2015E 2016E 2017E

Page 13 of 15

Valuation Methodology

We value Netia using the average of three methods: DCF, DDM and peer

multiples (14E&15E&16E EV/EBITDA) each method with an equal weight of

33%. Using a DCF, we derive a fair value of PLN 5.6; using a peer comparison

we arrive at PLN 7.1 while based on DDM we arrive at PLN 4.4. Our fair value is

PLN 5.6, implying 1% upside potential to the current share price.

Risks to Fair Value

Upside risk:

Better than expected net adds on post-Aster network,

A slowdown in net client erosion among existing segments, fixed-

voice and fixed-broadband,

UKE reduced wholesale tariffs BSA/WLR/LLU resulting in higher

margin of regulated access services for Netia,

Downside risks:

Speed up in client erosion in fixed-voice and fixed-broadband,

Worse than expected performance of client net adds on post-Aster

network

Please visit our website at www.EspiritoSantoIB.co.uk for up to date recommendation charts.

Netia NET PW

Report date Recommendation Fair value Share price

2014 July 22 Neutral PLN 5.40 PLN 5.48

2013 August 12 Buy PLN 5.80 PLN 4.99

February 27 Buy PLN 5.40 PLN 4.23

2012 December 10 Buy PLN 5.90 PLN 4.84

September 26 Buy PLN 7.00 PLN 6.02

April 18 Buy PLN 7.20 PLN 6.12

2011 November 24 Buy PLN 6.70 PLN 4.84

Source: Bloomberg, BESI Research

N

B

B

B

BB

B

3.5

4

4.5

5

5.5

6

6.5

Nov-11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14

Buy Trading Buy Neutral Trading Sell Sell Restricted Dropped Coverage

Page 14 of 15

IMPORTANT DISCLOSURES

101014

This report was prepared by BESI Research, a global brand name for the equity research teams of Banco Espírito Santo de Investimento, S.A., with headquarters in Lisbon, Portugal, of its Branches in Spain and Poland and of its affiliates BES Securities do Brasil, S.A – Corretora de Câmbio e Valores Mobiliários, in Brazil, Execution Noble Limited, in the United Kingdom, and Espirito Santo Securities India Private Limited, in India, all authorized to engage in securities activities according to each domestic legislation. All of these entities are included within the perimeter of the financial group controlled by Novo Banco, S.A., a Portuguese bank authorised and regulated by Banco de Portugal (Portuguese Banking Regulator) and Comissão do Mercado de Valores Mobiliários (the Portuguese Securities Market Authority), which was incorporated on the 3rd of August 2014 in the context of the resolution action taken on the former financial institution Banco Espírito Santo, S.A..

Analyst Certification

Each research analyst primarily responsible for the content of this research report, in whole or in part, certifies that with respect to each security or issuer that the analyst covered in this report: (1) all of the views expressed accurately reflect his or her personal views about those securities or issuers; the issuers were not previously informed about the content of the recommendation included in this research report and the assumptions were not validated by the issuers; (2) no part of his or her compensation is directly or indirectly related to: (a) the specific recommendations or views expressed by that research analyst in the research report; and/or (b) any services provided or to be provided by Banco Espírito Santo de Investimento, S.A. and/or by any of its affiliates to the issuer of the securities under recommendation. Moreover, each of the analysts hereby certifies that he or she has no economic or financial interest whatsoever in the companies subject to his or her opinion and does not own or trade any securities issued by the latter.

Ratings Distribution

BESI Research hereby provides the distribution of the equity research ratings in relation to the total issuers covered and to the investment banking clients as of end of September 2014.

Explanation of Rating System Ratings Distribution

12-MONTH RATING DEFINITION

BUY Analyst expects at least 10% upside potential to fair value, which should be realized in the next 12 months

NEUTRAL Analyst expects upside/downside potential of between +10% and -10% to fair value, which should be realized in the next 12 months

SELL Analyst expects at least 10% downside potential to fair value, which should be realized in the next 12 months

As at end September 2014 Total BESI Research

Total Investment Banking Clients (IBC)

