IT, Hungary 26 May 2021 Sponsored research report
4iG Initiation of coverage
Valuation range: HUF 782-996/share The rise of a Hungarian technology star
We initiate sponsored research coverage of 4iG, and we see the company as a compelling growth story (a 2020-23E EBITDA CAGR of 34%), with Expected events results expansion stemming from organic growth and market consolidation via numerous M&A. While it is the No.2 player in the 2Q21 results 31 August segment currently, by 2022E, this could result in 4iG becoming the No.1 3Q21 results 25 November IT company in Hungary and a relevant player in the CEE and Balkan region, in our view. We appreciate 4iG’s strategy, aimed at transforming Key data from commodity-like services to more sophisticated technological segments, including telecoms services, data centres, defence and Share price HUF 604 satellite services. On our estimates, 4iG trades at a 24% discount vs. its Market Cap HUF 56.8bn 3M ADTV HUF 42.3m peers on 2021E EV/EBITDA and 39-44% discounts on the 2022-23E Free float 35% EV/EBITDAs. We see the potential fair valuation range at HUF 782- Shares outstanding 94m 996/share vs. its current share price of HUF 604. Major S/holder Gellért Jászai, CEO: 62% Bloomberg Code 4iG HB Second-largest IT integration company in Hungary. 4iG offers SI&IT BUX Index 46,397 services, managed services and the outsourcing of IT operations. It is the fastest-growing Hungarian IT company (102% 2018-20 sales CAGR), with a strategic goal of replacing T-Systems as the No.1 IT systems integrator in Price performance Hungary by 2022E, and a significant player in the CEE and Balkan region. It 52-w range HUF 488-716 aims to achieve this through both organic growth and M&A, and has been 52-w performance -4.3% executing its strategy consistently: in 2020, it acquired three companies and Relative performance -36.1% co-founded CarpathiaSat JV; while, in 1Q21, it signed another five investment agreements. 4iG 12M share price performance Transforming into a more sophisticated IT services company. 4iG’s 900 BUX Index Rebased 4IG further growth potential should stem from international expansion and the 850 800 diversification of its current services portfolio, as it is aiming towards more 750 sophisticated, value-added IT services (in 2020, 59% of revenues came from 700 hardware & software sales). Its further business diversification should stem 650 600 from its entry into: data centres, through the DTSM acquisition; defence, where 550 the first step is the investment in Rotor & Cams; satellite services, through the 500 CarpathiaSat JV; and telecoms services, via the HDT and DIGI HU 450 400 acquisitions (the latter not included in our model yet). We forecast the share of May-20 Aug-20 Nov-20 Feb-21 May-21 IT services in revenues to increase from 41% in 2020 to 65% in 2023E. DIGI HU acquisition and CarpathiaSat JV – the most transformative projects for 4iG. The company holds a 51% stake in CarpathiaSat, which is
aiming to launch a satellite into geostationary Earth orbit in 2024E. In March 2021, 4iG signed an agreement to acquire DIGI HU, a telco with 2.5m RGUs and HUF 19bn in EBITDA in 2020. We believe the DIGI HU acquisition and the CarpathiaSat JV offer material upside for 4iG’s equity story. Due to a lack of data at the current stage of development, however, we do not incorporate either in our forecasts.
EBITDA margin to expand from 9% in 2020 to 11% in 2023E. We expect 4iG to record a 34% 2020-23E EBITDA CAGR. This is on the back of a growing top line, driven by organic expansion (we estimate a 2020-23E organic sales
CAGR of 16%), and the consolidation of the businesses acquired in 2020- 1Q21. The latter adds HUF 15.3bn, HUF 24.3bn and HUF 27.2bn to our sales forecasts in 2021-23E, respectively. Valuation range at HUF 782-996/share. Our valuation range is based on a blend of our comparative valuation, using the median 2021-23E P/E multiples (a mid-point of HUF 996), the median 2021-23E EV/EBITDAs (a mid-point of HUF 832) and our DCF model, implying a fair value of HUF 782. On our estimates, 4iG trades at a 24% discount vs. its peers on 2021E EV/EBITDA and 39-44% discounts on the 2022-23E EV/EBITDAs.
Year Revenues EBITDA NI EPS FCFPS ND/EBITDA FCF yield DPS Div yield P/E EV/EBITDA HUFbn HUFbn HUFbn HUF HUF x % HUF % x x 2020 57.3 5.0 3.4 36.1 9.7 -0.6x 1.6% 24 4.0% 16.7x 10.7x EQUITY 2021E 83.5 8.0 5.2 50.8 -48.0 -0.1x -8.6% 26 4.3% 11.0x 7.0x 2022E 102.7 10.4 7.2 70.5 64.1 -0.5x 11.5% 36 5.9% 7.9x 5.1x RESEARCH 2023E 115.1 12.1 8.5 83.1 74.4 -0.7x 13.4% 42 7.0% 6.7x 4.1x Analysts: Piotr Raciborski, CFA; Pawel Wieprzowski, PhD Warsaw: +48 222 221 551 E-mail: [email protected]; [email protected] Website: www.wood.com
Contents
Company snapshot – valuation range: HUF 782-996 ...... 3
Company description ...... 4
The Hungarian IT market...... 16
Risks ...... 20
Valuation range at HUF 782-996/share ...... 21
Financial forecasts ...... 25
Financials ...... 28
Important disclosures ...... 30
Closing Prices as of 24 May 2021
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4iG 2 WOOD & Company
Company snapshot – valuation range: HUF 782-996
4IG SHARE PRICE PERFORMANCE COMPANY DESCRIPTION Bloomberg ticker 4IG HB 4iG is the second-largest IT integration company in Hungary in terms of revenue and 900 BUX Index Rebased 4IG Closing price, HUF 604 850 employment size, operating since 1995. The company offers SI&IT services (digitalisation Valuation range, HUF 782-996 800 750 solutions for specific industries; custom solutions and development capabilities; IT Shares outstanding, m 94.0 700 infrastructure, including data centre, multicloud centralised and distributed systems, and Market cap, HUF bn 56.8 650 Free float 35% 600 client solutions), as w ell as managed services and the outsourcing of IT operations. In 3M ADTV, HUF m 42.3 550 52 Week performance -4.3% 500 2020, 4iG generated sales of HUF 57.3bn and HUF 5.0bn in EBITDA, and employed (directly 52 Week relative performance -36.1% 450 and indirectly) 924 employees as of end-2020. 4iG listed on the Budapest Stock Exchange 52 Week Range, HUF 488-716 400 May-20 Aug-20 Nov-20 Feb-21 May-21 in 2005. The company’s main shareholder is Gellert Jaszai, its CEO, w ith a 62% stake. RATIOS
PER SHARE RATIOS, HUF 2018 2019 2020 2021E 2022E 2023E DUPONT ANALYSIS 2018 2019 2020 2021E 2022E 2023E Number of shares (m) 19 94 94 102 102 102 Net margin 0.7% 7.0% 5.9% 6.2% 7.0% 7.4% EPS 5.4 30.8 36.1 50.8 70.5 83.1 Asset turnov er 1.67x 1.71x 1.51x 1.19x 1.26x 1.27x FCFPS -42.2 61.8 9.7 -48.0 64.1 74.4 ROA 1.2% 12.0% 9.0% 7.4% 8.8% 9.3% BVPS 145 59 78 149 195 242 Lev erage 3.09x 4.39x 4.93x 4.42x 3.90x 3.46x DPS, year of record 0.0 21.8 24.0 25.8 35.9 42.2 ROE 3.7% 52.7% 44.2% 32.7% 34.4% 32.3%
FINANCIAL RATIOS 2018 2019 2020 2021E 2022E 2023E VALUATION RATIOS 2018 2019 2020 2021E 2022E 2023E EBITDA margin 6.0% 9.9% 8.8% 9.6% 10.1% 10.5% EV/Sales 4.2x 1.3x 0.9x 0.7x 0.5x 0.4x Gross margin 39.6% 27.6% 28.6% 33.2% 35.0% 35.7% EV/EBITDA 69.4x 12.9x 10.7x 7.0x 5.1x 4.1x EBIT margin 1.7% 8.1% 7.3% 8.1% 8.5% 8.8% P/BV 20.9x 10.2x 7.8x 3.7x 2.9x 2.3x Net margin 0.7% 7.0% 5.9% 6.2% 7.0% 7.4% P/E 557.1x 19.6x 16.7x 11.0x 7.9x 6.7x Net debt/EBITDA 1.9x -1.0x -0.6x -0.1x -0.5x -0.7x Net debt/equity 0.6x -0.7x -0.4x -0.1x -0.3x -0.4x Asset turnov er 1.7x 1.7x 1.5x 1.2x 1.3x 1.3x FCF yield -1.4% 10.2% 1.6% -8.6% 11.5% 13.4% Capex/deprecation -0.2x -2.0x -3.0x -8.1x -1.3x -1.5x Dividend recorded yield 0.0% 3.6% 4.0% 4.3% 5.9% 7.0% Op. cash f low/capex 5.6x -4.9x -1.3x -0.6x -4.2x -3.6x Div idend pay -out ratio 0% 69% 65% 50% 50% 50%
