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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.

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.

Cyfrowy Polsat

BUY 18% upside

Fair Value PLN 29.10

Bloomberg ticker CPS PW

Share Price PLN 24.71

Market Capitalisation PLN 15,803.18m

Free Float 26%

Orange Polska

SELL 11% downside

Fair Value PLN 8.00

Bloomberg ticker OPL PW



Free Float 49%

Netia

NEUTRAL 1% downside

Fair Value PLN 5.60

Bloomberg ticker NET PW



Free Float 100%

All share price data as at close on 9-Dec-2014

Source: BESI Research, Company Data, Bloomberg

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.

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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.

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Figure 1 Spectrum costs versus frequency for recent European auctions by market

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


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).

0

500

1,000

1,500

2,000

2,500

3,000

0.00 0.20 0.40 0.60 0.80 1.00

Weig

hte

d a

vera

ge f

requency (

MH

z)

Price per MHz per pop (EUR)

Austria

Belgium

Czech

Denmark

Finland

France

Germany

Greece

Hungary

Ireland

Italy

Netherlands

Norway

Poland

Portugal

Romania

Spain

Sweden

Switzerland

UK

0

500

1,000

1,500

2,000

2,500

3,000

0.00 0.20 0.40 0.60 0.80 1.00

We

ighte

d a

ve

rag

e f

requ

en

cy (

MH

z)

Price per MHz per pop (EUR)

800

900

1800

2100

2600

Trend

Log. (Trend)

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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.

Figure 4 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.

0

500

1,000

1,500

2,000

2,500

3,000

0.00

0.20

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0

500

1,000

1,500

2,000

2,500

3,000

0.000

0.100

0.200

0.300

0.400

0.500

0.600

0.700

0.800

0.900

Au

str

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Oct 13

Neth

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Oct 14

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nd -

Nov 1

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Nov 1

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Jun 1

3S

weden -

Mar

11

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Oct 13

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2N

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Dec 1

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weden -

Oct

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Sw

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Feb 1

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May 1

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Nov 1

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Feb 1

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May 0

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Oct 14

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of 39

Figure 5 Pricing of mobile broadband commercial offers, EUR/GB

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 post-

auction 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 0.1-

0.15. 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.

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Poland Austria Hungary Czech Rep. Slovakia

up to 5GB/m 5-10GB/m 10-20GB/m 20-30GB/m

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.

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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

Source: UKE Source: UKE

Figure 8 Spectrum allocation (MHz) – 800&900&1800&2100&2600MHz Figure 9 Spectrum allocation (%)– 800&900&1800&2100&2600MHz

Source: UKE Source: UKE

0

20

40

60

80

100

120

Orange T-Mobile Play Solorz Group Sferia Unused

2600MHz 2100MHz 1800MHz 900MHz 800MHz

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Orange T-Mobile Play Solorz Group Sferia Unused


0

20

40

60

80

100

120

140


Unused Sferia Solorz Group Play T-Mobile Orange

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%


Unused Sferia Solorz Group Play T-Mobile Orange

of 39

Figure 10 90% coverage obligation on 800 & 2600MHz spectrum auction

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 Figure 12 Orange – current LTE coverage

Source: Espirito Santo Investment Bank Research, Play, December 2014 Source: Espirito Santo Investment Bank Research, Orange, December 2014

Population No of districts No of habitants % habitants Area [km2] % area90%

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

District >30k & <50k pop 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%

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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

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,

Band Predestination Usage

686-734 MHz Radiodiffusion Civil

Mobile Civil

734-750MHz Aerial radio navigation Governmental

Radiodiffusion Civil

Mobile Civil

750-790MHz Radiodiffusion Civil

Mobile Civil

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- 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).

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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

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

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.

HFC (CableTV),

55%

xDSL, 31%

Ethernet, 12%

others, 2%

xDSL, 67%

HFC, 23%

Ethernet, 9%

others, 1%

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Figure 19 Internet speed on deregulated districts Figure 20 Internet speed on regulated districts


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


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.

up to 2MB/s, 26%

2MB/s -10MB/s, 32%

10MB/s -30MB/s, 34%

30MB/s -100MB/s, 7%

above 100MB/s, 1%

up to 2MB/s, 42%

2MB/s -10MB/s, 36%

10MB/s -30MB/s, 15%

30MB/s -100MB/s, 6%

above 100MB/s, 1%

own network, 95%

BSA, 2% LLU, 3%

own network, 89%

BSA, 8%

LLU, 3%

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Figure 23 BSA share in deregulated districts Figure 24 BSA share in regulated districts


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 Figure 26 Market players in regulated districts


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%.

Netia, 71%

T-Mobile, 17%

MMP, 9%

Dialog, 2% others, 1%

Netia, 75%

MMP, 12%

T-Mobile, 10%

Dialog, 2% others, 1%

UPC, 23%

Orange Polska, 21%

MMP, 14%

Vectra, 8%

Netia, 8%

Dialog, 4%

Toya, 3%

Others, 19%

Orange Polska, 50%

Netia, 13%

UPC, 8%

MMP, 7%

Vectra, 4%

INEA, 2%

Dialog, 1%others, 15%

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Figure 27 Number of telco operators in deregulated districts Figure 28 Number of telco operators in regulated districts


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


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.

0, 3%1, 7%

2, 17%

3 and more, 73%

0, 23%

1, 37%

2, 18%

3 and more, 22%

0-10%, 9%

10%-20%, 46%

20%-30%, 37%

30%-40%, 8%

0%-20%, 4%

20%-40%, 7%

40%-60%, 8%

60%-80%, 21%80%-100%, 60%

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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


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

(PLN m) 2014E 2015E 2016E 2017E 2018E 2019E 2020E

Capex 1,826 2,168 2,140 2,056 2,035 2,018 2,004

Capex/revenues 15.0% 18.0% 18.0% 17.5% 17.5% 17.5% 17.5%

Maintenance capex 1,826 1,848 1,820 1,806 1,785 1,768 1,754

as % of revenues 15.0% 15.3% 15.3% 15.4% 15.4% 15.3% 15.3%

FTTx capex 320 320 250 250 250 250

as % of reveneus 2.7% 2.7% 2.1% 2.1% 2.2% 2.2%

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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.

