Telco puzzles in 2015

Transcription

FUNDAMENTAL INSIGHT
Poland | Telecom Services | 11-December-2014
Polish Telecoms
Telco puzzles in 2015
As we move into 2015 we believe the Polish telco market is in a very
interesting yet complicated situation – a puzzle to be worked out, we
would say. Some important events like the LTE auction, deregulation of
the fixed-broadband market, ongoing competitive pressure in
B2C/B2B all seem to be happening at the same time. On top of this we
also have potential M&A. This could all reshape the market in terms of
its players and products. Overall, we expect the telco market to
intensify its convergence path with more and more integration of
payTV into telco services and the other way around. We see a potential
additional competitive threat from cableTV expanding to quad-play
with mobile services. The spectrum auction is undoubtedly the crucial
element for 1H15 where we lift our LTE budget for OPL and CPS to PLN
1.4bn (vs PLN 900m). Cyfrowy Polsat remains our sector top-pick
(BUY, FV increased 7.4% to PLN 29.1) thanks to its convergent
attractive offer coupled with substantial cost synergies potential. We
downgrade Orange Polska from BUY to SELL (FV lowered 26% to PLN
8.0) on the back of higher FTTx capex and LTE budget which triggers a
2015E DPS cut to PLN 0.3. We keep a NEUTRAL on Netia (FV PLN 5.6).
Spectrum auction is undoubtedly the most crucial element in the mobile
broadband market, which shoud be the fastest-growing telco segment going
forward. NetNet’s appearance came as the biggest surprise. We see a few
different scenarios but our base case is OPL and Polkomtel buying 2 800MHz
blocks and 4 2600MHz spending PLN 1.4bn and T-Mobile buying one 800Mhz
block and 4 2600MHz spending PLN 600m.
Cyfrowy Polsat
BUY
18% upside
Fair Value
Bloomberg ticker
Share Price
Market Capitalisation
Free Float
PLN 29.10
CPS PW
PLN 24.71
PLN 15,803.18m
26%
Orange Polska
SELL
11% downside
Fair Value
Bloomberg ticker
Share Price
Free Float
PLN 8.00
OPL PW
PLN 9.00
PLN 11,811.22m
49%
Netia
NEUTRAL
1% downside
Fair Value
Bloomberg ticker
Share Price
Free Float
PLN 5.60
NET PW
PLN 5.65
PLN 1,965.64m
100%
All share price data as at close on 9-Dec-2014
Source: BESI Research, Company Data, Bloomberg
Dividends: As a result of raising our forecast spectrum budget for OPL and
believing it will invest in FTTx, we expect OPL to cut the DPS paid in 2015E to
PLN 0.3 (vs DPS PLN 0.5 before). Due to high leverage and debt covenants,
Cyfrowy Polsat will not pay a div in 2015.
M&A: TK Telekom has started its privatisation process and based on the
company’s forecasts we calculate a PLN 250m valuation (giving a 14E EV/EBITDA
5.0x). Given Netia announced the split of its network into B2B and B2C in its latest
strategy, we think a spin off of either its B2C or B2B asset could be an option for
Netia to consider. The outcome of the widely discussed Vodafone and Liberty
Global possible deal could have consequences for the Polish telco market
depending on whether Vodafone stays or exits Poland.
Competition: We expect ongoing price pressure in mobile B2B especially in SOHO
on the back of repricing to unlimited voice tariffs and some pressure on fixed
tariffs related to the integration of GTS in T-Mobile. In B2C, the market offer
should be focused on plans with a bundled mobile broadband service. A price war
in the mobile broadband market is not our base case scenario, although we
cannot rule it out given the growing client base and data usage. We expect CPS
to push its SmartDOM offer heavily, while we expect OPL to launch a FTTx
upgrade to defend its commercial offer against the likely scenario of cableTV
going quad-play.
Deregulation of fixed-broadband: In our view, on the back of the success of the
pilot offer in Warsaw, Orange will likely roll out FTTX in deregulated districts to
offer convergent and competitive offers to CableTV, helping defend its mobile
base. We expect a 500k HP upgrade in 2015/16E with PLN 320m incremental
capex and PLN 250m pa subsequently.
Analysts
Konrad Ksiezopolski
+48 22 347 4074
[email protected]
Banco Espírito Santo de Investimento, S.A. – Warsaw Branch
Poland 59 Zlota Street, 00-120 Warsaw
Andrew Hogley
+44 20 7456 1652
[email protected]
Execution Noble Ltd
Nuno Matias
+351 21 330 2133
[email protected]
Banco Espírito Santo de Investimento, S.A.
Miguel Borrega
+351 21 330 2173
[email protected]
Banco Espírito Santo de Investimento, S.A.
NOT FOR DISTRIBUTION TO ANY US PERSON OR TO ANY PERSON
OR ADDRESS IN THE UNITED STATES OF AMERICA
(v1.0.8.0)
Spectrum auction
24th November at 3pm was the deadline for submitting offers and denoted the
legal launch of the LTE spectrum auction in Poland. In total, there were six
bidders: Orange Polska, Polkomtel, T-Mobile, P4, Emitel and NetNet. The
participation of all mobile operators was practically a foregone conclusion and
Emitel was also widely expected but NetNet throwing its hat into the ring
came as a big surprise.
According to the National Legal Registry (KRS), NetNet was set up on 29th
January 2014 and the current President and sole owner is Szymon Ruta, a son of
Heronim Ruta who is a very close business partner of Zygmunt Zolorz-Zak (owner
of Cyfrowy Polsat and Midas) and the second biggest shareholder of Cyfrowy
Polsat with an 8.3% stake in shares and 9.3% in votes. The legal address of NetNet
is the same as Midas, controlled by Zygmunt Solorz-Zak. Hence, although NetNet
is not part of the Solorz capital group, there are some indirect connections.
The formal process of the LTE auction has now started and the Polish Telco
Regulator (UKE) will analyse the submitted offers. In January it will most likely
start to test the auction procedures and the IT systems (as the auction will be
conducted through the internet). Orange Poland and Cyfrowy Polsat say they
expect the real auction to start sometime in February and last a month or two
with potential cash payments and spectrum allocation in April – May 2015.
However, we think this is an optimistic scenario as it assumes no legal
objections from anyone and both OPL and CPS say they believe that legal
actions are very likely.
Owing to the twists and turns an auction process may take, we have decided
to focus on potential scenarios with potential spectrum budgets based on
international examples.
In the last report on Polish Telecoms, we maintained a LTE spectrum budget
for OPL and CPS at PLN 900m each. However, given the very fast growing
mobile data consumption (shown in Midas’ 3Q14 results) and more than
expected participants in the spectrum race, we have decided to lift our
expected LTE spectrum budget for OPL and CPS to PLN 1.4bn.
For OPL, our raised LTE spectrum budget, combined with higher targeted
2015E/16E capex to PLN 2.2bn due to a FTTx rollout in deregulated districts
and ongoing EBITDA pressure leads us to cut the dividend in 2015E to DPS 0.3
(from DPS PLN 0.5 before). Our financial forecasts imply net debt/EBITDA at
1.56x in 2015E and 1.51x in 2016E.
LTE spectrum - international examples
The auction strategies of its participants and the final price paid for
800&2600MHz are obviously still unknown. We look at international examples
to at least suggest a hypothetical level of spectrum budgets.
We have carried out an in-depth study of spectrum auctions in
800/900/1800/2600MHz that have happened in Europe. Below we have
charts summarising the results.
Most of the auctions in the last few years were for 4G (LTE) spectrum, i.e.
800MHz spectrum, 2.6GHz spectrum, or a mixture of the two. A number of
auctions have however also included the renewal of 2G and 3G spectrum. Of
these the most notable were the October 2013 auction in Austria and the
December 2012 auction in The Netherlands. Renewals also formed a significant
component of auctions in Greece, Ireland and Italy. It is notable that the
auctions that included the renewal of 2G spectrum resulted in a materially
higher price than the auctions for 4G spectrum.
Page 2 of 39
Figure 1
Spectrum costs versus frequency for recent European auctions by market
3,000
Austria
Weighted average frequency (MHz)
Belgium
Czech
2,500
Denmark
Finland
France
2,000
Germany
Greece
Hungary
1,500
Ireland
Italy
Netherlands
1,000
Norway
Poland
Portugal
500
Romania
Spain
Sweden
0
0.00
0.20
0.40
0.60
0.80
Price per MHz per pop (EUR)
1.00
Switzerland
UK
Source: BESI Research
Our analysis shows that 800MHz spectrum has been the most expensive
yielding on average EUR 0.5 per MHZ per capita while the 2600MHz spectrum
on average cost EUR 0.15 per MHZ per capita.
Figure 2
Average cost depending on spectrum band
3,000
2,500
2,000
800
900
1,500
1800
2100
2600
1,000
Trend
Log. (Trend)
500
0
0.00
0.20
0.40
0.60
0.80
Price per MHz per pop (EUR)
1.00
In the figure below, we have classified spectrum auctions in descending order
with the spots showing the weighted average frequency acquired. The chart
shows that the higher cost of spectrum auction per MHz per capita the lower
weighted average frequency (meaning that telcos acquired more spectrum in
lower spectrum scale 800/900MHz than 2100/2600MHz).
Page 3 of 39
Price per MHz per pop (Euro)
0.900
0.000
3,000
0.800
0.700
2,500
0.600
0.500
2,000
0.400
1,500
0.300
1,000
0.200
0.100
500
0
Figure 4
Austria - Oct 13
Netherlands - Dec 12
France - Dec 11
Greece - Oct 14
Belgium - Oct 13
Ireland - Nov 12
Greece - Nov 11
Italy - Sep 11
Poland - Jun 13
Sweden - Mar 11
Finland - Oct 13
Denmark - Jun 12
Norway - Dec 13
Sweden - Oct 11
Switzerland - Feb 12
Germany - May 10
Czech - Nov 13
UK - Feb 13
Sweden - May 08
Spain - Jul 2011
Portugal - Nov 11
Hungary - Sep 14
Denmark - May 10
Romania - Sep 12
Spain - Nov 11
France - Sep 11
Spain - May 11
Belgium - Oct 11
Greece - Oct 14
Norway - Nov 07
Austria - Oct 10
Greece - Oct 14
Finland - Nov 09
Netherlands - Apr 10
3,000
1.00
2,500
0.80
2,000
0.60
1,500
0.40
1,000
0.20
500
0.00
0
1.20
Netherlands - Vodafone
Austria - Telekom Austria
Austria - Deutsche Telekom
France - SFR
Netherlands - KPN
Austria - Three
France - Orange
Ireland - Eircom
Netherlands - Tele2
Greece - Wind
UK - Telefonica (O2)
Belgium - Belgacom
Belgium - Mobistar
Belgium - KPN (BASE)
France - Bouygues
Ireland - Vodafone
Ireland - O2
Netherlands - Deutsche Telekom
UK - Three
Switzerland - Sunrise
Poland - T-Mobile
Sweden - TeliaSonera
Italy - Telecom Italia
Italy - Vodafone
Greece - Vodafone
Spain - Telefonica
Finland - TeliaSonera
Sweden - Net4Mobility
Italy - Wind
Greece - Cosmote
Denmark - TDC
Finland - DNA
Finland - Elisa
Norway - TeliaSonera
Poland - P4
Spain - Orange
Sweden - Telenor/Tele2
Romania - RCS & RDS
Norway - Telco Data
Germany - Vodafone
Sweden - Three
Germany - Telefonica (O2)
Germany - T-Mobile
Norway - Telenor
Sweden - Tele2
Sweden - Three
Czech Republic - Vodafone
Sweden - Telenor
Denmark - TDC
Switzerland - Swisscom
Spain - Telefonica
Czech Republic - Telefonica
Czech Republic - T-Mobile
UK - Vodafone
Spain - Orange
Denmark - TeliaSonera
Portugal - Optimus
Portugal - Oi (TMN)
Denmark - Telenor
Spain - Vodafone
Portugal - Vodafone
UK - EE
Switzerland - Orange
Romania - Vodafone
Denmark - TT-Netværket
Romania - Orange
France - Iliad
Romania - Cosmote RMT
France - Orange
France - Bouygues
France - SFR
UK - BT Group
Germany - KPN (E-Plus)
Belgium - Belgacom
Belgium - Mobistar
Belgium - KPN (BASE)
Sweden - Intel Capital
Austria - Deutsche Telekom
Norway - Telenor
Spain - Yoigo
Austria - Telekom Austria
Austria - Orange
Austria - Three
Romania - 2K Telecom
Spain - Vodafone
Spain - Orange
Finland - Pirkanmaan Verkko
Denmark - Three
Finland - DNA
Finland - Elisa
Finland - TeliaSonera
Netherlands - KPN
Netherlands - Ziggo
Netherlands - T-Mobile
Netherlands - Vodafone
Netherlands - Tele2
Figure 3
Spectrum costs in EUR per MHZ per capita by operators
In the figure below, we have the same spectrum data but by country.
Spectrum costs in EUR per MHZ per capita by country
Apart from rebasing the price paid for spectrum to the per capita factor, we
believe it is important to compare the level of ARPU generated in the mobile
segment. We believe a fair assessment here would be that the higher ARPU
generated the higher prices operators are able to pay for spectrum (as ARPU
level corresponds to the payback period on spectrum outlay).
As the upcoming spectrum auction will be fully dedicated to the development
of mobile broadband services, it is worth comparing the pricing of commercial
offers on mobile broadband services. As can be seen in the chart below,
Poland has the lowest pricing of mobile broadband services in every monthly
download limit category. In our view, when looking at potential auction pricing
one has to bear this in mind in addition to examples of spectrum pricing per
MHz per capita that we show above.
Page 4 of 39
Figure 5
Pricing of mobile broadband commercial offers, EUR/GB
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Poland
up to 5GB/m
Austria
Hungary
5-10GB/m
Czech Rep.
10-20GB/m
Slovakia
20-30GB/m
Source: BESI Research, Company Data
Possible LTE spectrum scenarios
Scenario 1.
Each participant has applied for the max amount of available frequency (2
5MHz paired blocks in 800MHz and 4 5MHz paired blocks in 2600MHz). This
scenario makes sense as any operator acting alone in the future will need 2
5MHz blocks to effectively provide a good quality service and have enough
spectrum to form alliances with network sharing formed of 3 5MHz duplex
blocks. In this scenario price escalation looks very possible. Of course when
working out total spectrum budgets P4, Emitel and NetNet will need to bear in
mind that apart from spectrum fees they will need to include capex for postauction obligations (network coverage) in their business plans which P4
estimated at ca. PLN 600m.
Scenario 2.
In this scenario we assume Emitel and NetNet are passive bidders and exit the
race when the price rises above 175% of the opening price (as this will need to
be followed up by an increased deposit). In this scenario we assume Orange
Polska buys 2 5MHz 800MHz blocks, T-Mobile 1 5MHz 800MHz block to be
merged into 3 shared blocks and Polkomtel buys 2 5MHz 800MHz blocks. In
this scenario we would assume final price 100%+ above the initial budget at
PLN 3.2-3.4bn, which would imply a price per MHZ per capita of ca. EUR 0.10.15. This is our base case scenario.
Scenario 3.
In this scenario, we would assume Orange Polska bids for 2 5MHz 800Mhz
blocks (plus 4 5MHz 2600MHz blocks), T-Mobile for 1 5MHz 800Mhz block
(plus 4 5MHz 2600MHz), Polkomtel bids for 1 5MHz 800MHz block and NetNet
bids for 1 5MHz 800MHz block.
Scenario 4.
In this scenario, we assume Orange Polska bids for 2 5MHz 800Mhz blocks
(plus 4 5MHz 2600MHz), T-Mobile bids for 1 5MHz 800MHz block (plus 4
5MHz 2600MHz), and Emitel bids for 2 5MHz 800MHz blocks.
Our view
We maintain our view that P4 (Play mobile operator) may not compete as
aggressively on 800MHz as in 1800MHz due to the post acquisition obligation
to cover 100% within 48 months of the auction. 100% nationwide coverage
does not fit with P4’s strategy focusing on mid-/big-size cities. However, we
believe it is reasonable to expect P4 may bid for some 2600MHz blocks which
are capacity spectrum suitable for high density areas.
Page 5 of 39
Due to losing the spectrum battle for 1800MHz frequency, we expect Orange
Polska to be the most determined to acquire the full 2 5MHz 800Mhz blocks
and 4 5MHz 2600MHz blocks. T-Mobile, together with Orange Polska, will
likely fight to acquire 1 5Mhz 800MHz block in order to combine it in network
sharing with 15MHz 800MHz and would also likely want to buy some 2600MHz
blocks in order to increase its capacity network in big cities.
Emitel and NetNet are the biggest unknowns. The former is a B2B
infrastructure asset with a nationwide network but designed for transmitting a
TV signal. Fulfilling the post-auction obligation means it would need
incremental roll-out capex. This could make the business case tricky as Emitel
does not have a retail client base to sell data packs to. However perhaps a
network roll-out is not needed if Emitel signs a leasing agreement with the
existing operator with telco infrastructure like Midas for example. NetNet is an
entity with some indirect connections with Solorz group. We believe there are
two possible scenarios why NetNet is in the race: either to diversify risk in
spectrum acquisition (less aggressive scenario) or to bid for the full spectrum
pack together with Polkomtel. If this happens than market competition
(Orange Polska, T-Mobile and P4) is blocked from the 800MHz spectrum and
they would need to lease it in the future. In our base case scenario, we expect
the distribution of remaining 2 5MHz 800MHz to Polkomtel but a split
between Polkomtel and NetNet is also possible. If this happens Polkomtel
would save PLN 700m on its spectrum budget (ca. PLN 1/sh).
800&2600MHz auction – the rules
The main 800&2600MHz LTE spectrum auction details are as follows:

800 MHz frequency bundle is divided into 5 duplex 5MHz frequency
ranges (10MHz), while the 2.6 GHz frequency is divided into 14 duplex
5MHz bands (10MHz). The starting price for each 800MHz block
(duplex 5MHz) is set at PLN 250m while for the 2600Mhz block
(duplex 5MHz) it is PLN 25m. This implies a total starting budget for
the spectrum auction of PLN 1.6bn. (5 x PLN 250m + 14 x PLN 25m =
PLN 1.6bn). The government commented at the beginning of the
process in Autumn 2013 that it expects LTE spectrum proceeds to
total ca. PLN 2.5bn, 56% above the starting budget of PLN 1.6bn, but
there have been no updates since then.

