Investment Presentation

Team Members:Daniela CHILARICristina NEGRUNicolae OTGON

Iurie RUSU

CFA Institute Research Challenge

SELL

TARGET PRICERON 30.20

Sector: Telecommunication ServicesMarket Cap: RON 3.645 bn

52 weeks high: RON 43.6052 weeks low: RON 30.30

16 Feb 2018 priceRON 36.45

Source: Bucharest Stock Exchange website

Source: Team Analysis

SELL

Investment RisksBusiness Description Corporate GovernanceIndustry Overview

Investment Summary Financial Analysis

Increasing cost of debt

Interest rates expected to spike up

Low investor

confidenceDeficient corporate governance

Over the top players

take over

Operators become just a data pipe

Price sensitive customer

baseUnsustainable low prices strategy

On 16 May 2017DIGI went public on BSE

23,918,519 shareRON 40 per share

On 16 February 2017RON 36.45 per share

Downside of8.87% since IPO

Business Description

Digi IPO

Cable TV1

DTH2

Mobile Telephony4

Fixed Line Telephony5

Fixed Internet3

Hungary

73%

16%

11%

Romania

Spain and Italy

Revenue split by Country

916.5 mn €

25% 24%

26%

8%4%

13%Cable TV

Fixed Internet and Data

DTH

Fixed-line telephony

Other Revenues

Mobile telecommunications

services

Revenue split by Product

Business Description

Business Description

Source: DIGI’s investors presentation

RCS Management 62%

Retail Shareholders

Institutional shareholders6%

Zoltan Teszariultimate shareholder

with 56,93% control of the company

2%

28%

Shareholder Structure

DIGI

34%

Class B

Class A

66%

Corporate Governance

Source: Company’s financial reports

* the remaining 2% from Class A shares represents treasury shares

Overall Score6/14

underperformance

2/3

• The major shareholder has 91% of the total company’s voting power

1/5

• Only 1/3 of the Board of Directors are independent

.

2/4

• The Group has not accounted for any provision for lawsuits

1/2

• The Executive Director of RCS&RDS has been accused of bribery and money laundering

Corporate Governance

Corporate Governance Appraisal

Source: Team Analysis

Industry Trends

Industry OverviewCompetitive Positioning

Towards satisfying data usage demand

Becomingdata pipe for

transferring media

Need to satisfy network quality

demand

Cost efficiency for clientsMarket share for Co.

28.7

20.5

91.4

62.9

Good Price

Connection Problems

3.91

3.14

3.28

2.83

Coverage Level

Loyalty Offers

Digi Average

Industry OverviewCompetitive Positioning

Survey

Percentage of respondents

Scale from 1 to 5

Source: Team Survey

-

100

200

300

400

500

600

700

2013 2014 2015 2016 2017

Revenues (EUR mn)

TV Market Share

49%

20%

13%

18%

Fixed Broadband Market Share

12%

12%

49%

27%

Industry OverviewCompetitive Positioning

Romanian Segment Outlook

Source: Team Analysis based on DIGI’s financials

1

2

3

4

5

1 2 3 4 5C

ove

rag

e Q

ua

lity

Price (1 highest, 5 lowest)

Telecom operators: Price vs. Coverage

Digi

Orange

Vodafone

Telekom

12%

21%

31%36%

Mobile Services Market Share

Source: Team Survey

Industry OverviewCompetitive Positioning

Romanian Mobile Network Position

Source: Team Analysis based on DIGI’s financials

-

20

40

60

80

100

120

140

160

2013 2014 2015 2016 2017

Revenues (EUR mn)

Fixed Broadband Market Share

38%

22%

16%9%

15% 29%

27%

14%

25%5%

TV Market Share

Industry OverviewCompetitive Positioning

Hungarian Segment Outlook

Source: Team Analysis based on DIGI’s financials

SELL 17.15% Downside

TARGET PRICE

RON 30.20

30%70%

Investment Summary

Valuation Summary

FCFF

RON

30.71 per share

SOTP

RON

29.92 per share

FCFF

Terminal Value 1206.09Enterprise Value 1417.84Net Debt 759.77Fair value/share 6.53Discount 15%Fair value/share 25.8612m TP 30.71Closing (16 Feb 2018) 36.45

Downside -15.74%

30.71RON / share

WACC 8.13%Computed Beta 1.87

Cost of Equity 18.75%Cost of Debt 6.52%

Investment Summary

Intrinsic Valuation

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

SOTP on EV/SALES

Entertainment 1.71x Cable 1.48xTelecom 1.42xEV 1405.2412m TP 29.98

Downside -17.76%

Investment Summary

Sum-of-the-Parts Based on Multiples

85% CEE

15% WE

29.98RON/share

Source: Team Analysis and Bloomberg data

Investment Summary

Monte Carlo

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

Entertainment Sector

Cable&Satelite Sector

Net Debt

Telecom Sector

Cost of Equity

Exchange Rate

Minor Share Holders

Sensitivity Analysis - SOTP

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

Net Debt

GDP RO

GDP HU

GDP ES

Minor Share Holders

GDP IT

Sensitivity Analysis - FCFF

Source: Team Analysis

RGU &

ARPU

Industry evolution GDP

RevenueGrowth Rates

Financial Analysis

Growth Rate Computation

Revenue Generating Unit

Average Revenue Per Unit

RO

HU

ITES

-2%

0%

2%

4%

6%

8%

2017e 2018e 2019e 2020e 2021e

Cable Internet Entertainment Telephony

Forecasted Revenue Growth Rates (RO)

Financial Analysis

Source: Team Estimations

-5%

-3%

-1%

1%

3%

5%

7%

9%

2017e 2018e 2019e 2020e 2021e

Cable Internet Entertainment Telephony

Forecasted Revenue Growth Rates (HU)

Financial Analysis

Source: Team Estimations

Telephony expenses19%

Salaries and related taxes

18%

Depreciation12%

Programming expenses 11%

Rentals7%

Cost of goods sold5%

Other expenses19%

OPEX

Utilities 4%

Pension fund contributions

5%

Financial Analysis

Expenses Analysis

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

0

50

100

150

200

250

300

350

2013 2014 2015 2016 2017

EU

R m

n

CAPEX and EBIDTA Evolution

EBIDTA CAPEX EBIDTA Margin

Source: Team Analysis based on DIGI’s financials

8%

92%

Capital Structure

Equity

Debt

580

600

620

640

660

680

700

720

740

760

780

2013 2014 2015 2016 2017

EU

Rm

n

Consolidated Debt Evolution

95 93

60

150

-

350

13% 12%8%

20%

0%

47%

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2018 2019 2020 2021 2022 2023

-

50

100

150

200

250

300

350

400

EU

R m

n

Loans Maturity

Total % of Total

Financial Analysis

Debt Analysis

Source: Team Analysis based on DIGI’s financials

Risk Assessment

Asc

end

ing

ris

kBusiness

Operational

Financial

ReputationalFiscal

Investment Risks

Source: Team Analysis

The government increases taxation as

an effect to high public deficit

In 2017 a series of criminal offenses

have been indicted to a

senior manager

In 2015, DIGI lost their license to broadcast UEFA

Champions League to Telekom

National Telecom Regulator might target DIGI for

dominant position on the market

Government

Content

ProvidersSenior management

ANCOM

Risk Contributors

Investment Risks

Increasing cost of debt

Low investor

confidencePrice

sensitive customer

base

Over the top players

take over

SELL

TARGET PRICERON 30.20 per share

16 Feb 2018 priceRON 36.45 per share

30% 70%

FCFF SOTP

17.15% Downside