Recommendation Count % of Total Count % of IBC % of Total

12 Month Rating:

Buy 205 46.8% 31 86.1% 7.1%

Neutral 141 32.2% 4 11.1% 0.9%

Sell 90 20.5% 0 0.0% 0.0%

Restricted 1 0.2% 1 2.8% 0.2%

Under Review 1 0.2% 0 0.0% 0.0%

TRADING RATING DEFINITION

TRADING BUY Analyst expects a positive short-term movement in the share price (max duration 3 months from the time Trading Buy is announced) and may move out of line with the fair value estimate during that period

TRADING SELL Analyst expects a negative short-term movement in the share price (max duration 3 months from time Trading Sell is announced) and may move out of line with the fair value estimate during that period

Trading Rating:

Trading Buy 0 0.0% 0 0.0% 0.0%

Trading Sell 0 0.0% 0 0.0% 0.0%

Total recommendations 438 100% 36 100% 8.2%

For further information on Rating System please see “Definitions and distribution of ratings” on: http://www.espiritosantoib-research.com.

Share Prices

Share prices are as at the close of business on the day preceding publication, unless otherwise specified.

Coverage Policy

BESI Research reserves the right to choose the securities it expresses opinions on. The main criteria to choose such securities are: 1) markets in which they trade 2) market capitalisation 3) liquidity, 4) sector suitability. BESI Research has no specific policy regarding the frequency in which opinions and investment recommendations are released.

Representation to Investors

BESI Research has issued this report for information purposes only. This material constitutes "investment research" for the purposes of the Markets in Financial Instruments Directive and as such contains an objective or independent explanation of the matters contained in the material.

Any recommendations contained in this document must not be relied upon as investment advice based on the recipient's personal circumstances. This report is not, and should not be construed as an offer or a solicitation to buy or sell any securities or related financial instruments. The investment discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. The material in this research report is general information intended for recipients who understand the risks associated with investment. It does not take account of whether an investment, course of action, or associated risks are suitable for the recipient. This research report does not purport to be comprehensive or to contain all the information on which a prospective investor may need in order to make an investment decision and the recipient of this report must make its own independent assessment and decisions regarding any securities or financial instruments mentioned herein. In the event that further clarification is required on the words or phrases used in this material, the recipient is strongly recommended to seek independent legal or financial advice. Where an investment is denominated in a currency other than the investor’s currency, changes in rates of exchange may have an adverse effect on the value, price of, or income derived from the investment. Past performance is not necessarily a guide to future performance. Income from investments may fluctuate. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. Any recommendation and opinion contained in this report may become outdated as a consequence of changes in the environment in which the issuer of the securities under analysis operates, in addition to changes in the estimates and forecasts, assumptions and valuation methodology used herein. The securities mentioned in this publication may not be eligible for sale in some states or countries.

All the information contained herein is based upon information available to the public and has been obtained from sources believed to be reliable. However, BESI Research does not guarantee the accuracy or completeness of the information contained in this report. The opinions expressed herein are BESI Research present opinions only, and are subject to change without prior notice. BESI Research is not under any obligation to update or keep current the information and the opinions expressed herein nor to provide the recipient with access to any additional information.

BESI Research has not entered into any agreement with the issuer relating to production of this report. BESI Research does not accept any form of liability for losses or damages which may arise from the use of this report or its contents.

This communication has been issued and approved by Execution Noble Limited in the United Kingdom where it is being directed at persons who have professional experience in matters relating to investments. It is not intended for retail customer use.

Ownership and Material Conflicts of Interest

Banco Espírito Santo de Investimento, S.A. and/or its Affiliates (including all entities within BESI Research) and/or their directors, officers and employees, may have, or have had, interests or qualified holdings on issuers mentioned in this report. Banco Espírito Santo de Investimento, S.A. and/or its Affiliates may have, or have had, business relationships with the companies mentioned in this report. However, the research analysts may not purchase or sell securities or have any interest whatsoever in companies subject to their opinion.

Banco Espírito Santo de Investimento, S.A. and/or its Affiliates have a qualified shareholding (1% or more) in CTT and Oi. Bradesco has a direct qualified shareholding (20%) in BES Investimento do Brasil, S.A., the parent company of BES Securities do Brasil S.A. CCVM.

Pursuant to Polish Ministry of Finance regulations, we inform that neither does Banco Espírito Santo de Investimento, S.A. nor its Affiliates have any qualified shareholding in the Polish Securities Issuers mentioned in this report in excess of 5% of its total share capital.