When submitting a bid, each auction participant will need to pay a
guarantee valued at PLN 6m for each 5MHz block in 800MHz and PLN
2m for each 5MHz block in 2600MHz. It means that if the entity bids
the max amount in the 800&2600MHz blocks, it will need to pay a
PLN 20m guarantee.

In the auction process, if the total price of auctioned blocks exceeds
PLN 2bn or PLN 2.8bn (25% and 75% higher than the starting price),
each entity will need to pay a deposit worth 25% of the total value of
auctioned frequencies. Entities have 5 working days to pay a deposit,
if not they are excluded from the auction. To give an example, a
company bidding for two 800MHz blocks and four 2600MHz will
need to pay PLN 187m or a PLN 263m deposit if auctioned prices
exceed 25% and 75% of the starting budget.

Each competing entity will be entitled to no more than two frequency
bands in the 800 MHz range and four frequencies in the 2.6GHz
range.

The UKE will allow winning entities to share LTE networks but with no
more than 3x5MHz duplex. Note that each entity can buy up to two
duplex 5MHz.

Winning entities will be entitled to use frequencies for a period of 15
years from the time of the award.
Page 6 of 39

Auction winners will be obliged to start using the allocated
frequencies and offer commercial services within 12 (800 MHz) or 36
(2.6 GHz) months of the allocation. Additionally, winning entities in
the 800 MHz tender will be obliged to extend their coverage area to
90% of the municipalities (so-called ‘white spots’ with low population
density) indicated by UKE in the auction documentation.