Figure 32 Beteles Index – performance Figure 33 Beteles Index, OPL, CPS, NET – rebased performance

Source: Bloomberg. 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%

0

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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

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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).


(v1.0.8.0)

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).

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.

BUY 18% upside

Fair Value PLN 29.10

Bloomberg ticker CPS PW



Free Float 26%

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

Revenues 2778.2 2910.7 7462.1 9913.5

EBITDA 1051.1 1046.4 2784.5 3759.1

EBIT 808.1 789.9 1417.2 1943.0

Net income 617.2 525.5 386.9 929.9

Net debt 2011.8 1582.8 11508.9 12153.2

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

DY (%) 0.0% 0.0% 0.7% 0.0%

net debt / EBITDA (X) 1.9 1.5 4.1 3.2

ROA (%) 11.1% 9.3% 1.4% 3.5%

ROE (%) 25.0% 17.5% 4.2% 8.9%



90

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Jan 2014

Feb 2014

Mar 2014

Apr 2014

May 2014

Jun 2014

Jul 2014

Aug 2014

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Oct 2014

Nov 2014

Dec 2014

CPS PW vs WIG Index

Share Price Performance

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

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Summary Financial Information

Valuation Metrics (Year end Dec) 2010 2011 2012 2013 2014E 2015E 2016E

Rating BUY P/E (x) 16.8 29.6 13.9 16.4 40.8 17.0 16.1

Fair Value (PLN): 29.1 EV / Sales (x) 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

24.7 EV / EBIT (x) 13.3 12.8 13.1 12.9 19.3 14.4 13.5

18% FCF Yield (%) 3.5% 5.9% 8.0% 7.9% 6.4% 1.1% 11.8%

Dividend yield (%) 0.0% 0.0% 0.0% 0.0% 0.7% 0.0% 0.0%

27.1 EV (PLN m) 4,339 7,189 10,620 10,191 27,312 27,956 26,861

CPS PW

CPSM.WA Key Ratios 2010 2011 2012 2013 2014E 2015E 2016E

Shares in Issue (m) 639.5 EBITDA margin 27.5% 31.1% 37.8% 35.9% 37.3% 37.9% 39.5%

Market Cap (PLN m) 15,803 EBIT margin 22.0% 23.7% 29.1% 27.1% 19.0% 19.6% 20.1%

Net Debt, end 2013 (PLN m) 1,583 Capex / Revenue (x) 3.1% 2.8% 3.3% 4.2% 13.1% 24.9% 10.4%

Adjustments for Associates & Minorities (PLN m) 0 Capex / Depreciation (x) 56% 38% 38% 48% 71% 136% 53%

Enterprise Value (PLN m), end 2013 17,386 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%

Forthcoming Catalysts

P&L (PLN m, unless stated) 2010 2011 2012 2013 2014E 2015E 2016E

4Q14 results Mar-15

LTE spectrum auction 1Q15 Revenue 1,482 2,366 2,778 2,911 7,462 9,914 9,869

% change 17.1% 59.6% 17.4% 4.8% 156.4% 32.9% -0.5%

EBITDA 407 735 1,051 1,046 2,785 3,759 3,902

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%

Revenues Breakdown (2014E) % margin 22.0% 23.7% 29.1% 27.1% 19.0% 19.6% 20.1%

Associates 0 2 2 2 2 2 2

Net Financials (4) (370) (96) (200) (985) (797) (773)

Other Pre-tax Income 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)

Minority Interests 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

Payout Ratio 0% 0% 0% 0% 0% 0% 0%

Shares in Issue (Less Treasury) (m) 268 348 348 348 640 640 640

Cyfrowy Polsat - profitability ratios, 2009-2015E

Cash Flow Summary (PLN m) 2010 2011 2012 2013 2014E 2015E 2016E

Net income 258 160 617 525 387 930 981

D&A 81 175 243 257 1,367 1,816 1,920

Operating Cash Flow 198 347 781 803 1,992 2,645 2,893

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)

Net Cash Flow (72) 248 (7) 100 1,573 (1,689) (114)

Shareholders structure, 3Q14

Balance Sheet Summary (PLN m) 2010 2011 2012 2013 2014E 2015E 2016E

Cash & Equivalents 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

Interest Bearing Debt 20 2,729 2,282 1,925 13,324 12,279 11,070

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

Minority Interests - - 0 0 0 0 0

Total Equity 1,015 5,325 5,561 5,676 27,343 27,018 25,775

Net Debt (8) 2,451 2,012 1,583 11,509 12,153 11,058

Source: Company data, Reuters, Bloomberg, BESI Research for estimates.

Cyfrowy Polsat

Share Price (09/12/2014, PLN):

Upside / Downside potential

Previous Fair Value (PLN):

Bloomberg

Reuters

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2010 2011 2012 2013 2014E 2015E 2016E

EBITDA margin EBIT margin

Pola Inv estments

(Zy gmunt

Solorz), 58%Sensor

Ov erseas

(Hieronim

Ruta), 8%

EBRD, 7%

others, 26%

% of shares

Pola Inv estments

(Zy gmunt

Solorz), 64.0%

Sensor Ov erseas

(Hieronim

Ruta), 9.6%

EBRD, 5.8%

others, 20.7%

% of votes

Retail revenue

Wholesale revenue

Sale of equipment

Other revenue

of 39

4Q14 results – preview

Figure 1 Cyfrowy Polsat – quarterly results

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

Source: BESI Research for estimates

(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%

EBITDA margin 33.3% 38.0% 33.5% 38.1% 16.2% 29.3% 35.4% 34.3% 35.9% 37.3%

EBIT 185 195 203 207 220 398 432 368 104% 790 1417 79%

EBIT margin 25.1% 28.8% 25.4% 28.6% 12.6% 16.4% 16.8% 14.3% 27.1% 19.0%

Net income 95 81 176 173 98 132 48 109 3% 525 387 -26%

Net profit margin 12.9% 11.9% 22.0% 23.9% 5.6% 5.5% 1.9% 4.2% 18.1% 5.2%

(PLN m) New Old Change New Old 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%

Net profit 387 540 -28% 930 1,039 -11% 980 1,278 -23%

2014E 2015E 2016E

of 39

BESI vs Bloomberg consensus

Figure 3 BESI vs BBG

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

Source: BESI Research for estimates, Company Data

Figure 5 Cyfrowy Polsat – sensitivity analysis


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.

(PLN m) BESI BBG Change BESI 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%

Net income 387 502 -23% 930 906 3% 980 1121 -13%

2014E 2015E 2016E

(PLN m) 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E RV

EBIT 1,417 1,943 1,983 2,243 2,493 2,672 2,806 2,914 3,006 3,085 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

FCF 1,917 816 2,495 2,488 2,454 2,453 2,464 2,485 2,501 2,540 2,499

FCF change -57.4% 205.8% -0.3% -1.4% 0.0% 0.4% 0.8% 0.6% 1.6% 1.0%

WACC Calculation

debt/equity 48.7% 45.9% 43.0% 39.6% 37.7% 31.0% 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%

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

cost of debt 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% 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

DCF Valuation

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%

WA

CC

change

of 39

Figure 6 Peer valuation – priced as on 9/12/2014

Source: Company data, BESI Research for estimates

2014E 2015E 2016E 2014E 2015E 2016E

T V

TVN BUY PLN 17.9 15.7 12.7 10.8 10.1 0.0% 0.0% 3.2%

CETV not rated n.a. 2.8 14.2 9.8 8.0 0.0% 0.0% 0.0%

RTL not rated n.a. 78.2 10.6 10.3 9.8 6.7% 6.0% 6.1%

Prosieben Sat1 not rated n.a. 33.7 11.3 10.7 10.2 4.8% 5.3% 5.8%

ITV not rated n.a. 208.5 11.5 10.5 9.8 0.0% 0.0% 0.0%

Atresmedia BUY 13.9 11.0 19.1 13.1 10.2 2.9% 4.5% 6.2%

CBS Corp not rated n.a. 52.4 10.2 9.8 8.9 1.0% 1.2% 1.3%

CTC M edia not rated n.a. 4.9 2.8 3.1 2.9 14.4% 13.3% 14.5%

M 6 M etropole not rated n.a. 15.6 6.5 6.2 6.1 5.5% 5.7% 6.0%

M odern Times not rated n.a. 244.0 11.4 9.7 9.0 4.6% 5.0% 5.4%

TF1 not rated n.a. 12.3 11.2 8.8 8.0 4.0% 4.6% 4.8%

T V M edian 11.3 10.0 9.4 3.4% 4.6% 5.1%

Satellite T V

Cyfrowy Polsat (BESI) BUY 29.1 24.7 9.8 7.4 7.1 0.7% 0.0% 0.0%

Sky BUY 1170 921 8.8 7.8 7.6 0.0% 0.0% 0.0%

DirecTV not rated n.a. 83.785 7.1 6.8 6.5 0.0% 0.0% 0.0%

Dish Network not rated n.a. 71.39 13.1 12.6 12.1 0.0% 0.0% 0.0%

Sky Deutschland BUY 6.1 6.75 71.0 28.8 17.9 0.0% 0.0% 0.4%

Cablevision not rated n.a. 20.72 7.6 7.5 7.3 2.9% 2.9% 3.0%

Comcast not rated n.a. 56.14 8.3 7.9 7.4 1.6% 1.8% 1.9%

Dish TV India not rated n.a. 64.2 11.3 9.3 8.0 0.0% 0.3% 0.3%

D T H median 9.3 7.8 7.5 0.0% 0.0% 0.0%

EU T eleco ms

Belgacom SELL 10.5 31.4 7.3 7.6 7.9 4.8% 4.8% 4.8%

BT Group BUY 4.8 4.1 6.8 6.8 6.6 3.1% 3.5% 3.9%

CWC BUY 0.68 0.5 6.3 5.7 5.4 5.1% 5.1% 5.1%

Daisy NEUTRAL 1.66 1.8 9.8 9.5 9.4 2.9% 3.2% 3.5%

Deutsche Telekom NEUTRAL 10.75 13.2 6.4 6.3 6.2 3.8% 3.8% 4.2%

Elisa SELL 14.7 23.6 9.2 9.5 9.9 5.5% 5.5% 5.1%

Hellenic Telecom NEUTRAL 11.85 9.2 4.4 4.8 4.9 5.4% 8.2% 9.2%

Iliad BUY 217 192.1 8.9 7.8 7.2 0.3% 0.7% 1.0%

Jazztel NEUTRAL 13 12.6 16.9 13.4 12.2 0.0% 0.0% 2.2%

Kcom BUY 1 0.9 7.4 7.4 7.3 6.0% 6.6% 7.0%

KPN 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%

Orange NEUTRAL 10.3 13.8 5.1 5.1 5.1 4.3% 4.3% 4.3%

Swisscom SELL 370 572.5 8.6 8.7 8.9 3.8% 3.8% 3.8%

Talk Talk BUY 4.2 3.0 11.8 9.1 7.8 4.6% 5.4% 6.2%

TDC BUY 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%

Telecom Italia BUY 1 0.9 5.4 5.5 5.6 1.1% 1.1% 1.6%

Telefonica SELL 9.65 12.9 6.6 6.3 6.2 5.8% 5.8% 5.8%

Telekom Austria SELL 5 5.6 8.0 5.4 5.4 0.9% 1.3% 1.3%

Telenor NEUTRAL 135 149.6 6.3 6.1 6.0 5.3% 6.0% 6.7%

TeliaSonera SELL 33.75 52.3 7.0 6.6 6.6 5.7% 5.7% 5.9%

Vodafone SELL 1.68 2.2 7.1 6.8 6.5 5.1% 5.4% 5.6%

M agyar Telekom NEUTRAL 370 350 4.7 4.5 4.4 0.0% 0.0% 8.6%

Netia NEUTRAL 5.6 5.7 3.7 4.4 4.6 7.5% 7.5% 7.5%

O2 CR NEUTRAL 304 251.9 4.5 4.6 4.5 7.1% 6.1% 5.7%

Orange Polska SELL 8.0 9.0 4.2 4.9 4.9 5.6% 3.3% 3.3%

EU T elco median 6.8 6.6 6.5 4.8% 4.8% 5.1%

Synthet ic EV/ EB IT D A 7.9 7.3 7.0

C P S (B ESI) 9.8 7.4 7.1 0.0% 0.7% 0.0%

CPS ve TV peers -13% -26% -24%

CPS vs DTH peers 6% -5% -5%

CPS vs Telco peers 44% 12% 10%

CPS vs synthetic multiples 24% 2% 1%

Equity value (PLN m) 15,282

Equity value per share (PLN) 23.9

F air valueShare

priceN ame R ating

EV/ EB IT D A D ividend yield

of 39

Financials

Income statement

Figure 7 Cyfrowy Polsat – P&L


Balance sheet

Figure 8 Cyfrowy Polsat – balance sheet


Operating data

Figure 9 Cyfrowy Polsat – operating data


Cash Flow

Figure 10 Cyfrowy Polsat – cash flow


Cyfrowy 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

% YoY change 17.1% 59.6% 17.4% 4.8% 156.4% 32.9% -0.5% 0.0%

EBITDA 407 735 1,051 1,046 2,785 3,759 3,902 3,927

% YoY change 28% 81% 43% 0% 166% 35% 4% 1%

% EBITDA margin 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%

Financial income/(expense), net -4 -370 -96 -200 -985 -797 -773 -734

Profit before tax 321 192 715 593 434 1,148 1,211 1,511

Income tax -63 -32 -97 -67 -47 -218 -230 -287

effective tax rate -20% -17% -14% -11% -11% -19% -19% -19%

Net income 258 160 617 525 387 930 981 1,224

% YoY change 12% -38% 285% -15% -26% 140% 6% 25%

% net margin 17.4% 6.8% 22.2% 18.1% 5.2% 9.4% 9.9% 12.4%

EPS (PLN) 0.96 0.46 1.77 1.51 0.60 1.45 1.53 1.91

% YoY change 12% -52% 285% -15% -60% 140% 6% 25%

Cyfrowy 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

Intangibles and goodw ill 75 3,306 3,497 3,631 16,958 16,958 16,958 16,958

Other f ixed 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

Total assets 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

Total equity & liabilities 1,015 5,325 5,561 5,676 27,343 27,018 25,775 25,060

Cyfrowy 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) n/a n/a n/a 4,469 4,094 3,929 3,814 3,749

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

ARPU per pre-paid customer n/a n/a n/a 18 18 18 17 17

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

Cash Flow from Operations 198 347 781 803 1,992 2,645 2,893 2,858

Capital Expenditures -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

Ending cash 28 278 271 370 1,815 126 12 57


(v1.0.8.0)

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 OPL PW



Free Float 49%

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

Revenues 14147.0 12923.0 12173.7 12043.9

EBITDA 4845.0 3904.0 3956.4 3644.3

EBIT 1573.0 788.0 901.5 796.2

Net income 853.0 294.0 474.2 373.2

Net debt 5187.0 4666.0 4753.2 5669.7

DPS 1.5 0.5 0.5 0.3

Capex (2354.0) (2188.0) (1826.0) (2167.9)

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

adj. EV/EBITDA 4.7 4.3 4.2 4.9

adj. P/E 14.1 40.9 25.4 32.2

DY (%) 9.0% 5.5% 5.6% 3.3%

net debt/EBITDA 1.1 1.2 1.2 1.6

adj. EBITDA margin 33.9% 31.3% 30.7% 30.3%

Capex/Revenues 16.5% 16.9% 15.0% 18.0%

ROE 6.6% 2.3% 3.8% 3.0%

FCF Yield 9.2% 8.6% 11.7% 7.4%



90

95

100

105

110

115

120

125

Jan 2014

Feb 2014

Mar 2014

Apr 2014

May 2014

Jun 2014

Jul 2014

Aug 2014

Sep 2014

Oct 2014

Nov 2014

Dec 2014

OPL PW vs WIG Index



of 39


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

Rating SELL Recurrent P/E (x) 9.8 14.1 40.9 25.4 32.2 30.7Fair Value (PLN): 8.00 Reported P/E (x) 6.3 14.1 40.9 25.4 32.2 30.7

EV / Sales (x) 1.7 1.6 1.3 1.4 1.5 1.59.00 EV / EBITDA (x) 4.2 4.7 4.3 4.2 4.9 4.9

-11% EV / EBIT (x) 11.3 14.3 21.2 18.6 22.2 23.4FCF Yield (%) 10.7% 9.2% 8.6% 11.7% 7.4% 7.8%

10.8 Dividend yield (%) 8.6% 9.0% 5.5% 5.6% 3.3% 3.3%-26%

OPL PW Key Ratios 2011 2012 2013 2014E 2015E 2016ETPSA.WA

adj. EBITDA margin 36.2% 33.9% 31.3% 30.7% 30.3% 30.2%EBIT margin 14.9% 11.1% 6.1% 7.4% 6.6% 6.3%Capex / Revenue (x) 17% 16% 17% 15% 18% 18%

1,312 Capex / Depreciation (x) 0.7 0.7 0.7 0.6 0.8 0.811,811 Net Debt / EBITDA (x) 0.4 1.1 1.2 1.2 1.6 1.5

4,666 EBITDA / net interest (%) 14 9 8 10 11 142 ROE 13.4% 6.6% 2.3% 3.8% 3.0% 3.2%

16,479

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

Revenue 14,922 14,147 12,923 12,174 12,044 11,890 % change -5.0% -5.2% -8.7% -5.8% -1.1% -1.3%

4Q14 results Feb-15 EBITDA 5,928 4,845 3,904 3,956 3,644 3,5951Q15 % change 25.9% -18.3% -19.4% 1.3% -7.9% -1.4%

% margin 39.7% 34.2% 30.2% 32.5% 30.3% 30.2%adj. EBITDA 5,407 4,802 4,050 3,742 3,644 3,595 adj. EBITDA margin 36.2% 33.9% 31.3% 30.7% 30.3% 30.2%

Konrad Księżopolski Depreciation & Amortisation (3,703) (3,261) (3,107) (3,048) (2,848) (2,849)+48 22 347 40 74 EBIT reported 2,217 1,573 788 902 796 745

EBIT adjusted 1696 1530 934 688 796 745 % margin 14.9% 11.1% 6.1% 7.4% 6.6% 6.3%Net Financials (433) (559) (478) (394) (335) (261)Other Pre-tax Income 0.0 0.0 0.0 1.0 2.0 2.0Pre-Tax Profit 1,784 1,014 275 276 277 277Income Tax Expense 133 (161) (16) (34) (88) (92)Discontinued Operations 0.0 0.0 0.0 1.0 2.0 2.0Minority Interests 0.0 0.0 0.0 1.0 2.0 2.0Net Income 1,917 853 294 474 373 392Recurrent Net Income 1,224 853 294 474 373 392

Reported EPS (PLN) 1.4 0.6 0.2 0.4 0.3 0.3Recurrent EPS (PLN) 0.9 0.6 0.2 0.4 0.3 0.3DPS (PLN) 1.5 1.5 0.5 0.5 0.3 0.3 Payout Ratio n.a. 103% 77% 227% 85% 107%Shares in Issue (Less Treasury) (m) 1,334 1,335 1,336 1,336 1,336 1,336

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

Net income 1,918 855 294 474 373 392D&A 3,703 3,261 3,107 3,048 2,848 2,849Change in Working Capital 353 (383) 54 (66) (16) (14)Associate & Minority Dividends 224 0 0 1 2 3Other Operating Cash Flow (805) (1,869) (163) 0 0 0Operating Cash Flow 5,169 1,864 3,292 3,438 3,202 3,223Capital Expenditure (2,606) (2,354) (2,188) (1,826) (2,168) (2,140)

Organic Free Cash Flow 2,451 1,594 1,105 988 797 841Acquisitions & Disposals 1,516 (396) 14 (318) (1,550) (450)Dividend Paid to Shareholders (2,004) (1,970) (656) (668) (401) (401)Equity Raised / Bought Back (200) (200) 0 0 0 0Other Financing Cash Flow (1,452) (649) 236 500 0 0Net Cash Flow 416 (2,488) (198) 1,126 (916) 232

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

Cash & Equivalents 3,329 524 365 1,491 574 807Tangible Fixed Assets 14,912 13,935 12,768 14,630 15,350 14,641Goodwill & Intangibles 6,971 6,974 7,021 3,940 3,940 3,940Associates & Financial Investments 12 162 13 13 13 13Other Assets 2,995 2,543 2,635 3,582 3,723 4,157Total Assets 28,219 24,138 22,802 23,656 23,600 23,558Interest Bearing Debt 4,937 5,577 4,864 6,077 6,077 6,077Other Liabilities 8,355 5,061 4,855 4,690 4,662 4,628Total Liabilities 13,885 11,180 10,171 11,219 11,191 11,157Shareholders' Equity 14,331 12,956 12,629 12,435 12,408 12,399Minority Interests 3 2 2 2 2 2Total Equity 14,334 12,958 12,631 12,437 12,410 12,401

Net Debt 2,077 5,187 4,666 4,753 5,670 5,437

Revenues Breakdown (2013)

Revenues YoY Growth

Margins Trend

Enterprise Value (PLN m)


LTE spectrum auction

ES Equity Research Analyst

[email protected]

Adjustments for Associates & Minorities (PLN m)

Orange Polska

Share Price (09/12/2014, PLN):Upside / Downside potential

Previous Fair Value (PLN): % change to fair value

BloombergReuters

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

Mobile services

47%

Mobile equipment

sales1%

fixed-services47%

Other revenue

5%

-10%

-9%

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%2011 2012 2013 2014E 2014E 2015E 2016E

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

2011 2012 2013 2014E 2014E 2015E 2016E

EBITDA EBIT

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


Sensitivity analysis

Figure 2 Orange Polska – sensitivity analysis


DCF Valuation

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

EBIT 902 796 745 837 932 1,028 1,077 1,122 1,165 1,210 1,210

Tax rate 7% 19% 19% 19% 19% 19% 19% 19% 19% 19% 19%

NOPAT 842 645 604 678 755 833 872 909 944 980 980

Depreciation 3,048 2,848 2,849 2,719 2,602 2,502 2,417 2,344 2,282 2,229

CAPEX -2,329 -3,568 -2,440 -2,056 -2,035 -2,018 -2,004 -1,992 -1,981 -1,972

Change of Working Capital -84 -19 -18 -16 -14 -12 -9 -8 -7 -6

FCF 1,476 -94 995 1,324 1,307 1,305 1,276 1,253 1,238 1,231 980

FCF change -19% -106% -1159% 33% -1% 0% -2% -2% -1% -1% 0%

WACC Calculation

debt/equity 25.7% 25.7% 25.8% 26.1% 26.5% 26.9% 27.3% 27.6% 27.9% 28.1% 27.6%

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 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5%

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

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

cost of debt 4.0% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5%

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 6.8% 6.7% 6.7% 6.7% 6.7% 6.6% 6.6% 6.6% 6.6% 6.6% 6.6%

PV (FCF) 1,470 -88 871 1,087 1,007 943 865 798 740 691

PV [FCF] 6,912

PV [RV] 8,318

net debt, end 2014E 4,753


# of shares (m) 1,312

Fair value/ share 8.0

WACC

8.0 5% 6% 7% 8% 9% 10% 5% 6% 7% 8% 9%

1% 13.4 10.8 9.2 8.0 7.2 6.6 1% 67% 36% 15% 1% -10%

RFR 0% 10.7 9.1 8.0 7.1 6.5 6.0 0% 34% 14% 0% -10% -18%

-1% 9.0 7.9 7.1 6.5 6.0 5.6 -1% 13% -1% -11% -19% -25%

of 39

Peer valuation

Figure 3 Peer valuation – priced as on 09/12/2014

Source: Source: Company data, BESI Research for estimates

FINANCIALS


Figure 4 Orange Polska – changes to estimates



Figure 5 Orange Polska – BESI vs Bloomberg

Source: BESI Research for estimates, Bloomberg

Company Rating Fair Share %age

Value Price Upside 2014E 2015E 2016E 2014E 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

Orange 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

Telenor NEUTRAL 135.00 149.60 -9.8% 5.3% 6.0% 6.7% 6.3 6.1 6.0

TeliaSonera 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

Orange Polska 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%


Value/share (PLN) 12.5

EV/EBITDADividend yield

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

Revenues 12,174 12,134 0% 12,044 11,844 2% 11,890 11,576 3%

EBITDA 3,956 3,793 4% 3,644 3,524 3% 3,595 3,491 3%

D&A -3048 -2940 4% -2848 -2837 0% -2849 -2664 7%

EBIT 902 853 6% 796 687 16% 745 827 -10%

Net income 474 496 -4% 373 322 16% 392 465 -16%

2014E 2015E 2016E

(PLN m) BESI BBG % diff BESI BBG % diff BESI BBG % diff

Revenues 12,174 12,265 -1% 12,044 12,015 0% 11,890 11,821 1%

EBITDA 3,956 3,992 -1% 3,644 3,775 -3% 3,595 3,605 0%

EBIT 902 989 -9% 796 862 -8% 745 1,094 -32%

Net income 474 502 -5% 373 430 -13% 392 582 -33%

2014E 2015E 2016E

of 39

Income statement

Figure 6 Orange Polska – P&L


Operating data

Figure 7 Orange Polska – operating data


Balance sheet

Figure 8 Orange Polska – balance sheet


P&L (PLN m) 2011 2012 2013 2014E 2015E 2016E 2017E

Revenues 14,922 14,147 12,923 12,174 12,044 11,890 11,751

% YoY change -5.0% -5.2% -8.7% -5.8% -1.1% -1.3% -1.2%

f ixed-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

other 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%

Depreciation -3,703 -3,261 -3,107 -3,048 -2,848 -2,849 -2,719

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%

Financial income/(expense), net -433 -559 -478 -394 -335 -261 -261

Income tax 133 -161 -16 -34 -88 -92 -109

Minority interest in earnings 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%

Recurrent EPS (PLN) 0.9 0.6 0.2 0.4 0.3 0.3 0.3

% YoY change 2.8% -30.4% -65.6% 61.3% -21.3% 5.1% 18.9%

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

mobile voice client base 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

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

Intangibles and goodw ill 6,971 6,974 7,021 3,940 3,940 3,940 3,940

Other f ixed assets 1,208 1,036 936 1,982 2,135 2,589 2,742

Total current assets 5,128 2,193 2,077 3,104 2,175 2,388 2,665

Inventory 214 194 200 189 192 190 188

Trade and other receivables 1,506 1,408 1,199 1,129 1,117 1,103 1,090

Other current assets 79 67 313 295 292 288 285

Cash and equivalents 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

Total stockholders equity 14,331 12,956 12,629 12,435 12,408 12,399 12,197

Including minority interest 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

Short-term debt 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

Total equity & liabilities 28,219 24,138 22,802 23,656 23,600 23,558 23,326

BVPS (PLN) 10.7 9.7 9.5 9.3 9.3 9.3 9.1

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Cash Flow

Figure 9 Orange Polska – cash flow


Cash Flow (PLN m) 2011 2012 2013 2014E 2015E 2016E 2017E

Net income 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

Change in Net Working Capital 353 -383 54 -66 -16 -14 -13

Other -805 -1,869 -163 0 0 0 0

Cash Flow from Operations 5,169 1,864 3,292 3,438 3,202 3,223 3,169

Capital Expenditures -2,606 -2,333 -2,180 -1,826 -2,168 -2,140 -2,056

Other 1,516 -396 14 -318 -1,550 -450 -150

Cash Flow from Investing Activities -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

Dividends paid -2,004 -1,970 -656 -668 -401 -401 -668

Other -236 991 -906 0 0 0 0

Cash Flow from Financing Activities -3663 -1623 -1324 -168 -401 -401 -668

Beginning cash 2,447 2,860 406 198 1,324 407 640

Increase/(decrease) in cash 416 -2,488 -198 1,126 -916 232 295

Ending cash 2,860 390 198 1,324 407 640 934

DPS (PLN) 1.5 1.5 0.5 0.5 0.3 0.3 0.5


(v1.0.8.0)

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.

GigaKablowka offer: In August, Netia launched a commercial offer on the post-

Aster HFC network covering ca. 314k homes in Warsaw and ca. 106k homes in

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

1.5k phone. Netia 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.

NEUTRAL 1% downside

Fair Value PLN 5.60

Bloomberg ticker NET PW



Free Float 100%

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

Revenues 2121.4 1876.0 1680.8 1569.2

EBITDA 461.5 532.8 578.8 463.0

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

EV/EBITDA 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

DY 0.0% 7.5% 7.4% 7.4%

net debt/EBITDA 0.9 0.5 0.3 0.2

ROE (3.8%) 2.1% 4.7% 2.4%

FCF Yield 16.8% 15.2% 17.2% 11.4%

adj. EBITDA margin 27.3% 29.4% 29.6% 29.5%



85

90

95

100

105

110

115

Jan 2014 Apr 2014 Jul 2014 Oct 2014

NET PW vs WIG Index



of 39


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

Rating NEUTRAL Recurrent P/E (x) 14.5 (56.6) 72.7 (160.7) 38.9 31.3Fair Value (PLN): 5.6 Reported P/E (x) 8.3 (18.9) 41.6 18.9 38.9 31.3

EV / Sales (x) 1.6 1.0 1.2 1.3 1.3 1.45.7 EV / EBITDA (x) 4.3 4.5 4.2 3.7 4.5 4.6

-1% EV / EBIT (x) 8.6 (98.5) 23.9 13.9 24.5 21.3FCF Yield (%) 7.6% 16.8% 15.2% 17.2% 11.4% 10.3%

5.6 Dividend yield (%) 0.0% 0.0% 7.5% 7.4% 7.4% 7.4%

0%

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

EBITDA margin 37.8% 21.8% 28.4% 34.4% 29.5% 29.7%EBIT margin 18.7% -1.0% 4.9% 9.2% 5.4% 6.4%Capex / Revenue (x) 0.2 0.1 0.2 0.1 0.1 0.1

348 Capex / Depreciation (x) 0.9 0.5 0.6 0.5 0.5 0.61,966 Net Debt / EBITDA (x) 0.9 0.9 0.5 0.3 0.2 0.1

291 EBITDA / net interest (%) 17 8 12 15 13 140 ROE 9.9% -3.8% 2.1% 4.7% 2.4% 3.1%

2,256

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

Revenue 1,619 2,121 1,876 1,681 1,569 1,473 % change 3.2% 31.0% -11.6% -10.4% -6.6% -6.1%

4Q14 results Feb-15 EBITDA 611 462 533 579 463 437 % change 4.3% -24.5% 15.4% 8.7% -20.0% -5.7% % margin 37.8% 21.8% 28.4% 34.4% 29.5% 29.7%adj EBITDA 408 580 551 497 463 437

adj EBITDA margin 25.2% 27.3% 29.4% 29.6% 29.5% 29.7%Konrad Księżopolski Depreciation & Amortisation (309) (482) (440) (424) (379) (342)+48 22 347 40 74 EBIT 303 (21) 93 154 84 94