COMPANY FINANCIALS INCOME STATEMENT, HUF bn 2018 2019 2020 2021E 2022E 2023E BALANCE SHEET, HUF bn 2018 2019 2020 2021E 2022E 2023E Revenues 14.0 41.1 57.3 83.5 102.7 115.1 PP&E 0.1 0.3 0.8 0.8 0.8 0.8 Other operating income 0.5 0.4 0.5 0.5 0.5 0.5 Goodwill and intangibles 1.2 0.9 2.0 11.0 11.4 12.3 Costs of goods and serv ices sold -8.9 -30.1 -41.4 -56.3 -67.3 -74.5 Other 0.2 0.7 1.2 1.6 1.6 1.6 Gross margin 5.5 11.4 16.4 27.7 35.9 41.0 Total non current assets 1.6 1.9 4.0 13.4 13.8 14.8 Operating costs -13.6 -37.4 -52.7 -76.0 -92.8 -103.4 Cash and cash equiv alents 0.2 6.2 7.2 20.5 24.5 28.5 Operational expenditures -1.4 -1.8 -2.5 -4.7 -7.4 -8.9 Trade receiv ables 4.3 12.9 17.5 25.5 31.4 35.1 Staf f costs -3.1 -5.4 -8.7 -14.7 -17.8 -19.6 Inv entories 0.2 0.5 3.4 4.9 6.0 6.7
Other expenditures -0.2 -0.1 -0.2 -0.3 -0.3 -0.4 Other current assets 2.1 2.5 5.8 5.8 5.8 5.8 EBITDA 0.8 4.1 5.0 8.0 10.4 12.1 Total current assets 6.8 22.2 33.9 56.7 67.7 76.1 D&A -0.6 -0.7 -0.8 -1.3 -1.6 -2.0 Total assets 8.4 24.1 37.9 70.2 81.5 90.9 EBIT 0.2 3.3 4.2 6.8 8.8 10.2 Net f inance costs 0.0 0.0 0.0 -0.3 0.3 0.5 Shareholders' equity 2.7 5.6 7.3 15.2 19.8 24.7 PBT 0.2 3.3 4.2 6.5 9.1 10.7 Non-controlling interest 0.0 -0.1 0.4 0.6 1.1 1.5 Income tax -0.1 -0.5 -0.7 -1.1 -1.5 -1.7 Total equity 2.7 5.5 7.7 15.9 20.9 26.2 Minorities 0.0 -0.1 0.0 -0.3 -0.4 -0.5 Debt LT 0.0 0.3 0.5 16.0 16.0 16.0 Net profit 0.1 2.9 3.4 5.2 7.2 8.5 Def erred tax liabilities 0.0 0.0 0.0 0.0 0.0 0.0 CASH FLOW STATEMENT, HUF bn 2018 2019 2020 2021E 2022E 2023E Other non-current liabilities 0.0 0.1 0.5 0.5 0.5 0.5 CF f rom operations -0.7 7.2 3.3 5.8 8.6 10.5 Total non-current liabilities 0.0 0.4 1.1 16.5 16.5 16.5 o/w depreciation 0.6 0.7 0.8 1.3 1.6 2.0 Debt ST 1.8 1.9 3.5 3.5 3.5 3.5 o/w change in WC -0.2 0.5 -0.2 -0.9 -0.7 -0.4 Trade pay ables 2.2 11.6 18.9 27.5 33.9 37.9 CF f rom inv estments -0.1 -1.4 -2.4 -10.7 -2.1 -2.9 Other current liabilities 1.7 4.8 6.7 6.7 6.7 6.7 o/w capex -0.1 -1.5 -2.5 -10.2 -2.1 -2.9 Total current liabilities 5.7 18.2 29.1 37.8 44.1 48.1 CF f rom f in. activ ities 0.6 0.3 0.1 18.2 -2.6 -3.6 Total liabilities 5.7 18.6 30.2 54.3 60.6 64.7 o/w div idends 0.0 0.0 -2.0 -2.2 -2.6 -3.6 Total liabilities&equity 8.4 24.1 37.9 70.2 81.5 90.9 o/w net change in debt 0.7 0.1 1.7 15.5 0.0 0.0 Net change in cash -0.1 6.1 1.0 13.3 3.9 4.0 Gross debt 1.8 2.2 4.0 19.5 19.5 19.5 FCF -0.8 5.8 0.9 -4.9 6.5 7.6 Net debt 1.6 -4.0 -3.2 -1.1 -5.0 -9.0
OPERATIONS Revenues by segment (HUFbn) 2018 2019 2020 2021E 2022E 2023E EBIT by segment (HUFbn) 2018 2019 2020 2021E 2022E 2023E Hardware and sof tware sales 7.6 29.9 33.8 36.5 38.7 40.6 Hardware and sof tware sales 0.1 2.7 3.7 4.0 4.2 4.4 IT serv ices 6.4 11.1 23.4 46.9 63.9 74.3 IT serv ices 1.4 2.7 3.9 7.9 11.0 13.0 Other 0.0 0.2 0.2 0.2 0.2 0.2 Other -0.1 0.3 0.5 0.5 0.5 0.5 % of total sales EBIT margin (%) Hardware and sof tware sales 54% 73% 59% 44% 38% 35% Hardware and sof tware sales 1% 9% 11% 11% 11% 11% IT serv ices 45% 27% 41% 56% 62% 65% IT serv ices 22% 24% 17% 17% 17% 17%
4iG 3 WOOD & Company
Company description The second-largest IT company in Hungary 4iG is the second-largest IT integration company in Hungary in terms of revenue and employment size, behind T-Systems. It was founded in 1995 as FreeSoft, and was listed on the Budapest Stock Exchange in 2004. The company offers SI&IT services, as well as the managed services and outsourcing of IT operations. SI&IT services include: digitalisation solutions for specific industries; custom solutions and development capabilities; IT infrastructure, including data centres; multi-cloud centralised and distributed systems; and client solutions. In 2020, 4iG generated sales of HUF 57.3bn, EBITDA of HUF 5.0bn, and employed (directly and indirectly) 924 employees as of end-2020. The company’s main shareholder is Gellért Jászai, the CEO of the company, who holds a 62% stake.
Sales evolution (HUF bn, %) EBITDA evolution (HUF bn, %)
70.0 250% 6.0 12% 194% 10% 5.0 60.0 200% 5.0 9% 10% 50.0 4.1 150% 4.0 8% 40.0 5% 6% 100% 3.0 6% 30.0 39% 4% 50% 2.0 4% 20.0 8% -5% -17% 0.9 2% 0.8 10.0 0% 1.0 0.6 2% 0.3 16.5 15.7 16.9 14.0 41.1 57.3 0.0 -50% 0.0 0% 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020
Sales (HUFbn, lhs) Change yoy (%, rhs) EBITDA (HUFbn, lhs) EBITDA margin (%, rhs)
Source: Company data, WOOD Research
Ownership structure (as of 13 April 2021)
Free float Gellert Jaszai 35% (through KZF and Manhattan) 62%
Treasury shares 3%
Source: Company data, WOOD Research
4iG has been listed on the BUX since 2004, although its results and share price were stagnant until 2018. The boost came when Lorinc Meszaros, through financial vehicles Konzum, Repro and Opus, acquired a 63% stake in the company in 2018, beginning the transformation of the business. The management team was changed, with Gellért Jászai becoming Chairman of 4iG in July 2018 and CEO in March 2019. He started the company’s transformation, including: improving efficiency; changes in the group structure (including the merger of Axis, HumanSoft and Mensor into 4iG); and focusing on large, more profitable contracts, mainly in the public sector. Moreover, 4iG has invested heavily in resources, through the hiring of employees with certain competencies, and via acquisitions in value-added services (such as software development) and recurring revenues in outsourcing (DTSM acquired in November 2020; Poli Computer – preliminary agreement signed in February 2021). The company has since started to report strong organic growth, supported by M&A, and increased its sales from HUF 14.0bn in 2018 to HUF 57.3bn in 2020. Since 2019, the current CEO has been increasing his stake in 4iG gradually, through purchasing shares from entities controlled by Lorinc Meszaros. The last such transaction happened in July 2020: Gellért Jászai, through his investment vehicles, IKON Investment Fund Management and KZF Asset Management, purchased the remaining 21.6% stake from OPUS GLOBAL and Konzum PE; and, as a result, increased his total share in 4iG to 62%.
4iG 4 WOOD & Company
Key milestones
The company was founded in 1995 as FreeSoft 1995
Listed on the Budapest Stock Exchange 2004
Multiple accquisitions between 2004 and 2008: HumanSoft, Axis, BankSoft 2009
Rebranding of FreeSoft to 4iG 2012
2013- Stable organic growth focused on the integration of new subsidiaries 2017 Change in ownership: Konzum, Opus and Repro (owned by Lorinc Meszaros) held a 63% stake 2018 as of end-2018 • Merger of Axis, HumanSoft, and Mensor 3D into 4iG. Acquisition of Veritas Consulting 2019 • Lorinc Meszaros reduced indirect stake in 4iG to 21.6%. CEO's stake increased to 40.2% • Acquisition of Innobyte, DTSM and TR Consult; launch of the CarpathiaSat JV 2020 • Opus and Konzum exit the company. Gellert Jászai increases his stake in 4iG to 62%
• Preliminary agreements to acquire Poli Computer, HDT and Spacenet; investment in rotors & 1Q21 cams; preliminary agreement on the DIGI HU acquisition
Source: Company data, WOOD Research
The first share price rise came in 2Q18, just after the change in 4iG’s shareholder structure, from HUF 45 at the beginning of the year to HUF 316 as of end-December 2018. In 1H19, 4iG’s share price was boosted additionally by market speculation regarding 4iG’s potential acquisition of T-Systems, the Hungarian IT leader, a subsidiary of Magyar Telekom. This speculation was cited by Vilaggazdasag, the Hungarian business daily, at the beginning of April 2019, and turned out to be true, as the two sides signed a preliminary deal in July 2019.
This was a strong lever for 4iG’s expansion plans and was welcomed by the market, which valued 4iG at over HUF 1k/share at its peak in mid-2019. The deal was terminated in December 2019, however, “following 4iGʼs initiative”, which triggered a negative market reaction, and the share price dropped to 4iG: share price performance (HUF) 1,400.0 1,200.0 1,000.0 800.0 600.0 400.0 200.0 0.0 Jul-18 Jul-19 Jul-20 Oct-18 Apr-19 Oct-19 Apr-20 Oct-20 Apr-21 Jun-18 Jan-19 Jun-19 Jan-20 Jun-20 Jan-21 Feb-19 Mar-19 Feb-20 Mar-20 Feb-21 Mar-21 Aug-18 Sep-18 Nov-18 Dec-18 Aug-19 Sep-19 Nov-19 Dec-19 Aug-20 Sep-20 Nov-20 Dec-20 May-19 May-20 May-21 May-18 Source: Bloomberg, WOOD Research 4iG 5 WOOD & Company Group structure 4iG owned seven subsidiaries as of end-2020: CarpathiaSat (satellite services), a 51% stake. In August 2020, 4iG created the CarpathiaSat JV with Antenna Hungary (a 44% stake) and New Space (5%). The aim is to launch a satellite into geostationary Earth orbit in 2024E, and to operate Hungary’s first satellite suitable for commercial, governmental and scientific research tasks. In 2020, the company generated sales of HUF 0m and an EBITDA loss of HUF 32m. HumanSoft Szerviz (hardware repairs), a 100% stake. Founded by 4iG in April 2019, this is a service partner of Dell, HP, Lenovo, Kingston, and repairs PCs, tablets, monitors, printers, etc. In 2020, the company generated sales of HUF 52m and EBITDA of HUF 7m. DOTO Systems (business process automation software), a 60% stake. DOTO Systems was established by 4iG in July 2019, as a JV with László Galambos (with 20 years’ experience in IT software development and consultancy), who was appointed CEO of the subsidiary. In 2020, it generated sales of HUF 629m and EBITDA of HUF 35m. TR Consulting (IT consulting), a 100% stake. 4iG acquired TR Consulting, which offers IT consultancy and cybersecurity services, in July 2020. It generated sales of HUF 647m and EBITDA of HUF 30m in 2020. Veritas Consulting (a SAP consulting firm), a 100% stake. Acquired by 4iG in September 2019, Veritas has PartnerEdge status, which also gives it the right to sell SAP licences. In 2020, it generated sales of HUF 643m and EBITDA of HUF 38m. Innobyte (software developer), a 70% stake. Acquired by 4iG in October 2020, Innobyte specialises in contact centre services, business intelligence, test automation, AI development, and database solutions. Its business comes primarily from the telecommunications, automotive, healthcare, agro-informatics, public administration, financial and banking IT segments. It is focused on both SMEs and large companies. It employs c.200 people, and generated sales of HUF 3,224m and EBITDA of HUF 527m in 2020. DTSM (data centres and cloud technologies), a 100% stake. 4iG acquired DTSM in November 2020. DTSM operates data centres and offers the installation, operation and integration of IT and telecommunications systems, as well as the construction and integration of cloud technologies. DTSM also has competencies in customer service desks, with 2,000 corporate customers daily. The company also had a supplier relationship with 4iG previously. In 2020, it generated sales of HUF 1,173m and EBITDA of HUF 70m. 4iG: organisational structure as of end-2020 4iG Veritas CarpathiaSat HumanSoft DOTO Systems TR Consulting Innobyte DTSM Consulting (51%) Szerviz (100%) (60%) (100%) (70%) (100%) (100%) Source: Company data, WOOD Research 4iG has continued with its M&A spree in 2021, thus far. It has signed another five M&A/investment agreements ytd, as follows: Rotors & Cams (drone systems), a 24% stake. 4iG acquired a 24% stake in R&C in January 2021. R&C offers the development, production and application of custom, optimised, multi-rotor, rigid and hybrid drone systems. It offers services mainly in the fields of cartography and geoinformatics, industrial diagnostics, disaster relief, agriculture and the environment. In 2020, it generated sales of HUF 4,342m and EBITDA of HUF 133m. Poli Computer (IT integration and outsourcing), a 100% stake. 4iG signed an agreement to acquire 100% of Poli Computer in February 2021. The stake is to be contributed to 4iG in kind by KZF Vagyonkezelő, and is due to close following the competition supervision procedures of the Hungarian Competition Authority. Poli Computer offers IT solutions and outsourcing services. In 2020, it generated sales of HUF 2,510m and EBITDA of HUF 218m. Hungaro DigiTel (telecommunications services), a 75% stake. In February 2021, 4iG signed an agreement to acquire a 75% stake in HDT. The transaction is due to be completed after the 4iG 6 WOOD & Company evaluation of the shares, the conclusion of the final share sale and purchase agreement, and the granting of the Hungarian Competition Authority’s approval. HDT is Hungary’s leading telecommunications services provider, as well as one of the leaders in the region. It provides VSAT and satellite broadcasting services through its satellite communications system. Its customers include major private sector companies (banks, television companies) and public customers. The company employs 45 people currently. In 2020, it generated sales of HUF 4,896m and EBITDA of HUF 3,101m. Spacenet (IT integration), a 70% stake. 4iG signed a preliminary agreement to acquire a 70% stake in Spacenet in March 2021, and concluded the final agreement in April 2021. Spacenet offers services including the implementation and operation of networks, IT security, collaboration and data centre infrastructure solutions, and has high-level automation and support. It is a Cisco GOLD partner, which allows it to provide support services to its customers based on its own competences. Spacenet employs 20 people currently, and its 2020 sales reached HUF 5,201m, while its EBITDA stood at HUF 583m. DIGI Hungary (convergent telecoms operator), a 100% stake. On 29 March 2021, 4iG entered into a preliminary, non-binding agreement with DIGI Communications to buy a 100% stake in its Hungarian unit. DIGI HU offers a broad services portfolio, covering cable TV, fixed internet and data, mobile telecoms services, fixed-line telephony and DTH services. As of end-2020, it served over 1.1m subscribers nationwide and had over 2.5m revenue generating units (RGUs), including 0.7m fixed-broadband, 0.9m pay-TV, 0.7m fixed-voice and 0.2m mobile subscribers. In 2020, DIGI’s consolidated revenues in Hungary stood at HUF 70bn (c.EUR 200m), and its adjusted EBITDA reached HUF 19bn (c.EUR 54m). Revenue structure, services portfolio and customer base 4iG breaks its sales structure into six main product lines: Hardware sales (51% of 2020 sales): reselling devices from Dell, Huawei, HP, Lenovo and Cisco, inter alia. Software sales (8%): software solutions from SAP and Oracle. Development (20%): developing custom software solutions. Operations (8%): IT outsourcing. Support, consulting (6%): infrastructure and security auditing, IT consultancy. Implementation (6%): a systems integration service including the installation of hardware and software. Revenues by service in 2020 Revenues by type in 2020 Implementati Other Recurring Software on 1% services sales 6% 14% 8% Support, consulting 6% Operation Hardware 8% sales 51% Non- Development recurring 20% services 86% Source: Company data, WOOD Research 4iG 7 WOOD & Company In the table below, we present an overview of the services offered by 4iG group. Services portfolio Digitalisation – vertical solutions Managed services Custom solutions IT Infrastructure Industry 4.0: Outsourcing: full IT, data centre, Complex projects: software Data centre, multi-cloud: planning, client, application and help desks. development, integration, project deployment, migration, optimisation; - Validation: pharmaceuticals and management, quality assurance. data storage, computing capacity, food industry quality assurance. IT remote monitoring: open source convergent infrastructure, HPC, Zabbix technology, hardware- Critical core systems: planning, - Track & trace: individual virtualisation; on-demand data centre infrastructure-application-cloud migration, operation. identification and tracking in the hardware capacity; private, public, monitoring service with 7x24 pharmaceuticals and food industry, Collaboration: document and and hybrid cloud central monitoring; attendance. and for consumer products. process management, real time backup and archiving; network PC fleet management: asset cooperation (video, chat). - Maintenance management: architecture, integration. rental and operation for a flexible scheduling maintenance windows in Data asset management planning: Digital workspace: PC/notebook/ monthly fee. industrial settings, process HR, physical assets; AI-based tablet/2:1, Client life cycle 360°, VDI, automatisation. GDPR compliance: data protection analysis, forecasting, self-service BI, RDS. with uniform management of data warehouse, big data. Utilities, energy sector: Hardware services & support business, legal and technical IT security consulting: BIA, risk - Mobile field maintenance working aspects, consultancy and continuous Security solutions: UTM, WAF, IPS, management, BCP, DR, training, environment: a combination of a updating on a monthly fee basis. SIEM, endpoint security, encryption, vulnerability assessment. special industry hybrid tablet- IDM, MDM, DLP, load balancer, VPN, BCP-DR service: inspection of IT notebook hardware and software MFA exposure and risk factors, preparing (cloud services). IT for catastrophes - continuously - Operational support for updated, tested and documented. maintenance staff working in external Perimeter defence UTM firewall locations. service: subscription-based Financial sector: managed security service including - Mandatory reporting + Credit hardware, software, updates, support Register (HITREG) system. and specialist operations and incident management. Based on - IT security consulting, risk & WatchGuard technology. compliance. Data centre hardware extended Public administration: warranty - Document management. Office 365 Backup: supplementary, 3D solutions: independent data backup and archiving for cloud-based team work. - 3D surveying and modelling. Managed security services: SOC- type outsourced IT security management, with SIEM-as-a- service, continuous vulnerability assessment, log analysis, stand-by incident management. Source: Company data, WOOD Research 4iG is the main IT supplier for the Hungarian public sector, which generated 73% of the company’s sales in 2020. The corporate segment generated 27%, of which 11ppts was large enterprises and 16ppts was SMEs. The main industries served by 4iG in 2020 were information and communications (20% sales) and public administration (29%). Its large non-government clients include Wizz Air, Unilever, TEVA and K&H. 4iG: revenues by industry in 2020 4iG: revenues by customer in 2020 Information, communicati SME Other on 16% 20% 20% Education 3% Manufacturing Large Financial 3% enterprise 11% and Transport, insurance Warehousing activities 5% 5% Health and Trade/ social care Commerce Consulting, 2% 8% Science, Public Public Legal Administratio 73% activities n 5% 29% Source: Company data, WOOD Research 4iG 8 WOOD & Company Key customers Source: Company data, WOOD Research Competitive advantages Since 2018, 4iG has been winning market share, thanks to its agility, efficiency, complexity of services, strong management, and strong local brand recognition, as one of the leading IT companies in Hungary and the only one listed. 4iG’s efficiency is visible in its average sales/employee ratio, which doubled between 2018 and 2020, to HUF 86m/employee. According to our estimates, the ratio in 2020 was over half again that of 4iG’s main competitor, T-Systems, which recorded a ratio of HUF 56m/employee, on our estimates, assuming 1,600 employees (cited in an index.hu article from July 2019) and sales of HUF 89.5bn recorded by MTelekom’s IT segment in 2020. 4iG emphasises that its employment structure, built up largely of full-time employees (while its competitors often use subcontractors), supports the company’s reputation of quality, flexibility and reliability among its customers. Almost 70% of these employees are technicians, consultants and highly-qualified engineers. Average number of employees (#) Average revenue/employee (HUF m) 800 100 90 86 86 700 667 80 600 70 481 60 500 47 399 50 42 42 374 373 38 400 350 40 30 300 20 200 10 100 0 2015 2016 2017 2018 2019 2020 0 2015 2016 2017 2018 2019 2020 Average annual sales/employee (HUFm) Source: Company data, WOOD Research 4iG is an IT one-stop-shop. The complexity of its offering and knowledge resources are reflected in its number of operated technologies – over 400+ developers employed by 4iG create customised solutions using: C#, .NET, Java, Python, JavaScript, TypeScript, Kotlin, Swift, Spring, Angular, Android, iOS, Oracle, MSSQL, PostgreSQL, MongoDB, MySQL, SharePoint, ElasticSearch, AWS, Google Cloud Platform, Docker, Kubernetes, Jira, Confluence, Bitbucket, JMeter, Git, Jenkins, Vagrant, Puppet, and Ansible. The company and its employees hold over 200 vendor and industry certifications (including certificates from such as: Dell, HPE, NetApp VMware, Cisco, Microsoft, F5, Barracuda, SAP HANA, AWS, Azure cloud, Veritas, Arcserve and Veeam, Oracle, MS SQL, and PostgreSQL). 4iG is a certified reseller of 32 vendors – we present the company’s technology partners in the graph below. 4iG 9 WOOD & Company 4iG: technology partners 4iG: security partners Source: Company data, WOOD Research The high quality of 4iG’s services is guaranteed by numerous certifications, including: the ISO 37001:2019 anti-corruption management system; ISO 9001:2015 quality management; ISO 27001:2013 information security; ISO /IEC 20000-1:2019 IT service management; ISO 14001:2013 environmental management; and NATO AQAP Military Quality Management. The company is also a member of the Global Sourcing Association and a supplier certified for Hungarian public procurement. Another advantage for 4iG is its good long-standing relations with the government, which is visible in the numerous state contracts that have been won by the company. In 2020, the public sector generated 73% of sales, vs. 62% in 2019. 4iG also founded CarpathiaSat JV in cooperation with state-controlled Antenna Hungary in 2020. We believe that 4iG is the preferred B2G supplier for rational reasons, considering the high quality and complexity of the services it offers, and because it is the largest IT group with Hungarian capital dominating the shareholder structure: a factor that seems to be gaining in importance, along with cyber-security. The company continues to be a preferred B2G supplier, and it has the following state contracts for 2H20-2Q21: Hungarian National Bank (HNB), 27 April 2021. The design and implementation of IT and meeting room infrastructure in the HNB’s K55 office building, which is compatible with CISCO systems and assists the work of employees in the real estate department, the functionality of the computer room and the meeting room, as well as the system support and licence tracking of the hardware and software in the building. Contract value: HUF 1.89bn. Digitális Kormányzati Ügynökség, 15 February 2021. The renewal, expansion and supplementation of SAP software licences and the provision of related product support services. Contract value: HUF 14.8bn. Magyar Nemzeti Bank (MNB), 2 February 2021. The implementation of the logistics system, providing the background for its entire Hungarian cash flow, and the data interrogator module forming part of the system, as well as operational support of the completed system for 60 months. In addition, it has a contract for the establishment of IT infrastructure for MNB at Buda Palota, for providing services for people working at that specific location, and the functionality of the computer room to be set up in the building, as well as system support and monitoring of the hardware and software components. Contract values: HUF 1.02bn and HUF 2.6bn, respectively. Ministry of Foreign Affairs and Trade, 30 December 2020. Manufacturer support and version control of the ministry’s united firewall and cyber defence system. Contract value: HUF 0.8bn. National Healthcare Service Centre, 29 December 2020. Central management and monitoring system for hospitals participating in the Healthy Budapest programme, within the framework of the network infrastructure development project, and the delivery and installation of the necessary hardware, software tools and necessary network licences. Contract value: HUF 1.8bn. Klebelsberg Centre, 29 September 2020. The procurement of computers and notebooks. As part of the project, 4iG will deliver 6,145 student PCs nationwide. Contract value: HUF 0.8bn. KTI Institute for Transport Sciences, 28 September 2020. The development of adult education programmes. Contract value: HUF 2.4bn. 4iG 10 WOOD & Company National Tax and Customs Administration of Hungary, 30 July 2020. ecommerce server infrastructure and licence acquisition; servers and storage purchases, and related services for the institution. Contract value: HUF 1.1bn. Digital Government Agency, 16 July 2020. The acquisition of display equipment and the provision of related services; the maximum quantity of the framework contract is 34,750 projectors and accessories and 3,700 interactive whiteboards. 4iG has also received state aid. In October 2020, the Ministry of Finance granted HUF 0.3bn of aid for the “Centre for Higher Education and Industrial Cooperation – Development of Research Infrastructure”, which 4iG has registered with the University of Pécs. The cost of the project amounted to HUF 0.55bn, so the grant covered 90%. Company strategy 4iG’s strategic goal is to become the No.1 IT system integrator in Hungary by 2022 (from No.2 currently and No.6 in 2018), and a significant player in the CEE and Balkan region. It hopes to achieve this through both organic growth and M&A, with its target areas being: technologies, including AI, blockchain, cybersecurity, digitalisation; Fintech and Industry 4.0; expansion into industry-specific software (transportation, banking, healthcare, agriculture and energetics); and the development of its own software solutions. The company has been executing its strategy consistently. In 2020, it acquired TR Consulting, DTSM and Innobyte, and co-founded the CarpathiaSat JV. It followed this in 1Q21 with the signing of another four preliminary acquisition agreements: Poli Computer, HDT, Spacenet, and DIGI HU. Considering 4iG’s strong growth outlook and the impact of the consolidation of the newly-acquired businesses (excluding DIGI HU, where the impact is still uncertain), we expect it to achieve its aim of becoming Hungary’s No.1 IT company by 2022E. In our model for Magyar Telekom, we expect its HU IT segment (consisting mainly of T-Systems, the current IT market leader in Hungary) to generate sales of HUF 98bn in 2022E (vs. HUF 86bn in 2020), while we assume that 4iG delivers sales of HUF 103bn in 2022E (vs. HUF 57bn in 2020). We note that we have not included any further M&A in our forecasts, although they are very likely, in our view, considering 4iG’s strategy. 4iG vs. Magyar Telekom’s IT segment revenues (HUF bn) 140 125 115 120 108 105 103 103 97 98 100 91 86 86 84 77 80 65 57 60 41 40 16 16 17 20 14 0 2015 2016 2017 2018 2019 2020 2021E 2022E 2023E 2024E 4iG Magyar Telekom (T-Systems) Source: 4iG, Magyar Telekom, WOOD Research 4iG’s further growth potential should stem from international expansion (opportunistic M&A targets in the CEE region) and the diversification of its current services portfolio. Not only is it aiming to increase the scale of its business, but also to move towards more sophisticated, value-added IT services. We note that, in 2020, 61% of 4iG’s revenues were hardware & software sales, which are a commodity in the IT market, offered by many other players. 4iGs further business diversification should stem from its entry into: Telecoms services. Entry into the telecoms services market should be achieved through the HDT and DIGI HU acquisitions. At end-March 2021, 4iG has signed a preliminary agreement with DIGI Communications to acquire its Hungarian business. We discuss this in more detail, below. Satellite services. This should be achieved through the CarpathiaSat JV. Please see below for further details. 4iG 11 WOOD & Company Data centre services. 4iG has emphasised its goal is to build a leading position in IT systems operations and data centres, as well as in customer service desks, which it hopes to do through the DTSM acquisition. Following the transaction, 4iG would have one of the largest outsourcing teams in the Hungarian market, and plans to expand this further in the future. According to a report from June 2020 by Arizton, a comprehensive market research company, the data centre market value in CEE was estimated at c.USD 5bn in 2019, and is set to record a CAGR of c.3% in 2020- 25E, to reach USD 6bn in 2025E, driven by the increasing adoption of AI, smart cities, IoT (CEE is expected to have more than 1.5bn IoT devices by 2024E) and big data. The IaaS and PaaS segments are expected post a CAGR of 30% during this forecast period. Defence. We note that 4iG has acquired a 24% stake in Rotor & Cams, which offers drone systems. With this investment, 4iG aims to strengthen the cooperation between companies in the IT and R&D segments, focused on the development of unmanned aerial vehicle (UAV) systems. Furthermore, it sees a number of strategic applications in the processing of remote sensor data with artificial intelligence in various areas of industry 4.0 solutions and IT imaging. DIGI HU acquisition: 4iG moves from HU IT leader to telecoms challenger On 29 March 2021, 4iG entered into a preliminary, non-binding agreement with DIGI Communications, to buy 100% of its Hungarian unit. The acquisition is targeted for completion by September 2021, subject to due diligence by DIGI Hungary and its subsidiaries, the signing of a sale and purchase agreement, and the necessary competition authority approvals. DIGI Hungary offers a broad services portfolio, covering cable TV, fixed internet and data, mobile telecoms, fixed-line telephony and DTH services. As of end-2020, it served over 1.1m subscribers nationwide and had over 2.5m RGUs, including 0.7m fixed-broadband, 0.9m pay-TV, 0.7m fixed-voice and 0.2m mobile subscribers. In 2020, DIGI’s consolidated revenues in Hungary stood at HUF 70bn (c.EUR 200m), and its adjusted EBITDA reached HUF 19bn (c. EUR 54m). DIGI HU: RGU evolution (m) DIGI HU: ARPU evolution (EUR/month, %)* 3.0 9.0 6% 7.8 7.8 2.4 2.5 2.5 8.0 7.5 7.4 4% 7.3 4% 3% 2.5 6.7 7.0 2% 2% 0.7 0.7 1% 2.0 0.7 6.0 0% 1.6 1.6 1.5 0.0 0.1 0.2 5.0 -2% 1.5 0.4 0.4 0.3 0.0 0.7 0.8 0.7 4.0 -4% 0.0 0.0 1.0 0.4 0.4 0.5 3.0 -6% -6% 2.0 -8% 0.5 0.8 1.0 1.0 0.9 0.8 0.8 1.0 -10%-10% 0.0 0.0 -12% 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020 Pay-TV Fixed-broadband Mobile Fixed-Voice Total ARPU (EUR/month, lhs) Change yoy (%, rhs) Source: DIGI Communications, WOOD Research; *WOOD estimates DIGI HU: sales evolution DIGI HU: adjusted EBITDA and adjusted EBITDA margin 250.0 27% 30% 70.0 45% 40% 25% 60.0 39% 37% 200.0 35% 20% 50.0 14% 30% 15% 28% 150.0 26% 27% 10% 9% 40.0 25% 6% 10% 30.0 20% 20% 100.0 5% 15% 20.0 0% 50.0 10% 10.0 -8% -5% 5% 126 138 150 191 217 200 49 51 40 39 61 54 0.0 -10% 0.0 0% 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020 Sales (EURm, lhs) Change yoy (%, rhs) Adj. EBITDA (EURm, lhs) Margin (%, rhs) Source: DIGI Communications, WOOD Research 4iG 12 WOOD & Company We would see the conclusion of the deal as a turning point for 4iG, transforming it from a Hungarian IT market leader into a telecoms challenger, with all the threats and opportunities of that market. We note that DIGI’s HU unit has been the most underperforming part of its business, with falling adjusted EBITDA, and considerable capex needs related to the ongoing mobile network rollout and the uncertain performance of the mobile segment, considering the lack of spectrum resources (DIGI was excluded from the last two spectrum auctions in Hungary). Moreover, we note the lack of relevant telecoms sector experience among 4iG’s managers; therefore, unless the company retains the current DIGI HU managers, we would see this as a risk. We also note the large scale of the potential transaction. Despite DIGI’s, and its main Hungarian peer, MTelekom’s, current LTM EV/EBITDAs multiples standing close to c.4x, we believe that the transaction multiples might be much higher than that, especially considering some probable premium for control application. Considering that some publicly-known telecoms transactions concluded in CEE in the past couple of years (Netia acquired by CPS for 5.9x EV/EBITDA in 2018; Telenor acquired by PPF for 6.4x in 2018; Vivacom acquired by United Group for 6.5x in 2019; and Invitel acquired by DIGI HU for 6x in 2018), we believe that the DIGI HU transaction EV/EBITDA multiple may exceed 6x materially. If we apply a 6.5x transaction EV/EBITDA multiple (in line with the Vivacom/United Group deal), we would arrive at a valuation of EUR 353m, vs. 4iG’s current market cap of c.EUR 162m (assuming a EUR/HUF rate of 350 in both cases). If the deal closes at 6.5x EV/EBITDA ,we would estimate 4iG’s 2020 post- deal ND/EBITDA leverage at above 4x, vs. its peers’ median of c.0x. In 2020, DIGI HU generated EBITDA of c.HUF19bn, while 4iG posted HUF 5.0bn. The funding structure is still uncertain; however, the company has indicated that bonds and loans should play a vital role in it. We believe that a share issue is probable as well, considering the scale of the transaction. In 1Q21, 4iG has already issued HUF 15.5bn of bonds. This is not the first time that 4iG has attempted to acquire a target that is larger than itself. In July 2019, it entered into negotiations to buy T-Systems, its main rival and the largest IT company in Hungary. As of 2018, T-Systems employed c.1.6k people (vs. the 373 employed by 4iG) and generated sales of over HUF 100bn in 2018 (vs. 4iG’s HUF 14bn in sales). At the time, 4iG also indicated loans and bonds as the main source of transaction financing. It abandoned the acquisition in December 2019. If successful, the DIGI acquisition is unlikely to be 4iG’s last transaction in the telecoms space, in our view. In an interview with Portfolio.hu in April 2021, 4iG’s CEO stated that this deal is just a “first step” into the sector, and that it is considering other opportunities here, both domestically and internationally. In our view, Telenor offers a perfect match for DIGI’s HU unit. We note that Telenor is currently the last mobile-only telco in Hungary, which is a serious disadvantage in a market of three convergent telcos (Magyar Telekom, Vodafone and DIGI), in our view. On the other hand, DIGI has struggled to develop its mobile segment, considering the abovementioned lack of spectrum resources, resulting in the lowest mobile service quality in Hungary. We note further that a 25% stake in Telenor is owned by state- controlled Antenna Hungary, a close partner of 4iG (e.g., in the CarpathiaSat JV). We note that, according to market speculation (broadbandtvnew.com, in an article on 14 August 2020, quoted anonymous sources cited by Mergermarket), PPF Group would like to sell its telecoms assets located in Bulgaria, Serbia, Montenegro and Hungary, to save costs on the development of 5G networks in several markets. It added that Petr Kellner, the owner of PPF Group at the time, had mentioned a sale informally and that Providence Equity had shown an interest in Telenor Bulgaria. We stress that this is just speculation, and note that the recent, sudden death of Petr Kellner might have changed PPF’s approach to its telecom assets. In 2020, Telenor HU generated sales of EUR 511m (vs. EUR 527m in 2019), EBITDA of EUR 166m (EUR 208m in 2019) and recorded ARPU of EUR 12/month. As of end-2020, Telenor HU recorded 3.449m mobile subscribers and employed 1,103 people. We would see a probable pure-mobile telco valuation in the c.6-7x EV/EBITDA range: Telenor was purchased by PPF for 6.4x in 2018; while Play was acquired by Iliad in 2020 for c.6.8x EV/EBITDA. CarpathiaSat JV: 4iG aiming for the stars In August 2020, 4iG created the CarpathiaSat JV with Antenna Hungary, a state-controlled telco, offering services in national terrestrial television and radio broadcasting, as well as wireless business telecommunications. As mentioned above, Antenna Hungary has a 25% stake in Hungarian mobile operator Telenor. 4iG holds 51% of the JV, vs. Antenna’s 44% and 5% held by New Space. The aim is to launch a satellite into geostationary Earth orbit in 2024E, and to operate Hungary’s first satellite suitable for commercial, governmental and scientific research tasks, in the long term. CarpathiaSat will have the right to operate the geostationary track section from 2024E, for 20 years. 4iG 13 WOOD & Company As discussed in the previous section, 4iG’s goal is to establish a dominant position in the telecoms sector, and the launch and long-term operation of the first satellite for Hungarian broadcasting, internet and telephone services, data transmission and other research tasks, fits this strategy. In February 2021, 4iG took another step towards space expansion, signing an agreement to acquire a 75% stake in Hungaro DigiTel (HDT) from Portuguese Telecommunication Investments (a company managed indirectly by Alpac Capital, a 50% stake) and Antenna Hungary (a 25% stake). HDT is Hungary’s leading telecoms service providers, as well as one of the leaders in the region. It provides VSAT and broadcasting services to its customers, through its satellite communications system. The company offers its satellite services through its own infrastructure, and leases resources from a number of international providers (AMOS, Eutelsat, Intelsat) to ensure satellite capacity. Its customers include major private sector companies (banks, television companies) and public customers. It could be the first potential client for the CarpathiaSat JV and its distribution platform. Following the conclusion of the transaction, 4iG and Antenna Hungary plan to develop a closer partnership, with the aim of being present in the national and regional telecommunications market with a joint expansion strategy. We believe the CarpathiaSat JV could offer material upside potential for 4iG’s equity story. Due to the lack of data at the current stage of development, however, we do not incorporate it in our forecasts. Satellites vary in terms of the capex required and the capacities: according to GlobalCom, the cost of a weather satellite amounts to c.USD 290m, while a spy satellite might cost an additional USD 100m. Launching the satellite into space consumes a large amount of that total capex, ranging from USD 50m to USD 400m, according to GlobalCom. 4iG 14 WOOD & Company Management Gellért Jászai, CEO and chairman. Mr. Jászai became the chairman of 4iG in July 2018 and the CEO in 2019. Prior to 4iG, he was the chairman of Appeninn (2018-19), Konzum (2015-19) and Hunguest Hotels (2016-19), as well as a member of the Board of Directors at Opus Global (2017-19), and a director at Istros Capital Partners (2013-15). He also founded and managed real estate investment company SCD group (2000-11). Mr. Jászai graduated from the Corvinus University of Budapest with a Master’s in Public Administration. Aladin Linczényi, board member and General Deputy CEO. Mr. Linczényi became a board member in 2018 and was appointed as General Deputy CEO in 2019. Prior to 4iG, he was the CEO of Konzum (2016-19) and KPRIA Hungary (2016-17), and Area Manager at Raiffeisen Bank in Hungary (2011- 2016). Mr. Linczényi graduated from the Corvinus University of Budapest with a Master’s in Economics. Péter Fekete, board member and Deputy CEO for Strategy and Corporate Governance. Responsible for the company’s M&A processes, Mr. Fekete was appointed in August 2019. Prior to his career at 4iG, he was Deputy CEO at Konzum (2017-19), Vice President – Aerospace, Defence & Government at Houlihan Lokey (2016-17), Vice President in Aerospace & Defence Investment Banking at Jefferies (2009-15) and an associate at UBS Investment Bank (2007-09). Mr. Fekete graduated from the Corvinus University of Budapest with a Master’s in Economics. Péter Farkas, Chief Technology Officer. Appointed in January 2018, Mr. Farkas is responsible primarily for all the company’s engineering and delivery activities. From 2001-11, he worked at 4iG subsidiary HumanSoft as a senior systems engineer. In 2011, he was promoted to Business Unit Director, and then to CTO of HumanSoft (2016-18). Mr. Farkas graduated from the University of Miskolc with a degree in IT Engineering. Gábor Radó, Chief Sales Officer (since January 2018). Mr. Radó is responsible for 4iG’s sales and commercial activities. Prior to joining 4iG, he worked at HumanSoft (2004-18), where he became the Sales Unit Director. Mr. Radó graduated from the Ort Braude College with a degree in Marketing and Industrial Management. Csaba Thurzó, CFO. Mr. Thurzó has been 4iG’s CFO since September 2018, and is responsible for its tax, finance, accounting and HR activities. He worked previously at Hungarian Post as CFO (2017-18) and controlling director (2012-17). He graduated from Eötvös Loránd University and Budapest Business School in Economics. 4iG: management Gellért Jászai Chief Executive Officer Péter Fekete Aladin Ádám Linczényi Péter Farkas Deputy CEO for Strategy and General Deputy CEO Corporate Governance Chief Technology Officer Péter Elkán Gábor Radó Csaba Thurzó Communications and Marketing Chief Sales Officer Chief Finance Officer Director Ibolya Gothárdi László Friss Zsolt Szilika HR Director Key Projects Director Security Director Source: Company data, WOOD Research 4iG 15 WOOD & Company The Hungarian IT market European ICT market stable in 2020, despite the pandemic According to research by the International Data Corporation (IDC) from December 2020, the European information and communications technology (ICT) market dropped by 0.4% in 2020, to USD 925.6bn, hurt by COVID-19 and the economic lockdowns. In 2021E, however, IDC expects a rebound of 1% yoy, driven by digital transformation initiatives and slightly exceeding the pre-COVID value. The IDC expects strong demand for infrastructure-as-a-service (IAAS) in 2021E, after the c.30% growth recorded in 2020, the highest rate of any technology category in Europe. According to IDC, demand for hardware rose in 2020, in response to remote working, school, and leisure arrangements, linked to the COVID-19 lockdowns, which resulted in 4.6% yoy growth. IDC notes that demand was strong in the retail segment (due to the home-office working model), while the B2B segment was sluggish, leading to an increase in units shipped, but a decline in value. The lockdowns and working-from-home policies also drove the demand for remote collaboration and consumer experience software. IDC believes that the software market recorded growth of around 4% yoy in 2020. In contrast, it estimates that the combined server/storage and network equipment markets contracted by 5.2% yoy in 2020, as the operations of small and medium-sized businesses were hit particularly hard by the COVID-19 crisis. In the CEE region, according to its February 2021 research, IDC expects the ICT market to grow at 0.5% yoy in 2021E, with IT services and business services posting the highest growth rates, at 2.8% and 2.7%, respectively. It emphasises that the prevalence of “working from home” should be even more significant in 2021E, with more employees adopting permanent or flexible remote working models, while companies are expected to continue investing in cloud infrastructure and cybersecurity, to support remote collaboration. In terms of the IT applications in specific industries, IDC expects healthcare organisations to continue investing in eHealth, telemedicine and online consultations, while the focus among manufacturers should be on process automation and autonomous operations. The IT spending drivers for utilities should be the internet of things (IOT) and cybersecurity. The education sector recorded strong IT investment in 2020, which was crucial for remote learning, so spending in this sector is expected to decline in 2021E. IDC: ICT spending growth forecasts in Europe IDC: ICT spending growth forecasts in CEE Source: IDC’s Worldwide Black Book: Live Edition (V3 2020, November 2020), IDC: Worldwide ICT Spending Guide Industry and Company Size, Jan (V1 2021) IDC: ICT spending growth forecasts in Europe IDC: ICT spending growth forecast in CEE 35.0 9% 15% 35.0 9% 15% 10% 10% 30.0 3% 30.0 3% 5% 5% -3% -3% 25.0 -5% 0% 25.0 -5% 0% 20.0 -11% -5% 20.0 -11% -5% -10% -10% -16% -16% 15.0 -15% 15.0 -15% -23% -23% 10.0 -20% 10.0 -20% -25% -25% 5.0 -31% 5.0 -31% 21.2 22.6 21.8 31.7 17.8 17.4 19.4 30.8 -30% 21.2 22.6 21.8 31.7 17.8 17.4 19.4 30.8 -30% 0.0 -35% 0.0 -35% 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20 3Q20 4Q20 Sales (HUFbn) Change yoy (%) Sales (HUFbn) Change yoy (%) Source: 4iG, Magyar Telekom, WOOD Research 4iG 16 WOOD & Company The COVID-19 pandemic took its toll on the revenue evolution of 4iG and the top player, T-Systems (the IT subsidiary of Magyar Telekom) in 2020, with the most severe impact visible in 2Q20, just after the initial lockdown, as economic uncertainty triggered austerity among both B2B and B2G customers. In its 3Q20 earnings presentation, 4iG stated that its financials were influenced moderately by the COVID-19 pandemic, as customers manoeuvred their spending towards remote technologies and cybersecurity, which mitigated a downturn in the backlog. In its FY20 report, Magyar Telekom stated that the drop in IT revenues was driven mainly by lower volumes of project implementations, delivered primarily to the public sector in Hungary. Since 3Q20, both companies have started to record some improvement in IT sales, which appears to support IDC’s assumptions of a demand recovery in 2021E. The Hungarian IT market The value of the Hungarian IT market stood at HUF 884bn in 2020 and IDC forecasts it to post a 4% CAGR between 2020-24E, to HUF 1,016bn in 2024E. IDC expects the market growth to be driven by public spending on software (public sector spending amounted to 21% of the overall information service market in 2019, according to IDC) and a general economic digital transformation, including: the Internet of Things (IoT), used in production, retail, utilities, agriculture and logistics; and Artificial Intelligence (AI), used in customer services, amongst other areas. Moreover, IDC notes that COVID-19 has had a positive impact on digitalisation, providing opportunities for IT solution providers. Hungary: IT market spending by segments (HUF bn, %) 1200 100% 991 1016 955 90% 1000 922 29% 28% 28% 28% 29% 884 80% 290 267 276 70% 800 260 8% 9% 10% 11% 13% 255 60% 95 112 128 19% 18% 18% 600 69 80 50% 17% 17% 172 173 167 168 172 40% 400 30% 20% 44% 45% 44% 43% 42% 200 393 414 421 431 425 10% 0 0% 2020 2021E 2022E 2023E 2024E 2020 2021E 2022E 2023E 2024E Hardware Software Cloud Services Total Hardware Software Cloud Services Source: IDC 2020, WOOD Research In the B2B segment, which amounted to HUF 727bn in 2020, IDC expects a rebound in the coming years, implying a 2020-24E CAGR of 4.1%, driven mainly by expansion in IT infrastructure services and SI/IT application services. Hungary: B2B IT market spending by segments (HUF bn, %) System Integration/ IT Application services System Integration/ IT Application services IT Infrastructure services IT Infrastructure services Hardware & Software Hardware & Software 1000 Total 100% 853 816 90% 782 25% 25% 25% 25% 26% 26% 735 727 749 800 80% 222 196 212 70% 184 182 187 23% 600 60% 24% 25% 26% 27% 28% 203 220 239 50% 169 174 187 400 40% 30% 53% 50% 50% 49% 47% 46% 200 390 364 375 383 384 392 20% 10% 0 0% 2019 2020 2021E 2022E 2023E 2024E 2019 2020 2021E 2022E 2023E 2024E Source: IDC 2020, WOOD Research Both the total IT market and the B2B segment consisted of around 50% of hardware and software sales, and a combined 50% in IT infrastructure and SI/IT applications services in 2020, according to IDC’s estimates. In the services segment, the largest areas in terms of revenues were IT infrastructure projects services and cloud solutions, which generated c.10% each of the total IT market in 2019. 4iG 17 WOOD & Company Hungarian IT services market by product, 2019 Package appl. Cloud 31 72 Custom app. Dev. 36 SI 41 Infra. Proj. Service 76 IT Consult. 12 Apps. OS & IT Infra. OS & op Hosting Outsourc. 24 40 15 Source: IDC 2020, Magyar Telekom, WOOD Research The largest client of IT services in Hungary, based on the sales structures of the two-largest players, is the government, which generated c.24% of T-Systems’ sales in 2019. Meanwhile, 4iG reported that c.69% of its 2019 revenues were generated by the public sector, while public administration sales stood at 21%. 4iG: revenues by industry in 2019 Magyar Telekom: HU IT revenues by customer in 2019 Information, Healthcare communicati Other 13% Finance 19% on 19% 23% Education 4% Manufacturing Transport Manufacturin Education 5% 14% g 11% 11% Transport, Financial Warehousing and 5% Retail & WS insurance 6% activities Trade/ Commerce 4% Consulting, Public Utilities Prof. 4% Health and Science, Legal Administratio 16% Services social care activities n Telco+Media 7% 8% 6% 15% 11% Source: Company data, WOOD Research The Hungarian IT market is highly fragmented: according to our estimates, with the two biggest players recording a joint market share of 17% in 2020: T-Systems at 10% and 4iG at 6%. In the B2B segment, MTelekom estimates T-Systems’ market share at c.11%, while we estimate 4iG’s B2B share at c.6%. Key players in the Hungarian services market by product Source: 4iG, public sources; note: the size of the bubble indicates estimated revenues 4iG 18 WOOD & Company EU funds should support the digital transformation In its forecasts, IDC emphasises that EU fund inflows should remain a major driver of IT spending in Hungary, as the EU continues to support the digitisation process in its member countries. The Digital Europe Programme has proposed EUR 7.5bn of funding for 2021-27E, including, inter alia: HUF 1.7bn for cybersecurity and HUF 2.1bn for AI development. Digital Europe Programme: 2021-27E targets (EUR bn) Ensuring wide use of digital technologies across economy and society Supercomputing 1.1 2.2 Digital skills 0.6 Cybersecurity 1.7 AI 2.1 Source: ec.europa.eu, WOOD Research 4iG 19 WOOD & Company Risks The high share of B2G contracts in the sales mix. As much as 73% of 4iG’s revenues in 2020 was generated from state contracts. According to some media reports (e.g., Portfolio.hu from February 2017, Reuters.com from March 2018, and Intellinews.com from December 2019), the personal relationships between the current CEO and main shareholder, Gellért Jászai, and Lorinc Meszaros (the main shareholder from 2018-20, through Konzum and Opus), might have been supportive for 4iG’s performance in the B2G segment. However, we believe there are rational reasons for Hungarian public entities to choose 4iG as their main IT supplier, as it offers a high-quality service and it is the biggest Hungarian-owned IT company (a factor that seems to be gaining importance, along with cyber-security). Moreover, we note that, despite the change in the ownership structure (the sale of the whole stake by Lorinc Meszaros), the company continues to be a preferred B2G supplier, and has won numerous state contracts (which we list in the paragraph concerning 4iG’s competitive advantages). Moreover, after last year’s change, 4iG’s shareholder’s structure is much clearer, with the CEO being the main shareholder, so management’s and shareholders’ interests should be fully aligned. Financial risks related to the CarpathiaSat JV. The JV aims to launch a satellite into geostationary Earth orbit in 2024E, and to operate Hungary’s first satellite suitable for commercial, governmental and scientific research tasks. We lack any details regarding the required capex for the project, nor any financial guidance, but we anticipate that it could be massive for 4iG (as much as USD 200m). We believe that the project might mean a huge hike in 4iG’s indebtedness, which could be dangerous for the company, if the JV faces technical or monetisation issues. Value-destructive M&A. 4iG’s growth strategy includes numerous acquisitions. Even though all the acquired subsidiaries seem to fit the company’s profile, we are lacking the data on pricing, so it is hard to evaluate whether they will be value accretive for the company. We also note that synergies extraction and the integration of newly-acquired subsidiaries might encounter difficulties, and could affect the group’s overall efficiency negatively. Labour force and labour costs. The company’s growth outlook depends on increasing the number of highly-qualified IT specialists, of which a shortage is visible across CEE countries currently. High demand for IT specialists might also put pressure on remuneration levels. However, we note that 4iG, due to its scale and brand, is in a relatively good position vs. its local peers, as it may attract highly-motivated professionals, with the opportunity of participation in large, highly-complex projects. 4iG 20 WOOD & Company Valuation range at HUF 782-996/share Our valuation range of HUF 782-996/share is based on three major valuation tools: A comparative valuation based on the median 2021-23E P/Es, implying a range of HUF 815- 1,176/share, with a mid-point of HUF 996/share. A comparative valuation based on the median 2021-23E EV/EBITDAs, implying a range of HUF 731-933/share, with a mid-point of HUF 832/share. A DCF model, implying a fair value of HUF 782/share. Valuation range (HUF/share) 731 832 Peer valuation - EV/EBITDA 933 996 Peer valuation - P/E 815 1,176 782 DCF valuation 600 700 800 900 1,000 1,100 1,200 1,300 Source: WOOD Research DCF We base our DCF valuation model on the following assumptions: A risk free rate of 4.0%. An unlevered beta of 1.37x, based on a blend of Damodaran’s unlevered EM beta for software companies. An equity risk premium (ERP) of 5.5%. A terminal growth rate of 2.0%. A 6/94% debt/equity structure, with the debt considered as the gross debt as of end-2020 and equity considered as the current market cap. A WACC of 11.7%, equal to the cost of equity. Beta and WACC calculation Unlevered beta (x) 1.4 Levered beta (x) 1.5 Risk free rate 4.0% Beta 1.5 Equity risk premium 5.5% Cost of equity 12.0% Risk free rate 4.0% Debt risk premium 6.0% Pre-tax cost of debt 10% Tax rate 16% After tax cost of debt 8.4% % D 7% % E 93% WACC 11.7% Source: WOOD Research 4iG 21 WOOD & Company DCF valuation HUF bn 2021E 2022E 2023E 2024E 2025E 2026E 2027E 2028E 2029E 2030E >2030E Revenues 83.5 102.7 115.1 125.4 132.9 139.6 143.8 148.1 151.0 154.1 154.1 EBITDA 8.0 10.4 12.1 13.5 14.7 15.7 16.5 17.2 17.8 18.5 18.5 EBITDA margin 9.6% 10.1% 10.5% 10.8% 11.0% 11.3% 11.5% 11.6% 11.8% 12.0% 12.0% EBIT 6.8 8.8 10.2 11.2 11.9 12.5 12.9 13.2 13.5 13.7 13.7 EBIT margin 8.1% 8.5% 8.8% 8.9% 8.9% 9.0% 9.0% 8.9% 8.9% 8.9% 8.9% Cash tax on EBIT -1.1 -1.4 -1.6 -1.8 -1.9 -2.0 -2.1 -2.1 -2.2 -2.2 -2.2 NOPAT 5.7 7.4 8.5 9.4 10.0 10.5 10.8 11.1 11.3 11.5 11.5 D&A 1.3 1.6 2.0 2.4 2.8 3.2 3.6 4.0 4.4 4.8 4.8 Change in WC -0.9 -0.7 -0.4 -0.4 -0.3 -0.2 -0.1 -0.1 -0.1 -0.1 Capex -10.2 -2.1 -2.9 -3.1 -3.3 -4.2 -5.0 -5.2 -5.3 -5.4 -6.4 FCFF -4.2 6.3 7.2 8.2 9.2 9.3 9.2 9.8 10.3 10.8 9.9 Discount factor (%) 89% 80% 72% 64% 57% 51% 46% 41% 37% 33% PV -3.7 5.0 5.1 5.3 5.3 4.8 4.2 4.0 3.8 3.5 PV 2021-30E 37.3 TV growth rate (%) 2.0% PV TV 33.3 EV 2020 70.7 Minorities 2020 0.4 Net debt 2020 -3.2 Equity value 2020 (HUF bn) 73.5 Number of shares, m 94.0 Fair value per share, end-2020E (HUF) 782 Source: WOOD Research DCF sensitivity analysis (HUF) Unlevered beta 1.1x 1.2x 1.3x 1.4x 1.5x 1.6x 1.7x 3.5% 997 920 853 796 745 700 659 3.0% 983 910 846 791 742 698 658 Terminal 2.5% 970 901 840 786 739 696 658 Growth 2.0% 959 893 834 782 736 694 657 Rate (%) 1.5% 950 886 829 779 734 693 656 1.0% 941 880 825 776 732 692 655 0.5% 933 874 821 773 730 690 655 Equity risk premium 4.75% 5.00% 5.25% 5.50% 5.75% 6.00% 6.25% 4.75% 812 780 751 724 698 674 651 4.50% 835 802 771 742 715 690 667 4.25% 859 824 792 762 734 707 683 Risk free 4.00% 885 848 814 782 753 725 700 rate (%) 3.75% 912 873 837 804 773 744 717 3.50% 940 900 862 827 794 764 736 3.25% 971 927 888 851 816 785 755 Source: WOOD Research Comparative valuation We base our comparative valuation approach for 4iG on our 2021-23E EV/EBITDA and P/E multiples. The current multiples calculations are based on WOOD’s forecasts for 4iG and Sirma, and the Bloomberg consensus for the peers. Our comparative valuation based on the median 2021-23E P/Es implies a fair share price range of HUF 815-1,176/share, with a mid-point of HUF 996/share. Our comparative valuation based on the median 2021-23E EV/EBITDAs implies a range of HUF 731- 933/share, with a mid-point of HUF 832/share. On our estimates, 4iG trades at a 24% discount vs. its peers on 2021E EV/EBITDA and 39-44% discounts on 2022-23E EV/EBITDAs. On our 2021-23E P/E multiples, 4iG trades at 32%, 49% and 53% discounts vs. its peers, respectively. 4iG 22 WOOD & Company Peer multiples* Country Mcap P/E EV/EBITDA EURm 2021E 2022E 2023E 2021E 2022E 2023E 4iG Hungary 163 11.0 7.9 6.7 7.0 5.1 4.1 IT integration peers Sirma Group Bulgaria 16 5.0 4.4 4.0 4.1 3.5 3.1 Asseco Poland Poland 1,351 14.2 14.3 13.9 4.5 4.3 3.8 Asseco SE Europe Poland 455 16.0 14.8 14.2 7.9 7.3 6.7 Asseco Business Solutions Poland 268 15.2 14.5 14.0 9.8 9.2 8.9 Comarch Poland 419 15.9 15.3 15.0 6.4 6.1 5.7 Comp Poland 79 8.6 9.2 12.9 4.7 5.3 4.8 Atos France 6,045 8.0 7.1 6.5 3.8 3.2 2.7 S&T Austria 1,379 18.8 15.7 13.6 9.5 8.3 7.2 Adesso Germany 789 22.0 24.5 20.1 9.2 9.2 7.8 Sopra Steria Group France 3,057 14.1 12.1 10.9 6.7 5.8 5.4 Softcat UK 4,110 38.9 38.0 35.8 29.1 28.3 26.4 Cancom Germany 1,866 30.1 25.2 21.8 11.0 9.2 8.3 Datagroup Germany 502 33.7 24.3 20.6 10.5 8.7 7.8 Enea Sweden 463 21.8 18.4 15.9 13.7 11.1 9.6 Panoply Holdings UK 275 45.7 37.0 34.4 36.4 25.5 22.2 Median 16.0 15.3 14.2 9.2 8.3 7.2 4iG premium/discount -32% -49% -53% -24% -39% -44% Source: Bloomberg, WOOD Research; *estimates based on WOOD’s forecasts for 4iG and Sirma, and the Bloomberg consensus for the other peers 4iG: peer multiples summary* P/E (x) EV/EBITDA (x) 2021E 2022E 2023E 2021E 2022E 2023E 4iG multiple 11.0 7.9 6.7 7.0 5.1 4.1 IT integration peers median 16.0 15.3 14.2 9.2 8.3 7.2 4iG premium (discount) -32% -49% -53% -24% -39% -44% 4iG results 5.2 7.2 8.5 8.0 10.4 12.1 EV implied 82.7 106.5 112.5 74.2 86.7 87.7 Net debt -1.1 -5.0 -9.0 -1.1 -5.0 -9.0 Minorities 0.6 1.1 1.5 0.6 1.1 1.5 Equity value implied 83.2 110.4 120.0 74.6 90.6 95.1 Fair value/share 815 1,082 1,176 731 888 933 Source: Company data, Bloomberg, WOOD Research; *estimates based on WOOD’s forecasts for 4iG and Sirma, and the Bloomberg consensus for the other peers 4iG: peers’ key indicators* CAGR 2020-23E ND/EBITDA FCF yield Dividend yield EBITDA margin NI margin NI EBITDA 2021E 2021E 2022E 2021E 2022E 2021E 2022E 2021E 2022E 4iG 35.7% 33.9% -0.1 -9% 12% 5.9% 7.0% 10% 10% 7% 7% IT integration peers Sirma Group 8.4% 7.0% 0.7 14% 14% 0.0% 0.0% 20% 19% 9% 9% Asseco Poland -1% 3.6% 0.0 n.a. n.a. 4% 4% 15% 15% 3% 3% Asseco South Eastern Europe n.a. n.a. -0.7 n.a. n.a. 3% 3% 22% 21% 12% 12% Asseco Business Solutions 5% 4.4% 0.0 n.a. n.a. 6% 6% 41% 41% 27% 27% Comarch 2% -1.3% -1.0 n.a. n.a. 1% 2% 16% 15% 7% 7% Comp 20% 4.7% 1.4 n.a. n.a. 7% 7% 13% 12% 7% 4% Atos 13% 7.6% 0.1 16% 18% 2% 2% 14% 15% 7% 7% S&T 20% 13.8% 0.1 4% 7% 1% 1% 10% 11% 5% 6% Adesso 19% 17.7% -0.3 2% 5% 0% 0% 13% 12% 6% 5% Sopra Steria Group 19% 14.2% 0.7 7% 9% 2% 2% 11% 12% 5% 5% Softcat 10% 9.9% -0.8 n.a. n.a. 2% 2% 10% 9% 7% 7% Cancom 5% 13.4% -2.1 3% 5% 2% 2% 8% 9% 4% 4% Datagroup 31% 20.4% 2.2 4% 6% 1% 1% 14% 15% 4% 4% Enea 20% 18.5% 0.3 5% 6% 2% 1% 36% 38% 22% 23% Panoply Holdings n.a. n.a. 1.2 n.a. n.a. 0% 0% 14% 15% 10% 11% Median 13% 10% 0.1 5% 6% 2% 2% 14% 15% 7% 7% Source: Company data, Bloomberg, WOOD Research; *estimates based on WOOD’s forecasts for 4iG and Sirma, and the Bloomberg consensus for the other peers 4iG 23 WOOD & Company 4iG does seem cheap when looking at its historical multiples: on Bloomberg estimates, it trades currently at 16.4x LTM P/E and 10.6x EV/EBITDA, around one standard deviation below its 1Y averages of 17.8x and 12.4x, respectively. 4iG: LTM P/E (x) 4iG: LTM EV/EBITDA (x) 23.0 LTM P/E Avg. 16.0 LTM EV/EBITDA Avg. 22.0 +st.dev -st.dev 21.0 15.0 +st.dev -st.dev 20.0 14.0 19.0 19.2 13.6 18.0 17.8 13.0 17.0 12.4 16.4 12.0 16.0 16.5 15.0 11.1 11.0 14.0 10.6 10.0 Source: Bloomberg, WOOD Research 4iG 24 WOOD & Company Financial forecasts Sales CAGR of 26% in 2020-23E. We expect 4iG to generate sales growth of 46% in 2021E and 23- 12% in 2022-23E, driven by the rapid expansion of the IT services segment (a 47% 2020-23E CAGR). On our estimates, this impressive growth rate should be achieved via both organic expansion (we estimate the 2020-23E organic sales CAGR at 16%) and the consolidation of the businesses acquired in 2020-1Q21: Innobyte, TR Consulting, DTSM, Spacenet, Poli Computer, and HDT. We note that the latter two are still awaiting approval from the Hungarian Competition Authority, but we expect a positive decision; therefore, we pencil their potential impact into our model. In our forecasts, the above-listed, newly-acquired businesses contribute HUF 15.3bn, HUF 24.3bn and HUF 27.2bn, respectively, to our 2021-23E sales forecasts. We note that, as of 14 April 2021, 4iG had a backlog of HUF 31.7bn contracted for 2021, in addition to the sales generated already. Revenue forecasts 2018 2019 2020 2021E 2022E 2023E CAGR 2020-23E Hardware and software sales 7.6 29.9 33.8 36.5 38.7 40.6 6% IT services 6.4 11.1 23.4 46.9 63.9 74.3 47% Other 0.0 0.2 0.2 0.2 0.2 0.2 0% Net sales revenues 14.0 41.1 57.3 83.5 102.7 115.1 26% Change yoy (%) Hardware and software sales -30% 292% 13% 8% 6% 5% n.a. IT services 6% 74% 111% 101% 36% 16% n.a. Other -59% 609% -11% 0% 0% 0% n.a. Net sales revenues -17% 194% 39% 46% 23% 12% n.a. Source: Company data, WOOD Research EBITDA margin to expand from 9% in 2020 to 11% in 2023E. We expect 4iG’s EBITDA to record a 34% 2020-23E CAGR (from HUF 5.0bn in 2020, to HUF 12.1bn in 2023E), on the back of a growing top line. We expect the EBITDA margin to expand from 9% in 2020 to 10% in 2021-22E and 11% in 2023E, on the back of a growing share of more profitable IT services in the sales mix, as a result of 4iG’s ongoing transformation towards more sophisticated, value-added IT services: we forecast the IT services segment share in total sales to increase from 41% in 2020 to 65% in 2023E. 4iG: EBITDA reconciliation (HUF bn, %) 2018 2019 2020 2021E 2022E 2023E CAGR 2020-23E Net sales revenues 14.0 41.1 57.3 83.5 102.7 115.1 26% Other operating income 0.5 0.4 0.5 0.5 0.5 0.5 0% COGS -8.9 -30.1 -41.4 -56.3 -67.3 -74.5 22% Gross margin 5.5 11.4 16.4 27.7 35.9 41.0 36% Hardware and software sales 0.8 3.9 5.1 5.5 5.8 6.1 6% IT services 4.3 7.1 10.8 21.7 29.6 34.4 47% Other 0.4 0.3 0.5 0.5 0.5 0.5 0% Direct costs -4.1 -5.7 -8.3 -15.3 -20.2 -23.1 40% Segment EBIT 1.4 5.6 8.1 12.4 15.7 17.9 30% Hardware and software sales 0.1 2.7 3.7 4.0 4.2 4.4 6% IT services 1.4 2.7 3.9 7.9 11.0 13.0 50% Other -0.1 0.3 0.5 0.5 0.5 0.5 0% Unallocated OPEX -1.2 -2.3 -3.9 -5.6 -6.9 -7.8 26% Group’s EBIT 0.2 3.3 4.2 6.8 8.8 10.2 34% D&A 0.6 0.7 0.8 1.3 1.6 2.0 33% EBITDA 0.8 4.1 5.0 8.0 10.4 12.1 34% Margins (%) Gross margin 40% 28% 29% 33% 35% 36% n.a. Hardware and software sales 11% 13% 15% 15% 15% 15% n.a. IT services 67% 65% 46% 46% 46% 46% n.a. Other 1816% 189% 343% 343% 343% 343% n.a. Segment EBIT 10% 14% 14% 15% 15% 16% n.a. Hardware and software sales 1% 9% 11% 11% 11% 11% n.a. IT services 22% 24% 17% 17% 17% 17% n.a. Other -361% 189% 343% 343% 343% 343% n.a. Group’s EBIT 2% 8% 7% 8% 9% 9% n.a. EBITDA 6% 10% 9% 10% 10% 11% n.a. Source: Company data, WOOD Research Net profit to almost triple, from HUF 3.4bn in 2020 to HUF 8.5bn in 2023E. We expect 4iG’s bottom line to expand from HUF 3.4bn in 2020 to HUF 5.2bn in 2021E, HUF 7.2bn in 2022E and HUF 8.5bn in 4iG 25 WOOD & Company 2023E, driven by an operating results expansion. We forecast the D&A to hike from HUF 0.8bn in 2020 to HUF 2.0bn in 2023E, on the back of the amortisation of the newly-acquired assets. In terms of finance costs, we expect an increase from HUF 0.4bn in 2020 to HUF 0.8bn in 2021E, and HUF 0.9bn in both 2022 and 2023E, due mainly to the issuance of HUF 15.5bn bonds in March 2021. 4iG: P&L forecasts (HUF bn, %) 2018 2019 2020 2021E 2022E 2023E CAGR 2020-23E Net sales revenues 14.0 41.1 57.3 83.5 102.7 115.1 26% