The return of the challengers - Grupo MÁSMÓVIL | Inicio · note we do a deep dive on the Spanish...

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H RBC Europe LimitedJulio Arciniegas (Analyst)+44 20 7429 [email protected] Dann (Analyst)+44 20 7429 [email protected]

Wilton Fry, ACA (Analyst)+44 20 7429 [email protected] Idrissova, CFA (Analyst)+44 20 7029 [email protected]

March 30, 2017

The return of the challengersSpanish TelecomsWe believe price increases resulting from "more-for-more" strategies and merger remedieshave created an environment ripe for low-price entrants and cable consolidation. In thisnote we do a deep dive on the Spanish market outlook and investment opportunities withsmaller players leveraged to these themes. We believe that mobile only to converged playerMasmovil (initiate at OP, PT €56) will deliver growth ahead of expectations with a 2016-2020EBITDA CAGR of 25%. Of the two regional cable players, Zegona, which owns Telecable,(initiate at OP, PT €1.70) trades at a higher discount, we think already factoring in the impactof stepped-up competition and will re-rate given the upside potential in mobile and M&Aoptionality. By contrast, we believe Euskaltel (initiate Underperform, PT €8.30) is expensiveand will de-rate as fibre competition steps up.Looking for best growth exposure? Pick Masmovil. Post 4-to-3 market consolidation, Spain is in themidst of market repair. Telefonica, Orange and Vodafone are raising prices in exchange for more services("more-for-more"). Meanwhile, Masmovil, Euskaltel and Zegona aim to gain scale. We think Masmoviloffers the best exposure to growth supported by regulatory remedies and wholesale access.

Cable growth and consolidation. Pressures from Fibre-to-the-home (FTTH) deployment/competitionshould continue in regions historically led by regional cable operators Euskaltel (Basque Country andGalicia) and Telecable (Asturias). Our proprietary FTTH/cable regional analysis shows that: 1) Euskaltel'sbroadband base has been stable while Telecable's declined; 2) Telecable has seen increased FTTHcompetition; and 3) telcos are focused on migrating subscribers from copper to FTTH. While Telecableis already experiencing increased competitive headwinds in fixed, it also offers mobile upside (55%penetration) and M&A optionality, which are not priced in. By contrast, Euskaltel is not pricing insufficiently increasing fixed competition and its mobile business offers less upside (77% penetration).

Spanish outlook and the big players. The main players are increasing prices (Telefonica, Orange andVodafone) with operators like Masmovil gaining a better chance to gain scale. We expect price increasesto continue, but generating a higher churn impact and more activity of larger-cap players at the low endof the market. We believe Orange (OP, PT €19.00) has the best growth profile among the large caps.Telefonica (UP, PT €9.20) has lower organic performance and Vodafone (OP, PT 270p) has less exposureto Spain. Spain is 43%, 17% and 10% of Telefonica's, Orange's and Vodafone's EV, respectively.

Masmovil: Outperform, price target €56.00. We are initiating coverage of Masmovil with anOutperform recommendation. We value Masmovil using a DCF-based approach and arrive at a pricetarget of €56 per share. We believe Masmovil has solid growth potential. Trading at 7.5x 2018E EV/EBITDA (peers on 7.6x), we believe this potential is not priced in. Our price target supports ourOutperform recommendation with potential upside of 46%.

Zegona: Outperform, price target £1.70. We are initiating coverage of Zegona with an Outperformrecommendation. We value Zegona using a DCF-based approach and arrive at a price target of £1.70.We believe that unlike Euskaltel, the intensified competitive situation is priced already in. Zegona tradeson 7.1.x 2018E EV/EBITDA (peers on 7.4x). The expected improvements in its business, M&A optionalityand our valuation support our Outperform rating with potential upside of 28%.

Euskaltel: Underperform, price target €8.30. We initiate coverage of Euskaltel with an Underperformrecommendation. We value Euskaltel using a DCF-based approach and arrive at a price target of €8.30per share. We believe the impending step-up in fixed competition in Euskaltel’s territory is not pricedin. Euskaltel trades on 8.9x 2018E EV/EBITDA (peers on 7.4x). The potential deterioration in its businessand our valuation support our Underperform recommendation with potential downside of -11%.

Disseminated: Mar 30, 2017 11:52ET; Produced: Mar 30, 2017 11:52ETPriced as of prior trading day's market close, EST (unless otherwise noted).

All values in EUR unless otherwise noted.For Required Non-U.S. Analyst and Conflicts Disclosures, see page 62.

Table of contents Spain – The return of the challengers ................................................................................... 3 Spain is leading main telecom themes ....................................................................................... 3 The basics – who operates in Spain?.......................................................................................... 3 FTTH is the game changer – multiple infrastructure market ..................................................... 4 Spain is leading fixed-mobile convergence in Europe ................................................................ 9 Consolidation – life after 4 to 3 ................................................................................................ 10 Spanish outlook – market disrepair?........................................................................................ 12

Spain .................................................................................................................................. 13 Spanish wireless – driven by convergence ............................................................................... 13 Spanish fixed – VOD and ORA successfully taking fixed share ................................................. 14 Spanish telecoms – per-pop analysis ....................................................................................... 16 Spain pay-TV dynamics ............................................................................................................. 16

Company profiles ............................................................................................................... 19 Euskaltel SA .............................................................................................................................. 20 Masmovil Broadband, S.A.U. .................................................................................................... 33 Zegona Communications plc .................................................................................................... 48

RBC comps.......................................................................................................................... 60

The return of the challengers

March 30, 2017 2

Spain – The return of the challengers Spain is leading main telecom themes • Advanced FTTH deployment – while most European countries have focused their efforts

on FTTx deployment (FTTB/S/C), Spain went directly to FTTH. Hence, we expect lower reinvestment risk in fixed networks.

• Leading in fixed-mobile convergence – Spain has rapidly adopted fixed-mobile convergence, with >60% of convergence penetration.

• Consolidation: life after 4 to 3 – after the JAZZTEL acquisition, an example of 4 to 3 consolidation, the market has been under a process of market repair.

• Standalone products – back to the game – post-consolidation, the main operators have been increasing prices; however, these price increases open the door for low-cost standalone products.

• Remedies effect – Masmovil has benefited from deal remedies but, more importantly, a good relationship with Orange (its MNO provider). We expect the destabilizing effect of Masmovil in the telecom market to be limited; however, the company has a chance to lead in the low end of the market, in our view.

• Market disrepair? – we expect further benefits of market repair; however, we believe we could be near the end of the easy wins. We expect more pressure in the low end of the market, not only driven by new operators such as Masmovil, but also by Orange and Vodafone looking to increase their market share and, in the case of Orange, being more active with their low-cost brands.

The basics – who operates in Spain? The Spanish market has three main operators (Telefonica, Orange and Vodafone) delivering fixed-mobile services nationwide. Masmovil delivers mobile services, while Euskaltel and Telecable (owned by Zegona) are cable operators delivering fixed-mobile services only to the north of Spain (Basque Country, Galicia and Asturias).

Spain has 13.8m broadband lines, of which 5.0m are delivered through fibre-to-the-home (FTTH) networks, 2.5m are cable lines and 6.3m uses copper networks (xDSL). Total mobile lines are 51.2m, of which 39.8m include data.

Exhibit 1: The fixed market is led by Telefonica, while the mobile market is more equally split between operators

Broadband market share, % Mobile market share, %

Source: Comisión Nacional de los Mercados y la Competencia (CNMC).

Telefonica44%

Orange29%

Vodafone22%

Euskaltel4%

TeleCable1%

Telefonica30%

Orange27%

Vodafone26%

Masmovil8%

Others9%

Spain has led fixed-mobile convergence (>60% penetration) and FTTH deployments (27m access) in Europe


March 30, 2017 3

FTTH is the game changer – multiple infrastructure market Spain has led FTTH deployments in Europe and has gone from having one main fixed infrastructure player (Telefonica) to multiple national infrastructure players (Orange, Vodafone) and some regional players, such as Zegona (Telecable), Euskaltel and Masmovil.

Exhibit 2: Spain is leading FTTH deployment due to the low cost of deployment

FTTx coverage (%) FTTH/cable deployment plan (m homes passed)

Source: OFCOM Source: Company Reports, RBC Capital Market estimates.

In three years, the FTTH deployment in Spain has advanced meaningfully, driven by the low cost of deployment. The main reason for this low cost of deployment is the prevalence of ducts infrastructure, owned by Telefonica: competitors can rent ducts under the “MARCo” regulation.

We assume that the cost of deployment per home passed ranges between €100 and €150, excluding low density population areas.

• Horizontal cost of €50 – including equipment in the central office and labour cost to take fibre to the distribution point.

• Vertical cost of €100 – this is the cost of fibre from the distribution point to the building façade and includes labour costs and equipment on the façade and CTO box.

Fibre is deployed by area, and the final cost will depend on the market share of the operator in the area; hence, a player with a 50% broadband market share would have a deployment cost of €300 (€150/50%). In addition, we assume a connection cost of €250, which includes the set-top box (STB), optical network termination (ONT), labour and wiring inside the premises. In this case, the total cost comes to €550; therefore, for a Spanish operator with a market share of 20–50%, the cost to supply FTTH would range from €500 to €1,000.

Alternative players have the benefit of not paying the wholesale cost paid to Telefonica when they change from copper to fibre, but Telefonica benefits from a higher market share, hence a reduced cost to supply FTTH.

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March 30, 2017 4

Exhibit 3: FTTH vs DSL vs Cable: FTTH increased since 2013

Evolution of lines connected per technology (million)

Source: Comisión Nacional de los Mercados y la Competencia (CNMC).

FTTH penetration is picking up Our analysis of FTTH penetration per inhabitants by region (see below) shows that Madrid and Cataluña have the highest penetration with 16% and 10%, respectively. On the other hand, Galicia, Cantabria (north of Spain with high cable penetration) and La Mancha have FTTH penetration below 2.5%.

Exhibit 4: Spain is leading FTTH deployment due to the low cost of deployment

2013 – FTTH penetration per region (%) 2015 – FTTH penetration per region (%)

Source: Comisión Nacional del Mercado y la Competencia (CNMC). Penetration measure as lines per 100 inhabitants

While FTTH penetration is increasing in Spain, cable continues to have a strong presence in the north. Galicia, where R cable operates (owned by Euskaltel), has a 7.5% cable penetration. The Basque Country, where Euskaltel operates, has the highest cable penetration (c12.5%) and Asturias, where Telecable operates, has a cable penetration of c10%. Vodafone (Ono) ranges from 8% in Valencia to 4-5% in most of regions.

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Focus on migration: since 2013, xDSL has reduced by -32% and FTTH multiplied by 7.5x


March 30, 2017 5

Exhibit 5: Cable continues to be strong in the north of Spain

2013 – Cable penetration per region (%) 2015 – Cable penetration per region (%)

Source: Comisión Nacional del Mercado y la Competencia (CNMC). Penetration measure as lines per 100 inhabitants

We analysed the change in FTTH/Cable penetration in cities where FTTH and cable have high penetration (see below). We also analysed the total number of total access supplied by all the operators in a market.

Exhibit 6: Lower growth of FTTH penetration in the North, but also lower FTTH access

Increased penetration of FTTH and Cable - 2015 vs 2013 (%) 2015 – FTTH/Cable total access (million)

Source: Comisión Nacional del Mercado y la Competencia (CNMC). Total Access is the sum of the available access of all operators analysed in the region.

• FTTH penetration has increased in all cities, however, more so in Madrid and Barcelona. • In Madrid and Barcelona, the ratio of FTTH homes passed to cable homes passed is 4:1.

This reflects both higher FTTH coverage, ie, more homes passed by fibre, and multiple FTTH providers. By comparison, in the northern cable cities (eg, where Euskaltel and Telecable/Zegona operate), the ratio is below 1:1.

• We believe, after the acquisition of ONO, Vodafone is pushing cable penetration on the main cities of Spain, where cable penetration is low.

• We see FTTH penetration increasing faster in Madrid and Barcelona, cities where there is a higher amount of fibre vs. cable access (see above).

• We expect FTTH penetration to increase in the north of Spain as FTTH deployments increase.

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March 30, 2017 6

Cable has been stable… for now We analysed net adds by technology in the north of Spain, Euskaltel’s markets (Basque Country and Galicia) and Telecable’s (Asturias) (see below).

Exhibit 7: In cities with low FTTH penetration, cable has been stable

Basque Country - Technology net adds (k)

Galicia - Technology net adds (k)

Asturias - Technology net adds (k)

Source: Comisión Nacional del Mercado y la Competencia (CNMC).

Additionally, we included several cities with high FTTH penetration: Madrid, Barcelona and Valencia (see below).

Exhibit 8: In cities with higher FTTH penetration, cable continues to be stable

Madrid - Technology net adds (k)

Barcelona - Technology net adds (k)

Valencia - Technology net adds (k)


By analysing data in these six cities with different levels of FTTH penetration and deployment, we arrive at the conclusion that:

• Cable has been stable in different regions despite high FTTH penetration; • There is a clear migration from copper to FTTH; • Cable net adds are stable, but regional cable operators have lost market share, hence

Vodafone is driving growth in cable; and • Size matters – net adds contribution in the north of Spain is still small (see below).

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March 30, 2017 7

Exhibit 9: Net adds contribution in the north still small – net adds per region and technology (k)

FTTH - Technology net adds (k)

Cable - Technology net adds (k)

xDSL - Technology net adds (k)


Why is cable stable despite new competition? • ULL savings is a priority – we believe Orange and Vodafone are prioritising the migration

of their customers from copper to FTTH. Migrating customers from copper to FTTH saves on cost of ULL, c€116 per year per subscriber.

• Quality matters - cable operators have better-quality KPIs. • Lower FTTH deployment in the north – the north of Spain has lower FTTH deployment

vs. cable (except Asturias). • DSL migration is moving fast – in Basque Country, Galicia (Euskaltel’s market) and Asturias

(Telecable’s market), DSL represents 49%, 63% and 47% of the broadband market, respectively. However, we do see a faster shift from DSL to FTTH in the Basque Country and Asturias (see below). We expect this to accelerate as FTTH deployment continues.

Exhibit 10: Cities with higher FTTH penetration, cable continues to be stable

Basque Country - mix of Technology (%)

Galicia - mix of Technology (%)

Asturias - mix of Technology (%)


We flexed the return on investment of FTTH for migrated customers vs new customers (see below) to understand the rationale for pushing migrations first. For the following analysis we took into account the cost of deployment, market share of the company, churn, ARPU and margin.

• Higher ROI for new customers. The ROI of customers for a company with a 10% market share (investment scenario: €100 per homes passed) is greater for new customers (17.4%) vs a customer migrated from copper to fibre (14.9%). In this scenario, the payback for investment in migrated customers is 9.5 years vs 8 for new customers.

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Challengers prioritising migrations from copper to FTTx/cable


March 30, 2017 8

• Low hanging fruit first. Despite the higher assumed ROI for new customers, the reality is that migrating customers is easier for telcos than obtaining new customers. Hence, building new market share would increase the payback time and reduce the ROI of the new customer.

Exhibit 11: ROI sensitivities for migrated vs new customers

ROI – Migrated customers, % ROI - new customers , %

Source: Ministerio de Energía, Turismo y Agenda Digital

Exhibit 12: Cable operators show better quality metrics vs. other challengers

Quality KPI – broadband provisioning time Quality KPI – Time to repair technical incidences

Source: Ministerio de Energía, Turismo y Agenda Digital

Spain is leading fixed-mobile convergence in Europe Spain is one of the European countries with a higher level of fixed-mobile convergence and FTTH deployment. Telefonica Spain is 25% and 32% of total group revenues and EBITDA, respectively. After going through the full cycle of fixed-mobile convergence, the operators Telefonica, Vodafone and Orange are focused on continuing their ultra-fast broadband network deployments and monetising their fixed-mobile infrastructure. For instance, Telefonica’s fusion ARPU increased by 13% in 2016.