% change 6% -107% -542% 66% -45% 12% % margin 18.7% -1.0% 4.9% 9.2% 5.4% 6.4%Associates 0 0 0 0 1 2Operating Profit 303 (21) 93 154 85 96Net Financials 15 (40) (28) (22) (22) (17)Other Pre-tax Income 0 0 0 0 1 2Pre-Tax Profit 317 (61) 64 133 62 77Income Tax Expense 68 27 18 28 12 15Discontinued Operations 0 0 0 0 0 0Minority Interests 0 0 0 0 0 0Net Income 249 (88) 46 104 50 63Recurrent Net Income 142 (29) 26 (12) 50 63

Reported EPS (PLN) 0.6 (0.2) 0.1 0.3 0.1 0.2Recurrent EPS (PLN) 0.4 (0.1) 0.1 (0.0) 0.1 0.2DPS (PLN) 0.0 0.0 0.4 0.4 0.4 0.4 Payout Ratio 0% 0% -155% 316% 140% 289%Shares in Issue (Less Treasury) (m) 389 389 389 348 348 348

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

Net income 249 (88) 46 104 50 63D&A 309 482 440 424 379 342Change in Working Capital 11 (12) 36 (1) (0) (0)Other Operating Cash Flow (150) 159 53 12 0 0Operating Cash Flow 419 541 575 540 429 405Capital Expenditure (263) (263) (282) (202) (204) (202)Free Cash Flow 156 279 293 338 225 203Acquisitions & Disposals (810) (3) 3 0 0 0Dividend Paid to Shareholders 0 0 0 (146) (146) (146)Equity Raised / Bought Back 0 0 0 0 0 0Other Financing Cash Flow 636 (304) (327) (100) (50) (50)Net Cash Flow (18) (28) (31) 92 29 7

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

Cash & Equivalents 161 145 93 185 214 221Tangible Fixed Assets 2,184 2,066 1,957 1,734 1,559 1,419Goodwill & Intangibles 770 597 538 538 538 538Associates & Financial Investments 26 0 0 0 0 0Other Assets 407 424 349 441 428 416Total Assets 3,549 3,233 2,938 2,899 2,740 2,594Interest Bearing Debt 695 551 384 365 315 265Other Liabilities 354 386 349 325 311 299Total Liabilities 1,049 937 733 690 626 564Shareholders' Equity 2,500 2,296 2,205 2,209 2,113 2,030Minority Interests 0 0 0 0 0 0Total Equity 2,500 2,296 2,205 2,209 2,113 2,030

Net Debt 534 406 291 180 101 44Source: Company data, Reuters, Bloomberg, BESI Research for estimates.

Revenues Breakdown (2013)

Revenues Growth

Shareholders structure, July 2014

Enterprise Value (PLN m)


ES Equity Research Analyst

[email protected]

Adjustments for Associates & Minorities (PLN m)

Netia

Share Price (09/12/2014, PLN):Upside / Downside potential

Previous Fair Value (PLN):

% change to fair value

BloombergReuters

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

fixed-voice

43%

internet

39%

TV/mobile

4%

wholesale

6%

interconnect

4%other

4%

3.2%

31.0%

-11.6% -10.4%-6.6% -6.1%

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%

30%

35%

2011 2012 2013 2014E 2015E 2016E

PZU OFE, 5.5%

ING OFE, 9.6%

SISU Capital,

12.7%

Aviva OFE, 5.8%

FIP, 10.0%

Mennica Polska,

15.9%

Navicorp Trust Polska,

5.0%

Others, 35.4%

of 39

Financial forecasts


Figure 1 Netia – changes to estimates



Figure 2 BESI vs BBG

Source: BESI Research for estimates, Bloomberg for consensus

VALUATION

DCF

Figure 3 Netia – DCF


Figure 4 Netia – sensitivity table – WACC vs TGR


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

Revenues 1,681 1,681 0% 1,569 1,550 1% 1,473 1,423 4%

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%

2014E 2015E 2016E

(PLN m) BESI BBG % diff BESI BBG % diff BESI BBG % diff

Revenues 1,681 1,703 -1% 1,569 1,610 -3% 1,473 1,540 -4%

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%

2014E 2015E 2016E

DCF Valuation

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

EBIT 154 84 94 99 100 103 111 124 136 145 145

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

NOPAT 125 68 76 80 81 83 90 100 110 118 118

Depreciation 424 379 342 314 292 275 262 252 246 242

CAPEX -202 -204 -202 -207 -207 -209 -213 -221 -223 -225

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

FCF 347 243 217 187 166 149 138 132 133 134 118

FCF change 32.9% -30.1% -10.7% -13.7% -11.5% -10.3% -7.4% -4.3% 0.8% 1.0% 0.0%

WACC Calculation

debt/equity 12.6% 11.5% 10.2% 8.8% 9.1% 9.4% 9.7% 9.9% 10.2% 10.5% 10.5%

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 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5% 1.5%

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

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

cost of debt 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5%

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 7.3% 7.3% 7.4% 7.4% 7.4% 7.4% 7.4% 7.4% 7.4% 7.3% 7.3%

PV (FCF) 345 225 187 150 124 103 89 80 75 71

PV (FCF) 1,104

PV (RV) 843

net debt, end 2014E 180


# of shares (PLN m) 348

Fair value/Share 5.1

Sensitivity Table

WACC WACC

5.1 5% 6% 7% 8% 9% 5% 6% 7% 8% 9%

-2% 5.0 4.7 4.5 4.3 4.2 -2% -1% -7% -11% -15% -17%

TGR -1% 5.4 5.1 4.8 4.5 4.4 -1% 7% 0% -6% -11% -14%

0% 6.0 5.5 5.1 4.8 4.6 0% 18% 8% 0% -6% -10%

1% 6.8 6.0 5.5 5.1 4.8 1% 34% 18% 8% 0% -5%

2% 8.1 6.8 6.1 5.5 5.1 2% 59% 35% 19% 9% 1%

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Peer valuation

Figure 5 Netia - peer valuation, as of 9/12/2014

Source: BESI Research for estimates, Bloomberg

FINANCIALS

Income Statement

Figure 6 Netia – P&L


Company Rating Share Fair %age

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

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

KPN SELL 2.58 2.20 -14.6% 2.7% 3.9% 5.8% 5.6 6.0 6.1

Orange 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

Telenor NEUTRAL 149.60 135.00 -9.8% 5.3% 6.0% 6.7% 6.3 6.1 6.0

TeliaSonera 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

Orange Polska 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%


Value/share (PLN) 7.5

Dividend yield EV/EBITDA

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

% YoY change 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

Total OPEX -1,531 -1,553 -2,084 -1,803 -1,643 -1,485 -1,379 -1,280

% YoY change 1% 1% 34% -13% -9% -10% -7% -7%

other opex 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%

Depreciation -301 -309 -482 -440 -424 -379 -342 -314

EBITDA 586 611 462 533 579 463 437 413

% adj EBITDA margin 22.9% 25.2% 27.3% 29.4% 29.6% 29.5% 29.7% 30.0%

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

Profit before tax 289 317 -61 64 133 62 77 86

Income tax 25 68 27 18 28 12 15 16

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

Net income 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%

Recurrent Net Income 56 142 -29 26 -12 50 63 70

% YoY change -867% 156% -121% -190% -146% -513% 24% 11%

EPS (PLN) 0.7 0.6 -0.2 0.1 0.3 0.1 0.2 0.2

% YoY change 197% -6% -135% -153% 152% -52% 24% 11%

Recurrent EPS (PLN) 0.1 0.4 -0.1 0.1 0.0 0.1 0.2 0.2

% YoY change -867% 156% -121% -190% -152% -513% 24% 11%

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Operating data

Figure 7 Netia – operating data


Balance sheet

Figure 8 Netia – balance sheet


Cash Flow

Figure 9 Netia – Cash Flow


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

f ixed-broadband client base (in 000) 690 912 875 849 795 793 783 758

fixed-voice client base (in 000) 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

RGU (in 000) 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 - f ixed-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

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

Intangibles and goodw ill 389 770 597 538 538 538 538 538

Other f ixed assets 109 149 113 126 241 241 241 241

Total current assets 595 447 456 317 386 401 396 366

Inventory 11 5 2 3 2 2 2 2

Trade and other receivables 198 250 249 196 176 164 154 144

Other current assets 38 30 60 25 22 21 19 18

Cash and equivalents 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

Total stockholders equity 2,298 2,500 2,296 2,205 2,209 2,113 2,030 1,954

Including minority interest 0 0 0 0 0 0 0 0

Long-term liabilities 27 549 451 317 244 194 144 94

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

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

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

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

Total equity & liabilities 2,569 3,549 3,233 2,938 2,899 2,740 2,594 2,456

BVPS (PLN) 5.9 6.4 5.9 5.7 6.3 6.1 5.8 5.6

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

Net income 264 249 -88 46 104 50 63 70

Depreciation and Amortization 301 309 482 440 424 379 342 314

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

Other -254 -150 159 53 12 0 0 0

Cash Flow from Operations 289 419 541 575 540 429 405 383

Capital Expenditures -193 -263 -263 -282 -202 -204 -202 -207

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

Cash Flow from Investing Activities -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 -1 -59 -116 -195 0 0 0 0

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

Beginning cash 181 173 155 124 93 185 214 221

Increase/(decrease) in cash -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

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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,

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

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

Cyfrowy Polsat CPS PW

Report date Recommendation Fair value Share price

2014 July 22 Buy PLN 27.10 PLN 22.80

2013 November 27 Buy PLN 23.80 PLN 19.35

September 2 Buy PLN 23.70 PLN 20.12


August 20 Neutral PLN 16.70 PLN 15.35

Source: Bloomberg, BESI Research

B

B

B

BN

10

12

14

16

18

20

22

24

26

28

30

Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14

Buy Trading Buy Neutral Trading Sell Sell Restricted Dropped Coverage

Orange Polska OPL PW


2014 July 22 Buy PLN 10.80 PLN 9.55


February 21 Sell PLN 6.30 PLN 7.13

2012 December 10 Neutral PLN 12.20 PLN 11.98

October 22 Sell PLN 11.90 PLN 13.23

September 26 Neutral PLN 15.50 PLN 16.35

February 17 Neutral PLN 17.40 PLN 16.60


B

B

S

N

S

NN

5

7

9

11

13

15

17

19



Netia NET PW


2014 November 12 Neutral PLN 5.60 PLN 5.54

July 22 Neutral PLN 5.40 PLN 5.48

2013 August 12 Buy PLN 5.80 PLN 4.99

February 27 Buy PLN 5.40 PLN 4.23

2012 December 10 Buy PLN 5.90 PLN 4.84

September 26 Buy PLN 7.00 PLN 6.02

April 18 Buy PLN 7.20 PLN 6.12


NN

B

B

B

BB

3.5

4

4.5

5

5.5

6

6.5



http://www.espiritosantoib.co.uk/

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 Ratings Distribution

12-MONTH RATING DEFINITION

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

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

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

As at end September 2014 Total BESI Research

Total Investment Banking Clients (IBC)

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

12 Month Rating:

Buy 205 46.8% 31 86.1% 7.1%

Neutral 141 32.2% 4 11.1% 0.9%

Sell 90 20.5% 0 0.0% 0.0%

Restricted 1 0.2% 1 2.8% 0.2%

Under Review 1 0.2% 0 0.0% 0.0%

TRADING RATING DEFINITION

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

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

Trading Rating:

Trading Buy 0 0.0% 0 0.0% 0.0%

Trading Sell 0 0.0% 0 0.0% 0.0%

Total recommendations 438 100% 36 100% 8.2%

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

Share Prices

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

Coverage Policy

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

Representation to Investors

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

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

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

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

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

Ownership and Material Conflicts of Interest

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

Banco Espírito Santo de Investimento, S.A. and/or its Affiliates have a qualified shareholding (1% or more) in 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.

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Banco Espírito Santo de Investimento, S.A. and/or its subsidiaries provided in the last 12 months investment banking services to the following companies: 4imprint, Abengoa, Altri, Alumetal, Bematech, Burford Capital, Capital Park, Casino Guichard, EDP, EDP Renovaveis, Galp Energia, Globe Trade Centre, Inditex, IQE, 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.


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