The frequencies offered during the auction may be used primarily to
offer mobile broadband data transmission services, such as LTE.
Below we show the current spectrum allocation:
Figure 6
Spectrum allocation 800&900&1800&2100&2600MHz
Figure 7
Spectrum allocation (%)– 800&900&1800&2100&2600MHz
100%
120
90%
100
80%
70%
80
60%
50%
60
40%
40
30%
20%
20
10%
0%
0
Orange
2600MHz
T-Mobile
Play
2100MHz
Solorz Group
1800MHz
Sferia
900MHz
800MHz
Source: UKE
Figure 8
Orange
Unused
2600MHz
T-Mobile
Play
2100MHz
Solorz Group
1800MHz
Sferia
900MHz
Unused
800MHz
Source: UKE
Spectrum allocation (MHz) – 800&900&1800&2100&2600MHz
Figure 9
Spectrum allocation (%)– 800&900&1800&2100&2600MHz
100%
140
90%
120
80%
100
70%
60%
80
50%
60
40%
30%
40
20%
20
10%
0
0%
800MHz
Unused
Source: UKE
900MHz
Sferia
1800MHz
Solorz Group
2100MHz
Play
T-Mobile
800MHz
2600MHz
Unused
Orange
900MHz
Sferia
1800MHz
Solorz Group
2100MHz
Play
T-Mobile
2600MHz
Orange
Source: UKE
Page 7 of 39
Figure 10 90% coverage obligation on 800 & 2600MHz spectrum auction
Population
No of districts
No of habitants % habitants
Area [km2]
% area
90%
coverage
Districts below 20k pop
1 242
9 235 038
24%
180 246
58%
24 months
Districts >20k & <30k pop
1 053
11 218 849
29%
115 322
37%
36 months
91
3 501 867
9%
8 246
3%
48 months
Total pop <30k & <50k pop
2 386
23 955 754
62%
303 814
97%
Poland total
2 479
38 533 299
100%
312 679
100%
District >30k & <50k pop
Source: Espirito Santo Investment Bank Research, UKE, red – municipalities below 20k habitants, yellow –municipalities with habitants above 20k but
below 30k, blue – municipalities with habitants above 30k but below 50k.
Figure 11
Play – current LTE coverage
Source: Espirito Santo Investment Bank Research, Play, December 2014
Figure 12 Orange – current LTE coverage
Source: Espirito Santo Investment Bank Research, Orange, December 2014
Page 8 of 39
Figure 13 T-Mobile – current LTE coverage
Figure 14 Polkomtel – LTE coverage
Source: Espirito Santo Investment Bank Research, Company Data, December 2014
Source: Espirito Santo Investment Bank Research, Company Data, December 2014
Upcoming 800&2600MHz auction is not the end of the world . . . there is
some frequency hidden in the second digital dividend
The upcoming 800&2600MHz is rightly commented upon as very important
as it will set the scene, power and competitive advantage in terms of LTE
technology and mobile broadband services which should be the fastest
growing among telco services going forward. However, one has to remember
that the current 800&2600MHz spectrum allocation is not over in terms of
potential frequencies available for distribution. There is also the so-called
700Mhz frequency band which is currently used for terrestrial TV
(radiodiffusion) or for aerial radio navigation or other mobile services like
signal for remote microphones.
Figure 15 Current usage of 700MHz frequency
Band
686-734 MHz
734-750MHz
750-790MHz
Predestination
Radiodiffusion
Mobile
Aerial radio navigation
Radiodiffusion
Mobile
Radiodiffusion
Mobile
Usage
Civil
Civil
Governmental
Civil
Civil
Civil
Civil
Source: UKE
Meaningful discussion about the potential allocation of 700MHz (second
digital dividend) has not started yet as Poland has not yet finished distribution
of the first digital dividend (800&2600MHz). However various scenarios have
already been presented by UKE like:
-
Keep 700Mhz for the radio diffusion purpose which will give the
ability to set up more TV channels on DTT (digital terrestrial TV) in
the HD standard, the implementation of 3D TV or other interactive TV
services,
-
Dedicate 700MHz to telecoms which will have to use it for
development of mobile data transmission services. This is a similar
scenario to the spectrum allocation within the first digital dividend
(800MHz),
-
Co-usage of 700MHz – current broadcasters and mobile broadband
telco operators will co-use spectrum according to the technical rules
and geographical separation,
Page 9 of 39
-
Convergence, which would mean that 700Mhz would be dedicated to
combined telecom (data transmission) and multimedia services (TV
content, interactive services etc).
As discussion has not started yet, it is hard to predict which scenario will be the
leading one. However, given that data consumption will grow further and the
already fragmented TV market has many thematic channels, we would expect the
telco industry to push for 700MHz spectrum allocation for mobile data
transmission while TV broadcasters keep their existing number of DTT TV
channels and upgrade them to HD, 3D or use them for other interactive services.
An example comes from France, where President Francois Hollande
reportedly announced that the telecoms regulator ARCEP (Autorite de
Regulation des Communications Electroniques et des Postes) will start the
process of auctioning frequencies in the 700MHz band for telecoms services
in 2015 (source: Telegeography.com). Addressing previously expressed
concerns of Digital Terrestrial Television (DTT) broadcasters that the
allocation would interfere with plans to migrate the DTT platform to MPEG-4
AVC by 2015 and DVB-T2 by 2023, President Hollande said that France
needed an audiovisual sector that could broadcast broadly, effectively and
securely, adding: ‘This is the objective of transferring the 700MHz band to the
telecom sector. The state will ensure that the available resources are
guaranteed for broadcasting.’
As such, according to Telegeography.com ARCEP is expected to launch a
tender for the 700MHz spectrum band in November 2015, with projections
that the auction could generate up to EUR 3bn for the treasury.
Deregulation of the fixed-broadband market
On 7th October 2014, the UKE deregulated “Market 5”, which represents the
fixed-broadband market in 76 local districts, from the BSA service, including
Warsaw, Lodz, Szczecin, Bydgoszcz, Katowice and Lublin (detailed map of
regulated and deregulated districts in the figure below). 76 districts cover 24%
of the Polish population (ca. 9.2m) with ca. 3.9 households. The main benefit
of deregulation is that Orange Polska will be able to use different pricing for
its internet service and also will not have to offer a wholesale access service.
UKE says it expects that deregulation will lift investment on network upgrades
and increase competition.
After deregulation of 76 districts, existing players using Orange Polska’s telco
infrastructure would have 24 months to migrate either to their own telco
network or LLU. At the end of 3Q14, the total BSA base amounted to 295k (of
which 247k pertained to Netia).
Page 10 of 39
Figure 16 Deregulated 76 districts in Poland (marked in white)
Source: BESI Research, Company Data, UKE, GUS
In the 76 deregulated districts HFC (CableTV) technology is dominant (55%),
followed by xDSL with 31%, Ethernet with 12% and FTTx with only 2%. When
we look at access technology for the regulated Market 5 we see xDSL is
dominant with a 67% share followed by HFC with 23%.
Figure 17 Access technology used in 76 deregulated districts
Figure 18 Access technology used in the not-deregulated districts
others, 1%
others, 2%
Ethernet,
9%
Ethernet, 12%
HFC, 23%
xDSL, 31%
Source: BESI Research, Company Data, UKE
HFC
(CableTV),
55%
xDSL, 67%
Access technology between regulated and deregulated districts determines
average internet speeds. In deregulated districts 58% of users have internet
speed below 10MB/s versus 78% in regulated areas. Density determines
quality of offered services; high density areas are the natural business ground
of CableTV which on average offers better quality services versus regulated
areas which cover low density areas sometimes so-called “white spots” where
telco infrastructure is of low quality.
Page 11 of 39
Figure 19 Internet speed on deregulated districts
30MB/s 100MB/s, 7%
above
100MB/s, 1%
up to 2MB/s,
26%
Figure 20 Internet speed on regulated districts
30MB/s 100MB/s, 6%
above
100MB/s, 1%
10MB/s 30MB/s, 15%
up to 2MB/s,
42%
10MB/s 30MB/s, 34%
2MB/s 10MB/s, 32%
2MB/s 10MB/s, 36%
Ownership structure of the telco network is pretty much similar between
regulated and deregulated areas. Own network is dominant. The only
difference is that in deregulated districts there are more operators with their
own infrastructure while in regulated districts Orange Polska is usually the
main provider. Overlapping infrastructure of various operators in deregulated
area improves network quality, capacity and competitiveness. BSA has only a
2% stake (vs 8% outside these districts) while LLU has a 3% stake (vs 2%
outside these districts).
Figure 21 Infrastructure ownership in deregulated districts
Figure 22 Infrastructure ownership in regulated districts
BSA, 2% LLU, 3%
LLU, 3%
BSA, 8%
own network,
89%
own network,
95%
When looking at market players using BSA technology only, the structure is
pretty much the same with Netia being the biggest BSA operator with a ca.
75% share.
Page 12 of 39
Figure 23 BSA share in deregulated districts
Dialog, 2%
Figure 24 BSA share in regulated districts
Dialog, 2% others, 1%
others, 1%
MMP, 9%
T-Mobile,
10%
T-Mobile, 17%
MMP, 12%
Netia, 71%
Netia, 75%
An interesting picture can be seen below related to market share of operators
in regulated and deregulated districts. In deregulated districts Cable TV
operators dominate with Orange Polska having only a 21% share and Netia 12%
(combined with Dialog). In regulated districts, Orange Polska is the
undisputable market leader with a 50% share and Netia also having a slightly
higher share at 14%.
Figure 25 Market players in deregulated districts
Others, 19%
Figure 26 Market players in regulated districts
Dialog, 1%
UPC, 23%
others, 15%
INEA, 2%
Vectra, 4%
Toya, 3%
Dialog, 4%
Orange Polska,
50%
MMP, 7%
Netia, 8%
UPC, 8%
Vectra, 8%
Orange Polska,
21%
Netia, 13%
MMP, 14%
The different competitive position between regulated and deregulated
districts is explained by the number of telco operators available. In
deregulated districts only 3% of HP (homes passed) do not have access to a
fixed-line operator while in regulated districts it is 23%.
Page 13 of 39
Figure 27 Number of telco operators in deregulated districts
Figure 28 Number of telco operators in regulated districts
0, 3%
1, 7%
0, 23%
3 and more,
22%
2, 17%
3 and more,
73%
2, 18%
1, 37%
All elements discussed above, such as access technology, number of
operators available, density explain Orange Polska’s market share which in
almost half the deregulated market is between 10% and 20% while in 81% of
the regulated market it is 60% and more.
Figure 29 Orange Polska market share in deregulated districts
Figure 30 Orange Polska market share in regulated districts
0%-20%, 4%
30%-40%, 0-10%, 9%
8%
20%40%,
7%
40%-60%,
8%
20%-30%, 37%
80%-100%,
60%
60%-80%, 21%
10%-20%, 46%
In our view, the main argument for deregulation of 76 districts is to encourage
the biggest fixed-line operator - Orange Polska - to invest in FTTx
infrastructure, especially in more densely populated areas where such
technology can have the shortest payback period without the need to lease
infrastructure to altnets and cable TV operators at a predefined wholesale
price.
Deregulation of the local market would mean that Orange Polska would not be
obliged to lease its telco network under the wholesale regime and upgrades to
FTTx standard infrastructure could be used only for Orange Polska’s existing
and potential new client base. Upgrading its telco infrastructure to FTTx could
allow it to offer internet with speeds above 100MB/s and attractive 3P
packages, which could be also competitive for cable TV bundle offering.
Just after the UKE deregulated 76 districts, Orange Polska launched a
commercial offer for this area called “Geopromocja” where the Neostrada
internet offer costs PLN 39.9/month irrespective of the internet speed
(10MB/s, 20MB/s or 80MB/s). The offer with TV costs PLN 59.9/month while
3P internet + TV + fixed-voice also costs PLN 59.9/month. The offer is for a
fixed 24-month period.
Page 14 of 39
Deregulation means two questions: how much OPL will need to invest
and what is threat of BSA/LLU Netia client base?
Deregulation of 76 districts raises at least two questions. Firstly, how much
will Orange Polska need to invest to upgrade its network to FTTx in a
deregulated area? Secondly, what could the impact of market deregulation be
on Netia, the biggest altnet with ca. 250k BSA and 155k LLU client base as of
3Q14?
Orange Polska says that average cost of upgrade of a single Home Passed to
FTTX is ca. EUR 150-200 (PLN 630-850). With ca. 3.9m HP within deregulated
districts this gives ca. PLN 2.5-3.3bn hypothetical capex in the future. To put
this into perspective, Orange Polska’s planned 2014E capex is PLN 1.8bn.
Following the 3Q14 results conference, OPL Management said that they are
currently carefully analysing district by district in order to work out where to
start the investments to make them the most effective and to avoid “carpet
bombing capex” as CFO said. The question is how determined OPL is to
upgrade its network in very competitive districts. As OPL comments, the pilot
project of FTTx currently being executed in Warsaw on ca. 15k HP is giving
positive results and after 12M OPL has reached ca. 10% penetration. The
positive commercial results of this project could support OPL’s decision to
invest in FTTx rollout. The second element having an impact on this decision
could be related to cable TV operators’ desire to expand into quad-play
services adding mobile-voce service (as MVNO) to existing 3P formed of
payTV/internet/fixed-voice. A recent press interview (Wirtualnemedia.pl) with
the CEO of UPC Polska, the biggest cable TV operator with a 1.4m client base
and ca. 2.5m RGU base suggests they are considering quad-play. If it happens,
it should be overall negative news for existing mobile operators but in our
view with a greater negative impact for Orange Polska whose mobile-voice
market share in big cities (natural UPC market) is bigger than in the whole
country. This naturally puts pressure on its mobile-voice base in big cities
which
can
be
won
by
UCP
through
attractive
3P
packs
internet/payTV/mobile-voice. If UPC goes quad-play, this could motivate OPL
to speed up FTTx rollout in deregulated districts.
We assume OPL would like to upgrade deregulated 3.9m HP to FTTx as soon
as possible to be able to offer a competitive service versus cable TV which
would help it to regain its market position in fixed-line in big cities. However,
there are two important constraints: cash and production capacity. When
trying to find level of production capacity in terms of upgrading HO, we
looked at the fulfilment of the Memorandum of Understanding with the Telco
Regulator based on which OPL was obliged to upgrade fixed-broadband in so
called white-spot areas. In 2011, OPL was able to upgrade 400k of HP but in
low density areas whereas the upgrade of HP is more time consuming.
In our base case scenario, we assume OPL upgrades 500k HP in 2015E/16E
and 300k HP in the following years. However, as the first stage of the network
upgrade should happen in the most dense areas, we expect in 2015-16E that
the average upgrade cost per HP amounts to EUR 150m which would imply ca.
PLN 320m incremental capex in 2015-16E. Starting from 2017E, we expect the
cost of the HP upgrade to increase to EUR 200 due to a network upgrade in
less dense areas. Assuming 300k HP upgrades per year and a EUR 200
average cost per HP, we arrive at incremental capex in 2017E of ca. PLN 250m.
Figure 31 Orange Polska – capex breakdown 2014E-2020E
(PLN m )
Capex
Capex/revenues
Maintenance capex
as % of revenues
FTTx capex
as % of reveneus
2014E
1,826
15.0%
1,826
15.0%
2015E
2,168
18.0%
1,848
15.3%
320
2.7%
2016E
2,140
18.0%
1,820
15.3%
320
2.7%
2017E
2,056
17.5%
1,806
15.4%
250
2.1%
2018E
2,035
17.5%
1,785
15.4%
250
2.1%
2019E
2,018
17.5%
1,768
15.3%
250
2.2%
2020E
2,004
17.5%
1,754
15.3%
250
2.2%
As for Netia, there is a real pressure on the BSA base. Keeping in mind that ca.
80% of the BSA market belongs to Netia and that 2% of total 3.9m
Page 15 of 39
deregulated households use BSA, there is a ca. 65k BSA base either for
migration into LLU/own network or to competition. Assuming a second option
and using blended ARPU of PLN 56 and avg EBITDA margin of ca. 10%, it puts
potential pressure on PLN 42-52m of annual revenues (ca. 3% of the total) and
ca. PLN 4-5m of EBITDA (ca. 1% of the total). We think BSA client migration
from market deregulation is not a material threat for Netia as we would expect
the BSA base to migrate to competition anyway during that time.
M&A
Telecoms revenues and margins are under constant pressure coming from
market saturation, fixed-to-mobile substitution, and competition. The
European telecom market has started to be very active in terms of planned
and executed M&A deals. Signs of telecom market consolidation have been
very positively received by investors as it would bring some relief for the
whole industry. This has been seen in the BETELES Index performance which
contains 24 European telecoms and has grown by 21% since mid-Oct 14.
Dec-14
Oct-14
Nov-14
Sep-14
Jul-14
Cyfrowy Polsat
Aug-14
Jun-14
Apr-14
May-14
Mar-14
Jan-14
Orange Polska
Feb-14
Dec-13
Oct-13
Nov-13
Sep-13
Jul-13
Beteles Index
Source: Bloomberg.
Aug-13
Jun-13
Apr-13
May-13
Jan-13
Dec-14
Oct-14
Nov-14
Sep-14
Jul-14
Aug-14
Jun-14
Apr-14
May-14
Mar-14
Jan-14
0.0
Feb-14
0
Dec-13
0.2
Oct-13
20
Nov-13
0.4
Sep-13
0.6
40
Jul-13
0.8
60
Aug-13
1.0
80
Jun-13
1.2
100
Apr-13
120
May-13
1.4
Mar-13
1.6
140
Jan-13
1.8
160
Feb-13
180
Mar-13
Figure 33 Beteles Index, OPL, CPS, NET – rebased performance
Feb-13
Figure 32 Beteles Index – performance
Netia
Source: Bloomberg.
Poland is one of the most competitive telecom markets in the EU with four
mobile players operating on their own telco infrastructure and many other
small players acting as MVNO. Cable TV is very fragmented with hundreds of
operators, mostly very small and local, but the top10 control 80% of the cable
TV base with UPC, Vectra, MMP being the leaders. The fixed market is
dominated by Orange Polska with Netia the biggest B2C altnet and smaller
altnets in B2B like Exatel, TK Telekom, Hawe, GTS, Midas. Although some
consolidation has already happened with the most high profile deal being in
2013 when Cyfrowy Polsat took over Polkomtel, and smaller ones like Netia
taking over Dialog, Crowley Data or T-Mobile taking over GTS, there is still a
lot of room for market consolidation.
TK Telekom
TK Telekom is an altnet 100% owned by Polish Railway Lines (PKP) with 7.4k
km of fiber network where 5k km is backbone. It offers data transmission,
access to internet, voice services and employs 511 employees. Data
transmission accounts for 43% of 2013 total revenues followed by internet
services of 13%, voice services of 10%, interconnect of 12%. In 2013 it generated
revenues of PLN 232m (vs PLN 248m in 2012). In 2014E, TK Telekom expects
revenues of PLN 198m. EBITDA reached PLN 50.8m in 2013 (EBITDA margin of
21.9%) and in 2012 PLN 83m (EBITDA margin of 33.4%). In 2013, 41% of
reveneus came from PKP Group while 11.6% from public administration. In
2014E, TK Telekom expects EBITDA of PLN 45m (EBITDA margin of 22.8%).
Capex in 2014E is expected at PLN 32.5m and in 2015E of PLN 47m which is
related to the network rollout (Warsaw ring). Net debt reached PLN -25m in
1H14. PKP has already started the privatization process and expects to close it
in 2-3Q15. We believe TK Telekom can be compared to GTS, an altnet
acquired by T-Mobile in 2014 at a 2013 EV/EBITDA of 6.3x. However, because
of its high revenue dependence on one client, PKP, we believe a ca. 20%
Page 16 of 39
discount could be possible, implying EV/EBITDA at ca. 5x which would be
close to OPL 15E EV/EBITDA at 4.9x. Based on the company´s forecasts this
would imply a hypothetical value of ca. PLN 250m.
Figure 34 TK Telekom – network coverage
UPC
In recent weeks numerous news agencies (for example Bloomberg) have
reported that Vodafone could potentially be interested in buying Virgin Media
- Liberty Global cable TV assets in the UK. Press comments suggest Vodafone
could be interested in buying the whole of Liberty Global including its cable
assets in CEE, and in Poland under the brand UPC. Apart from its potential
interest in Virgin Media, Vodafone is also reportedly interested in Everything
Everywhere (EE), the UK telco operator owned by Orange and Deutsche
Telekom or TalkTalk UK’s cable TV (source: Bloomberg). It looks like there are
different options for Vodafone but clearly the European telco market is
speeding up its consolidation pace. We believe VOD’s potential interest in
Liberty Global’s assets is driven by convergence, a magic word that seems to
have become the salvation for the telco industry in Europe bruised after a few
years of consumptive competition including a price war. We already
commented in a previous report on Polish Telecoms titled “Faith in cross-sell
and data consumption” that convergence will be the leading trend in telecoms
in the next few years, especially convergence between payTV and traditional
telco services which thanks to advancing technology allows the distribution of
a TV signal though air or IP signal which was not the case a few years ago. We
do not know how feasible the Vodafone deal could be, but here we present
some thoughts about what the consequences may be for the Polish telco
market if it happens.
In Poland, UPC is the biggest cable TV operator with ca. 1.4m total clients with
ca. 900k internet RGU, ca. 830k payTV RGU and ca. 510k fixed-voice RGU.
UPC is present in 116 cities but the vast majority of clients are located in 10
biggest cities.
Acquisition of Liberty Global would mean that Vodafone will enter Poland through
cable TV assets. Vodafone used to be present in Poland via a stake in Polkomtel
but decided to exit in 2011. We do not know whether Vodafone would like re-enter
Poland again. If yes, it would be negative for existing operators in Poland, in
particular for Orange Polska. This is because Vodafone could launch mobile voice
Page 17 of 39
services under MVNO technology and try to upsell mobile voice and mobile
broadband services to the existing UPC client base. It would be particularly
negative for Orange as its mobile market share in big cities (natural UPC market)
is bigger than average in the whole country. Orange, not being strong in fixed
services in high density areas (which we explain in the section on deregulation),
would see additional pressure on its client base. In order to avoid such a risk, we
believe OPL would need to speed up investment into the FTTx network upgrade.
In a second scenario, if Vodafone did not wish to enter Poland, the question is who
could be potentially interested in the acquisition of UPC. In our view, purely based
on the size of the asset and its geographical presence, we note that, amongst
others, it may be a fit for Orange Polska but we stress that there has been no
company comment or press reports suggesting any interest whatsoever in the
asset.
On 5th December 2014, the press published an interview with CEO Ramiro
Brollo in which he stated that UPC wants to take an active role in market
consolidation (source: Wirtualnemedia.pl).
Page 18 of 39
FUNDAMENTAL INSIGHT
Poland | Telecom Services | 11-December-2014
Cyfrowy Polsat
Execution of strategy is key
Although the reasons behind the CEO’s recent departure are still
unclear to us, Cyfrowy Polsat remains our top pick in the Polish
telecoms space owing to its exposure to two promising segments –
payTV and mobile broadband. The company’s attractive SmartDOM 3P
bundling product enables it to grow its RGU base and ARPU per unique
client (already visible in 2-3Q14 results), with a positive impact on the
top-line, while cost-cutting synergies leave room for slight EBITDA
margin expansion (we expect 39.5% in 2016E vs 37.3% in 2014E). A
growing mobile broadband base and data consumption puts some
pressure on Opex but just opened negotiations with Midas should
address this issue (exp a 35% cut in the price per GB). The upcoming
LTE auction is big unknown but the current spectrum capacity of CPS
group, coupled with NetNet as a ‘dark horse’ in the auction should put
CPS in a better position than other market participants. We maintain
our BUY rating and increase our FV to PLN 29.1 (from PLN 27.1).
BUY
18% upside
Fair Value
PLN 29.10
Bloomberg ticker
Share Price
Free Float
PLN m Y/E 31-Dec
2012A
2013A
2014E
2015E
Revenues
EBITDA
2778.2
1051.1
2910.7
1046.4
7462.1
2784.5
9913.5
3759.1
EBIT
808.1
789.9
1417.2
1943.0
Net income
617.2
525.5
386.9
929.9
2011.8
1582.8
11508.9
12153.2
Net debt
EPS (PLN)
1.8
1.5
0.6
1.5
DPS (PLN)
0.0
0.0
0.2
0.0
Y/E 31-Dec
2012A
2013A
2014E
2015E
P/E (x)
13.9
16.4
40.8
17.0
EV/EBITDA (x)
10.1
9.7
9.8
7.4
0.0%
0.0%
0.7%
0.0%
DY (%)
net debt / EBITDA (X)
Renegotiation of data cost: 3Q14 results showed a boost in data consumption to
22.7m GB, from 14m/GB in 2Q14, +60% qoq and +180% yoy. Cyfrowy Polsat
announced that it has started negotiations with Midas (MDS PW, not rated) on
data pricing. Data rates were last renegotiated in March 14, when they were cut by
26% to PLN 4.88/GB from PLN 6.6/GB. In the past, the renegotiation of data rates
has been followed by an order of a new, larger data pack with new pricing
applying to newly ordered and unused data. We expect the current negotiations
to finish by the year end. However, this time we would expect a slightly stronger
rate cut, by ca. 35% to ca. PLN 3.2, with the same mechanism of the new price
being applied to remaining and newly ordered data packs. Renegotiation of data
rates by ca. 35% (by PLN 1.7/GB) could reduce data transmission costs for CPS by
ca. PLN 200m in 2015E, assuming 120m/GB annual data usage, +50% yoy. In our
view, fast growing data transmission usage and costs could theoretically speed up
any talks in 2015 on the possibility of incorporating Midas into CPS.
Spectrum auction: In our base case scenario, we assume Polkomtel will acquire 2
800MHz and 4 2600MHz blocks spending a total of PLN 1.2bn. We would not
expect this to put any strain on the company’s financial position, as it had PLN
1.7bn in cash on the balance sheet in 3Q14. However, we have also presented a
few alternative spectrum scenarios. The first is more aggressive, with Polkomtel
and NetNet acquiring full spectrum packs. The second is conservative, assuming
the acquisition of 2 800Mhz being divided between Polkomtel and NetNet. We
see both scenarios as positive for CPS. In the first, the remaining market players
would lack sufficient LTE spectrum and would need to lease it from Midas or
Polkomtel, while in the second Polkomtel would save ca. PLN 600m (PLN 1/sh).
4Q14 preview: We forecast 4Q14 revenues of PLN 2.6bn, EBITDA of PLN 884m,
EBIT of 368m and net income of PLN 109m. We expect post-paid ARPU at PLN 87
(+0.6% qoq) supported by further cross-selling and up-selling (exp upselling ratio
at 2.02x vs 1.98x in 3Q14). We expect post-paid RGU net adds at +185 where +95k
should come from payTV (+35k from Multiroom), -30k from mobile voice and
+120k from internet. We expect the SmartDOM client base to increase to 580k
with RGU at 1.6m. In pre-paid, we expect net adds of -125k where -150k comes
from mobile voice, -5k from payTV and +30k from internet, pre-paid ARPU at
PLN 18.5. We expect OpCF at PLN 569m.
ROA (%)
ROE (%)
1.9
1.5
4.1
3.2
11.1%
25.0%
9.3%
17.5%
1.4%
4.2%
3.5%
8.9%
Share Price Performance
140
130
120
110
100
90
Jan Feb Mar
Apr May Jun
Jul
2014 2014 2014 2014 2014 2014 2014
CPS PW
Aug Sep Oct Nov Dec
2014 2014 2014 2014 2014
vs WIG Index
Analysts
Konrad Ksiezopolski
+48 22 347 4074
[email protected]
(v1.0.8.0)
CPS PW
PLN 24.71
PLN 15,803.18m
26%
Summary Financial Information
Valuation Metrics (Year end Dec)
Cyfrowy Polsat
2010
2011
2012
2013
2014E
2015E
2016E
16.8
29.6
13.9
16.4
40.8
17.0
16.1
2.9
3.0
3.8
3.5
3.7
2.8
2.7
EV / EBITDA (x)
10.7
9.8
10.1
9.7
9.8
7.4
6.9
13.3
12.8
13.1
12.9
19.3
14.4
13.5
11.8%
Rating
BUY
P/E (x)
Fair Value (PLN):
29.1
EV / Sales (x)
Share Price (09/12/2014, PLN):
24.7
EV / EBIT (x)
Upside / Downside potential
18%
FCF Yield (%)
3.5%
5.9%
8.0%
7.9%
6.4%
1.1%
Dividend yield (%)
0.0%
0.0%
0.0%
0.0%
0.7%
0.0%
0.0%
EV (PLN m)
4,339
7,189
10,620
10,191
27,312
27,956
26,861
Key Ratios
2010
2011
2012
2013
2014E
2015E
2016E
EBITDA margin
27.5%
31.1%
37.8%
35.9%
37.3%
37.9%
39.5%
EBIT margin
22.0%
23.7%
29.1%
27.1%
19.0%
19.6%
20.1%
Capex / Revenue (x)
3.1%
2.8%
3.3%
4.2%
13.1%
24.9%
10.4%
Capex / Depreciation (x)
56%
38%
38%
48%
71%
136%
53%
Net Debt / EBITDA (x)
(0.0)
3.3
1.9
1.5
4.1
3.2
2.8
ROE
60.4%
8.4%
25.0%
17.5%
4.2%
8.9%
8.8%
ROA
25.5%
3.0%
11.1%
9.3%
1.4%
3.5%
3.8%
2010
2011
2012
2013
2014E
2015E
2016E
Previous Fair Value (PLN):
27.1
Bloomberg
CPS PW
Reuters
CPSM.WA
Shares in Issue (m)
639.5
Market Cap (PLN m)
15,803
Net Debt, end 2013 (PLN m)
1,583
Adjustments for Associates & Minorities (PLN m)
0
Enterprise Value (PLN m), end 2013
17,386
Forthcoming Catalysts
P&L (PLN m, unless stated)
4Q14 results
Mar-15
LTE spectrum auction
1Q15
Revenue
% change
EBITDA
1,482
2,366
2,778
2,911
7,462
9,914
9,869
17.1%
59.6%
17.4%
4.8%
156.4%
32.9%
-0.5%
3,902
407
735
1,051
1,046
2,785
3,759
ES Equity Research Analyst
% change
28.0%
80.7%
43.0%
-0.5%
166.1%
35.0%
3.8%
Konrad Księżopolski
% margin
27.5%
31.1%
37.8%
35.9%
37.3%
37.9%
39.5%
+48 22 347 40 74
Depreciation & Amortisation
(81)
(175)
(243)
(257)
(1,367)
(1,816)
(1,920)
[email protected]
EBIT
326
560
808
790
1,417
1,943
1,983
% change
18%
72%
44%
-2%
79%
37%
2%
% margin
22.0%
23.7%
29.1%
27.1%
19.0%
19.6%
20.1%
Revenues Breakdown (2014E)
Associates
Net Financials
0
2
2
2
2
2
2
(4)
(370)
(96)
(200)
(985)
(797)
(773)
Other Pre-tax Income
Retail revenue
Wholesale revenue
Sale of equipment
Other revenue
0
0
0
0
0
0
0
Pre-Tax Profit
321
192
715
593
434
1,148
1,211
Income Tax Expense
(63)
(32)
(97)
(67)
(47)
(218)
(230)
0
0
0
0
0
0
0
Net Income
258
160
617
525
387
930
981
EPS (PLN)
1.0
0.5
1.8
1.5
0.6
1.5
1.5
DPS (PLN)
0.0
0.0
0.0
0.0
0.2
0.0
0.0
0%
0%
0%
0%
0%
0%
0%
268
348
348
348
640
640
640
2010
2011
2012
2013
2014E
2015E
2016E
258
160
617
525
387
930
981
81
175
243
257
1,367
1,816
1,920
Minority Interests
Payout Ratio
Shares in Issue (Less Treasury) (m)
Cyfrowy Polsat - profitability ratios, 2009-2015E
Cash Flow Summary (PLN m)
45%
40%
35%
Net income
30%
D&A
25%
Operating Cash Flow
198
347
781
803
1,992
2,645
2,893
20%
Capital Expenditure
(46)
(66)
(91)
(123)
(976)
(2,473)
(1,023)
Investing Cash Flow
(77)
(2,427)
(135)
(134)
786
(2,473)
(1,023)
Financing Cash Flow
(192)
2,327
(653)
(569)
(1,204)
(1,861)
(1,984)
(72)
248
(7)
100
1,573
(1,689)
(114)
2010
2011
2012
2013
2014E
2015E
2016E
15%
10%
5%
EBITDA margin
EBIT margin
0%
2010
2011
2012
2013
2014E
2015E
2016E
Net Cash Flow
Shareholders structure, 3Q14
% of shares
Balance Sheet Summary (PLN m)
Cash & Equivalents
others, 26%
Pola
Inv estments
(Zy gmunt
Solorz), 58%
EBRD, 7%
Sensor
Ov erseas
(Hieronim
Ruta), 8%
28
278
270
342
1,815
126
12
Tangible Fixed Assets
428
672
696
659
5,342
5,999
5,102
Goodwill & Intangibles
75
3,306
3,497
3,631
16,958
16,958
16,958
Other Assets
42
247
282
166
1,056
907
907
Total Assets
1,015
5,325
5,561
5,676
27,343
26,738
25,715
11,070
% of votes
Interest Bearing Debt
others, 20.7%
EBRD, 5.8%
Sensor
Ov erseas
(Hieronim
Ruta), 9.6%
Pola
Inv estments
(Zy gmunt
Solorz), 64.0%
20
2,729
2,282
1,925
13,324
12,279
Other Liabilities
568
700
811
750
4,781
4,290
3,495
Total Liabilities
587
3,429
3,093
2,675
18,104
16,569
14,565
Shareholders' Equity
428
1,896
2,468
3,001
9,239
10,449
11,210
0
0
0
0
0
Minority Interests
Total Equity
Net Debt
-
-
1,015
5,325
5,561
5,676
27,343
27,018
25,775
(8)
2,451
2,012
1,583
11,509
12,153
11,058
Source: Company data, Reuters, Bloomberg, BESI Research for estimates.
Page 20 of 39
4Q14 results – preview
Figure 1
Cyfrowy Polsat – quarterly results
(PLN m )
1Q13
2Q13
3Q13
4Q13
1Q14
2Q14
3Q14
4Q14E
% YoY
2013
2014E
% YoY
Revenues
736
677
800
723
1,746
2,420
2,573
2,573
256%
2,911
7,462
156%
EBITDA
245
257
268
275
282
709
910
884
221%
1,046
2,785
166%
33.3%
38.0%
33.5%
38.1%
16.2%
29.3%
35.4%
34.3%
35.9%
37.3%
EBITDA margin
EBIT
EBIT margin
185
195
203
207
220
398
432
368
25.1%
28.8%
25.4%
28.6%
12.6%
16.4%
16.8%
14.3%
Net incom e
Net profit margin
95
81
176
173
98
132
48
109
12.9%
11.9%
22.0%
23.9%
5.6%
5.5%
1.9%
4.2%
104%
3%
790
1417
27.1%
19.0%
525
387
18.1%
5.2%
79%
-26%
Source: BESI Research, Company Data, PAP consensus
4Q14 preview – key highlights:

In the post-paid segment, we expect total net adds at +185k, where +95k
should come from payTV (+35k from Multiroom), -30k from mobile voice
and +120k from internet. We expect ARPU per customer at PLN 87
(+0.6% qoq, -0.1% yoy). We forecast RGU per unique customer at 2.02x
vs 1.98x in 3Q14. We expect the number of unique clients to decrease by
-30k reaching 6155k. SmartDOM should perform well; we expect +200k
unique clients net adds, reaching a total base of 580k clients. We expect
Smart Dom’s RGU base to reach 1.6k, which would imply a total upsell
ratio at 2.76x vs 3.16x in 3Q14. In 4Q14 alone, we expect SmartDOM to
add 400k RGU with a 2x multiplay ratio.

We expect data consumption to further increase to 30m/GB from
23m/GB in 3Q14, supported by a growing base and the PowerLTE offer.
This should increase data transmission costs by ca. PLN 30-35m qoq.

In pre-paid, we expect -125k net adds in RGU, which breaks down into
-5k in payTV, -150k in mobile voice and +30k in mobile internet. We
expect ARPU per pre-paid client at PLN 18.5 (+1% qoq, -3% yoy).

We expect the TV ad market to grow by 6% in 4Q14 and TV ad
revenues at PLN 296m (+3.1% yoy),

We forecast an EBITDA margin of 34.3%, vs 35.4% in 3Q14, hampered
by seasonally higher marketing costs and higher data traffic costs. We
expect OpCF at PLN 560m in 4Q14E and PLN 2bn in 2014E.
Financial forecasts
Changes to estimates
We slightly adjust our forecasts, increasing 2014E/15E/16E revenues by 3%
owing to better-than-expected SmartDOM sales and the resulting impact on
ARPUs. We have also been positively surprised by the pace of mobile
broadband sales. Unfortunately, strong mobile broadband sales go hand in
hand with boosting data consumption, which puts pressure on EBITDA.
Additionally, upselling and cross-selling is a crucial commercial activity of
Cyfrowy Polsat, which wants to switch existing clients into its SmartDOM
offer. This will also be accompanied by higher commercial costs in 2014E and
probably in 2015E, but should have a positive impact on revenues and EBIDTA
in the long term. Finally, we also expect some one-off costs related to the
post-acquisition integration of Cyfrowy Polsat and Polkomtel. All those
elements lead us to trim our EBITDA forecasts for 2014E/15E/16E.
Figure 2
Cyfrowy Polsat – changes to estimates
2014E
(PLN m )
New
Old
2015E
Change
New
Old
2016E
Change
New
Old
Change
Revenues
7,462
7,234
3%
9,914
9,599
3%
9,869
9,579
3%
EBITDA
2,785
2,877
-3%
3,759
3,938
-5%
3,902
3,947
-1%
EBIT
1,417
1,506
-6%
1,943
2,098
-7%
1,983
2,280
-13%
387
540
-28%
930
1,039
-11%
980
1,278
-23%
Net profit
Source: BESI Research for estimates
Page 21 of 39
BESI vs Bloomberg consensus
Figure 3
BESI vs BBG
2014E
(PLN m )
BESI
2015E
BBG
Change
BESI
2016E
BBG
Change
BESI
BBG
Change
Revenues
7,462
6,951
7%
9,914
9,650
3%
9,869
9,760
1%
EBITDA
2,785
2,767
1%
3,759
3,906
-4%
3,902
3,957
-1%
EBIT
1,417
1,554
-9%
1,943
2,041
-5%
1,983
2,177
-9%
387
502
-23%
930
906
3%
980
1121
-13%
Net income
Source: BESI Research for estimates, Bloomberg for consensus
Valuation
DCF
We use a 10Y forecast, however as we are at the end of 2014, we use net debt
2014E and FCF in 2015E-2023E. We use a RFR of 2.8% (vs 3.8% before) and
beta at 1.0x (unchanged), which is typical for telco and defensive companies.
At the new Cyfrowy Polsat, ca 90% of total revenues will come from the
defensive telco and DTH segments. We assume g at 1% vs 0% for the CE3
telco peer group to reflect its better growth prospects (thanks to upselling
and cross-selling).
Figure 4
DCF
DCF Valuation
(PLN m )
2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E
EBIT
1,417
1,943
1,983
2,243
2,493
2,672
2,806
2,914
3,006
3,085
RV
3,085
Tax rate
11%
19%
19%
19%
19%
19%
19%
19%
19%
19%
19%
NOPAT
1,264
1,574
1,606
1,817
2,019
2,164
2,273
2,360
2,435
2,499
2,499
D&A
1,367
1,816
1,920
1,684
1,446
1,287
1,180
1,108
1,061
1,033
Capex
-436 -2,473 -1,023
-963
-963
-963
-963
-963
-977
-977
Change of WC
-278
-101
-8
-50
-48
-34
-26
-21
-18
-15
1,917
816
2,495
2,488
2,454
2,453
2,464
2,485
2,501
2,540
2,499
-57.4% 205.8%
-0.3%
-1.4%
0.0%
0.4%
0.8%
0.6%
1.6%
1.0%
37.7% 31.0%
FCF
FCF change
WACC Calculation
debt/equity
48.7%
45.9%
43.0%
39.6%
19.5%
9.3%
2.9%
0.8%
0.8%
risk free rate
2.8%
2.8%
2.8%
2.8%
2.8%
2.8%
2.8%
2.8%
2.8%
2.8%
2.8%
credit premium
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
2.0%
market premium
5.0%
5.0%
5.0%
5.0%
5.0%
5.0%
5.0%
5.0%
5.0%
5.0%
5.0%
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
4.3%
3.9%
3.9%
3.9%
3.9%
3.9%
3.9%
3.9%
3.9%
3.9%
3.9%
cost of equity
7.8%
7.8%
7.8%
7.8%
7.8%
7.8%
7.8%
7.8%
7.8%
7.8%
7.8%
WACC
6.1%
6.0%
6.1%
6.3%
6.3%
6.6%
7.0%
7.4%
7.7%
7.8%
beta
7.8%
PV (FCF)
14,528
PV (RV)
18,945
net debt, end 2014E
11,509
Valuation (PLN m)
21,964
# of shares (m)
639.5
Fair value/ share (PLN)
34.3
Source: BESI Research for estimates, Company Data
Figure 5
Cyfrowy Polsat – sensitivity analysis
WACC change
RV FCF y oy change
34.3
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
0.0
-2.0%
-1.0%
0.0%
1.0%
2.0%
3.0%
6.3%
28.2
31.8
36.4
42.8
52.2
67.3
6.3%
-18%
-8%
6%
25%
52%
96%
6.8%
26.9
30.0
34.1
39.5
47.2
59.0
6.8%
-22%
-13%
-1%
15%
37%
72%
7.3%
25.7
28.5
32.0
36.7
43.2
52.6
7.3%
-25%
-17%
-7%
7%
26%
53%
7.8%
24.6
27.1
30.3
34.3
39.8
47.6
7.8%
-28%
-21%
-12%
0%
16%
39%
8.3%
23.7
25.9
28.7
32.3
37.0
43.5
8.3%
-31%
-25%
-16%
-6%
8%
27%
8.8%
22.8
24.8
27.4
30.5
34.6
40.2
8.8%
-34%
-28%
-20%
-11%
1%
17%
9.3%
22.0
23.9
26.1
29.0
32.6
37.3
9.3%
-36%
-31%
-24%
-16%
-5%
9%
Peer valuation
We maintain our valuation methodology for the new Cyfrowy Polsat: we use a
synthetic EV/EBITDA multiple derived from the average of EV/EBITDA
multiples from the telco, DTH and TV businesses. We use weights
corresponding to Cyfrowy Polsat’s EBITDA generation from those three
business segments. As a result, in our synthetic EV/EBITDA, 75% comes from
the telco peer median group, 15% from the DTH peer median group and 10%
from the TV peer median group.
Page 22 of 39
Figure 6
Peer valuation – priced as on 9/12/2014
N ame
R a t ing
F a ir v a lue
S ha re
pric e
E V / E B IT D A
2 0 14 E
2 0 15 E
D iv ide nd yie ld
2 0 16 E
2 0 14 E
2 0 15 E
2 0 16 E
TV
TVN
B UY
P LN 17.9
15.7
12.7
10.8
10.1
0.0%
0.0%
3.2%
CETV
no t rated
n.a.
2.8
14.2
9.8
8.0
0.0%
0.0%
0.0%
RTL
no t rated
n.a.
78.2
10.6
10.3
9.8
6.7%
6.0%
6.1%
P ro sieben Sat1
no t rated
n.a.
33.7
11.3
10.7
10.2
4.8%
5.3%
5.8%
ITV
no t rated
n.a.
208.5
11.5
10.5
9.8
0.0%
0.0%
0.0%
A tresmedia
B UY
13.9
11.0
19.1
13.1
10.2
2.9%
4.5%
6.2%
CB S Co rp
no t rated
n.a.
52.4
10.2
9.8
8.9
1.0%
1.2%
1.3%
CTC M edia
no t rated
n.a.
4.9
2.8
3.1
2.9
14.4%
13.3%
14.5%
M 6 M etro po le
no t rated
n.a.
15.6
6.5
6.2
6.1
5.5%
5.7%
6.0%
M o dern Times
no t rated
n.a.
244.0
11.4
9.7
9.0
4.6%
5.0%
5.4%
TF1
no t rated
n.a.
12.3
11.2
8.8
8.0
4.0%
4.6%
4.8%
11.3
10 .0
9 .4
3 .4 %
4 .6 %
5 .1%
T V M e dia n
S a t e llit e T V
Cyfro wy P o lsat (B ESI)
B UY
29.1
24.7
9.8
7.4
7.1
0.7%
0.0%
0.0%
Sky
B UY
1170
921
8.8
7.8
7.6
0.0%
0.0%
0.0%
DirecTV
no t rated
n.a.
83.785
7.1
6.8
6.5
0.0%
0.0%
0.0%
Dish Netwo rk
no t rated
n.a.
71.39
13.1
12.6
12.1
0.0%
0.0%
0.0%
B UY
6.1
6.75
71.0
28.8
17.9
0.0%
0.0%
0.4%
Cablevisio n
no t rated
n.a.
20.72
7.6
7.5
7.3
2.9%
2.9%
3.0%
Co mcast
no t rated
n.a.
56.14
8.3
7.9
7.4
1.6%
1.8%
1.9%
Dish TV India
no t rated
n.a.
64.2
11.3
9.3
8.0
0.0%
0.3%
0.3%
9 .3
7 .8
7 .5
0 .0 %
0 .0 %
0 .0 %
Sky Deutschland
D T H m e dia n
E U T e le c o m s
B elgaco m
SELL
10.5
31.4
7.3
7.6
7.9
4.8%
4.8%
4.8%
B T Gro up
B UY
4.8
4.1
6.8
6.8
6.6
3.1%
3.5%
3.9%
CWC
B UY
0.68
0.5
6.3
5.7
5.4
5.1%
5.1%
5.1%
Daisy
NEUTRA L
1.66
1.8
9.8
9.5
9.4
2.9%
3.2%
3.5%
Deutsche Teleko m
NEUTRA L
10.75
13.2
6.4
6.3
6.2
3.8%
3.8%
4.2%
SELL
14.7
23.6
9.2
9.5
9.9
5.5%
5.5%
5.1%
NEUTRA L
11.85
9.2
4.4
4.8
4.9
5.4%
8.2%
9.2%
B UY
217
192.1
8.9
7.8
7.2
0.3%
0.7%
1.0%
NEUTRA L
13
12.6
16.9
13.4
12.2
0.0%
0.0%
2.2%
Elisa
Hellenic Teleco m
Iliad
Jazztel
Kco m
B UY
1
0.9
7.4
7.4
7.3
6.0%
6.6%
7.0%
KP N
SELL
2.2
2.6
5.6
6.0
6.1
2.7%
3.9%
5.8%
Numericable
SELL
24.85
37.3
11.5
7.9
7.6
0.0%
0.0%
2.7%
NEUTRA L
10.3
13.8
5.1
5.1
5.1
4.3%
4.3%
4.3%
Swissco m
SELL
370
572.5
8.6
8.7
8.9
3.8%
3.8%
3.8%
Talk Talk
B UY
4.2
3.0
11.8
9.1
7.8
4.6%
5.4%
6.2%
TDC
B UY
66
48.0
6.0
6.6
6.7
5.2%
5.2%
5.2%
Tele2
SELL
73
94.0
8.0
7.8
7.5
4.8%
5.1%
5.3%
Teleco m Italia
B UY
1
0.9
5.4
5.5
5.6
1.1%
1.1%
1.6%
Telefo nica
SELL
9.65
12.9
6.6
6.3
6.2
5.8%
5.8%
5.8%
Orange
Teleko m A ustria
SELL
5
5.6
8.0
5.4
5.4
0.9%
1.3%
1.3%
NEUTRA L
135
149.6
6.3
6.1
6.0
5.3%
6.0%
6.7%
TeliaSo nera
SELL
33.75
52.3
7.0
6.6
6.6
5.7%
5.7%
5.9%
Vo dafo ne
SELL
1.68
2.2
7.1
6.8
6.5
5.1%
5.4%
5.6%
M agyar Teleko m
NEUTRA L
370
350
4.7
4.5
4.4
0.0%
0.0%
8.6%
Netia
NEUTRA L
5.6
5.7
3.7
4.4
4.6
7.5%
7.5%
7.5%
O2 CR
NEUTRA L
304
251.9
4.5
4.6
4.5
7.1%
6.1%
5.7%
SELL
8.0
9.0
4.2
4.9
4.9
5.6%
3.3%
3.3%
E U T e lc o m e dia n
6 .8
6 .6
6 .5
4 .8 %
4 .8 %
5 .1%
S ynt he t ic E V / E B IT D A
7 .9
7 .3
7 .0
0 .0 %
0 .7 %
0 .0 %
Teleno r
Orange P o lska
C P S ( B E S I)
9 .8
7 .4
7 .1
CP S ve TV peers
-13%
-26%
-24%
CP S vs DTH peers
6%
-5%
-5%
CP S vs Telco peers
44%
12%
10%
CP S vs synthetic multiples
24%
2%
1%
Equity value (P LN m)
Equity value per share (P LN)
15,282
23.9
Source: Company data, BESI Research for estimates
Page 23 of 39
Financials
Income statement
Figure 7
Cyfrowy Polsat – P&L
Cyfrow y Polsat - P&L (PLN m )
2010
2011
2012
2013
2014E
2015E
2016E
2017E
Revenues
1,482
2,366
2,778
2,911
7,462
9,914
9,869
9,865
17.1%
59.6%
17.4%
4.8%
156.4%
32.9%
-0.5%
0.0%
407
735
1,051
1,046
2,785
3,759
3,902
3,927
28%
81%
43%
0%
166%
35%
4%
1%
27.5%
31.1%
37.8%
35.9%
37.3%
37.9%
39.5%
39.8%
D&A
-81
-175
-243
-257
-1,367
-1,816
-1,920
-1,684
EBIT
326
560
808
790
1,417
1,943
1,983
2,243
% YoY change
18%
72%
44%
-2%
79%
37%
2%
13%
% EBIT margin
22.0%
23.7%
29.1%
27.1%
19.0%
19.6%
20.1%
22.7%
-4
-370
-96
-200
-985
-797
-773
-734
321
192
715
593
434
1,148
1,211
1,511
% YoY change
EBITDA
% YoY change
% EBITDA margin
Financial income/(expense), net
Profit before tax
Income tax
effective tax rate
-63
-32
-97
-67
-47
-218
-230
-287
-20%
-17%
-14%
-11%
-11%
-19%
-19%
-19%
1,224
Net incom e
258
160
617
525
387
930
981
12%
-38%
285%
-15%
-26%
140%
6%
25%
17.4%
6.8%
22.2%
18.1%
5.2%
9.4%
9.9%
12.4%
% YoY change
% net margin
EPS (PLN)
% YoY change
0.96
0.46
1.77
1.51
0.60
1.45
1.53
1.91
12%
-52%
285%
-15%
-60%
140%
6%
25%
Balance sheet
Figure 8
Cyfrowy Polsat – balance sheet
Cyfrow y Polsat - Balance sheet (PLN m )
2010
2011
2012
2013
2014E
2015E
2016E
2017E
Total fixed assets
545
4,225
4,476
4,456
23,356
23,864
22,968
22,378
PP&E
428
672
696
659
5,342
5,999
5,102
4,382
75
3,306
3,497
3,631
16,958
16,958
16,958
16,958
Intangibles and goodw ill
Other fixed assets
42
247
282
166
1,056
907
907
1,038
Total current assets
470
1,100
1,085
1,220
3,988
2,874
2,747
2,777
Inventory
173
156
162
147
332
438
433
418
Trade receivables
184
297
376
374
1,431
1,901
1,893
1,892
Other current assets
85
347
277
357
410
690
470
314
Cash and equivalents
28
278
270
342
1,815
126
12
57
1,015
5,325
5,561
5,676
27,343
26,738
25,715
25,156
Total stockholders equity
428
1,896
2,468
3,001
9,239
10,449
11,210
12,278
Liabilities
587
3,429
3,093
2,675
18,104
16,569
14,565
12,782
Total debt
20
2,729
2,282
1,925
13,324
12,279
11,070
9,956
Accounts payable
318
375
472
413
1,494
1,969
1,948
1,883
Other liabilities
250
325
339
337
3,286
2,321
1,547
943
1,015
5,325
5,561
5,676
27,343
27,018
25,775
25,060
Total assets
Total equity & liabilities
Operating data
Figure 9
Cyfrowy Polsat – operating data
Cyfrow y Polsat - Operating data
2010
2011
2012
2013
2014E
2015E
2016E
2017E
Total RGU (post-paid + pre-paid)
n/a
n/a
n/a
16,246
16,510
16,714
17,007
17,391
Post-paid RGU
n/a
n/a
11,735
11,778
12,416
12,785
13,193
13,642
payTV
n/a
n/a
3,995
4,212
4,440
4,640
4,820
4,980
Mobile telephony
n/a
n/a
6,980
6,779
6,587
6,456
6,385
6,374
Internet
n/a
n/a
761
988
1,389
1,689
1,989
2,289
Number of unique customers
n/a
n/a
6,313
6,288
6,155
6,105
6,055
6,005
ARPU per post-paid customer
n/a
n/a
94
89
86
86
86
87
RGU/unique client - post-paid
n/a
n/a
1.86
1.87
2.02
2.09
2.18
2.27
Total RGU (pre-paid)
3,749
n/a
n/a
n/a
4,469
4,094
3,929
3,814
Pay TV
n/a
n/a
n/a
78
93
88
83
78
Mobile telephony
n/a
n/a
n/a
4,172
3,706
3,506
3,356
3,256
Internet
n/a
n/a
n/a
219
295
335
375
415
n/a
n/a
n/a
18
18
18
17
17
ARPU per pre-paid customer
Cash Flow
Figure 10 Cyfrowy Polsat – cash flow
Cyfrow y Polsat - Cash Flow (PLN m )
2010
2011
2012
2013
2014E
2015E
2016E
2017E
Cash Flow from Operations
Capital Expenditures
198
347
781
803
1,992
2,645
2,893
2,858
-46
-66
-91
-123
-976
-2,473
-1,023
-963
Cash Flow from Investing Activities
-77
-2,427
-135
-134
786
-2,473
-1,023
-963
Cash Flow from Financing Activities
-192
2327
-653
-569
-1204
-1861
-1984
-1849
28
278
271
370
1,815
126
12
57
Ending cash
Page 24 of 39
FUNDAMENTAL INSIGHT
Poland | Telecom Services | Large Cap | 11-December-2014
Orange Polska
Unfortunate coincidence
We downgrade Orange Polska to SELL (from BUY) and reduce our FV
to 8.0 (from PLN 10.8) on the back of increased capex forecasts (FTTx
project) and an increase in our LTE budget estimate to PLN 1.4bn (from
PLN 900m). In our view, this will trigger a DPS cut in 2015E to PLN 0.3
(vs PLN 0.5 exp before). Despite some revival in KPIs observed in
2-3Q14 results (3P base +36k, reduced erosion in fixed-voice, ongoing
increase of Orange Open, NJU.Mobile base), OPL’s cash flow should
face another headwind predominantly driven by the upcoming LTE
auction and incremental capex on FTTx rollout in deregulated districts.
Apart from that, we think OPL should face ongoing price pressure in
B2B which could be further intensified or prolonged when GTS is fully
integrated into T-Mobile. Last but not least, expanding the SmartDOM
offer outside Cyfrowy Polsat group should have some consequences in
terms of mobile KPIs. Although we do not know how high pricing might
go in the LTE auction, the fact that there are six bidders in the race,
coupled with OPL’s lack of LTE spectrum, leads us to believe that OPL
is looking to win spectrum at any price.
Orange likely to be most determined to acquire LTE spectrum: After losing out in
the 1800MHz tender, OPL is the only telco among the four biggest players without
its own LTE spectrum and is only able to offer LTE service thanks to a lease
agreement with T-Mobile. In our view, this factor, combined with OPL’s goal of
establishing itself as an incumbent with nationwide coverage (not as P4 which
targets its offer to a more limited group), means that OPL will be the most
determined to acquire a full spectrum pack (2 800MHz and 4 2600MHz blocks) at
any price. We do not lend much credence to comments from OPL’s management
that there are other avenues to LTE access. Of course there are other options but
they would not be sufficient to improve the quality of service throughout the
entire country for a nationwide operator. Examples from other European markets
indicate that the average price per MHZ per capita could range from EUR 0.2 to
EUR 0.3 based on a 800&2600MHz spectrum pack. This would imply hypothetical
spectrum budget for the full spectrum pack of PLN 1.9-3.8bn. However, it is
important to bear in mind that the pricing per 1 GB in Poland is 50% below that in
other CEE countries and in our view this should affect the LTE spectrum budget.
Taking all those elements into consideration, we increase our LTE spectrum
budget for OPL to PLN 1.4bn (from PLN 0.9bn).
FTTx capex will hamper FCF: Although the timing of capex related to the FTTx
rollout in 76 deregulated districts is flexible (unlike LTE spectrum capex, which is
to be paid in a specific quarter), we do not expect OPL to postpone it until 2016E
when the company’s cash position should be partially rebuilt after the LTE outlay.
In our view, OPL’s goal is to upgrade its network to FTTx before cable launches
quad-play (likely to be soon, based on a recent press interview with the CEO of
UPC) so as to defend its client base in the big cities. On the one hand, the network
upgrade to FTTx in deregulated districts will create some room for organic net
adds in fixed-broadband, an area where OPL is currently losing ground. On the
other hand, OPL will have a convergent offer competitive with the current 3P
standard cableTV offer that would also provide some defence against new
quad-play cableTV offers that otherwise could undermine OPL’s mobile voice.
Overall, we expect OPL to roll out 500k HP in 2015E/16E, spending PLN 320m
incremental capex.
SELL
11% downside
Fair Value
PLN 8.00
Bloomberg ticker
Share Price
Free Float
PLN m Y/E 31-Dec
Revenues
EBITDA
2012A
2013A
2014E
2015E
14147.0
4845.0
12923.0
3904.0
12173.7
3956.4
12043.9
3644.3
796.2
EBIT
1573.0
788.0
901.5
Net income
853.0
294.0
474.2
373.2
5187.0
4666.0
4753.2
5669.7
Net debt
DPS
Capex
1.5
0.5
0.5
0.3
(2354.0)
(2188.0)
(1826.0)
(2167.9)
Y/E 31-Dec
2012A
2013A
2014E
adj. EV/EBITDA
4.7
4.3
4.2
4.9
adj. P/E
14.1
40.9
25.4
32.2
9.0%
5.5%
5.6%
3.3%
1.1
1.2
1.2
1.6
33.9%
16.5%
31.3%
16.9%
30.7%
15.0%
30.3%
18.0%
DY (%)
net debt/EBITDA
adj. EBITDA margin
Capex/Revenues
2015E
ROE
6.6%
2.3%
3.8%
3.0%
FCF Yield
9.2%
8.6%
11.7%
7.4%
125
120
115
110
105
100
95
90
Jan Feb Mar Apr May Jun
Jul
Aug Sep Oct Nov Dec
2014 2014 2014 2014 2014 2014 2014 2014 2014 2014 2014 2014
OPL PW
vs WIG Index
Analysts
Konrad Ksiezopolski
+48 22 347 4074
[email protected]
(v1.0.8.0)
OPL PW
PLN 9.00
PLN 11,811.22m
49%
Orange Polska
Rating
Fair Value (PLN):
SELL
8.00
9.00
-11%
% change to fair value
10.8
-26%
Bloomberg
Reuters
OPL PW
TPSA.WA
Shares in Issue (Less Treasury)(m)
Market Cap (PLN m)
2013 Net Debt (PLN m)
Enterprise Value (PLN m)
1,312
11,811
4,666
2
16,479
2011
2012
2013
2014E
2015E
2016E
9.8
6.3
1.7
4.2
11.3
10.7%
8.6%
14.1
14.1
1.6
4.7
14.3
9.2%
9.0%
40.9
40.9
1.3
4.3
21.2
8.6%
5.5%
25.4
25.4
1.4
4.2
18.6
11.7%
5.6%
32.2
32.2
1.5
4.9
22.2
7.4%
3.3%
30.7
30.7
1.5
4.9
23.4
7.8%
3.3%
2011
2012
2013
2014E
2015E
2016E
36.2%
14.9%
17%
0.7
0.4
14
13.4%
33.9%
11.1%
16%
0.7
1.1
9
6.6%
31.3%
6.1%
17%
0.7
1.2
8
2.3%
30.7%
7.4%
15%
0.6
1.2
10
3.8%
30.3%
6.6%
18%
0.8
1.6
11
3.0%
30.2%
6.3%
18%
0.8
1.5
14
3.2%
2011
2012
2013
2014E
2015E
2016E
14,922
-5.0%
5,928
25.9%
39.7%
5,407
36.2%
(3,703)
2,217
1696
14.9%
(433)
0.0
1,784
133
0.0
0.0
1,917
1,224
14,147
-5.2%
4,845
-18.3%
34.2%
4,802
33.9%
(3,261)
1,573
1530
11.1%
(559)
0.0
1,014
(161)
0.0
0.0
853
853
12,923
-8.7%
3,904
-19.4%
30.2%
4,050
31.3%
(3,107)
788
934
6.1%
(478)
0.0
275
(16)
0.0
0.0
294
294
12,174
-5.8%
3,956
1.3%
32.5%
3,742
30.7%
(3,048)
902
688
7.4%
(394)
1.0
276
(34)
1.0
1.0
474
474
12,044
-1.1%
3,644
-7.9%
30.3%
3,644
30.3%
(2,848)
796
796
6.6%
(335)
2.0
277
(88)
2.0
2.0
373
373
11,890
-1.3%
3,595
-1.4%
30.2%
3,595
30.2%
(2,849)
745
745
6.3%
(261)
2.0
277
(92)
2.0
2.0
392
392
Reported EPS (PLN)
Recurrent EPS (PLN)
DPS (PLN)
Payout Ratio
1.4
0.9
1.5
n.a.
1,334
0.6
0.6
1.5
103%
1,335
0.2
0.2
0.5
77%
1,336
0.4
0.4
0.5
227%
1,336
0.3
0.3
0.3
85%
1,336
0.3
0.3
0.3
107%
1,336
2011
2012
2013
2014E
2015E
2016E
Net income
D&A
Change in Working Capital
Associate & Minority Dividends
Other Operating Cash Flow
Operating Cash Flow
Capital Expenditure
1,918
3,703
353
224
(805)
5,169
(2,606)
855
3,261
(383)
0
(1,869)
1,864
(2,354)
294
3,107
54
0
(163)
3,292
(2,188)
474
3,048
(66)
1
0
3,438
(1,826)
373
2,848
(16)
2
0
3,202
(2,168)
392
2,849
(14)
3
0
3,223
(2,140)
Organic Free Cash Flow
Acquisitions & Disposals
Dividend Paid to Shareholders
Equity Raised / Bought Back
Other Financing Cash Flow
Net Cash Flow
2,451
1,516
(2,004)
(200)
(1,452)
416
1,594
(396)
(1,970)
(200)
(649)
(2,488)
1,105
14
(656)
0
236
(198)
988
(318)
(668)
0
500
1,126
797
(1,550)
(401)
0
0
(916)
841
(450)
(401)
0
0
232
2011
2012
2013
2014E
2015E
2016E
3,329
14,912
6,971
12
2,995
28,219
4,937
8,355
13,885
14,331
3
14,334
524
13,935
6,974
162
2,543
24,138
5,577
5,061
11,180
12,956
2
12,958
365
12,768
7,021
13
2,635
22,802
4,864
4,855
10,171
12,629
2
12,631
1,491
14,630
3,940
13
3,582
23,656
6,077
4,690
11,219
12,435
2
12,437
574
15,350
3,940
13
3,723
23,600
6,077
4,662
11,191
12,408
2
12,410
807
14,641
3,940
13
4,157
23,558
6,077
4,628
11,157
12,399
2
12,401
2,077
5,187
4,666
4,753
5,670
5,437
Recurrent P/E (x)
Reported P/E (x)
EV / Sales (x)
EV / EBITDA (x)
EV / EBIT (x)
FCF Yield (%)
Dividend yield (%)
Key Ratios
adj. EBITDA margin
EBIT margin
Capex / Revenue (x)
EBITDA / net interest (%)
ROE
P&L Summary (PLN m, unless stated)
4Q14 results
LTE spectrum auction
Feb-15
1Q15
+48 22 347 40 74
[email protected]
Revenues Breakdown (2013)
Other
revenue
5%
Mobile
services
47%
fixed-services
47%
Mobile
equipment
sales
1%
Revenue
% change
EBITDA
% change
% margin
adj. EBITDA
adj. EBITDA margin
EBIT reported
EBIT adjusted
% margin
Net Financials
Pre-Tax Profit
Income Tax Expense
Discontinued Operations
Minority Interests
Net Income
Recurrent Net Income
Revenues YoY Growth
0%
-1%
2011
2012
2013
2014E
2014E
2015E
2016E
-2%
-3%
-4%
-5%
-6%
-7%
-8%
-9%
-10%
Margins Trend
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%
2011
2012
2013
EBITDA
2014E
2014E
2015E
EBIT
2016E
Cash & Equivalents
Associates & Financial Investments
Other Assets
Total Assets
Other Liabilities
Total Liabilities
Minority Interests
Total Equity
Net Debt
Page 26 of 39
VALUATION
DCF
We use a 10-year forecast free cash flow period. The valuation is based on
FCF forecasts for 2015E-2023E; Net debt at the end of 2014E; risk free rate is
set at 2.8% (vs 3.8% before) and beta is unchanged at 1.0.
Figure 1
DCF
DCF Valuation
EBIT
Tax rate
NOPAT
Depreciation
CAPEX
Change of Working Capital
FCF
FCF change
WACC Calculation
debt/equity
risk free rate
credit premium
market premium
beta
cost of debt
cost of equity
WACC
PV (FCF)
PV [FCF]
PV [RV]
net debt, end 2014E
Valuation (PLN m)
# of shares (m)
Fair value/ share
2014E 2015E 2016E
902
796
745
7%
19%
19%
842
645
604
3,048
2,848
2,849
-2,329 -3,568 -2,440
-84
-19
-18
1,476
-94
995
-19% -106% -1159%
2017E
837
19%
678
2,719
-2,056
-16
1,324
33%
2018E
932
19%
755
2,602
-2,035
-14
1,307
-1%
2019E
1,028
19%
833
2,502
-2,018
-12
1,305
0%
2020E
1,077
19%
872
2,417
-2,004
-9
1,276
-2%
2021E
1,122
19%
909
2,344
-1,992
-8
1,253
-2%
2022E
1,165
19%
944
2,282
-1,981
-7
1,238
-1%
2023E
1,210
19%
980
2,229
-1,972
-6
1,231
-1%
RV
1,210
19%
980
25.7%
2.8%
1.5%
5.0%
1.0
4.0%
7.8%
6.8%
1,470
26.1%
2.8%
1.5%
5.0%
1.0
3.5%
7.8%
6.7%
1,087
26.5%
2.8%
1.5%
5.0%
1.0
3.5%
7.8%
6.7%
1,007
26.9%
2.8%
1.5%
5.0%
1.0
3.5%
7.8%
6.6%
943
27.3%
2.8%
1.5%
5.0%
1.0
3.5%
7.8%
6.6%
865
27.6%
2.8%
1.5%
5.0%
1.0
3.5%
7.8%
6.6%
798
27.9%
2.8%
1.5%
5.0%
1.0
3.5%
7.8%
6.6%
740
28.1%
2.8%
1.5%
5.0%
1.0
3.5%
7.8%
6.6%
691
27.6%
2.8%
1.5%
5.0%
1.0
3.5%
7.8%
6.6%
25.7%
2.8%
1.5%
5.0%
1.0
3.5%
7.8%
6.7%
-88
25.8%
2.8%
1.5%
5.0%
1.0
3.5%
7.8%
6.7%
871
980
0%
6,912
8,318
4,753
10,477
1,312
8.0
Sensitivity analysis
Figure 2
Orange Polska – sensitivity analysis
WACC
8.0
RFR
5%
6%
7%
8%
9%
10%
5%
6%
7%
8%
9%
1%
67%
36%
15%
1%
-10%
6.0
0%
34%
14%
0%
-10%
-18%
5.6
-1%
13%
-1%
-11%
-19%
-25%
1%
13.4
10.8
9.2
8.0
7.2
6.6
0%
10.7
9.1
8.0
7.1
6.5
-1%
9.0
7.9
7.1
6.5
6.0
Page 27 of 39
Peer valuation
Figure 3
Peer valuation – priced as on 09/12/2014
Com pany
Rating
Fair
Share
%age
Value
Price
Upside
2014E
2015E
2016E
2014E
Dividend yield
EV/EBITDA
2015E
2016E
Belgacom
SELL
10.50
31.36
-66.5%
4.8%
4.8%
4.8%
7.3
7.6
7.9
BT Group
BUY
4.80
4.09
17.5%
3.1%
3.5%
3.9%
6.8
6.8
6.6
Deutsche Telekom
NEUTRAL
10.75
13.24
-18.8%
3.8%
3.8%
4.2%
6.4
6.3
6.2
Hellenic Telecom
NEUTRAL
11.85
9.19
28.9%
5.4%
8.2%
9.2%
4.4
4.8
4.9
Kcom
BUY
1.00
0.89
12.0%
6.0%
6.6%
7.0%
7.4
7.4
7.3
KPN
SELL
2.20
2.58
-14.6%
2.7%
3.9%
5.8%
5.6
6.0
6.1
NEUTRAL
10.30
13.85
-25.6%
4.3%
4.3%
4.3%
5.1
5.1
5.1
Sw isscom
SELL
370.00
572.50
-35.4%
3.8%
3.8%
3.8%
8.6
8.7
8.9
TDC
BUY
66.00
48.01
37.5%
5.2%
5.2%
5.2%
6.0
6.6
6.7
Tele2
SELL
73.00
93.95
-22.3%
4.8%
5.1%
5.3%
8.0
7.8
7.5
Telecom Italia
BUY
1.00
0.93
7.5%
1.1%
1.1%
1.6%
5.4
5.5
5.6
Telefonica
SELL
9.65
12.92
-25.3%
5.8%
5.8%
5.8%
6.6
6.3
6.2
Telekom Austria
SELL
5.00
5.58
-10.4%
0.9%
1.3%
1.3%
8.0
5.4
5.4
NEUTRAL
135.00
149.60
-9.8%
5.3%
6.0%
6.7%
6.3
6.1
6.0
SELL
33.75
52.25
-35.4%
5.7%
5.7%
5.9%
7.0
6.6
6.6
Magyar
NEUTRAL
350
370.0
-5.4%
0.0%
0.0%
8.6%
4.7
4.5
4.4
Netia
NEUTRAL
5.6
5.7
-0.9%
7.4%
7.4%
7.4%
3.7
4.4
4.6
O2 CR
NEUTRAL
251.9
304.0
-17.1%
7.1%
6.1%
5.7%
4.5
4.6
4.5
SELL
8.0
9.0
-11.1%
5.6%
3.3%
3.3%
4.2
4.9
4.9
Median
4.8%
4.8%
5.1%
6.3
6.1
6.1
Premium (+) / Discount (-)
17%
-30%
-35%
-32%
-21%
-21%
Orange
Telenor
TeliaSonera
Orange Polska
Valuation (PLN m )
16,462
Value/share (PLN)
12.5
Source: Source: Company data, BESI Research for estimates
FINANCIALS
Figure 4
Orange Polska – changes to estimates
2014E
(PLN m )
New
Old
Revenues
12,174
12,134
EBITDA
3,956
D&A
2015E
% diff
New
Old
0%
12,044
11,844
3,793
4%
3,644
-3048
-2940
4%
EBIT
902
853
Net income
474
496
2016E
% diff
New
Old
2%
11,890
11,576
3%
3,524
3%
3,595
3,491
3%
-2848
-2837
0%
-2849
-2664
7%
6%
796
687
16%
745
827
-10%
-4%
373
322
16%
392
465
-16%
% diff
Figure 5
Orange Polska – BESI vs Bloomberg
(PLN m )
BESI
BBG
Revenues
12,174
12,265
3,956
EBIT
Net income
2014E
EBITDA
2015E
% diff
BESI
BBG
-1%
12,044
12,015
3,992
-1%
3,644
902
989
-9%
474
502
-5%
2016E
% diff
BESI
BBG
0%
11,890
11,821
% diff
3,775
-3%
3,595
3,605
0%
796
862
-8%
745
1,094
-32%
373
430
-13%
392
582
-33%
1%
Source: BESI Research for estimates, Bloomberg
Page 28 of 39
Income statement
Figure 6
Orange Polska – P&L
P&L (PLN m )
Revenues
% YoY change
2011
2012
2013
2014E
2015E
2016E
2017E
14,922
14,147
12,923
12,174
12,044
11,890
11,751
-5.0%
-5.2%
-8.7%
-5.8%
-1.1%
-1.3%
-1.2%
fixed-voice
4,569
4,032
3,451
2,994
2,703
2,468
2,276
mobile-voice
7,010
6,806
5,943
5,778
5,632
5,661
5,690
947
885
800
756
725
709
697
% YoY change
-2.3%
-0.8%
-7.4%
-5.5%
1.3%
-0.9%
-0.8%
% YoY change
137.9%
-29.0%
-49.9%
14.4%
-11.7%
-6.4%
12.3%
% EBIT margin
14.9%
11.1%
6.1%
7.4%
6.6%
6.3%
7.1%
-3,703
-3,261
-3,107
-3,048
-2,848
-2,849
-2,719
other
Depreciation
EBITDA
5,928
4,845
3,904
3,956
3,644
3,595
3,556
% YoY change
25.9%
-18.3%
-19.4%
1.3%
-7.9%
-1.4%
-1.1%
% EBITDA margin
39.7%
34.2%
30.2%
32.5%
30.3%
30.2%
30.3%
-433
-559
-478
-394
-335
-261
-261
133
-161
-16
-34
-88
-92
-109
0
0
0
0
0
0
0
% YoY change
1352%
-56%
-66%
61%
-21%
5%
19%
% net margin
12.8%
6.0%
2.3%
3.9%
3.1%
3.3%
4.0%
0.9
0.6
0.2
0.4
0.3
0.3
0.3
2.8%
-30.4%
-65.6%
61.3%
-21.3%
5.1%
18.9%
Income tax
Minority interest in earnings
Recurrent EPS (PLN)
% YoY change
Operating data
Figure 7
Orange Polska – operating data
Operating data
2011
2012
2013
2014E
2015E
2016E
2017E
Fixed-voice client base
5,623
5,104
4,699
4,344
4,089
3,934
3,829
fixed-broadband client base
2,346
2,345
2,327
2,327
2,337
2,347
2,357
14,658
14,895
14,997
15,099
15,178
15,257
15,336
fixed-voice ARPU
47.7
46.3
43.2
41.5
40.2
39.0
37.9
fixed-broadband ARPU
53.4
54.7
55.0
55.0
55.0
55.0
55.0
mobile -voice ARPU
40.3
38.3
32.4
32.0
31.0
31.0
31.0
mobile voice client base
Balance sheet
Figure 8
Orange Polska – balance sheet
Balance sheet (PLN m )
2011
2012
2013
2014E
2015E
2016E
2017E
Total fixed assets
23,091
21,945
20,725
20,552
21,425
21,170
20,661
PP & E, net
14,912
13,935
12,768
14,630
15,350
14,641
13,979
6,971
6,974
7,021
3,940
3,940
3,940
3,940
Other fixed assets
1,208
1,036
936
1,982
2,135
2,589
2,742
5,128
2,193
2,077
3,104
2,175
2,388
2,665
214
194
200
189
192
190
188
1,506
1,408
1,199
1,129
1,117
1,103
1,090
Inventory
Trade and other receivables
79
67
313
295
292
288
285
3,329
524
365
1,491
574
807
1,101
Total assets
28,219
24,138
22,802
23,656
23,600
23,558
23,326
14,331
12,956
12,629
12,435
12,408
12,399
12,197
3
2
2
2
2
2
2
Long-term liabilities
5,717
4,676
2,775
4,750
4,740
4,729
4,719
Long-term debt
4,170
3,273
1,245
3,273
3,273
3,273
3,273
Other long-term liabilities
1,547
1,403
1,530
1,477
1,467
1,456
1,446
Short-Term Liabilities
7,575
5,962
6,944
6,018
5,998
5,975
5,955
Accounts payable
3,199
2,218
1,921
1,810
1,790
1,767
1,747
767
2,304
3,619
2,804
2,804
2,804
2,804
Other short-term liabilities
3,609
1,440
1,404
1,404
1,404
1,404
1,404
28,219
24,138
22,802
23,656
23,600
23,558
23,326
10.7
9.7
9.5
9.3
9.3
9.3
9.1
Including minority interest
Short-term debt
BVPS (PLN)
Page 29 of 39
Cash Flow
Figure 9
Orange Polska – cash flow
Cash Flow (PLN m )
2011
2012
2013
2014E
2015E
2016E
Net incom e
1,918
855
294
474
373
392
466
Depreciation and Amortization
3,703
3,261
3,107
3,048
2,848
2,849
2,719
-13
Change in Net Working Capital
2017E
353
-383
54
-66
-16
-14
-805
-1,869
-163
0
0
0
0
5,169
1,864
3,292
3,438
3,202
3,223
3,169
-2,606
-2,333
-2,180
-1,826
-2,168
-2,140
-2,056
1,516
-396
14
-318
-1,550
-450
-150
-1,090
-2,729
-2,166
-2,144
-3,718
-2,590
-2,206
Change in Debt
-1,423
-644
238
500
0
0
0
Issue of shares
0
0
0
0
0
0
0
-2,004
-1,970
-656
-668
-401
-401
-668
Other
Other
Dividends paid
Other
-236
991
-906
0
0
0
0
-3663
-1623
-1324
-168
-401
-401
-668
Beginning cash
2,447
2,860
406
198
1,324
407
640
416
-2,488
-198
1,126
-916
232
295
2,860
390
198
1,324
407
640
934
1.5
1.5
0.5
0.5
0.3
0.3
0.5
Increase/(decrease) in cash
Ending cash
DPS (PLN)
Page 30 of 39
FUNDAMENTAL INSIGHT
Poland | Telecom Services | Small & Mid Cap | 11-December-2014
Netia
High dividend is not enough
Although Netia offers the highest DY 15E among Polish telecoms on
our estimates, at 7.4% vs 3.3% for OPL and 0% for CPS, we reiterate
our NEUTRAL stance on the stock as we expect revenues and
EBITDA to remain under pressure in the years ahead (we expect
2013-16E CAGR at -8.5% for both revenues and EBITDA). Hence,
Netia’s significant valuation discount to int’l peers on 15E/16E
EV/EBITDA of 22%/18% is also justified in our view. Its updated
strategy with a focus on defending the client base on own network
with further cross-selling and cost optimization seems to be the only
way to mitigate EBITDA pressure, in our view. Netia’s goal of
separating B2B and B2C infrastructure assets would make a spin-off
scenario more likely in our view. We think more value could be
unlocked though a spin-off scenario into B2B and B2C assets and
possible buyers range from cableTV to mobile-only operators;
however this is only a hypothetical at this point and hence we
maintain our NEUTRAL rating and FV of PLN 5.6.
Headcount reduction plan: In the 3Q14 results conference call, the CEO
mentioned that following an internal audit executed just after the new Board’s
arrival, Netia will continue its restructuring process with headcount reductions.
Keeping in mind the ongoing top-line and EBITDA pressure, we would expect
new management to take visible restructuring steps. We expect a headcount
reduction plan similar (in relative scale) to that announced in 2011 after the
Dialog/Crowley acquisition. We expect ca. 300 headcount reduction (16% of
total staff) with avg severance payment at 4-6 salaries, which we estimate
would imply a ca. PLN 11-16m severance provision probably booked in 4Q14E.
Netia could be interested in TK Telekom: In our view, Netia could be among a
small number of companies that might be interested in acquiring TK Telekom
(put up for sale by the Polish state railways). However, Netia’s management has
stated that it would only be interested at the right price. Given TK Telekom’s
forecast for 14E EBITDA of PLN 45m, we would value the asset at ca. PLN 250m,
at a ca. 20% discount to the GTS deal on the back of TK Telekom’s high
dependence on PKP group. Comments from Netia’s management indicate that it
would be willing to pay no more than PLN 200m.
NEUTRAL
1% downside
Fair Value
PLN 5.60
Bloomberg ticker
Share Price
Free Float
NET PW
PLN 5.65
PLN 1,965.64m
100%
PLN m Y/E 31-Dec
2012A
2013A
2014E
2015E
Revenues
EBITDA
2121.4
461.5
1876.0
532.8
1680.8
578.8
1569.2
463.0
adj EBITDA
579.9
550.9
497.3
463.0
EBIT
(21.0)
92.8
154.4
84.3
Net income
(87.7)
46.3
104.3
50.5
adj Net income
(29.3)
26.5
(12.2)
50.5
net debt
405.7
290.7
179.7
101.0
Y/E 31-Dec
2012A
2013A
2014E
2015E
4.5
4.2
3.7
4.5
P/E
(18.9)
41.6
18.9
38.9
adj P/E
(56.6)
72.7
(160.7)
38.9
0.0%
7.5%
7.4%
7.4%
0.9
(3.8%)
0.5
2.1%
0.3
4.7%
0.2
2.4%
EV/EBITDA
DY
net debt/EBITDA
ROE
FCF Yield
16.8%
15.2%
17.2%
11.4%
adj. EBITDA margin
27.3%
29.4%
29.6%
29.5%
115
110
105
100
95
90
85
Jan 2014
Apr 2014
NET PW
Jul 2014
Oct 2014
vs WIG Index
GigaKablowka offer: In August, Netia launched a commercial offer on the postAster 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 says that ca. 80% of services are sold either in 2P or 3P. The
base package with 100MB/s internet speed and 12M contract at PLN 49.9/m
looks attractive in comparison with OPL’s Geopromocja offer at PLN 59.9 and
other cableTV offers but its payTV offer includes fewer channels and is intended
more for pure internet users and low-end clients. When upgrading the payTV
offer to market standard with 100+ channels, the pricing is comparable.
Settlement with Orange Polska could sweeten DPS in 2015E: Orange Polska and
Netia have settled all mutual claims and OPL paid PLN 145m gross. Netia already
commented that PLN 75m cash received from OPL has been used for debt
restructuring. In our view, some of the remaining cash could be used to increase
the dividend in 2015E to at least the level of DPS PLN 0.5. However, we think the
decision will be based on whether or not Netia acquires the TK Telekom asset
and the price it pays.
Analysts
Konrad Ksiezopolski
+48 22 347 4074
[email protected]
(v1.0.8.0)
Netia
Rating
Fair Value (PLN):
NEUTRAL
5.6
5.7
-1%
% change to fair value
5.6
0%
Bloomberg
Reuters
NET PW
NTIA.WA
Shares in Issue (Less Treasury)(m)
Market Cap (PLN m)
end 2013 Net Debt (PLN m)
Enterprise Value (PLN m)
348
1,966
291
0
2,256
2011
2012
2013
2014E
2015E
2016E
Recurrent P/E (x)
Reported P/E (x)
EV / Sales (x)
EV / EBITDA (x)
EV / EBIT (x)
FCF Yield (%)
Dividend yield (%)
14.5
8.3
1.6
4.3
8.6
7.6%
0.0%
(56.6)
(18.9)
1.0
4.5
(98.5)
16.8%
0.0%
72.7
41.6
1.2
4.2
23.9
15.2%
7.5%
(160.7)
18.9
1.3
3.7
13.9
17.2%
7.4%
38.9
38.9
1.3
4.5
24.5
11.4%
7.4%
31.3
31.3
1.4
4.6
21.3
10.3%
7.4%
Key Ratios
2011
2012
2013
2014E
2015E
2016E
37.8%
18.7%
0.2
0.9
0.9
17
9.9%
21.8%
-1.0%
0.1
0.5
0.9
8
-3.8%
28.4%
4.9%
0.2
0.6
0.5
12
2.1%
34.4%
9.2%
0.1
0.5
0.3
15
4.7%
29.5%
5.4%
0.1
0.5
0.2
13
2.4%
29.7%
6.4%
0.1
0.6
0.1
14
3.1%
2011
2012
2013
2014E
2015E
2016E
1,619
3.2%
611
4.3%
37.8%
408
25.2%
(309)
303
6%
18.7%
0
303
15
0
317
68
0
0
249
142
2,121
31.0%
462
-24.5%
21.8%
580
27.3%
(482)
(21)
-107%
-1.0%
0
(21)
(40)
0
(61)
27
0
0
(88)
(29)
1,876
-11.6%
533
15.4%
28.4%
551
29.4%
(440)
93
-542%
4.9%
0
93
(28)
0
64
18
0
0
46
26
1,681
-10.4%
579
8.7%
34.4%
497
29.6%
(424)
154
66%
9.2%
0
154
(22)
0
133
28
0
0
104
(12)
1,569
-6.6%
463
-20.0%
29.5%
463
29.5%
(379)
84
-45%
5.4%
1
85
(22)
1
62
12
0
0
50
50
1,473
-6.1%
437
-5.7%
29.7%
437
29.7%
(342)
94
12%
6.4%
2
96
(17)
2
77
15
0
0
63
63
0.6
0.4
0.0
0%
389
(0.2)
(0.1)
0.0
0%
389
0.1
0.1
0.4
-155%
389
0.3
(0.0)
0.4
316%
348
0.1
0.1
0.4
140%
348
0.2
0.2
0.4
289%
348
2011
2012
2013
2014E
2015E
2016E
Net income
D&A
Change in Working Capital
Other Operating Cash Flow
Operating Cash Flow
Capital Expenditure
Free Cash Flow
Acquisitions & Disposals
Dividend Paid to Shareholders
Equity Raised / Bought Back
Other Financing Cash Flow
Net Cash Flow
249
309
11
(150)
419
(263)
156
(810)
0
0
636
(18)
(88)
482
(12)
159
541
(263)
279
(3)
0
0
(304)
(28)
46
440
36
53
575
(282)
293
3
0
0
(327)
(31)
104
424
(1)
12
540
(202)
338
0
(146)
0
(100)
92
50
379
(0)
0
429
(204)
225
0
(146)
0
(50)
29
63
342
(0)
0
405
(202)
203
0
(146)
0
(50)
7
2011
2012
2013
2014E
2015E
2016E
Cash & Equivalents
Associates & Financial Investments
Other Assets
Total Assets
Other Liabilities
Total Liabilities
Minority Interests
Total Equity
161
2,184
770
26
407
3,549
695
354
1,049
2,500
0
2,500
145
2,066
597
0
424
3,233
551
386
937
2,296
0
2,296
93
1,957
538
0
349
2,938
384
349
733
2,205
0
2,205
185
1,734
538
0
441
2,899
365
325
690
2,209
0
2,209
214
1,559
538
0
428
2,740
315
311
626
2,113
0
2,113
221
1,419
538
0
416
2,594
265
299
564
2,030
0
2,030
534
406
291
180
101
44
EBITDA margin
EBIT margin
Capex / Revenue (x)
EBITDA / net interest (%)
ROE
P&L Summary (PLN m, unless stated)
4Q14 results
Feb-15
+48 22 347 40 74
[email protected]
Revenues Breakdown (2013)
interconnect
4%
wholesale
6%
other
4%
fixed-voice
43%
TV/mobile
4%
Revenue
% change
EBITDA
% change
% margin
adj EBITDA
adj EBITDA margin
EBIT
% change
% margin
Associates
Operating Profit
Net Financials
Pre-Tax Profit
Income Tax Expense
Discontinued Operations
Minority Interests
Net Income
Recurrent Net Income
Reported EPS (PLN)
Recurrent EPS (PLN)
DPS (PLN)
Payout Ratio
internet
39%
Revenues Growth
35%
30%
25%
20%
15%
10%
5%
0%
-5%
-10%
-15%
31.0%
3.2%
2011
2012
-11.6%
2013
-10.4%
2014E
-6.6%
-6.1%
2015E
2016E
Shareholders structure, July 2014
Others,
35.4%
Navicorp
Trust Polska,
5.0%
Mennica
Polska,
15.9%
PZU OFE,
5.5%
ING OFE,
9.6%
FIP,
10.0%
SISU
Capital,
12.7%
Aviva OFE,
5.8%
Net Debt
Source: Company data, Reuters, Bloomberg, BESI Research for estimates.
Page 32 of 39
Financial forecasts
Figure 1
Netia – changes to estimates
2014E
(PLN m )
New
Revenues
2015E
Old
% diff
New
Old
2016E
% diff
New
Old
% diff
1,681
1,681
0%
1,569
1,550
1%
1,473
1,423
EBITDA
579
579
0%
463
455
2%
437
415
5%
EBIT
154
154
0%
84
77
9%
94
73
29%
Net profit
104
104
0%
50
44
15%
63
46
36%
4%
Figure 2
BESI vs BBG
2014E
(PLN m )
BESI
Revenues
2015E
BBG
% diff
BESI
BBG
2016E
% diff
BESI
BBG
% diff
1,681
1,703
-1%
1,569
1,610
-3%
1,473
1,540
EBITDA
579
512
13%
463
458
1%
437
434
1%
D&A
424
422
1%
379
383
-1%
342
351
-2%
EBIT
154
90
71%
84
75
13%
94
83
13%
Net income
104
75
39%
50
48
5%
63
57
10%
-4%
Source: BESI Research for estimates, Bloomberg for consensus
VALUATION
DCF
Figure 3
Netia – DCF
DCF Valuation
2014E 2015E 2016E 2017E 2018E 2019E
154
84
94
99
100
103
19%
19%
19%
19%
19%
19%
125
68
76
80
81
83
424
379
342
314
292
275
-202
-204
-202
-207
-207
-209
-1
0
0
0
0
0
347
243
217
187
166
149
32.9% -30.1% -10.7% -13.7% -11.5% -10.3%
EBIT
Tax rate
NOPAT
Depreciation
CAPEX
Change of WC
FCF
FCF change
WACC Calculation
debt/equity
risk free rate
credit premium
market premium
beta
cost of debt
cost of equity
WACC
PV (FCF)
PV (FCF)
PV (RV)
net debt, end 2014E
Valuation (PLN m)
# of shares (PLN m)
Fair value/Share
12.6%
2.8%
1.5%
5.0%