The three stages of convergence • Initial stages of convergence. The initial convergence outcome is that the incumbents

with higher ARPUs suffer due to revenue cannibalisation. For challengers the situation is different: they have an opportunity for growth in their new business ‘silo’ (fixed or mobile).

8.75 50 100 150 300 500 750 9003 9.7 5.2 3.5 1.8 1.1 0.7 0.65 14.9 8.3 5.7 3.0 1.8 1.2 1.08 21.3 12.4 8.8 4.7 2.9 1.9 1.6

10 24.8 14.9 10.6 5.7 3.5 2.4 2.015 31.9 20.3 14.9 8.3 5.2 3.5 3.020 37.2 24.8 18.6 10.6 6.8 4.7 3.925 41.3 28.6 21.9 12.8 8.3 5.7 4.8

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FTTH penetration %

10.84 50 100 150 300 500 750 9003 11.9 6.7 4.6 2.4 1.5 1.0 0.85 17.4 10.3 7.3 3.9 2.4 1.6 1.48 23.4 14.8 10.8 6.0 3.8 2.6 2.2

10 26.5 17.4 12.9 7.3 4.6 3.2 2.715 32.2 22.6 17.4 10.3 6.7 4.6 3.920 36.0 26.5 21.0 12.9 8.5 6.0 5.125 38.8 29.6 24.0 15.3 10.3 7.3 6.2


FTTH penetration %

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March 30, 2017 9

• Second stage – investment phase. As challengers’ new silos increase, there is a potential for margin erosion from the new business. On the other hand, once incumbents have advanced in their investment plans, it is time to have them on the radar.

• Third stage – market consolidation. Challengers see consolidation as a way of improving the potential margin erosion from their new silos. Incumbents offer good outcomes along the way since they are in a good position before consolidation due to infrastructure superiority, and potential exposure to market repair when consolidation happens.

Exhibit 13: Convergence penetration above 65% of total broadband connections, %

Source: RBC Capital Markets estimates

Consolidation – life after 4 to 3 After JAZZTEL was acquired by Orange and a remedy package was acquired by Masmovil, the Spanish market has been going through a period of market repair.

• More for more – Telefonica, Orange and Vodafone had been increasing prices in exchange for more services: extra mobile data allowances, higher broadband speeds (based on FTTH/Cable technology) and content.

Exhibit 14: Post consolidation all operators have raised prices (fixed-mobile bundles, €/month)

Price evolution - Low end Price evolution - high end

Source: Company reports, RBC Capital Market estimates.

Retail market revenues went through a cycle of erosion due to fixed-mobile convergence, but started to recover after market consolidation.

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March 30, 2017 10

Exhibit 15: Retail market revenues increased after consolidation - yoy growth (%)

Total market retail revenues, €m


From revenue to EBITDA, mixed Retail revenues have grown, but EBITDA was affected by content cost increases. In Spain, football is one of the main drivers of content demand. Telefonica and Mediaset bid for this content and generated a cost increase of 44%, which has been distributed among operators. Telefonica acquired rights to the Spanish Football League (LFP) for the best match of the week, paying €750m for a three-year duration. Mediapro acquired the 2016-2019 rights for €1,900m (excluding the best match acquired by Telefonica) from the LFP. Additionally, Mediapro acquired the European Champions League, and we assume a cost of €200m for two seasons (2017 and 2018).

Exhibit 16: Higher opex cost have lagged EBITDA recovery

Spain – total market retail revenues, yoy growth (%) Spain – total market EBITDA, yoy growth (%)

Source: Company reports, RBC Capital Market estimates. Comisión Nacional del Mercado y la Competencia (CNMC)

Standalone products back to the game • Main players focus on convergence – the main players in the Spanish market

(Telefonica, Orange and Vodafone) have been increasing prices of their bundles and standalone products to drive fixed-mobile penetration.

• The low-cost opportunity – the price increase by the main players opens a window of opportunity for low-cost brands to push standalone products.

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March 30, 2017 11

Exhibit 17: Price increase of bundles brings standalone products back to the game

Broadband – low-cost vs high-end brands, € per month Mobile – low-cost vs high-end brands, € per month

Source: Company reports, RBC Capital Market estimates

We expect further price increases and higher activity of low-cost brands to have more impact on churn. For instance, we saw Telefonica’s churn increase in 2016.

Exhibit 18: Churn has picked up from 0.9% to 1.4%


Spanish outlook – market disrepair? • Post-consolidation and convergence – we expect further ARPU upside on a ‘more for

more’ basis; however, this upside is not unlimited. The Spanish regulator has made a number of comments criticizing the “more for more” price increase policy. Additionally we expect more impact on churn from future price increases.

• Masmovil has potential, but is no JAZZTEL – we believe Masmovil has the potential to increase market share in both fixed and mobile; however, we see execution as the main challenge (see the Masmovil section).

• What really matters is market share distribution – mobile market share is more equally distributed among the main players. However, Telefonica’s dominance vs competitors in the broadband market is high, and we expect competitive pressures on this front. For instance, Orange is using JAZZTEL as its low-cost brand to capture market share.

• Hungry for the low-end market – we expect the new battlefield to be in the low end of the market. With Masmovil offering lower-cost, fixed-mobile convergence products and Orange using JAZZTEL, we expect Vodafone to follow and use Lowi brand in the low-cost segment.

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March 30, 2017 12

Spain Spanish wireless – driven by convergence The Spanish market has seen a seismic shift in the type of product delivered to clients in recent years. This was triggered by Movistar’s launch of Fusion in 2H12 — its quad-play offer. Soon after, the market saw the consolidation of Vodafone with Ono, and Orange with Jazztel, precipitating the additional penetration of convergence offers. Generally, the negative “discount” effects of bundling have washed through to some degree, allowing competitors to focus more on price and profitability. Regarding the latter, we note a move to handset leasing has improved margins in the mobile segment.

Exhibit 19: Subscriber market share and cumulative net adds

Subscriber market share, % Cumulative net adds (000s)

Source: Company reports, RBC Capital Markets estimates

Exhibit 20: Post-paid subscriber market share and cumulative net adds

Post-paid subscriber market share, % Post-paid cumulative net adds (000s)


44.4 43.6 39.8 39.8 38.5 36.6 34.8 34.2 33.1

20.220.4 20.6 21.8 24.0 24.8 25.0 25.8 30.7 30.5

31.5 31.0 31.2 31.9 28.3 27.4 29.1 28.3 28.6 27.9

3.4 5.1 6.1 6.6 6.9 6.9 6.9 6.6 8.5

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

1Q10

A2Q

10A

3Q10

A4Q

10A

1Q11

A2Q

11A

3Q11

A4Q

11A

1Q12

A2Q

12A

3Q12

A4Q

12A

1Q13

A2Q

13A

3Q13

A4Q

13A

1Q14

A2Q

14A

3Q14

A4Q

14A

1Q15

A2Q

15A

3Q15

A4Q

15A

1Q16

A2Q

16A

3Q16

A4Q

16A

TEF Orange VOD Yoigo/Masmovil Jazztel

-8,000

-6,000

-4,000

-2,000

0

2,000

4,000

6,000

1Q10

A2Q

10A

3Q10

A4Q

10A

1Q11

A2Q

11A

3Q11

A4Q

11A

1Q12

A2Q

12A

3Q12

A4Q

12A

1Q13

A2Q

13A

3Q13

A4Q

13A

1Q14

A2Q

14A

3Q14

A4Q

14A

1Q15

A2Q

15A

3Q15

A4Q

15A

1Q16

A2Q

16A

3Q16

A4Q

16A

TEF Orange VODYoigo/Masmovil Jazztel

46.2 46.1 45.5 43.4 41.6 39.0 36.8 34.4 33.8

20.1 20.1 20.6 22.1 23.9 25.1 24.6 28.5 28.8

31.1 29.8 29.2 28.5 26.6 25.9 28.1 26.4 26.2

2.5 3.6 4.3 5.4 5.8 6.0 5.6 5.3 5.4

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

70.0%

80.0%

90.0%

100.0%

1Q10

A2Q

10A

3Q10

A4Q

10A

1Q11

A2Q

11A

3Q11

A4Q

11A

1Q12

A2Q

12A

3Q12

A4Q

12A

1Q13

A2Q

13A

3Q13

A4Q

13A

1Q14

A2Q

14A

3Q14

A4Q

14A

1Q15

A2Q

15A

3Q15

A4Q

15A

1Q16

A2Q

16A

3Q16

A4Q

16A

TEF Orange VOD Yoigo/Masmovil Jazztel

-2,000

0

2,000

4,000

6,000

8,000

1Q10

A2Q

10A

3Q10

A4Q

10A

1Q11

A2Q

11A

3Q11

A4Q

11A

1Q12

A2Q

12A

3Q12

A4Q

12A

1Q13

A2Q

13A

3Q13

A4Q

13A

1Q14

A2Q

14A

3Q14

A4Q

14A

1Q15

A2Q

15A

3Q15

A4Q

15A

1Q16

A2Q

16A

3Q16

A4Q

16A

TEF Orange


March 30, 2017 13

Exhibit 21: Service revenue analysis

Reported service revenue growth (%) Underlying service revenue growth (%)


Spanish fixed – VOD and ORA successfully taking fixed share The Spanish fixed-line market continues to be extremely competitive. Vodafone and Orange have been leading the market in terms of broadband net additions as they successfully lever their wide mobile bases. In our view, the lack of regulation on wholesale for speeds above 20Mbps and the current rollout of FTTH by all operators will likely be a key competitive factor in the near term, with recent mergers (Orange-Jazztel and Vodafone-ONO) levelling the playing field.

Exhibit 22: Spain – incumbent ABC revenues, fixed-line and implied ARPL growth (%)

Source: Company reports and RBC Capital Markets estimates

-25.0

-15.0

-5.0

5.0

15.0

25.0

35.0

45.0

1Q10

A2Q

10A

3Q10

A4Q

10A

1Q11

A2Q

11A

3Q11

A4Q

11A

1Q12

A2Q

12A

3Q12

A4Q

12A

1Q13

A2Q

13A

3Q13

A4Q

13A

1Q14

A2Q

14A

3Q14

A4Q

14A

1Q15

A2Q

15A

3Q15

A4Q

15A

1Q16

A2Q

16A

3Q16

A4Q

16A

TEF Orange VOD Yoigo/Masmovil

-45.0

-35.0

-25.0

-15.0

-5.0

5.0

15.0

25.0

35.0

45.0

1Q10

A2Q

10A

3Q10

A4Q

10A

1Q11

A2Q

11A

3Q11

A4Q

11A

1Q12

A2Q

12A

3Q12

A4Q

12A

1Q13

A2Q

13A

3Q13

A4Q

13A

1Q14

A2Q

14A

3Q14

A4Q

14A

1Q15

A2Q

15A

3Q15

A4Q

15A

1Q16

A2Q

16A

3Q16

A4Q

16A

TEF Orange VOD Yoigo/Masmovil

-14.0

-12.0

-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

1Q13

A

2Q13

A

3Q13

A

4Q13

A

1Q14

A

2Q14

A

3Q14

A

4Q14

A

1Q15

A

2Q15

A

3Q15

A

4Q15

A

1Q16

A

2Q16

A

3Q16

A

4Q16

A

ABC rev growth Fixed line growth Implied ARPL growth


March 30, 2017 14

Exhibit 23: Incumbent fixed-line analysis

Incumbent line loss, (000s) Incumbent fixed-line market share, %


Exhibit 24: Broadband market analysis

Share of broadband net adds, % Broadband subscriber market shares, %

Source: Company reports, RBC Capital Markets

-300

-250

-200

-150

-100

-50

0

1Q10

A2Q

10A

3Q10

A4Q

10A

1Q11

A2Q

11A

3Q11

A4Q

11A

1Q12

A2Q

12A

3Q12

A4Q

12A

1Q13

A2Q

13A

3Q13

A4Q

13A

1Q14

A2Q

14A

3Q14

A4Q

14A

1Q15

A2Q

15A

3Q15

A4Q

15A

1Q16

A2Q

16A

3Q16

A4Q

16A

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

1Q10

A2Q

10A

3Q10

A4Q

10A

1Q11

A2Q

11A

3Q11

A4Q

11A

1Q12

A2Q

12A

3Q12

A4Q

12A

1Q13

A2Q

13A

3Q13

A4Q

13A

1Q14

A2Q

14A

3Q14

A4Q

14A

1Q15

A2Q

15A

3Q15

A4Q

15A

1Q16

A2Q

16A

3Q16

A4Q

16A

-60.0%

-40.0%

-20.0%

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

1Q10

A2Q

10A

3Q10

A4Q

10A

1Q11

A2Q

11A

3Q11

A4Q

11A

1Q12

A2Q

12A

3Q12

A4Q

12A

1Q13

A2Q

13A

3Q13

A4Q

13A

1Q14

A2Q

14A

3Q14

A4Q

14A

1Q15

A2Q

15A

3Q15

A4Q

15A

1Q16

A2Q

16A

3Q16

A4Q

16A

TEF Orange Jazztel VOD All Cable

52.9 50.3 48.7 48.2 46.8 46.5 45.6 45.144.2

10.3 11.0 11.5 12.0 13.6 15.0 15.928.9 29.2

8.0 9.4 10.9 11.3 11.6 12.0 12.66.6 7.4 7.0 6.5 7.3

21.422.2

22.8 22.818.1 17.7 17.3 16.7 16.02.8 2.7 2.7 2.73.9 4.2 4.6 4.9 4.4

0.0%10.0%20.0%30.0%40.0%50.0%60.0%70.0%80.0%90.0%

100.0%

1Q10

A2Q

10A

3Q10

A4Q

10A

1Q11

A2Q

11A

3Q11

A4Q

11A

1Q12

A2Q

12A

3Q12

A4Q

12A

1Q13

A2Q

13A

3Q13

A4Q

13A

1Q14

A2Q

14A

3Q14

A4Q

14A

1Q15

A2Q

15A

3Q15

A4Q

15A

1Q16

A2Q

16A

3Q16

A4Q

16A

TEF Orange Jazztel VOD All Cable Others


March 30, 2017 15

Spanish telecoms – per-pop analysis Exhibit 25: Spanish service revenue/pop/month – EBITDA and opex split (€, 2009A–2025E)


Spain pay-TV dynamics Since Telefonica acquired DTS, the pay-TV market has accelerated. The main drivers for this change are that for the first time Telefonica, Orange and Vodafone are addressing the market with attractive prices in the fixed-mobile convergence bundles.

Exhibit 26: Spain pay-TV market share data


24.5 22.1 24.118.2 16.8 14.6 14.7 15.3 16.0 16.5 17.1 17.7 18.2 19.0 19.5 20.0 20.6

33.030.9 24.7

26.9 24.823.6 21.8 19.0 18.8 19.1 19.4 20.0 20.5 20.8 21.2 21.7 22.2

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

2009

A

2010

A

2011

A

2012

A

2013

A

2014

A

2015

A

2016

A

2017

E

2018

E

2019

E

2020

E

2021

E

2022

E

2023

E

2024

E

2025

E

EBITDA revenue per pop per month Opex revenue per pop per month

-200

-100

0

100

200

300

400

500

600

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

TEF DTS ONO GolTV TeleCable Esukaltel Orange R


March 30, 2017 16

Exhibit 27: Spain pay-TV market share data

Spain pay-TV market by subscriber (000s) Spain pay-TV market share, %


Exhibit 28: Spain pay-TV growth has slowed to 4.9%, penetration is c30%

Spain pay-TV growth, % Spain pay-TV penetration, %


0.0

1,000.0

2,000.0

3,000.0

4,000.0

5,000.0

6,000.0

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

TEF DTS ONO GolTV TeleCable Esukaltel Orange

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1Q10

2Q10

3Q10

4Q10

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

TEF DTS ONO TeleCable Esukaltel Orange R

(20.00)

(10.00)

0.00

10.00

20.00

30.00

40.00

50.00

1Q11

2Q11

3Q11

4Q11

1Q12

2Q12

3Q12

4Q12

1Q13

2Q13

3Q13

4Q13

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

1Q10

3Q10

1Q11

3Q11

1Q12

3Q12

1Q13

3Q13

1Q14

3Q14

1Q15

3Q15

1Q16

3Q16

Pay-TV Penetation, %


March 30, 2017 17

Exhibit 29: Spain – total revenue and EBITDA by company (EUR m)

Total revenue EBITDA

Note: Figures as of 2015 calendar year-end. Source: Company reports and RBC Capital Markets

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

TEF

VOD

Ora

nge

Eusk

alte

l

Mas

Mov

il

Tele

cabl

e 0 1,000 2,000 3,000 4,000 5,000 6,000

TEF

VOD

Orange

Euskaltel

MasMovil

Telecable


March 30, 2017 18

Company profiles


March 30, 2017 19

UnderperformSIBE: EKT; EUR 9.78

Price Target EUR 8.30Scenario Analysis*

DownsideScenario

6.5030%

PriceTarget

8.3011%

CurrentPrice

9.78

UpsideScenario

11.5021%

*Implied Total Returns

Key StatisticsShares O/S (MM): 151.8Dividend: 0.36

Market Cap (MM): 1,485Yield: 3.7%Enterprise Val. (MM): 2,567Avg. Daily Volume: 507,623

RBC EstimatesFY Dec 2016E 2017E 2018E 2019ERevenue 573.0 582.0 587.0 587.0EBITDA 281.0 287.0 289.0 290.0EV/EBITDA 9.1x 8.9x 8.9x 8.9xEPS, Adj Basic 0.44 0.42 0.47 0.51P/AEPS 22.2x 23.3x 20.8x 19.2xDPS 0.36 0.40 0.44 0.41Div Yield 3.7% 4.1% 4.5% 4.2%Capex 96.0 93.0 94.0 95.0

All values in EUR unless otherwise noted.

Euskaltel SANo more blue sky: initiating at UnderperformOur view: We see more downside risk for Euskaltel as FTTH takes awaythe company’s network advantage and increases competition. Cable netadds have been stable, as the migrations to FTTH have been primarily fromcopper DSL with rivals first looking to save their wholesale cost. However,as migrations advance, Euskaltel will face tougher competition. Trading on8.9x EV/EBITDA, we believe this risk is not priced in.

Key points:Living in heaven. In our view, Euskaltel previously enjoyed networkadvantage (cable vs. copper), strong brand and low competition (blue-skyscenario). Alternative players competing with copper saw limited upsidein this market and focused their efforts in other regions. Stable marketshare (c40%) and good FCF generation made Euskaltel an attractive asset.However, in our view, this dynamic is now changing and we see downsiderisk to Euskaltel’s stock due to upcoming competition.

But no more blue skies. Euskaltel no longer has network advantageas fibre to the home (FTTH) is being deployed and competition isincreasing. Our proprietary analysis shows that cable subscribers inEuskaltel’s regions (Basque Country and Galicia) are stable, even with thenew FTTH deployment. However, we believe this stability is temporarilydriven by alternative players' initial focus on migrating customers fromcopper to fibre to reduce wholesale fees paid to Telefonica. We expectas the migration/deployment progresses (today FTTH accesses lag cableaccesses), Euskaltel’s broadband market share should decline and seebroadband subscriber losses in 2018 as we have seen in nearby Asturias.In our opinion, the blue-sky scenario is gone and competition can onlyincrease.

We estimate fixed revenue decline. Operational KPI growth has beendriven by mobile, as cable subscriber numbers remained stable. Revenuegrowth was 1.3% in 2016; however, we estimate that fixed retail revenue isdecreasing, which does not bode well for a cable company (see inside thisnote). Mobile (c30% of revenues, RBC estimate) has been the key driverof revenue growth. With mobile penetration now high (77%) and most ofthe positive impact of the new MVNO contract factored in, bottom-lineupside is limited. As we expect broadband sub losses to accelerate in themedium term, we forecast total revenue and EBITDA to be flat.

Stock rating: Underperform, price target €8.3. We initiate coverage ofEuskaltel with an Underperform recommendation. We value the companyusing a DCF-based approach and arrive at a price target of €8.3 per share.We believe the increased competition in Euskaltel’s regions is not fullypriced in. Our EBITDA is in line with consensus on 2017 but 3% below in2018 and 4% in 2019. Euskaltel trades on 8.9x 2018E EV/EBITDA (peers on7.4x). The potential deterioration in its business and our valuation supportan Underperform recommendation with possible downside of 11%.


March 30, 2017 20

Target/Upside/Downside Scenarios

Exhibit 1: Euskaltel SA

30m

20m

10m

J A S O N2015

D J F M A M J J A S O N2016

D J F2017

M

UPSIDE 11.50

CURRENT 9.78

TARGET 8.30

DOWNSIDE 6.50

Mar 2018

13.5

12.5

11.5

10.5

9.5

8.5

7.50

92 Weeks 30JUN15 - 29MAR17

EKT SM Rel. MSCI EUROPEAN INDEX MA 40 weeks

Source: Bloomberg and RBC Capital Markets estimates for Upside/Downside/Target

Target price/base caseWe use discounted cash flow (DCF) to arrive at our ex-dividendprice target of €8.30. Our weighted average cost of capital is8.0% for Euskaltel with a perpetual growth rate assumption of2.0%. Continued revenue growth (0-1.5%) and EBITDA growth(-0.7-1.6%) are implicit to our assumptions. Our price targethas an implicit EV/EBITDA 2018E of 8.0x, above its peer group(7.4x EV/OpCF).

Upside scenarioOur upside scenario would see delayed competition fromalternative operators and growing market share. PuttingEuskaltel on a multiple of 10x FY17E EBITDA would value theequity at €11.5.

Downside scenarioOur downside scenario would see extensive competition andsubscriber loss to FTTH competitors. Putting Euskaltel on adepressed multiple of 7x FY17E EBITDA would value the equityat €6.5.

Investment summary• Euskaltel is a cable company facing increased competition

from FTTH players Telefonica, Orange and Vodafone. Weconsider Euskaltel's outlook as challenging, it has to defenda high ARPU and market share, and therefore we see moredownside risk to its story.

• Mobile (c30% of revenues, RBC estimate) has been the keydriver of revenue growth. With mobile penetration nowhigh (77%) and most of the positive impact of the newmobile virtual network operator (MVNO) contract factoredin, bottom-line upside is limited. As we expect broadbandsub losses to accelerate in the medium term, we forecasttotal revenue and EBITDA to be flat.

• In 2016 broadband adds were almost flat and growth at theresidential segment came mainly from mobile. We believethat a bad trend in broadband net adds could drag downmarket sentiment.

Potential catalysts• A faster FTTH deployment by competitors (Orange and

Vodafone) in the Basque Country and Galicia could generatea faster reduction of their broadband base. This will impactrevenues and CF, increase financial leverage and decreaseEuskaltel's valuation.

Risks to our rating and price target• A slower FTTH deployment by competitors will reduce

competitive pressure. Additional interest by Vodafone tocontinue consolidating cable in Spain should make Euskalteltrade at higher multiples.


March 30, 2017 21

Key questions Our view

1. Is Telefonica deploying fibre in theregions where Euskaltel operates?

Telefonica is deploying FTTH networks in the Basque Country and Galicia. The company claims that Telefonica’s FTTH deployment in its footprint is above 85% of households. In addition, EKT noticed that TEF’s deployment was slower during 2016, which, in our opinion, could be the result of the FTTH regulation framework. In this regulatory framework, TEF is forced to open its FTTH network in the Basque Country and Galicia (except Vigo). Nonetheless, the reduction of TEF’s deployment plan affects a population area of low density.

2. Are Orange and Vodafone alsodeploying fibre networks?

Orange is deploying a FTTH network in the Basque Country and Galicia. Both Orange and Vodafone are behind TEF’s deployment, but we believe the companies will accelerate their deployment due to a high return on investment (deployment cost €100-150 per home passed) and the chance to gain market share in those regions. Vodafone has signed a wholesale agreement with Telefonica to access its fibre; we expect this agreement to be used by Vodafone while the company deploys its network.

3. Is there a change in the competitivelandscape for Euskaltel?

We perceive a change in the competitive landscape. The Basque Country and Galicia historically have been regions where cable operators have outperformed due to the strong regional brand perception and network/service superiority. This has changed: Telefonica now has a better infrastructure based on FTTH and both Orange and Vodafone are investing.

4. What are the implications forEuskaltel if it does not includefootball in its pay-TV product?

Telefonica, Orange and Vodafone include football in their pay-TV content. Football has been one of the main drivers of TV subscriber growth and not having it may limit growth opportunities.

5. Is being an MVNO a risk for Euskaltel? Euskaltel says that its MVNO terms with Orange are good and do not represent arisk to its business model. Additionally, Euskaltel says it will leverage its regional 2.6GHz LTE band frequency. It paid €2.1 million (100 sites/year for the next 3-4 years) to offload between 30% and 40% of data traffic that goes through Orange. We see a risk here, as data consumption is growing fast and can drag down EBITDA and cash flow generation.


March 30, 2017 22

Company financial charts Exhibit 2: Group revenue and EBITDA analysis

2016A segmental revenue analysis, % Group EBITDA (LHS) and margin (RHS), €m and %


Exhibit 3: Group capex and OpFCF

Group capex/sales, % Group OpFCF (LHS) and margin (RHS), CHFm and %


Exhibit 4: Group equity FCF and net debt/EBITDA

Group EBITDA to FCF analysis, €m Group net debt/EBITDA (LHS) and dividend coverage (RHS), %

Source: Company reports, RBC Capital Markets estimates. Adjusted for R acquisition (€1.2bn)

Residential65%

SME + Large Accounts

29%

Wholesale & Others

6%

30.0

32.0

34.0

36.0

38.0

40.0

42.0

44.0

46.0

48.0

50.0

0

50

100

150

200

250

300

350

2013A 2014A 2015A 2016A 2017E 2018E 2019E

Reported EBITDA Margin, %

0.00 5.00 10.00 15.00 20.00

2019E

2018E

2017E

2016A

2015A

2014A

2013A

Capex/sales, %

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

0

50

100

150

200

250

2013A 2014A 2015A 2016A 2017E 2018E 2019E

OpFCF Margin, %

0

50

100

150

200

250

300

350

2013A 2014A 2015A 2016A 2017E 2018E 2019E

EFCF Capex Other Tax

0.0

100.0

200.0

300.0

400.0

500.0

600.0

700.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

2013A 2014A 2015A 2016A 2017E 2018E 2019ENet debt/EBITDA Dividend as % of FCF


March 30, 2017 23

No more blue sky What has changed for Euskaltel? Euskaltel is a well-run company, in our view; however, we see downside risks as competition can only increase. We believe Euskaltel faces a challenging landscape going forward and, trading on 8.9x, we don’t think this is factored into the share price.

In the past, low competition and the best technology – Euskaltel has led the broadbandmarket due to its technological superiority vs. copper players and its strong brand.Alternative players saw this market as challenging, hence they focused their commercialefforts in other regions of Spain.

Today, new FTTH/cable competition – FTTH deployment in the north of Spain has takenaway Euskaltel’s network advantage and now alternative players (Orange, Vodafone) aremore active in this market.

Cable has been stable, is this sustainable? – Cable has been stable in Spain, even withthe new FTTH deployment. But, in our view, alternative players are focused on migratingcustomers from copper to FTTH and will save on the unbundled local loop (ULL) feespaid to Telefonica. Finally, the evidence also shows that the FTTH footprint in the northof Spain lags cable (except in Asturias). We expect this to change in the future withnegative implications for Euskaltel.

The basics – market share structure Exhibit 5: Euskaltel group in Spain has c4% broadband market share (2015)

Source: RBC Capital Markets, Comisión Nacional del Mercado y la Competencia (CNMC)

Euskaltel is a small nationwide player; however, it is the main broadband provider in the north of Spain (Basque Country and Galicia).

Zooming onto market in Basque Country According to the available geographical data, in 2015 Euskaltel had a market share of c39% in the Basque Country, followed by Telefonica with 33%. With low FTTH penetration in the region, Euskaltel lost c1% market share during 2015 while Orange and Vodafone both gained.

Movistar44%

Vodafone23%

Orange16%

Jazztel12%

Euskaltel2%

R2%

TeleCable1% Ono

0%

Euskaltel historically had the best technology, a strong brand and lower competition…

… but FTTH is beingdeployed in Euskaltel’s regions and competition can only increase


March 30, 2017 24

Exhibit 6: Euskaltel leads the broadband market in the Basque Country with 39% market share

Basque Country – market share 2015 (%) Basque Country – market share gain/losses 2015 vs 2014 (%)


Zooming onto market shares in Galicia In Galicia, R Cable (owned by Euskaltel) had a market share of c31% in 2015, followed by Telefonica with 40%. R Cable lost c1% market share during 2015 while Orange and Vodafone gained.

Exhibit 7: Euskaltel has a presence in Galicia after acquiring R Cable in 2015

Galicia – market share 2015 (%) Galicia – market share gain/losses 2015 vs 2014 (%)


Cable – stable growth even with new competition By analysing broadband market net adds by technology, cable net connections have been stable in most cases; however, DSL connections have reduced while FTTH has increased.

Movistar33%

Vodafone9%

Orange11%

Jazztel7%

Euskaltel39%

R0%

TeleCable0%

Ono0%

Resto1%

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Movistar Vodafone Orange Jazztel Euskaltel Others

Movistar40%

Vodafone10%

Orange11%

Jazztel5%

R31%

Ono0%

Resto3%

-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Movistar Vodafone Orange Jazztel R Others


March 30, 2017 25

Exhibit 8: In the Basque Country/Galicia cable net adds are stable

Basque Country – technology net adds (000) Galicia – technology net adds (000)

Source: Comisión Nacional del Mercado y la Competencia (CNMC)

FTTH deployment is advancing in both the Basque Country and Galicia; however, cable continues to have higher footprint than fibre (see below). This is not the situation in the other main cities of Spain, such as Madrid, Barcelona or even Asturias in the north of Spain, where the FTTH footprint is larger than cable.

Exhibit 9: FTTH deployment in the Basque Country and Galicia has sped up, but FTTH access is still below that of cable

Basque Country FTTH/cable access (000) Galicia FTTH/cable access (000)

Source: Comisión Nacional del Mercado y la Competencia (CNMC). Definition of Access: Total access of multiple suppliers per market.

Why is cable seeing stable growth even with new competition? We believe there are different factors that explain cable stability in a FTTH deployment environment.

Orange/Vodafone are focused on migration. We believe Orange and Vodafone arefocused on migrating customers from copper to FTTH/cable and saving the ULL fee paidto Telefonica.

Lower FTTH footprint vs. cable. The evidence also shows that the FTTH footprint in thenorth of Spain is below the cable footprint (except Asturias). We expect this to change inthe future with negative implications for Euskaltel.

Vodafone drives cable growth. Euskaltel’s market share has reduced, however, cablenet adds are showing stable growth in the Basque Country and Galicia; hence, webelieve cable has been driven by Vodafone, which used cable technology in the region.

-30

-20

-10

0

10

20

30

40

50

2008 2009 2010 2011 2012 2013 2014 2015


-30

-20

-10

0

10

20

30

40

50

2008 2009 2010 2011 2012 2013 2014 2015


0.0

0.2

0.4

0.6

0.8

1.0

2010 2011 2012 2013 2014 2015

FTTH Cable

0.0

0.2

0.4

0.6

0.8

1.0

2010 2011 2012 2013 2014 2015

FTTH Cable

Challenger prioritising migrations from copper to FTTx/cable


March 30, 2017 26

Euskaltel – more downside than upside Increased competition – we expect increased competition in Euskaltel’s market (Basque

Country and Galicia) driven by FTTH deployments.

Revenues driven by mobile – with broadband subscriber growth nearly flat, we expectretail revenues to be driven by mobile (a lower-margin business vs fixed).

MVNO COGS upside limited – after migrating mobile subscribers to the new MVNOcontract with Orange (better terms), we see limited upside potential in EBITDA in themedium term.

Increased pressure in broadband – we expect broadband subscribers to decrease asOrange and Vodafone finish migrating customers to their FTTH/cable networks. Also, wesee the future increase in the FTTH footprint as a challenging factor.

A cable company with no cable upside Euskaltel’s broadband growth has been limited; however, fixed-mobile convergence has driven mobile subscriber growth.

Exhibit 10: Euskaltel Broadband net adds are stable, but RGU growth has been driven by mobile

Broadband net adds, (000) Mobile net adds, (000)


Euskaltel and Telefonica are ceding market share to alternative players.

Exhibit 11: Orange and Vodafone are gaining market share in Euskaltel’s regions

Basque Country market share gain/loss per operator (2015 vs 2014) Galicia market share gain/loss per operator(2015 vs 2014)

Source: Comisión Nacional del Mercado y la Competencia (CNMC)

-5

0

5

10

15

20

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16

0

5

10

15

20

25

30

35

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

Movistar Vodafone Orange Jazztel Euskaltel Others-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

Movistar Vodafone Orange Jazztel R Others

We expect a c5% broadband base reduction by 2020


March 30, 2017 27

Total revenue driven by mobile – a low-margin business Euskaltel financial reporting does not disclose the split between fixed and mobile revenues. We estimate the breakdown of retail revenue between fixed and mobile, and arrive at the conclusion that fixed revenues are decreasing. We used blended mobile ARPU of €18 per subscriber/month (calculated based on the CNMC data). Through this exercise, we can imply that Euskaltel revenues have been driven by mobile subs growth (with lower margin vs. fixed), while the company has been losing fixed revenues – its core business (cable).

Exhibit 12: We estimate a fixed-revenue reduction excluding mobile revenues

Euskaltel – residential revenue growth, yoy (%) Euskaltel – organic EBITDA growth, yoy (%)


Below, we flex mobile ARPU and price erosion to assess the growth of fixed revenues.

Only in a scenario of sharply falling mobile ARPU do cable revenues grow. Disclosure in this area is key to understand future trends.

Exhibit 13: Euskaltel needs a 5% ARPU erosion to have implicit fixed revenue growth


More cable consolidation? Further cable consolidation has been a point of debate as regional cable operators can gain further synergies and expand margins through consolidation. Euskaltel tried to acquire Telecable in 2015; however, the company was bought by Zegona for €640m (9.8x EV/EBITDA 2015).

We believe that as top-line growth becomes more challenging for Euskaltel, consolidation with Telecable (owned by Zegona) makes more sense. On the other hand, we don’t see Vodafone consolidating a regional cable operator in the short term, as the company recently acquired ONO for €6bn and is focused on its cable deployment and ONO’s integration.

-10

-8

-6

-4

-2

0

2

4

6

8

10

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16

Revenue growth, % Fixed Rev growth, % .

Implicit no mobile

ARPU erosion

Implicit 3% mobile

ARPU increase

-8

-6

-4

-2

0

2

4

6

8

10

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 4Q16

-3% -5.0% -2.5% 0.0% 2.5% 5.0%

25€ -2.3% -5.6% -8.8% -12.1% -15.4%

20€ -0.1% -2.3% -4.4% -6.5% -8.7%

18€ 0.5% -1.3% -3.1% -4.8% -6.6%

15€ 1.3% 0.0% -1.4% -2.7% -4.1%

10€ 2.4% 1.6% 0.9% 0.1% -0.7%

Mobile price erosion

Mo

bil

e A

RP

U 2

01

5

We estimate that a 0%-2.5% mobile ARPU increase implies -3.0 - c7% fixed revenue erosion

What’s next once synergies and opex savings are over?


March 30, 2017 28

Valuation – target price €8.3 We use a DCF to arrive at our price target. Our weighted cost of capital is 7.8% with 8.0% perpetual growth assumptions. Our price target implies a 2018E EV/EBITDA of 8.0x (peers on 7.4x) and EV/OpCF of 12.0x (peers on 13.1x).

Exhibit 14: Euskaltel DCF (€m)

Year end Dec. 2016A 2017E 2018E 2019E 2020E 2021E 2022E 2025E Terminal Year

EBIT 133 142 148 155 157 159 161 169

Taxation -35 -37 -38 -40 -41 -41 -42 -44

Capex -96 -93 -94 -95 -95 -95 -95 -88

D&A 148 145 141 135 132 129 127 120

WC 1 0 0 0 0 0 0 0

FCF 152 157 157 154 153 152 151 157 2,648

Number of years 0 0 1 2 3 4 5 8 8

Present value 0 145 132 121 112 103 85 1,434

WACC 8.0

Perpetual Growth 2.0

Implied FCF terminal multiple 16.9

Consolidated EV 2,322

2018E Net Debt -1,091

NOLs 25

Equity Value 1,255

Number of shares, 2015E 152

Value per share 8.3


We flex our valuation with the terminal growth (1.0% to 3.0%) and WACC from (6% to 10%).

Exhibit 15: Sensitivity of valuation: Terminal growth vs. WACC


Risks to rating and price target Further consolidation of regional operators could generate higher trading multiples. The delay in the deployment of alternative operators’ FTTH networks could generate an improvement in broadband adds and further cash flow expansion.

Company description Euskaltel is the main regional cable operator in northern Spain with a cable technology network covering most of the Basque Country and Galicia after the acquisition of R in 2015. The company primarily offers bundled services of high-speed broadband, pay TV, mobile & fixed services to residential as well as business customers.

8.3 6.0 7.0 7.8 9.0 10.0

1.0 12.2 9.1 7.2 5.1 3.7

1.5 13.7 10.0 7.8 5.5 4.1

2.0 15.5 11.1 8.6 6.0 4.4

2.5 17.8 12.4 9.5 6.6 4.8

3.0 20.9 14.1 10.7 7.2 5.3

WACC (%)

Pe

rpe

tual

gro

wth

(%

)


March 30, 2017 29

Exhibit 16: Euskaltel – key financials (€m)

Key Financials, CHF m 2015A 2016A 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

Revenues 349 573 582 587 587 585 584 583 584 585 586

EBITDA (after fees) 152 281 287 289 290 289 288 288 288 289 289

EBIT/Operating Profit 66 133 142 148 155 157 159 161 164 167 169

Net Income 7 83 86 96 104 109 114 119 124 130 135

EPS 0.05 0.44 0.42 0.47 0.51 0.53 0.55 0.58 0.61 0.63 0.66

DPS 1.64 0.36 0.40 0.44 0.41 0.43 0.44 0.46 0.48 0.51 0.53

Capex 53 96 93 94 95 95 95 95 90 90 88

OpFCF 98 185 194 196 194 193 193 193 198 199 201

Adjusted Equity FCF 33 134 122 125 123 124 124 124 129 128 131

Number of shares 152 152 152 152 152 152 152 152 152 152 152

Net debt/(cash) 1,358 1,223 1,156 1,091 1,034 972 912 855 796 742 687



March 30, 2017 30

Financials Below, we lay out our profit & loss account, balance sheet and cashflow statement.

Exhibit 17: Euskaltel profit & loss account

Profit & Loss Account (€ million) 2016A 2017E 2018E 2019E 2020E

Total Revenues 573 582 587 587 585

EBITDA 281 287 289 290 289

Depreciation and Amortization -148 -145 -141 -135 -132

EBIT 133 142 148 155 157

Net Interest Expense -50 -55 -52 -51 -48

Profit before tax 83 86 96 104 109

Income Taxes -15 -22 -25 -27 -28

Net Income 67 64 71 77 81


Exhibit 18: Euskaltel cashflow statement

Cashflow Statement (€ million) 2016A 2017E 2018E 2019E 2020E

EBITDA 281 287 289 290 289

Interest paid -41 -55 -52 -51 -48

Tax -4 -17 -19 -20 -21

WC and other -4 0 0 0 0

Net operating cash flow 232 215 219 219 220

PPE -65 -68 -69 -70 -70

Intangibles -33 -25 -25 -25 -25

Others 0.1 0 0 0 0

Net cash generated by investing activities -98 -93 -94 -95 -95

Dividends paid on ordinary shares, net of dividends received -0.3 -55 -60 -66 -62

Net cash flow used in financing activities 0 -55 -60 -66 -62

Equity FCF 134 122 125 123 124



March 30, 2017 31

Exhibit 19: Euskaltel balance sheet

Euskaltel Balance Sheet 2016 2017 2018 2019 2020

Assets

Intangible assets 773 759 747 735 723

PP&E 1192 1153 1118 1091 1066

Financial assets 7 7 7 7 7

Derivative financial instruments 0 0 0 0 0

Deferred tax assets 147 141 135 128 121

Non-current assets 2,119 2,061 2,008 1,961 1,918

Inventories 4 4 4 4 4

Trade receivables 48 48 48 48 48

Other current assets 12 12 12 12 12

Cash & cash equivalents 157 224 289 346 409

Current assets 221 288 353 410 473

Total Assets 2,340 2,349 2,360 2,371 2,390

Equity and Liabilities

Capital 456 456 456 456 456

Share premium 208 208 208 208 208

Retained earnings 103 112 123 134 153

Other comprehensive income -24 -24 -24 -24 -24

Equity 742 751 762 773 792

Long/term borrowing and other 1,302 1,302 1,302 1,302 1,302


Other non-current liabilities 8 8 8 8 8

Deferred tax liabilities 77 77 77 77 77

Non-current liabilities 1,388 1,388 1,388 1,388 1,388

Short-term borrowings 59 59 59 59 59

Trade and other payables 109 109 109 109 109

Current income tax payable 2 2 2 2 2

Other current liabilities 39 39 39 39 39

Current liabilities 210 210 210 210 210

Total Equity and Liabilities 2,340 2,349 2,360 2,371 2,390



March 30, 2017 32

OutperformSIBE: MAS; EUR 38.28

Price Target EUR 56.00Scenario Analysis*

DownsideScenario

25.0035%

CurrentPrice

38.28

PriceTarget

56.0046%

UpsideScenario

75.0096%



Market Cap (MM): 766Yield: 0.0%Enterprise Val. (MM): 1,369Avg. Daily Volume: 27,074

RBC EstimatesFY Dec 2016E 2017E 2018E 2019ERevenue 398.5 1,179.0 1,306.6 1,424.4EV/EBITDA 36.9x 9.7x 7.6x 6.0xCapex 47.3 129.7 143.7 149.6EBITDA 37.2 141.5 179.8 227.9EPS, Adj Diluted 0.13 0.58 1.72 3.26

All values in EUR unless otherwise noted.

Masmovil Broadband, S.A.U.Execution...Yes they can; initiating at OutperformOur view: Masmovil benefits from the Orange/Jazztel merger, hasacquired Yoigo, is gaining scale and has hired well (ex Jazztel managers).Can this team deliver growth without destabilizing the market? Ourproprietary analysis leads us to believe it can. We estimate Masmovil willachieve the 2020 subscribers consensus during 2018. It trades on 7.6x EV/EBITDA 2018E (peers on 7.6x) but will deliver for higher growth.

Key points:The next Jazztel? In our view, Jazztel was a very successful operationbased on innovation, best value for money proposition, low dependencyon resale services and leading fibre deployment in Spain. In contrast, webelieve Masmovil will rely more on resale access given it lacks scale forfibre-to-home (FTTH) deployment. It is no Jazztel, but offers investorsexposure to high growth and benefits of remedies. We expect Masmovilto be a solid growth story with 2016-2020 EBITDA CAGR of c25%.

Benefiting from wholesale access. Masmovil acquired an attractiveremedy package as part of the EU-mandated remedies for Orange’stakeover of Jazztel. The remedy package included national resale DSLaccess and ownership of c0.9m FTTH homes passed. Additionally, we alsosee value in Masmovil's relationship with Orange. The company has signeda wholesale agreement to access Orange's fibre network and improvedthe national roaming terms vs. the prior Telefonica contract (see body ofthe note for details). We expect c900k broadband subscribers by 2020(c5% broadband market), double market expectations, but in our viewvery achievable.

Hurdles ahead, but outlook robust. Masmovil will go through big changesin the next few years. The most obvious one is the pivot from a mobile-only model to a converged one. Masmovil will need to manage differentwholesale access technologies (DSL, FTTH), operate a small fibre networkand try to deploy its FTTH infrastructure. We believe the company hasthe opportunity to grow, but execution is everything. We have factoredin higher churn due to initial headwinds. Despite this, we see 2016-2020CAGR revenue and EBITDA of c10% and c25%, respectively.

Stock rating: Outperform, price target €56. We are initiating coverageof Masmovil with an Outperform recommendation. We value Masmovilusing a DCF-based approach and arrive at a price target of €56 per share.Trading on 7.6x 2018E EV/EBITDA (peers on 7.6x), we believe the growthpotential is not priced in. Our price target supports our Outperformrecommendation with potential upside of 46%.


March 30, 2017 33


Exhibit 1: Masmovil Broadband, S.A.U.

800k600k400k200k

N D J F M A M J J A S O N2015


D J F2017

M

UPSIDE 75.00TARGET 56.00CURRENT 38.28

DOWNSIDE 25.00

Mar 2018

56463631

26

21

16

11

125 Weeks 07NOV14 - 29MAR17

MAS SM Rel. MSCI EUROPEAN INDEX MA 40 weeks


Target price/base caseWe use discounted cash flow (DCF) to arrive at our ex-dividendprice target of €56 per share. Our weighted average costof capital is 8.1% for Masmovil with a perpetual growthrate assumption of 2.0%. We expect mid-single-digit revenuegrowth between 2017-20 and EBITDA expansion driven bybroadband growth and cost savings mainly coming fromroaming costs (c€60m). However, we also expect higher churn,acquisition and roaming costs increased driven by subscriberand data growth. Our price target has an implicit 2018E EV/EBITDA of 9.6x, above the peer group (7.6x), justified byMasmovil's growth profile.

Upside scenarioOur upside scenario would see Masmovil being acquired ona multiple of 11.5x FY18E EBITDA. This would imply an equityvalue of €75 per share.

Downside scenarioOur downside scenario would see lower EBITDA growth as aresult of strong competition from the main player in the lowend of the market. Putting Masmovil on a depressed multipleof 6.0x FY17E EBITDA would value the equity at €25 per share.

Investment summaryMasmovil is more active now as the fourth telecom operatorin the Spanish market as a consequence of the 4 to 3consolidation process in Spain. The company has increased insize after acquiring Yoigo and is refocusing its strategy from amobile-only operator to a fixed-mobile convergent player.

Good wholesale access granted by Orange Spain plus theremedy package are the foundations for Masmovil's plan.Masmovil won't replace the Jazztel gap in the Spanish marketas both companies are very different. However, we believeMasmovil has the chance to grow in the broadband marketleveraging in the regulated remedies and its mobile base ofc4.5m.

We expect savings from the new agreement with Orange,which will have a positive impact at bottom line in itsmobile business. Its broadband subscribers will growth abovemarket expectations driven by the remedies and wholesaleaccess. Masmovil is moving from a mobile-only to a fixed-mobile strategy, is working under different agreements, has tomanage churn and control SAC. The the challenge of the fourthoperator is huge but we believe they can execute. Trading on7.6x 2018E EV/EBITDA (peers on 7.6x) we believe this growthpotential is not priced in the shares.

Potential catalystsWe see better-than-expected growth in the broadband marketand cost control as potential catalysts. These should increaseincrease CF generation and reduce execution risk.

Potential risksMasmovil has not only grown rapidly in size with Yoigo,but is going through a strategy change. It is moving from amobile-only to fixed-mobile convergence strategy. We expectsubscriber growth as its pricing proposition is attractive.However, issues with its sales channels, provisioning process,and quality issues could generate an increase in churn andnegatively impact margins.


March 30, 2017 34

Key questions Our view

1. Is Masmovil going to destabilize themarket?

Masmovil is the fourth mobile player in the market and will push fixed services through the wholesale access granted by Orange, in our view. Spain has become a multi-infrastructure market where Telefonica, Orange and Vodafone own both fixed and mobile networks and higher margins. Masmovil has growth potential, but will try to keep market stability to avoid a response (price decrease) from the other players. Hence, we believe Masmovil can benefit without being a destabilizing factor.

2. Can Masmovil become the 4th

infrastructure player in Spain?The company has a plan to deploy an FTTH network and has signed a co-investment agreement with Orange. Under this agreement Orange will give access to Masmovil in the high density areas and Masmovil will deploy in low density areas where Orange has not deployed. However, under the agreement, Masmovil is not forced to deploy. In our view, it is more rational considering Masmovil’s lack of scale to have FTTH resale access; hence, we believe Masmovil will be more active in the wholesale front rather than deploying its own network.

3. Is Masmovil an M&A candidate? Masmovil can continue buying small MVNOs; however, we don’t see a high probability of Masmovil being taken out by the main operators in Spain. In the 2007-08 M&A cycle, Orange and Vodafone acquired companies looking to increase scale when both companies were starting to run their fixed business in Spain. In the M&A cycle of 2014-15, the main driver of consolidation was network demand. Masmovil does not hold network or scale, and hence we don’t see Masmovil as a target. A consolidation scenario with the regional cable operators is, in our view, more possible in the long term; however, we believe consolidation between the small cable companies is most likely to take place first.

4. What are the implications forMasmovil if it does not includefootball in its pay TV product?

Telefonica, Orange and Vodafone are including football in their Pay TV content while we believe Masmovil will not. As Masmovil is targeting the low-end market we do not see content/football as fundamental.

5. Can opex savings drive EBITDA? Masmovil Group (Masmovil, Yoigo and Pepephone) spend €120M on national roaming. We estimate Masmovil and Pepephone can generate c€30m of savings on national roaming. This savings comes from using Yoigo’s network plus better conditions for the national roaming agreement. On the other hand, Yoigo will generate savings from the new roaming agreement signed with Orange. We expect c€30m of savings for total savings of c€60m on national roaming. The terms of the contract are not known, but we expect cost to decrease at an initial stage; however, costs will increase going forward driven by higher data consumption as well as the increase of the mobile subscriber base.


March 30, 2017 35


2016E segmental revenue analysis, % Group EBITDA (LHS) and margin (RHS), €m and %



Group capex/sales, % Group OpFCF (LHS) and margin (RHS), €m and %


Exhibit 4: Group equity FCF and net debt/EBITDA

Group EBITDA to FCF analysis, €m Group net debt/EBITDA

Source: Company reports, RBC Capital Markets estimates (ex Yoigo)

Mobile96%

Broadband4%

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

16.0

18.0

20.0

0

50

100

150

200

250

300

2014A 2015A 2016E 2017E 2018E 2019E

Reported EBITDA Margin, %

0.00 5.00 10.00 15.00

2019E

2018E

2017E

2016A

Capex/sales, %

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

-20

-10

0

10

20

30

40

50

60

70

80

90

2015A 2016E 2017E 2018E 2019E

OpFCF Margin, %

-50

0

50

100

150

200

250

300

2014A 2015A 2016A 2017E 2018E 2019E

EFCF Capex Other Tax

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2016E 2017E 2018E 2019ENet debt/EBITDA


March 30, 2017 36

Focus on execution – It won’t be easy Is Masmovil the next Jazztel? After the 4 to 3 market consolidation, in our view the Spanish market lost one of the most innovative and well managed companies in Europe (Jazztel). However, the remedy condition acquired by Masmovil has raised the question of whether Masmovil is the next Jazztel. We believe this is not the case.

Jazztel led the market in terms of innovation (20MB in 2005, VDSL, FTTH, OTT).

Had the best value for money offering.

Was leading FTTH deployment. Had the largest alternative FTTH network in Spain.

Led fixed-mobile convergence. Launched the first fixed-mobile convergence offer withno revenue cannibalization risk.

Did not like to offer resale services. More than 95% of subscribers were full ULL and thecompany was building its own FTTH network.

Today, none of these are attributes of Masmovil; however, the company has the chance to grow in the broadband market, favourable DSL access under the remedy and lead a niche of the market where the main players are not competing heavily (for now). The company must go through many transformations and we see execution risk as the main concern.

No scale to build FTTH infrastructure. The company will move from a mobile-only to afixed-mobile strategy. We expect the company’s broadband market share to reach c900kbroadband subscribers by 2020, and our analysis implies that currently the company haslack of scale to have return on the FTTH investments. We expect a 6-8% broadbandmarket share needed to have a sufficient return on FTTH deployment (assuming €100-150 cost of homes passed). Hence we believe the company must achieve this targetbefore building its own infrastructure.

Remedies and good terms for wholesale access. The company acquired a remedypackage including the acquisition of 0.85m FTTH homes passed for €20m and xDSLaccess at €10.65, similar to the ULL fee paid by a full ULL player but without opex/capexrequirements. However, we see the business relationship with Orange and wholesaleagreement as leading to greater upside.

Where is the challenge? We see execution risk as company’s main challenge. Thecompany has a wholesale contract with Orange, which includes different types of access(bit stream, share access, FTTH/DSL resale, mobile). The company is moving from amobile-only to fixed-mobile operation, from running a 0.3m mobile subscriber companyto a c4.5m subscriber company and to building its own FTTH network without scale.

Masmovil in a nutshell Masmovil has been following an M&A strategy to increase its mobile customer base. After the acquisition of Yoigo and Pepephone for €612m and €158m, respectively, Masmovil went from c1% mobile market share to c8%.

With the Yoigo mobile base and a fixed wholesale agreement, the strategy is to become the best alternative value for money offering vs. Telefonica, Orange and Vodafone. The company expects to capture customers in the low-end market, leveraging the Yoigo brand, which the company says has high brand recognition (60% vs. 6% of Masmovil).

It’s not Jazztel but has great growth potential, c900k broadband subscribers in 2020E

Yoigo acquisition took Masmovil from from c1% to c8% of mobile market share


March 30, 2017 37

Exhibit 5: After acquiring different companies, Masmovil has increased its mobile market share from c1% to c8%

Mobile subscribers – from 0.3m to 4.5m mobile subscribers Mobile market share, 2016


Remedies – A life changer The Orange/Jazztel deal was approved by the European Commission under a remedy package acquired by Masmovil. We summarize it below:

850k FTTH homes passed. Masmovil paid €89m and sold an IRU €69m for a nettransaction cost of €20m. We estimate the cost of the homes to be c€130m (€150 perhome passed). Orange stays with 40% of the capacity of the network. The opex of thisnetwork is c€7m/year and 40% will be paid by Orange.

DSL national access. €29m one-off cost to have access to Orange’s DSL network (87% ofDSL national coverage). Of this amount, 70% will be paid between in 2019-22. Under theremedy package, Masmovil pays €10.65 monthly per xDSL broadband subscriber vs. theregulated AMLT (wholesale access) price of c€21 (RBC estimate).

Why life changer? The terms for the FTTH and DSL access are good but, in our view, themost important outcome of the remedy is a good relationship that has been built withOrange and the wholesale agreements signed outside of the remedy package.

Wholesale access from Orange Besides the remedy package, Masmovil and Orange signed different agreements, which we summarize below:

FTTH homes wholesale access. Masmovil has wholesale access to Orange’s FTTHnetwork, equivalent to 65% of Telefonica’s FTTH converge. The wholesale fibreregulated price is €25+ variable driven by data usage. We expect in total c€30 (RBCestimate). Hence we expect a FTTH wholesale price between c€20-25. A positive featureof the agreement is that the price is fixed: e.g., a 200MB and a 500MB connection havethe same wholesale price.

FTTH co-investment agreement. Orange focuses on highly competitive areas. Masmovilis focused on lower density areas – towns of 10k inhabitants, where Telefonica is theonly player. The company expects to have c4.3m homes (including the 850k homes fromthe remedy) in 3-4 years under this agreement.

Sites sharing. The company will share sites with Orange in mobile.

4G access. We estimate Masmovil will have a c25% reduction in national roaming costsunder its new contract with Orange. This is going to be one of the main drivers of marginexpansion in the following years.

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16E 4Q16E

Pepephone Masmovil Yoigo

Movistar30%

Orange28%

Vodafone26%

Grupo MASMOV!L

8%

OMV8%

Masmovil paid €20m for 850k FTTH homes passed; value at c€130m


March 30, 2017 38

The plan – to not destabilize the market Masmovil has to execute different projects with different outcomes. The company has a plan to deploy its own network and also operate with a wholesale access agreement. We believe Masmovil will be mainly a wholesale operator with a strong position in its niche markets.

Owner of infrastructure or wholesaler? The economic terms of the FTTH wholesaleagreement with Orange are not known, but we expect they are good, below the €30(€25+variable component) regulated wholesale price. On the other hand, currently wedo not see Masmovil having the scale to invest in its own fibre infrastructure; hence, weexpect Masmovil to focus on its operations as a wholesaler.

Yoigo in the equation. Yoigo underperformed in the past due to the lack of fixedinfrastructure. With the new fixed wholesale access, we expect Yoigo, which has highbrand recognition, to drive growth in the fixed-mobile convergence market and takeshare from Orange, Vodafone and Telefonica.

Masmovil – low-end market. We expect the Masmovil brand to be more focused on thelow end of the market.

Grow, but not disrupt. Masmovil Group needs a rational pricing scenario to makepricing strategy more attractive. In our view, it should not be highly disruptive to avoid aprice response from the main player (Telefonica, Orange and Vodafone). We expect thecompany to reach c900k broadband subscribers and c5m mobile subscribers by 2020.

Yoigo’s brand and mobile base will drive broadband growth Yoigo’s mobile base has declined since 2012 due to the lack of fixed-mobile convergence offers. Since then, Yoigo has focused on a commercial strategy for mobile-only services. We believe that Yoigo’s subscriber base has a mobile-only profile. Hence, we expect lower fixed-mobile convergence penetration vs. competitors Vodafone, Orange and Telefonica.

Exhibit 6: We expect lower fixed-mobile penetration vs. Orange, Telefonica and Vodafone

2016 Converged SIMs / total SIMs (%)


We expect convergence penetration of c30% by 2020 and c900k broadband users.

20

25

30

35

40

45

50


2020E: c€5m mobile subscriber and c900k broadband connections


March 30, 2017 39

Exhibit 7: We assume 30% of converged SIMs and 1.7x SIMs per converged home

Mobile subscriber (00) LHS, Convergence penetration, (%) RHS Broadband subscriber base


Wholesale-centric fibre strategy We expect Masmovil to have a wholesale-centric strategy as the company does not have the scale to have its own FTTH infrastructure for now.

Wholesale access didn’t work in the past. In Spain operators that provide servicesthrough wholesale access had lower quality and higher churn than network operators.

The multi infrastructure effect. We believe this time wholesale access is going to workin Spain as operators do not rely on only one infrastructure (Telefonica) but there aredifferent infrastructures to work with. Hence, Masmovil can close deals with thenetwork which offers it the best wholesale service.

We also flex the return on investment with variation of cost per homes passed (€50 – 900) and Masmovil’s potential market share (5% to 25%).

Exhibit 8: ROI –c5-8% of broadband market share to start having return on FTTH


Assuming a cost per home passed in the range of €100-150 (similar cost to Jazztel), Masmovil will need between 5-8% of broadband market share. We expect company will achieve c5% broadband market share by 2020.

0

5

10

15

20

25

30

35

4,100

4,200

4,300

4,400

4,500

4,600

4,700

4,800

4,900

5,000

2016E 2017E 2018E 2019E 2020E

0

100

200

300

400

500

600

700

800

900

1,000

2016E 2017E 2018E 2019E 2020E

8.75 50 100 150 300 500 750 900

3 9.7 5.2 3.5 1.8 1.1 0.7 0.6

5 14.9 8.3 5.7 3.0 1.8 1.2 1.0

8 21.3 12.4 8.8 4.7 2.9 1.9 1.6

10 24.8 14.9 10.6 5.7 3.5 2.4 2.0

15 31.9 20.3 14.9 8.3 5.2 3.5 3.0

20 37.2 24.8 18.6 10.6 6.8 4.7 3.9

25 41.3 28.6 21.9 12.8 8.3 5.7 4.8


FTTH penetration

%

Masmovil needs between 5-8% market share to have return on fibre


March 30, 2017 40

Exhibit 9: We expect Masmovil to be a wholesaler in multi-infrastructure player markets

Homes passed, million


What we assume for national roaming savings Pepephone and Masmovil. We estimate Pepehone and Masmovil national roaming

costs before migrating their subscribers to Orange to be c€50m. Their cost structure willbenefit from Yoigo’s mobile network footprint (c60% on-net traffic) and the new termsunder the Orange wholesale contract. The company expects net savings of €30m.

Yoigo on-net traffic is c60%. Yoigo has c40% of its mobile traffic under the roamingagreement with Telefonica. We expect an annual payment to Telefonica of c€120m and€30m savings under the new contract with Orange.

Telefonica in the equation. Telefonica improved its roaming agreement with Masmovilgroup; hence, Telefonica will see the wholesale revenue losses (€120m) phased in twoyears and Masmovil have a more controlled migration of costumers from the Telefonicanetwork to Orange.

But in the medium term costs will go up. We expect savings on national mobile roamingunder the new contract in the first year. However, we expect costs to increaseafterwards driven by higher mobile subscribers and mobile date usage.

10.1 9.6

17.0

0.9 2.2

14.0 15.0

25.0

2.3 2.2

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Vodafone Orange TEF Mas Movil Euskaltel/Telecable

2016 2019

Under new national roaming agreement we expect c€60m savings


March 30, 2017 41

Exhibit 10: We expect roaming to increase driven by data consumption and subs growth


For our analysis, we use a starting average data consumption of 0.5GB/month per mobile subscriber and an increase of data usage to 1.3GB by 2020. For this exercise, we use a constant cost of €3 per GB.

Masmovil and Orange wholesale terms are not known; however, we believe that given the small size of Masmovil (2016E EBITDA €113m) fluctuations in mobile data consumption, subscribers and the cost per GB will generate significant deviations in its results.

Exhibit 11: Masmovil EBITDA variation driven by data consumption


70

90

110

130

150

170

190

210

230

2016E 2017E 2018E 2019E 2020E

Scenario (1GB data) Scenario (1.3GB data) Scenario (1.6GB data) Scenario (1.8GB data)

1.8GB average usage

1.6GB average usage

1.3GB average usage (base case)

1GB average usage

70

120

170

220

270

320

2016E 2017E 2018E 2019E 2020E

Scenario (1GB data) Scenario (1.3GB data) Scenario (1.6GB data) Scenario (1.8GB data)

1.8GB average usage

1.6GB average usage

1.3GB average usage (base case)

1GB average usage


March 30, 2017 42

Masmovil – The challenges Masmovil has the opportunity to extract value from a market from which main operators are moving away, given price increases and the ‘more for more’ strategy. Masmovil has a favourable wholesale agreement with Orange, but now execution is key.

From a mobile-only to a fixed-mobile strategy. The company has been a mobile-onlyprovider. However, the new strategy is based on fixed-mobile convergence. Thistransition is not simple (systems, billing, sales channels) and could have an impact ontime to market and churn levels.

Working under different agreements. The company has the challenge to work underdifferent agreements with different providers. The company has to execute a bit-streamagreement for FTTH, manage its 0.8m homes passed, a co-investment agreement tobuild FTTH, a wholesale DSL agreement, and two MNOs to support its national roamingtraffic.

Pros and cons on margin expansion. We see a positive effect from national roamingsavings. However, we expect growth both in fixed and mobile; hence, in the initial phase,we expect a negative impact from acquisition cost. We do also expect higher churn whilethe company achieves the transformation needed.

It’s no Jazztel, but we see growth potential. We see an opportunity for Masmovil as thecompany is taking advantage of the main players’ (Telefonica, Orange Vodafone) pricehikes by offering lower priced services. We expect subscriber growth, but maintain aconservative view on execution as we acknowledge it is a challenge.


March 30, 2017 43

Valuation – Price target €56 We use a DCF to arrive to our price target of €56. Our weighted cost of capital is 8.1% with a 2% perpetual growth assumption. Our price target implies 2018E EV/EBITDA of 9.6x (peers on 7.6x). We calculate our terminal value based on 2030E FCF (€147m). Masmovil trades at higher multiples due to its high growth profile.

Exhibit 12: Masmovil DCF (€m)

Year end Dec. 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2030E Terminal Year

EBIT 16 47 79 123 166 194 213 276

Taxation -5 -14 -24 -37 -50 -58 -64 -83

Capex -47 -130 -144 -150 -162 -172 -182 -204

D&A 21 95 100 105 111 117 124 155

WC -88 4 4 3 2 3 3 3

FCF -103 2 17 45 68 84 95 147 2,422

Number of years 0 0 0 1 2 3 4 12 12

Present value 0 0 41 58 67 69 58 953

WACC 8

Perpetual Growth 2


Consolidated EV 1,717

2018E Net Debt -605

2018E NOL 0

Equity Value 1,111

Number of shares, 2018E 20

Value per share 56


We flex our valuation with terminal growth ranging from 1% to 3% and WACC 6% to 10%.

Exhibit 13: Sensitivity of valuation – Terminal growth vs. WACC


Risks to rating and price target Higher opex/COGS savings and higher competition in the Spanish market will reduce subscriber growth, margin expansion and cash flow generation, and as a result, the shares should trade at lower multiples.

Company description The Masmovil is the 4

th player in Spain offering fixed line, mobile, and internet services to

residential, businesses and operators, through its main brands: Yoigo, Másmovil, Pepephone and Llamaya. The Group has its own mobile network infrastructures and mainly through wholesale access reaches 18m households with xDSL and 7m with optical fibre.

56 6.0 7.0 8.1 9.0 10.0

1.0 86.8 65.3 48.8 38.7 30.0

1.5 94.9 70.3 51.9 40.9 31.5

2.0 105.1 76.2 56 43.4 33.2

2.5 118.2 83.5 59.7 46.3 35.2

3.0 135.7 92.6 64.8 49.7 37.4

WACC (%)

Pe

rpe

tual

gro

wth

(%)


March 30, 2017 44

Exhibit 14: Masmovil – Key financials (€m)

2015A 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

Revenues 130 398 1,179 1,307 1,424 1,539 1,641 1,730 1,803 1,864 1,920

EBITDA (after fees) 11 37 141 180 228 277 312 337 352 373 403


Net Income -2 3 12 34 65 96 116 131 139 152 171

EPS -0.08 0.13 0.58 1.72 3.26 4.79 5.84 6.58 6.96 7.60 8.57

DPS 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Capex 4 47 130 144 150 162 172 182 189 196 202

OpFCF 7 -10 12 36 78 115 140 156 162 177 202

Adjusted Equity FCF -9 11 -26 -9 20 47 64 77 84 98 125

Number of shares 20 20 20 20 20 20 20 20 20 20 20

Net debt/(cash) 43 649 596 605 585 538 475 398 314 217 91



March 30, 2017 45

Financials Below we lay out our profit & loss account, balance sheet and cash flow statement.

Exhibit 15: Masmovil profit & loss account

(€ million) 2016E 2017E 2018E 2019E 2020E

Total Revenues 398 1,179 1,307 1,424 1,539

EBITDA 37 141 180 228 277

Depreciation and Amortization 21 95 100 105 111

EBIT 16 47 79 123 166

Net Interest Expense -8 -30 -30 -30 -30

Profit before tax 8 16 49 93 136

Income Taxes -5 -5 -15 -28 -41

Net Income 3 12 34 65 96


Exhibit 16: Masmovil cash flow statement

(€ million) 2016E 2017E 2018E 2019E 2020E

Earning before tax 8.0 16.4 49.1 92.8 136.4

D&A 21.3 95.0 100.4 105.0 110.9

WC -88.3 4.0 4.4 3.1 2.2

Others 177.7 -11.5 -19.1 -31.2 -41.2

Net operating cash flow 118.8 104.0 134.8 169.7 208.3

PPE -31 -83 -91 -100 -108

Others -846 -47 -52 -50 -54

Net cash generated by investing activities -878 -130 -144 -150 -162

Dividends paid on ordinary shares, net of dividends received 0 0 0 0 0

Net cash flow used in financing activities 775 39 0 0 0

Equity FCF -759 -26 -9 20 47



March 30, 2017 46

Exhibit 17: Masmovil balance sheet

(€ million) 2016E 2017E 2018E 2019E 2020E

Assets

Intangible assets 122 148 175 195 217

PP&E 734 743 760 783 813

Financial assets 6 6 6 6 6


Deferred tax assets 8 6 2 -1 -5

Non-current assets 869 903 941 983 1030

Inventories 0 0 0 0 0

Trade receivables 146 150 154 157 159

Other current assets 66 66 66 66 66

Cash & cash equivalents 47 60 51 72 118

Current assets 259 277 272 295 344

Total Assets 1,128 1,179 1,214 1,279 1,374

Equity and Liabilities

Capital 1 1 1 1 1

Share premium 247 287 287 287 287

Retained earnings 1 12 47 112 207

Other comprehensive income 1 1 1 1 1

Equity 250 301 336 401 496

Long-term borrowing and other 530 530 530 530 530

Other financial liabilities 51 51 51 51 51

Other non-current liabilities 79 79 79 79 79

Deferred tax liabilities 4 4 4 4 4

Non-current liabilities 665 665 665 665 665

Short-term borrowings 95 95 95 95 95

Trade and other payables 51 51 51 51 51

Other financial liabilities 65 65 65 65 65

Other current liabilities 2 2 2 2 2

Current liabilities 213 213 213 213 213

Total Equity and Liabilities 1,128 1,179 1,214 1,279 1,374



March 30, 2017 47

OutperformLSE: ZEG; GBp 132.50

Price Target GBp 170Scenario Analysis*

DownsideScenario

120.009%

CurrentPrice

132.50

PriceTarget

170.0028%

UpsideScenario

210.0059%



Market Cap (MM): 260Yield: 0.0%Enterprise Val. (MM): 523

Market Cap in GBP

RBC EstimatesFY Dec 2016E 2017E 2018E 2019ERevenue 138.5 143.8 149.4 152.8EV/EBITDA 8.0x 7.4x 7.1x 6.8xCapex 25.4 25.9 25.4 25.6EBITDA 65.5 70.5 73.9 76.4EPS, Adj Diluted (0.02) 0.03 0.05 0.07DPS 0.05 0.05 0.07 0.05Div Yield 3.8% 3.8% 5.3% 3.8%

All market data in GBp; all financial data in GBP; dividends paid in GBp.

Zegona Communications plcBack to growth; initiating at OutperformOur view: Zegona (Telecable) has already seen the impact of highercompetition. We believe continued fixed line pressure is already priced in.In the meantime, we expect top line growth as mobile is set to pick up.Zegona (initiate at OP, PT €1.70) trades at 7.1x EV/EBITDA 2018E, discountto peers (7.4x) and should re-rate given the upside in mobile, mid-single-digit EBITDA growth and M&A optionality.

Key points:The FTTH effect. Telecable which operates in the Asturias region innorthwest of Spain has been the local broadband market leader due to itstechnological superiority vs. copper players. However, FTTH deploymenthas advanced quicker in Asturias than in other regions in northern Spainsuch as Galicia or Basque country (Euskaltel markets). In Asturias FTTHaccesses are already above cable and cable net adds had been diminishing.In our view Telecable sets a precedent for Euskaltel in terms of the effectsof FTTH competition vs cable in the north of Spain.

Fixed is under pressure. FTTH competition is increasing and with c40%broadband market share (lower in their footprint), in our view, thepotential upside in fixed is more constrained. In the 12 months through1H16, the company lost 4k broadband subscribers. We expect furtherpressure in broadband driven by competition. However, B2B offerspotential, as it only represents 24% of revenues vs Euskaltel c36%.

Mobile, is the driver of growth. Telecable switched its MVNO toTelefonica, gaining access to 4G at better terms vs previous contract. Weexpect this to act as catalyst for faster mobile growth, given relatively lowmobile penetration off their fixed base (55% vs Euskaltel 77%). With thenew MVNO contract and low mobile back book, we believe there is roomfor top-line growth.

Cable consolidation. After months of newsflow around a potential dealbetween Zegona and Euskaltel, the companies have indicated that theyare currently in negotiations for a potential merger. In the past Euskalteltried to acquire Telecable without success. The low growth profile of thecable operators in our view is a driver for the potential merger.

Stock rating: Outperform, price target £1.70. We are initiating coverageof Zegona with an Outperform rating. We value Zegona using a DCF-based approach and arrive at a price target of £1.70. We believe increasedcompetition in the Telecable region is priced in. Telecable trades on 7.1x2018E EV/EBITDA, (peers on 7.4.x). The expected improvements on theirbusiness, M&A exposure and our valuation supports our Outperformrating with potential upside of 28%. Although Telecable has been facingincreased competition driven by FTTH in the Asturias region (northwestSpain), we expect stronger upside on the mobile front to drive top-linegrowth.


March 30, 2017 48


Exhibit 1: Zegona Communications plc

10m

5m

M A M J J A S O N2015


D J F2017

M

UPSIDE 210.00TARGET 170.00

CURRENT 132.50

DOWNSIDE 120.00

Mar 2018

185175165155

145

135

125

115

105

95

107 Weeks 18MAR15 - 29MAR17

ZEG LN Rel. FT ALL SHARE INDEX MA 40 weeks


Target price/base caseWe use discounted cash flow (DCF) to arrive at our ex-dividendprice target of £1.70 per share. Our weighted average costof capital is 8.1% for Zegona with a perpetual growth rateassumption of 2.0%. Continued revenue growth (c2-3.5%) andEBITDA growth (3% to 7%) are implicit to our assumptions forZegona. Our price target has an implicit EV/OpCF 2018E of12.6x, a bit below its peer group (13.1x).

Upside scenarioOur upside scenario would see delayed competition fromalternative operators and growing market share. PuttingTelecable on a multiple of 10x FY17E EBITDA would value thestock at £2.10 per share.

Downside scenarioOur downside scenario would see extensive competition andsubscriber loss to FTTH competitors. Putting Zegona on adepressed multiple of 7x FY17E EBITDA would value the stockat £1.20 per share.

Investment summaryZegona is a cable company that is facing an increase incompetition from the FTTH players Telefonica, Orange andVodafone. In the Asturias region (northwest Spain), the impactof FTTH competition has been seen. Telecable's broadband netadds have been diminishing and have suffered from a weakfixed-mobile convergence proposition. However, we believethis is priced in as the company trades at a discount to peers.We expect the stock will re-rate given the upside in mobile andM&A optionality

We consider that Telecable's outlook is challenging in thefixed side of the business. However, we do see top-line upsidedriven by mobile growth as mobile penetration is currentlylow.

We believe the risk of increased competition is already pricedin and we expect a re-rating as top-line growth improves.Additionally we think the low growth profile of Euskaltelshould be a driver of further consolidation between theregional cable operators.

Potential catalystBetter broadband performance due to an improved fixed-mobile convergence proposition. We see Zegona benefitingfrom regional cable consolidation if a Euskaltel-Zegona deal iscompleted.

RisksFurthermore, a faster increase in competition could generatelower trading multiples. Acceleration in the deploymentof alternative’s FTTH networks could generate lower-than-expected broadband losses and further cash flow reduction.


March 30, 2017 49

Key questions Our View

1. What is Zegona’s strategy? Zegona is an operating company that looks to buy Telecom assets (EV of £1bn-3bn) with a buy - fix and sell strategy. Currently Zegona’s main asset is Telecable, which it bought for €640m, hence Zegona’s stock price will be driven by the performance of the Spanish cable operator.

2. Are Telefonica, Orange and Vodafonedeploying fibre in the region whereTelecable operates?

The three main Spanish players (Telefonica, Orange and Vodafone) are deploying FTTH networks in Asturias. In comparison with other regions in the north of Spain such as Galicia and Basque country, Asturias has more advanced FTTH network deployment, with a larger FTTH footprint than cable. The company sees FTTH competition as one of the reasons for its underperformance in broadband adds.

3. Is there a change in the competitivelandscape for Telecable?

We do perceive a change in the competitive landscape. Asturias is a region in which cable had previously outperformed due to the strong regional brand perception of Telecable and network/service superiority vs. competitors. This has changed: Telefonica has better infrastructure based on FTTH, and Orange and Vodafone are deploying their own fibre networks.

4. What is Telecable’s TV strategy? Telecable had a different approach to TV than Euskaltel, as the company believes having the Spanish football league is important. Hence the company acquired content during 2016, but the effect on its P&L will be seen during 2H 2016 and FY 2017.

5. Is being an MVNO a risk forTelecable?

Telecable has just switched its MVNO contract from Vodafone to Telefonica, as Vodafone didn’t provide 4G access following the global policy of not giving 4G access at “any price”. Telecable believes that the new terms with Telefonica allow it to offer better fixed-mobile bundles and increase convergence penetration, driving top-line growth while having a sustainable mobile margin.

6. How does the managementcompensation structure works?

Management is entitled to compensation representing 15% of the value that they generate; this can be paid in shares or cash. The generated value is based on net shareholder invested capital (c£295m). In order for management to receive this compensation, Zegona shareholders must have at least 5% return per annum on their equity. Management is entitled to this compensation in five different vesting periods starting in August 2018. Compensation can take place before year three in case of a sale of Zegona with change of control. If there is a merger or deal in which Zegona receives shares from Euskatel, Zegona’s management would have to wait until August 2018 to calculate the value generated vs its invested capital less dividend payments.


March 30, 2017 50


2017 Segmental revenue analysis, % Group EBITDA (LHS) and margin (RHS), €m and %



Group capex/sales, % Group OpFCF (LHS) and margin (RHS), CHFm and %


Exhibit 4: Group equity FCF and Net/EBITDA

Group EBITDA to FCF analysis, €m Group net debt/EBITDA (LHS) and dividend coverage (RHS), %


Handset sale0%

Residential72%

SME + Large Accounts

28%

26.0

27.0

28.0

29.0

30.0

31.0

32.0

33.0

34.0

0

10

20

30

40

50

60

2016A 2017E 2018E 2019E 2020E

Group OpFCF Margin, %

15.50 16.00 16.50 17.00 17.50 18.00 18.50

2020E

2019E

2018E

2017E

2016A

Capex/sales, %

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2016A 2017E 2018E 2019E 2020ENet debt/EBITDA Dividend coverage

-10

0

10

20

30

40

50

60

70

80

90

2016A 2017E 2018E 2019E 2020E

EFCF Minorities Capex Other Tax Interest WC

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

2016A 2017E 2018E 2019E 2020ENet debt/EBITDA Dividend coverage


March 30, 2017 51

Facing reality, potential upside going forward What has changed for Telecable? Telecable has seen the effect of competition sooner than the other regional cable operators as FTTH deployment has advanced faster in Asturias. As a consequence, Telecable has seen a reduction of its broadband subscriber in recent years.

In the past, lower competition and best technology – Telecable has led the broadbandmarket due to its technological superiority vs. copper players.

Today, new FTTH/cable competition – FTTH deployment in Asturias is more advancedthan in other regions. The FTTH footprint is larger than cable and the network advantageof Telecable has eroded. Hence, alternative players (Orange, Vodafone) are more activein this market, looking to monetize their investments in fixed.

Lack of fixed-mobile convergence strategy – The company had an MVNO agreementwith Vodafone that didn’t allow it to be more active in the fixed-mobile convergencemarket with 4G access. Mobile data traffic is growing fast and Telecable needs goodterms for 4G access to offer high-data packages and at the same time be profitable.Hence, Telecable switched its MVNO agreement from Vodafone to Telefonica toimprove MVNO terms. We expect a better trend on the mobile front going forward as itsmobile penetration within the broadband base is low (55% over broadband vs 85% forEuskaltel).

The basics – 2015 market share structure Exhibit 5: Telecable is leading the fixed market in Asturias


Telecable is the third largest regional cable operator after Euskaltel and R cable (now owned by Euskaltel).

Movistar44%

Vodafone23%

Orange16%

Jazztel12%

Euskaltel2%

R2%

TeleCable1% Ono

0%


March 30, 2017 52

Zooming into market shares in Asturias Telecable operates in Asturias and had a market share of c39% in 2015, followed by Telefonica (Movistar) with 30%. In 2015 Telecable lost c2% market share, followed by Telefonica with c1.5% while Orange and Vodafone gained market share.

Exhibit 6: Telecable leads the broadband market in the Asturias country with a 39% market share

Asturias - Market share in 2015 (%) Asturias - Market share gain/losses in 2015 vs 2014 (%)


Cable – suffering from the FTTH effect In three years the FTTH footprint has gone from c30k to c800k access lines and cable net adds have underperformed.

FTTH update – In contrast to what happened in other regions in northern Spain (BasqueCountry/Galicia), the FTTH total access (including multiple suppliers) in Asturias hassurpassed that of cable.

Broadband losses – As FTTH deployment is more advanced in Asturias, Telecable hasbeen suffering from stronger competition from alternative players (Orange/Vodafone).

Zegona footprint vs competitors. Their network is 65% overbuilt with Telefonica and50% with Vodafone. This leaves the company with a 35% of their footprint where theyare the only network. The company does not expect deployments on those areas due tolow density of population.

Exhibit 7: In the Asturias cable access is below FTTH, hence higher competition (million)


Movistar30%

Vodafone10%

Orange13%

Jazztel6%

R0%

TeleCable39%

Resto2%

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

0.0

0.2

0.4

0.6

0.8

1.0

2010 2011 2012 2013 2014 2015

FTTH Cable


March 30, 2017 53

By analysing broadband net adds by technology, it can be seen that cable has underperformed. However, it is also clear that there has been a migration from DSL to FTTH.

Exhibit 8: In the Asturias region cable net adds are underperforming – (000)


Increased competition in the broadband market has had a negative effect on Telecable. We expect the pressure in broadband to continue; however, we should see a better trend in mobile subscribers and revenues as the company improves its fixed-mobile convergent portfolio under the new MVNO terms. We see headroom as Telecable mobile’s penetration within its broadband base is low (55% for Zegona vs 85% for Euskaltel).

Exhibit 9: Telecable broadband net adds are decreasing but mobile growth is strong

Broadband net adds, k Mobile net adds, k

Source: Company reports, RBC Capital Markets estimates. CNMC (1H16 statistics)

Telecable – two is better than one Cable consolidation has been a point of debate as the regional cable operators can gain further synergies and expand margins through consolidation. Euskaltel tried to acquire Telecable in 2015; however, Telecable was bought by Zegona for €640m (c10x EV/EBITDA).

-30

-20

-10

0

10

20

30

40

2008 2009 2010 2011 2012 2013 2014 2015


-2.0

-1.5

-1.0

-0.5

0.0

0.5

1.0

1.5

2.0

1Q15 2Q15 3Q15 4Q15 1Q16 2Q160.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

2Q15 3Q15 4Q15 1Q16 2Q16


March 30, 2017 54

We believe that as top-line growth becomes more challenging for Euskaltel,consolidation with Telecable is (owned by Zegona) is possible and could drive furthergrowth.

In our view Zegona management / experience (ex Virgin Media executives) and ambitioncan bring further growth opportunities. If the wholesale market works based on multiinfrastructure availability (TEF, VOD, Orange), the NewCo (Zegona+Euskaltel) couldextend their operation outside the north of Spain.

We don’t expect Vodafone to consolidate as the company recently acquired ONO for€6bn and is focused on its cable deployment.

When Zegona bought Telecable, they paid €640m of EV when FX was €1.45/£. Howeverthe sterling pound has devaluated (c€1.3/£) which should have a positive effect onTelecable’s valuation in pounds.

If Telecable is sold for €640m, the implicit share price of Zegona will be €1.82. If sold for€700m, 0.8x EBITDA higher, the new target price will be €2.0.


March 30, 2017 55

Valuation –price target of £1.70 We use a DCF to arrive to our price target of £1.70. Our weighted cost of capital is 8.1% with 2.0% perpetual growth assumptions. Our price target implies a EV/OpCF 2018E of 12.6x, still below its peer group on 13.1x. Our price target supports an Outperform rating.

Exhibit 10: Telecable DCF (€m) except value per share in £

Year end Dec. 2016A 2017E 2018E 2019E 2020E 2021E 2022E 2025E Terminal Year

EBIT 3 20 25 29 32 35 37 41

Taxation -1 -6 -7 -9 -10 -10 -11 -12

Capex -25 -26 -25 -26 -26 -26 -27 -28

D&A 54 47 46 43 43 43 43 42

WC 9 0 0 0 0 0 0 0

FCF 39 35 37 38 39 41 42 43 705

Number of years 0 0 1 2 3 4 5 8 8

Present value 0 35 33 31 30 28 23 378

WACC 8.1

Perpetual Growth 2.0


Consolidated EV (€) 609

2018E Net Debt, (€) -210

2018 NOL 0

FX: EUR:£, 2018E 0.83

Equity Value, £ 331

Number of shares, 2018 196

Value per share 1.7


We flex our valuation with terminal growth (1% to 3.0%) and WACC from (6% to 10%).

Exhibit 11: Sensitivity of valuation: terminal growth vs WACC


Risks to rating and price target Acceleration on the deployment of alternative’s FTTH networks could generate higher competition and more broadband losses than expected, lower top line growth and cash flow. In this case, the company should trade at lower multiples.

1.7 6.0 7.0 8.1 9.0 10.0

1.0 2.4 1.9 1.5 1.2 1.0

1.5 2.7 2.1 1.6 1.3 1.0

2.0 3.0 2.2 1.7 1.4 1.1

2.5 3.4 2.5 1.8 1.5 1.1

3.0 4.0 2.8 2.0 1.6 1.2

WACC (%)

Pe

rpe

tual

gro

wth

(%)


March 30, 2017 56

Company description Telecable is one of the main regional cable operators in northern Spain with a cable technology network covering most of the Asturias region. The company offers primarily bundled services of high-speed broadband, Pay TV, mobile & fixed services to residential as well as business customers.

Exhibit 12: Telecable – Key financials (€m)

Key Financials, €m 2015A 2016A 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2025E

Revenues 134 139 144 149 153 157 160 164 167 170 172

EBITDA 65 66 70 74 76 79 81 83 84 86 87


Net Income 13 -5 6 10 13 16 18 21 23 25 27

EPS 0.06 -0.02 0.03 0.05 0.07 0.08 0.09 0.11 0.12 0.13 0.14

DPS, GBp 0.00 0.05 0.05 0.07 0.05 0.05 0.05 0.05 0.05 0.05 0.05

Capex 29 25 26 25 26 26 26 27 27 28 28

OpFCF 36 40 45 49 51 53 55 56 57 58 59

Adjusted Equity FCF -4 12 27 30 31 33 35 37 38 40 41

Number of shares 196 196 196 196 196 196 196 196 196 196 196

Net debt/(cash) 252 252 232 210 186 160 133 103 72 40 6



March 30, 2017 57

Financials Below we layout our Profit & Loss account, Balance Sheet and Cashflow Statement.

Exhibit 13: Telecable: Profit & loss account

Profit & Loss Account (€ million) 2017E 2018E 2019E 2020E 2021E 2022E 2023E

Revenue 144 149 153 157 160 164 167

Reported EBITDA 70 74 76 79 81 83 84

Margin, % 49.0 49.5 50.0 50.3 50.6 50.6 50.6

Adjustment 0 0 0 0 0 0 0

Adjusted EBITDA 70 74 76 79 81 83 84

Depreciation and Amortisation -47 -46 -43 -43 -43 -43 -42

EBIT 20 25 29 32 35 37 38

Interests -11 -10 -10 -9 -8 -7 -6

Taxes -3 -4 -6 -7 -8 -9 -10

tax rate % 30.0 30.0 30.0 30.0 30.0 30.0 30.0

Net income 6 10 13 16 18 21 23


Exhibit 14: Telecable Cashflow statement

Cashflow Statement (€ million) 2017E 2018E 2019E 2020E 2021E 2022E 2023E

Profit before tax 9 14 19 23 26 30 33

D&A 47 46 43 43 43 43 42

Finance income 11 10 10 9 8 7 6

Adjustments 67 70 73 75 77 79 81

Interest paid -11 -10 -10 -9 -8 -7 -6

Income tax paid -3 -4 -6 -7 -8 -9 -10

Net Cashflows from Operating Activities 53 55 56 59 61 63 65

Acquisition of intangible assets -9 -7 -8 -8 -7 -7 -8

Acquisition of PP&E -17 -18 -18 -18 -19 -19 -20

Net Cash used in Investing Activities -26 -25 -26 -26 -26 -27 -27

Dividends payed -7 -7 -7 -7 -7 -7 -7

Net Cash used in Financing Activities -7 -7 -7 -7 -7 -7 -7

Cash & cash equivalents at beginning of period 22 42 65 88 114 142 171

Total change in cash 20 23 24 25 28 29 31

Net foreign exchange differences 0 0 0 0 0 0 0

Cash & cash equivalents at end of period 42 65 88 114 142 171 202



March 30, 2017 58

Exhibit 15: Telecable: Balance Sheet

Telecable Balance Sheet 2017E 2018E 2019E 2020E 2021E 2022E 2023E

PP&E 540 522 505 488 471 454 438

Intangible Assets 122 120 119 119 120 120 122

Financial assets 2 2 2 2 2 2 2

Non-current assets 664 644 626 609 592 576 561

Inventories 1 1 1 1 1 1 1

Trade receivables 15 15 15 15 15 15 15

Cash & cash equivalents 42 65 88 114 142 171 202

Current assets 58 81 104 130 158 187 218

Total Assets 722 724 730 739 750 763 779

Equity and Liabilities 0 0 0 0 0 0 0

Capital 3 3 3 3 3 3 3

Share premium 0 1 1 1 1 1 1

Retained earnings -26 -23 -18 -9 2 16 31

Other comprehensive income 385 385 385 385 385 385 385

Equity 362 366 372 380 391 405 420

Long/term borrowing and other 266 266 266 266 266 266 266

Deferred revenue 3 3 3 3 3 3 3

Deferred tax liabilities 51 51 51 51 51 51 51

Non-current liabilities 320 320 320 320 320 320 320

Short-term borrowings 11 11 11 11 11 11 11

Trade and other payables 27 27 27 27 27 27 27

Current income tax payable 0 0 0 0 0 0 0

Deferred revenue 0 0 0 0 0 0 0

Current liabilities 38 38 38 38 38 38 38

Total Equity and Liabilities 720 724 730 739 750 763 779

PP&E 540 522 505 488 471 454 438

Intangible Assets 122 120 119 119 120 120 122

Financial assets 2 2 2 2 2 2 2

Non-current assets 664 644 626 609 592 576 561

Inventories 1 1 1 1 1 1 1

Trade receivables 15 15 15 15 15 15 15



March 30, 2017 59

RBC comps Exhibit 30: RBC comps

P/E EV/EBITDA EV/OpFCF Equity FCF Yield Dividend Yield Net debt/EBITDA Company Share price Currency 2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E EURO & EM MEDIAN 21.5 18.5 17.5 6.7 6.6 6.3 15.6 14.0 12.5 5.3 5.5 7.2 4.3 4.5 4.7 2.1 2.1 2.0 Incumbents MEDIAN 16.0 16.4 14.8 6.9 6.7 6.5 15.1 14.7 12.6 5.8 6.1 6.6 4.8 4.7 4.9 2.1 2.3 2.2 BT 323.6 £p 12.7 11.3 9.7 6.5 6.2 5.8 11.6 10.4 9.3 8.6 8.4 10.8 4.7 5.2 5.7 1.2 1.0 0.8 DT 16.4 EUR 27.7 45.4 23.4 7.7 7.3 6.8 16.6 15.7 13.9 5.4 6.4 7.0 3.7 4.0 4.3 2.4 2.5 2.3 Elisa 33.0 EUR 20.5 19.9 18.7 11.4 11.0 10.4 17.8 18.1 16.0 1.2 4.5 5.5 4.5 4.5 5.1 2.0 2.1 2.0 KPN 2.8 EUR 42.9 24.1 17.5 6.8 6.6 6.2 13.5 12.6 12.0 8.9 7.5 8.3 15.6 5.3 5.9 2.8 2.5 2.3 Orange 14.6 EUR 13.2 16.7 15.1 5.5 5.5 5.3 12.1 12.4 11.5 0.4 5.8 5.6 4.1 4.5 4.8 1.9 1.9 1.8 Proximus 29.0 EUR 17.3 16.1 15.2 6.9 6.8 6.4 14.7 14.7 13.1 5.5 5.3 6.2 5.2 5.2 5.9 1.2 1.2 1.1 Swisscom 456.5 CHF 14.7 16.9 17.6 8.0 8.4 8.7 18.3 20.5 21.9 5.3 4.4 2.3 4.8 4.8 4.8 1.8 1.9 2.1 TDC 36.1 DKK 8.8 16.0 14.4 6.3 6.1 5.8 12.4 11.5 10.8 6.3 7.8 8.7 0.0 2.8 4.2 2.9 2.7 2.4 TI 0.8 EUR 10.3 15.7 13.1 5.7 5.5 5.2 14.5 17.2 11.7 3.5 1.6 7.6 0.0 0.0 0.0 3.3 3.2 3.0 TEF 10.4 EUR 21.8 14.1 13.6 8.4 7.3 7.1 20.6 14.6 13.9 7.0 6.7 6.1 5.3 3.8 3.8 3.2 2.7 2.6 TKA 6.3 EUR 10.0 19.6 13.9 5.9 5.6 5.3 13.6 12.3 11.9 9.1 8.5 8.4 0.8 3.2 0.8 1.7 1.5 1.3 Telenor 142.7 NOK 75.6 13.8 13.2 7.3 7.3 7.1 15.7 17.3 -25.8 6.1 3.0 -0.2 5.4 5.6 5.8 1.2 1.3 1.2 Telia 37.3 SEK 9.9 12.1 11.7 6.1 6.7 6.5 15.5 14.0 13.2 4.4 5.5 5.9 5.4 5.5 5.6 2.2 2.7 2.6 Vodafone 210.2 £p 18.4 42.7 31.6 7.0 7.0 6.8 15.8 15.4 13.6 6.2 6.9 8.6 6.1 6.1 6.2 2.6 2.6 2.6 Altnets MEDIAN 31.9 25.2 21.1 8.6 8.0 7.6 12.6 13.6 13.2 3.3 5.6 6.0 4.2 4.2 4.2 2.0 1.9 1.7 Bouygues 38.3 EUR 22.0 19.0 17.9 5.6 5.3 5.1 11.1 13.6 12.6 3.3 0.1 3.1 4.2 4.2 4.2 0.7 0.8 0.9 SKY 976.0 £p 15.6 17.4 14.3 11.6 10.8 9.2 22.9 20.3 16.0 4.2 5.6 6.4 3.4 3.4 3.7 3.2 2.8 2.3 Sunrise 76.3 CHF 39.5 42.1 35.3 8.5 8.2 8.0 12.4 13.6 13.2 6.8 7.3 7.9 4.3 4.6 5.2 2.8 2.6 2.4 Iliad 212.3 EUR 31.9 30.5 31.4 8.6 7.9 7.6 40.7 36.2 50.8 0.2 0.8 0.2 0.2 0.2 0.2 1.0 1.0 1.1 Ora. Bel. 20.0 EUR 28.2 23.3 21.1 5.3 5.1 4.8 12.6 11.0 11.1 3.1 8.8 8.0 2.5 3.0 3.3 1.3 1.0 0.7 TalkTalk 187.3 £p 19.9 13.6 9.9 8.7 8.0 6.9 15.2 10.8 10.9 7.9 11.0 11.3 8.5 8.5 8.5 2.6 2.3 2.0 TEF De 4.6 EUR 286.5 NM 155.3 6.1 6.5 6.4 11.7 13.3 12.8 6.8 5.8 6.0 5.5 7.4 8.8 0.3 0.4 0.4 Tele2 84.9 SEK 64.0 27.1 18.7 10.3 9.1 8.1 37.1 24.2 17.4 2.9 3.4 4.9 6.2 4.7 4.7 2.0 1.9 1.7 Masmovil 38.3 EUR 300.3 66.4 22.2 38.0 9.6 7.6 -139.3 115.4 38.0 1.4 -3.4 -1.2 0.0 0.0 0.0 17.5 4.2 3.4

Priced as of 29 March 2017, 2:45pm BST. Source: Company reports and RBC Capital Markets estimates, Datastream


March 30, 2017 60

Exhibit 30: RBC comps (cont’d)

P/E EV/EBITDA EV/OpFCF Equity FCF Yield Dividend Yield Net debt/EBITDA Company Share price Currency 2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E 2016E 2017E 2018E Cable 22.2 33.9 23.0 9.2 8.2 7.4 17.1 15.4 13.1 4.6 5.3 7.9 0.0 0.0 3.6 4.2 3.8 3.5 Altice 21.4 EUR 33.0 178.9 27.1 9.2 8.2 7.4 19.3 14.3 12.3 2.7 3.3 10.3 0.0 0.0 0.0 5.6 5.0 4.4 Com Hem 100.7 SEK 58.8 35.2 25.5 10.9 9.6 9.4 16.3 15.6 16.3 7.3 7.5 7.6 4.0 4.2 4.4 4.1 3.6 3.6 Liberty G 35.1 USD NM NM NM 7.4 8.8 8.2 17.1 18.5 15.9 6.4 4.9 5.1 0.0 0.0 0.0 4.5 5.3 4.9 LILAC 22.0 USD NM 32.6 17.4 9.5 7.0 6.6 19.9 15.4 14.5 -1.3 2.9 3.5 0.0 0.0 0.0 5.0 3.7 3.5 NOS 4.9 EUR 22.5 16.6 12.8 5.8 5.2 4.8 18.6 10.2 8.8 4.6 9.9 10.1 4.6 7.1 9.9 1.7 1.4 1.2 SFR 29.0 EUR -62.4 -32.5 22.4 6.8 7.0 6.2 17.0 16.7 12.7 4.0 5.3 7.9 0.0 0.0 0.0 3.8 4.1 3.5 Telenet 55.4 EUR NM 40.7 23.6 9.9 9.2 8.0 17.5 18.6 13.5 2.7 4.2 7.4 0.0 0.0 3.6 4.2 3.8 3.1 Euskaltel 9.7 EUR 21.9 23.1 20.8 9.6 9.2 8.9 14.6 13.6 13.1 9.1 8.2 8.4 3.7 4.1 4.5 4.4 4.0 3.8 Zegona 1.3 £p -53.1 43.5 26.2 7.8 7.0 7.1 12.7 11.0 9.7 4.8 10.4 11.6 3.4 3.4 5.1 3.8 3.3 2.8 EM 26.1 17.8 17.2 5.6 5.5 5.3 13.4 11.8 10.1 5.6 5.4 7.6 4.8 5.6 5.7 1.9 1.8 1.7 AMX 14.4 USD 90.4 19.1 20.6 6.3 5.7 5.5 15.8 13.2 12.4 15.0 6.3 7.2 1.9 2.0 1.7 2.5 2.2 2.0 Millicom 496.8 SEK 79.3 25.4 20.1 5.6 5.5 5.3 10.6 10.5 10.1 6.5 7.7 8.4 4.5 4.8 4.8 1.9 1.8 1.7 Oi 1.3 USD NM NM NM 6.6 2.7 2.8 9.2 4.1 4.1 NM NM NM NM NM NM 6.4 2.6 2.6 OTE 8.9 EUR 31.0 18.5 17.6 4.6 4.3 4.1 9.3 11.2 7.4 8.7 4.0 10.1 1.8 2.3 3.4 0.4 0.3 0.1 TIM Brasil 16.0 USD 36.0 43.1 30.0 5.2 4.9 4.5 38.1 19.5 13.9 NM NM 1.2 1.0 0.8 1.3 0.6 0.6 0.6 Turk Tel (consensus) 5.9 TRY 9.2 8.6 8.2 5.6 5.5 5.3 13.4 11.8 10.0 4.3 7.2 9.1 9.9 10.6 11.1 1.9 2.0 1.9 Turkcell (consensus) 12.2 TRY 10.7 10.1 9.3 6.5 6.3 5.7 16.8 14.0 11.4 1.8 3.5 5.7 5.6 6.4 7.5 1.0 1.3 1.2 VEON 3.9 USD 2.9 13.6 10.6 4.3 3.9 3.9 9.3 7.4 6.8 4.1 5.4 8.0 5.9 6.6 7.7 2.2 2.0 2.0 Vivo 14.8 USD 21.3 17.1 16.7 5.9 5.7 5.4 14.6 13.5 12.0 5.6 4.4 6.7 5.0 6.4 6.5 0.3 0.4 0.3 Towers 43.4 28.5 24.3 18.6 15.5 13.9 23.4 18.9 15.9 3.4 4.7 5.4 1.4 1.9 2.3 2.8 2.1 1.6 Cellnex 15.2 EUR 57.0 31.1 25.2 18.4 14.4 13.0 24.1 18.1 16.4 5.5 6.8 6.5 0.2 0.8 1.1 5.1 3.6 2.8 Inwit 4.8 EUR 29.8 25.9 23.5 18.8 16.6 14.8 22.7 19.6 15.4 1.4 2.5 4.2 2.6 3.0 3.5 0.6 0.6 0.4 Satellites 11.5 15.8 15.8 8.8 9.1 9.0 17.0 18.6 13.9 6.5 4.8 8.5 5.4 5.6 5.8 3.4 3.4 3.2 Inmarsat 822.0 £p 18.9 21.1 20.1 8.5 9.2 9.0 17.7 36.5 33.5 5.9 0.8 0.8 5.3 5.5 5.8 2.4 2.8 2.9 Intelsat 4.3 USD 0.5 7.8 3.6 9.0 9.0 9.0 16.8 15.5 13.0 NM NM 32.3 0.0 0.0 0.0 8.7 8.7 8.7 Eutelsat 19.7 EUR 14.0 16.1 14.4 7.3 7.3 7.1 11.9 12.3 11.9 6.5 8.4 8.9 5.6 5.6 5.8 3.3 3.2 3.0 SES 20.0 EUR 9.0 15.5 17.2 9.9 9.8 9.3 17.2 21.8 14.8 12.3 4.8 8.1 6.7 6.9 7.1 3.5 3.6 3.4 Viasat 65.3 USD 147.8 121.0 NM 14.2 13.1 12.1 -99.2 -22.9 -22.8 -3.7 -4.7 -6.8 0.0 0.0 0.0 2.7 2.3 2.8

Note: Telia multiple reflects valuation ex-Eurasia. Priced as of 29 March 2017, 2:45pm BST. Source: Company reports, RBC Capital Markets estimates and Datastream for consensus estimates


March 30, 2017 61

Required disclosures

Non-U.S. analyst disclosureJulio Arciniegas, Jonathan Dann, Wilton Fry and Irina Idrissova (i) are not registered/qualified as research analysts with the NYSEand/or FINRA and (ii) may not be associated persons of the RBC Capital Markets, LLC and therefore may not be subject to FINRARule 2241 restrictions on communications with a subject company, public appearances and trading securities held by a researchanalyst account.

Conflicts disclosuresThis product constitutes a compendium report (covers six or more subject companies). As such, RBC Capital Markets chooses toprovide specific disclosures for the subject companies by reference. To access conflict of interest and other disclosures for thesubject companies, clients should refer to https://www.rbccm.com/GLDisclosure/PublicWeb/DisclosureLookup.aspx?entityId=1.These disclosures are also available by sending a written request to RBC Capital Markets Research Publishing, P.O. Box 50, 200 BayStreet, Royal Bank Plaza, 29th Floor, South Tower, Toronto, Ontario M5J 2W7 or an email to [email protected].

The analyst(s) responsible for preparing this research report received compensation that is based upon various factors, includingtotal revenues of the member companies of RBC Capital Markets and its affiliates, a portion of which are or have been generatedby investment banking activities of the member companies of RBC Capital Markets and its affiliates.

Distribution of ratingsFor the purpose of ratings distributions, regulatory rules require member firms to assign ratings to one of three rating categories- Buy, Hold/Neutral, or Sell - regardless of a firm's own rating categories. Although RBC Capital Markets' ratings of Top Pick(TP)/Outperform (O), Sector Perform (SP), and Underperform (U) most closely correspond to Buy, Hold/Neutral and Sell, respectively,the meanings are not the same because our ratings are determined on a relative basis (as described above).

Distribution of ratings

RBC Capital Markets, Equity Research

As of 31-Dec-2016

Investment Banking

Serv./Past 12 Mos.

Rating Count Percent Count Percent

BUY [Top Pick & Outperform] 824 51.38 289 35.07

HOLD [Sector Perform] 676 42.14 141 20.86

SELL [Underperform] 104 6.48 11 10.58

Conflicts policyRBC Capital Markets Policy for Managing Conflicts of Interest in Relation to Investment Research is available from us on request.To access our current policy, clients should refer tohttps://www.rbccm.com/global/file-414164.pdfor send a request to RBC Capital Markets Research Publishing, P.O. Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, SouthTower, Toronto, Ontario M5J 2W7. We reserve the right to amend or supplement this policy at any time.

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March 30, 2017 62

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RBC Capital Markets is the business name used by certain branches and subsidiaries of the Royal Bank of Canada, including RBC Dominion Securities Inc., RBCCapital Markets, LLC, RBC Europe Limited, Royal Bank of Canada, Hong Kong Branch and Royal Bank of Canada, Sydney Branch. The information contained in thisreport has been compiled by RBC Capital Markets from sources believed to be reliable, but no representation or warranty, express or implied, is made by RoyalBank of Canada, RBC Capital Markets, its affiliates or any other person as to its accuracy, completeness or correctness. All opinions and estimates contained in thisreport constitute RBC Capital Markets' judgement as of the date of this report, are subject to change without notice and are provided in good faith but withoutlegal responsibility. Nothing in this report constitutes legal, accounting or tax advice or individually tailored investment advice. This material is prepared for generalcirculation to clients and has been prepared without regard to the individual financial circumstances and objectives of persons who receive it. The investments orservices contained in this report may not be suitable for you and it is recommended that you consult an independent investment advisor if you are in doubt aboutthe suitability of such investments or services. This report is not an offer to sell or a solicitation of an offer to buy any securities. Past performance is not a guideto future performance, future returns are not guaranteed, and a loss of original capital may occur. RBC Capital Markets research analyst compensation is basedin part on the overall profitability of RBC Capital Markets, which includes profits attributable to investment banking revenues. Every province in Canada, state inthe U.S., and most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offeredto their residents, as well as the process for doing so. As a result, the securities discussed in this report may not be eligible for sale in some jurisdictions. RBCCapital Markets may be restricted from publishing research reports, from time to time, due to regulatory restrictions and/ or internal compliance policies. If thisis the case, the latest published research reports available to clients may not reflect recent material changes in the applicable industry and/or applicable subjectcompanies. RBC Capital Markets research reports are current only as of the date set forth on the research reports. This report is not, and under no circumstancesshould be construed as, a solicitation to act as securities broker or dealer in any jurisdiction by any person or company that is not legally permitted to carry on thebusiness of a securities broker or dealer in that jurisdiction. To the full extent permitted by law neither RBC Capital Markets nor any of its affiliates, nor any otherperson, accepts any liability whatsoever for any direct or consequential loss arising from any use of this report or the information contained herein. No mattercontained in this document may be reproduced or copied by any means without the prior consent of RBC Capital Markets.

Additional information is available on request.

To U.S. Residents:This publication has been approved by RBC Capital Markets, LLC (member FINRA, NYSE, SIPC), which is a U.S. registered broker-dealer and which acceptsresponsibility for this report and its dissemination in the United States. Any U.S. recipient of this report that is not a registered broker-dealer or a bank acting ina broker or dealer capacity and that wishes further information regarding, or to effect any transaction in, any of the securities discussed in this report, shouldcontact and place orders with RBC Capital Markets, LLC.


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To Canadian Residents:This publication has been approved by RBC Dominion Securities Inc.(member IIROC). Any Canadian recipient of this report that is not a Designated Institution inOntario, an Accredited Investor in British Columbia or Alberta or a Sophisticated Purchaser in Quebec (or similar permitted purchaser in any other province) andthat wishes further information regarding, or to effect any transaction in, any of the securities discussed in this report should contact and place orders with RBCDominion Securities Inc., which, without in any way limiting the foregoing, accepts responsibility for this report and its dissemination in Canada.To U.K. Residents:This publication has been approved by RBC Europe Limited ('RBCEL') which is authorized by the Prudential Regulation Authority and regulated by the FinancialConduct Authority ('FCA') and the Prudential Regulation Authority, in connection with its distribution in the United Kingdom. This material is not for generaldistribution in the United Kingdom to retail clients, as defined under the rules of the FCA. However, targeted distribution may be made to selected retail clients ofRBC and its affiliates. RBCEL accepts responsibility for this report and its dissemination in the United Kingdom.To German Residents:This material is distributed in Germany by RBC Europe Limited, Frankfurt Branch which is regulated by the Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin).To Persons Receiving This Advice in Australia:This material has been distributed in Australia by Royal Bank of Canada - Sydney Branch (ABN 86 076 940 880, AFSL No. 246521). This material has been preparedfor general circulation and does not take into account the objectives, financial situation or needs of any recipient. Accordingly, any recipient should, before acting onthis material, consider the appropriateness of this material having regard to their objectives, financial situation and needs. If this material relates to the acquisitionor possible acquisition of a particular financial product, a recipient in Australia should obtain any relevant disclosure document prepared in respect of that productand consider that document before making any decision about whether to acquire the product. This research report is not for retail investors as defined in section761G of the Corporations Act.To Hong Kong Residents:This publication is distributed in Hong Kong by Royal Bank of Canada, Hong Kong Branch, which is regulated by the Hong Kong Monetary Authority and the Securitiesand Futures Commission ('SFC'), RBC Investment Services (Asia) Limited and RBC Investment Management (Asia) Limited, both entities are regulated by the SFC.Financial Services provided to Australia: Financial services may be provided in Australia in accordance with applicable law. Financial services provided by the RoyalBank of Canada, Hong Kong Branch are provided pursuant to the Royal Bank of Canada's Australian Financial Services Licence ('AFSL') (No. 246521.)To Singapore Residents:This publication is distributed in Singapore by the Royal Bank of Canada, Singapore Branch, a registered entity granted offshore bank licence by the MonetaryAuthority of Singapore. This material has been prepared for general circulation and does not take into account the objectives, financial situation, or needs of anyrecipient. You are advised to seek independent advice from a financial adviser before purchasing any product. If you do not obtain independent advice, you shouldconsider whether the product is suitable for you. Past performance is not indicative of future performance. If you have any questions related to this publication,please contact the Royal Bank of Canada, Singapore Branch. Royal Bank of Canada, Singapore Branch accepts responsibility for this report and its disseminationin Singapore.To Japanese Residents:Unless otherwise exempted by Japanese law, this publication is distributed in Japan by or through RBC Capital Markets (Japan) Ltd. which is a Financial InstrumentsFirm registered with the Kanto Local Financial Bureau (Registered number 203) and a member of the Japan Securities Dealers Association ("JSDA").

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