Mr. Rafael Valverde, a member of the board of Banco Espírito Santo de Investimento, S.A., is a non-executive board member of EDP Renováveis. Mr. Ricardo Abecassis Espírito Santo Silva, the Chief Executive Officer of BES Investimento do Brasil, S.A., is a board member of Brazil Hospitality Group.

Banco Espírito Santo de Investimento, S.A and/or its subsidiaries are liquidity providers or market makers for Altri, Usiminas and Vale.

Banco Espírito Santo de Investimento, S.A. and/or its subsidiaries participate or have participated in the last 12 months as a syndicate member in share offerings of 4imprint, Alumetal, Capital Park, CTT, EDP, Just Retirement, Klabin, Liberbank, Mota-Engil, NAHL Group, NOS, Oi, PGE, Prime Car Management, REN and SKS Microfinance.

Banco Espírito Santo de Investimento, S.A. and/or its subsidiaries participate or have participated in the last 12 months as a syndicate member in the bond issues of the following companies: Abengoa, Altri, Bematech, EDP, Globe Trade Centre, Kredyt Inkaso and Sonae.

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Banco Espírito Santo de Investimento, S.A. and/or its subsidiaries provided in the last 12 months investment banking services to the following companies: 4imprint, Abengoa, Altri, Alumetal, Bematech, Burford Capital, Capital Park, Casino Guichard, EDP, EDP Renovaveis, Galp Energia, Globe Trade Centre, Inditex, IQE, Just Retirement, Kcom Group, Klabin, Kredyt Inkaso, Kruk, Laird, Liberbank, Mota-Engil, NAHL Group, NOS, Novae Group Plc, Oi, Prime Car Management, REN, Semapa, SKS Microfinance, Sonae, Sonaecom, Sports Direct, SVG Capital, Ted Baker and Xchanging.

Affiliates of Banco Espírito Santo de Investimento, S.A. are partners to Mota-Engil in the infrastructure business in Portugal and other countries. Mota-Engil jointly with ES Concessões, S.G.P.S., S.A. (held by an Affiliate of Banco Espírito Santo de Investimento, S.A.) has created a joint holding company – Ascendi – for all stakes in transportation infrastructure concessions in Portugal and abroad. Banco Espírito Santo de Investimento, S.A. provided, or continues to provide, investment banking services to Ascendi.

Banco Espírito Santo de Investimento, S.A. and/or its subsidiaries do and seek to provide investment banking or other services to the companies referred to in this research report. As a result, investors should be aware that a conflict of interest may exist.

Market Making UK

Execution Noble Limited is a Market Maker in companies covered and may sell to or buy from customers as principal in certain financial instruments listed or admitted to listing on the London Stock Exchange. For information on Companies to which Execution Noble Limited is a Market Maker please see “Execution Noble Limited UK Market Making” on http://www.espiritosantoib-research.com.

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This report cannot be reproduced, in whole or in part, in any form or by any means, without BESI Research’s specific written authorization. This report is confidential and is intended solely for the designated addressee. Therefore any disclosure, replication, distribution or any action taken in reliance on it, is prohibited and unlawful. Receipt and/or review of this research report constitutes your agreement not to redistribute, retransmit, or disclose to others the contents, opinions, conclusion, or information contained in this report (including any investment recommendations, estimates or price targets without first obtaining express permission from an authorized officer of Banco Espírito Santo de Investimento, S.A.

Regulatory Authorities

Portugal: Banco Espírito Santo de Investimento, S.A. is regulated by the Comissão do Mercado de Valores Mobiliários (the Portuguese Securities Market Authority); Spain: the branch in Madrid is regulated by the Comisión Nacional del Mercado de Valores (the Spanish Securities Market Authority); Poland: the branch in Warsaw is regulated by the Komisja Nadzoru Finansowego (the Polish Financial Supervision Authority); Brazil: BES Securities do Brasil, S.A. - Corretora de Câmbio e Valores Mobiliários is regulated by the Comissão de Valores Mobiliários (the Brazilian Securities Market Authority); United Kingdom: Execution Noble Limited is authorised and regulated by the Financial Conduct Authority; India: Espirito Santo Securities India Private Limited is regulated by the Securities and Exchange Board of India.

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