1.0
3.5%
7.8%
7.3%
345
11.5%
2.8%
1.5%
5.0%
1.0
3.5%
7.8%
7.3%
225
10.2%
2.8%
1.5%
5.0%
1.0
3.5%
7.8%
7.4%
187
8.8%
2.8%
1.5%
5.0%
1.0
3.5%
7.8%
7.4%
150
9.1%
2.8%
1.5%
5.0%
1.0
3.5%
7.8%
7.4%
124
9.4%
2.8%
1.5%
5.0%
1.0
3.5%
7.8%
7.4%
103
2020E
111
19%
90
262
-213
0
138
-7.4%
2021E
124
19%
100
252
-221
0
132
-4.3%
2022E
136
19%
110
246
-223
0
133
0.8%
2023E
145
19%
118
242
-225
0
134
1.0%
>2023
145
19%
118
9.7%
2.8%
1.5%
5.0%
1.0
3.5%
7.8%
7.4%
89
9.9%
2.8%
1.5%
5.0%
1.0
3.5%
7.8%
7.4%
80
10.2%
2.8%
1.5%
5.0%
1.0
3.5%
7.8%
7.4%
75
10.5%
2.8%
1.5%
5.0%
1.0
3.5%
7.8%
7.3%
71
10.5%
2.8%
1.5%
5.0%
1.0
3.5%
7.8%
7.3%
118
0.0%
1,104
843
180
1,767
348
5.1
Figure 4
Netia – sensitivity table – WACC vs TGR
Sensitivity Table
TGR
5.1
-2%
-1%
0%
1%
2%
5%
5.0
5.4
6.0
6.8
8.1
6%
4.7
5.1
5.5
6.0
6.8
WACC
7%
4.5
4.8
5.1
5.5
6.1
8%
4.3
4.5
4.8
5.1
5.5
9%
4.2
4.4
4.6
4.8
5.1
-2%
-1%
0%
1%
2%
5%
-1%
7%
18%
34%
59%
WACC
6%
7%
8%
9%
-7% -11% -15% -17%
0% -6% -11% -14%
8%
0% -6% -10%
18%
8%
0% -5%
35% 19%
9%
1%
Page 33 of 39
Peer valuation
Figure 5
Netia - peer valuation, as of 9/12/2014
Com pany
Rating
Share
Fair
%age
Price
Value
Upside
2014E
2015E
2016E
2014E
2015E
2016E
Dividend yield
EV/EBITDA
Belgacom
SELL
31.36
10.50
-66.5%
4.8%
4.8%
4.8%
7.3
7.6
7.9
BT Group
BUY
4.09
4.80
17.5%
3.1%
3.5%
3.9%
6.8
6.8
6.6
CWC
BUY
0.49
0.68
39.4%
5.1%
5.1%
5.1%
6.3
5.7
5.4
Deutsche Telekom
NEUTRAL
13.24
10.75
-18.8%
3.8%
3.8%
4.2%
6.4
6.3
6.2
Hellenic Telecom
NEUTRAL
9.19
11.85
28.9%
5.4%
8.2%
9.2%
4.4
4.8
4.9
SELL
2.58
2.20
-14.6%
2.7%
3.9%
5.8%
5.6
6.0
6.1
NEUTRAL
13.85
10.30
-25.6%
4.3%
4.3%
4.3%
5.1
5.1
5.1
TDC
BUY
48.01
66.00
37.5%
5.2%
5.2%
5.2%
6.0
6.6
6.7
Telecom Italia
BUY
0.93
1.00
7.5%
1.1%
1.1%
1.6%
5.4
5.5
5.6
Telefonica
SELL
12.92
9.65
-25.3%
5.8%
5.8%
5.8%
6.6
6.3
6.2
Telekom Austria
SELL
5.58
5.00
-10.4%
0.9%
1.3%
1.3%
8.0
5.4
5.4
NEUTRAL
149.60
135.00
-9.8%
5.3%
6.0%
6.7%
6.3
6.1
6.0
SELL
52.25
33.75
-35.4%
5.7%
5.7%
5.9%
7.0
6.6
6.6
Magyar Telekom
NEUTRAL
350.0
370.0
5.7%
0.0%
0.0%
8.6%
4.7
4.5
4.4
Netia
NEUTRAL
5.7
5.6
-0.9%
7.4%
7.4%
7.4%
3.7
4.5
4.6
O2 CR
NEUTRAL
251.9
304.0
20.7%
7.1%
6.1%
5.7%
4.5
4.6
4.5
SELL
9.0
8.0
-11.1%
5.6%
3.3%
3.3%
4.2
4.9
4.8
Median
4.8%
4.8%
5.1%
6.0
5.7
5.6
Premium (+) / Discount (-)
55%
55%
46%
-38%
-22%
-18%
KPN
Orange
Telenor
TeliaSonera
Orange Polska
Valuation (PLN m )
2,603
Value/share (PLN)
7.5
Source: BESI Research for estimates, Bloomberg
FINANCIALS
Income Statement
Figure 6
Netia – P&L
Netia - P&L (PLN m )
2010
2011
2012
2013
2014E
2015E
2016E
2017E
Revenues
1,569
1,619
2,121
1,876
1,681
1,569
1,473
1,379
4%
3%
31%
-12%
-10%
-7%
-6%
-6%
o/w fixed-voice
742
737
948
809
680
605
520
449
o/w broadband
580
604
766
725
689
661
649
629
o/w others
248
277
407
342
313
303
304
301
-1,531
-1,553
-2,084
-1,803
-1,643
-1,485
-1,379
-1,280
-7%
% YoY change
Total OPEX
1%
1%
34%
-13%
-9%
-10%
-7%
other opex
% YoY change
248
237
-58
20
116
0
0
0
EBIT
286
303
-21
93
154
84
94
99
% YoY change
1864%
6%
-107%
-542%
66%
-45%
12%
5%
% EBIT margin
18.2%
18.7%
-1.0%
4.9%
9.2%
5.4%
6.4%
7.2%
-301
-309
-482
-440
-424
-379
-342
-314
586
611
462
533
579
463
437
413
22.9%
25.2%
27.3%
29.4%
29.6%
29.5%
29.7%
30.0%
Depreciation
EBITDA
% adj EBITDA margin
3
15
-40
-28
-22
-22
-17
-13
289
25
317
68
-61
27
64
18
133
28
62
12
77
15
86
16
effective tax rate
9%
22%
-44%
28%
21%
19%
19%
19%
Net incom e
264
249
-88
46
104
50
63
70
% YoY change
197%
-6%
-135%
-153%
125%
-52%
24%
11%
% net margin
16.8%
15.4%
-4.1%
2.5%
6.2%
3.2%
4.3%
5.1%
56
142
-29
26
-12
50
63
70
-867%
156%
-121%
-190%
-146%
-513%
24%
11%
Profit before tax
Income tax
Recurrent Net Incom e
% YoY change
EPS (PLN)
% YoY change
Recurrent EPS (PLN)
% YoY change
0.7
0.6
-0.2
0.1
0.3
0.1
0.2
0.2
197%
-6%
-135%
-153%
152%
-52%
24%
11%
0.1
0.4
-0.1
0.1
0.0
0.1
0.2
0.2
-867%
156%
-121%
-190%
-152%
-513%
24%
11%
Page 34 of 39
Operating data
Figure 7
Netia – operating data
Operating data
2010
2011
2012
2013
2014E
2015E
2016E
2017E
690
912
875
849
795
793
783
758
1,219
1,745
1,644
1,489
1,338
1,197
1,062
946
TV client base (in 000)
n/a
51
79
120
144
194
224
244
mobile broadband client base (in 000)
n/a
30
30
26
20
16
12
8
mobile voice client base (in 000)
n/a
52
60
42
23
13
8
8
1,909
2,789
2,688
2,526
2,320
2,214
2,089
1,965
ARPU - internet (PLN/month)
54
52
57
56
56
55
55
55
ARPU - fixed-voice (PLN/month)
52
50
47
43
41
39
38
37
ARPU - TV (PLN/month)
n/a
38
43
38
37
37
38
38
ARPU - mobile-internet (PLN/month)
n/a
28
27
27
28
28
28
28
ARPU - mobile-voice (PLN/month)
n/a
29
26
28
28
28
28
28
fixed-broadband client base (in 000)
fixed-voice client base (in 000)
RGU (in 000)
Balance sheet
Figure 8
Netia – balance sheet
Netia - Balance sheet (PLN m )
2010
2011
2012
2013
2014E
2015E
2016E
2017E
Total fixed assets
1,974
3,103
2,777
2,621
2,513
2,338
2,198
2,091
PP & E, net
1,476
2,184
2,066
1,957
1,734
1,559
1,419
1,311
389
770
597
538
538
538
538
538
Other fixed assets
109
149
113
126
241
241
241
241
595
447
456
317
386
401
396
366
11
5
2
3
2
2
2
2
198
250
249
196
176
164
154
144
Inventory
Trade and other receivables
38
30
60
25
22
21
19
18
347
161
145
93
185
214
221
202
Total assets
2,569
3,549
3,233
2,938
2,899
2,740
2,594
2,456
2,298
2,500
2,296
2,205
2,209
2,113
2,030
1,954
0
0
0
0
0
0
0
0
27
549
451
317
244
194
144
94
34
Including minority interest
Long-term liabilities
Long-term debt
0
515
384
257
184
134
84
Other long-term liabilities
27
35
67
60
60
60
60
60
Short-Term Liabilities
244
500
486
416
446
432
420
409
Accounts payable
207
262
260
232
208
194
182
170
0
181
166
127
181
181
181
181
37
57
59
58
58
58
58
58
2,569
3,549
3,233
2,938
2,899
2,740
2,594
2,456
5.9
6.4
5.9
5.7
6.3
6.1
5.8
5.6
2017E
Short-term debt
Other short-term liabilities
BVPS (PLN)
Cash Flow
Figure 9
Netia – Cash Flow
Netia - Cash Flow (PLN m )
2010
2011
2012
2013
2014E
2015E
2016E
Net incom e
264
249
-88
46
104
50
63
70
Depreciation and Amortization
301
309
482
440
424
379
342
314
0
Change in Net Working Capital
-21
11
-12
36
-1
0
0
-254
-150
159
53
12
0
0
0
289
419
541
575
540
429
405
383
-193
-263
-263
-282
-202
-204
-202
-207
-96
-810
-3
3
0
0
0
0
-289
-1,073
-266
-279
-202
-204
-202
-207
Change in Debt
-7
694
-187
-132
-100
-50
-50
-50
Issue of shares
0
0
0
0
0
0
0
0
Dividends paid
0
0
0
0
-146
-146
-146
-146
Other
Other
Other
-1
-59
-116
-195
0
0
0
0
-8
636
-304
-327
-246
-196
-196
-196
181
173
155
124
93
185
214
221
-8
-18
-28
-31
92
29
7
-19
Ending cash
173
155
128
93
185
214
221
202
DPS (PLN)
0.00
0.00
0.00
0.35
0.42
0.42
0.42
0.42
Beginning cash
Increase/(decrease) in cash
Page 35 of 39
Valuation Methodology
Cyfrowy Polsat
We value the new Cyfrowy Polsat using two methods, DCF and peer valuation.
Our final value is a weighted average of the two methods where each has an
equal 50% weight. Using a DCF, we arrive at a FV of PLN 34.2/share while via
a peer valuation we arrive at PLN 23.9. Our final value is PLN 29.1, giving 18%
upside potential to the current share price.
Orange Polska
We value OPL using DCF, DDM and show peer multiples for illustrative
purposes only. However, due to the LTE auction and increased capex related
to the deregulation of 76 districts, and our expectation for a dividend cut, we
use a weighted average of DCF and DDM with equal weighting of 50%. Using
a DCF, we derive a fair value of PLN 8.0 and using DDM we arrive at PLN 7.9.
Our fair value is PLN 8.0, implying 11% downside potential to the current share
price.
Netia
We value Netia using the average of three methods: DCF, DDM and peer
multiples (14E&15E&16E EV/EBITDA) where DCF and DDM each have a 40%
weighting and the multiple method has a weighting of 20%. Using a DCF, we
derive a fair value of PLN 5.1; using a peer comparison we arrive at PLN 7.5
and based on DDM we arrive at PLN 5.24. Our fair value is PLN 5.6, which is in
line with the current market price.
Risks to Fair Value
Cyfrowy Polsat
Weaker than expected delivery on revenue and costs synergies
Weaker than expected performance of SmartDOM offer
ARPU and margin dilution from bundling offer
Weaker than expected performance of TV ad market
Stronger than expected dilution of Polsat TV and TVN audience share coming
from digital switchover in 2013
Weaker-than-expected macro situation that could reduce consumption
spending on telecom-related services
Orange Polska
Risk to the downside:
Price escalation on LTE spectrum auction,
Price war on mobile broadband offer,
Further price pressure on B2B market,
SmartDOM offer churning OPL clients,
Higher-than-expected erosion of ARPU in the mobile voice segment,
Acceleration of net adds erosion in fixed-voice and fixed-data.
CableTV going quad-play faster than expected,
Risk to upside:
Lower than expected LTE budget,
Successful FTTx network rollout or lower incremental capex spent,
Consolidation of Polish telco market reducing competitive landscape,
Page 36 of 39
Netia
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
Cyfrowy Polsat
Buy
CPS PW
Trading Buy
Neutral
Trading Sell
Sell
Restricted
Orange Polska
Dropped Coverage
Buy
OPL PW
Trading Buy
Neutral
Trading Sell
Sell
Restricted
Dropped Coverage
30
19
28
N
26
N
17
B
24
15
B
22
S
B
13
N
20
B
11
18
16
B
B
N
9
14
S
7
12
10
Dec-11
Mar-12
Jun-12
Sep-12
Report date
Dec-12
Mar-13
Jun-13
Sep-13
Recommendation
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Fair value
Share price
2014 July 22
Buy
PLN 27.10
PLN 22.80
2013
Buy
PLN 23.80
PLN 19.35
Buy
PLN 23.70
PLN 20.12
Buy
PLN 17.90
PLN 15.60
Neutral
PLN 16.70
PLN 15.35
November 27
September 2
2012
November 23
August 20
Source: Bloomberg, BESI Research
5
Dec-11
Mar-12
Jun-12
Sep-12
Report date
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Recommendation
Fair value
2014 July 22
Buy
PLN 10.80
PLN 9.55
2013
Buy
PLN 12.60
PLN 10.54
November 27
February 21
2012
December 10
October 22
Share price
Sell
PLN 6.30
Neutral
PLN 12.20
PLN 11.98
Sell
PLN 11.90
PLN 13.23
PLN 7.13
September 26
Neutral
PLN 15.50
PLN 16.35
February 17
Neutral
PLN 17.40
PLN 16.60
Netia
NET PW
Buy
Trading Buy
Neutral
Trading Sell
Sell
Restricted
Dropped Coverage
6.5
B
B
6
N
N
5.5
B
B
5
B
4.5
4
3.5
Dec-11
Mar-12
Jun-12
Sep-12
Report date
Dec-12
Mar-13
Jun-13
Recommendation
Sep-13
Dec-13
Mar-14
Fair value
Jun-14
Sep-14
Dec-14
Share price
2014 November 12
Neutral
PLN 5.60
July 22
Neutral
PLN 5.40
PLN 5.48
August 12
Buy
PLN 5.80
PLN 4.99
February 27
Buy
PLN 5.40
PLN 4.23
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
2013
2012
PLN 5.54
Please visit our website at www.EspiritoSantoIB.co.uk for up to date recommendation charts.
Page 37 of 39
IMPORTANT DISCLOSURES
091214
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
12-MONTH RATING
BUY
Ratings Distribution
DEFINITION
Analyst expects at least 10% upside potential to fair
value, which should be realized in the next 12 months
As at end September 2014
Recommendation
Total BESI Research
Count % of Total
Total Investment Banking Clients
(IBC)
Count
% of IBC % of Total
12 Month Rating:
NEUTRAL
SELL
Analyst expects upside/downside potential of between
+10% and -10% to fair value, which should be realized in
the next 12 months
Analyst expects at least 10% downside potential to fair
value, which should be realized in the next 12 months
TRADING RATING
TRADING BUY
DEFINITION
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
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 Buy
0
0.0%
0
0.0%
0.0%
Trading Sell
0
0.0%
0
0.0%
0.0%
438
100%
36
100%
8.2%
Trading Rating:
Total recommendations
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 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.
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, Klabin, Liberbank, Mota-Engil, Mota-Engil Africa, 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, Mota-Engil and Sonae.
Page 38 of 39
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, Kcom Group, Klabin, Kredyt Inkaso, Kruk, Laird,
Liberbank, Mota-Engil, Mota-Engil Africa, NAHL Group, NOS, Oi, Prime Car Management, REN, Semapa, SKS Microfinance, Sonae, Sonaecom, Sports Direct, SVG Capital and Ted Baker.
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.
Confidentiality
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.
NOT FOR DISTRIBUTION TO ANY US PERSON OR TO ANY PERSON OR ADDRESS IN THE UNITED STATES OF AMERICA
Page 39 of 39

Telco puzzles in 2015

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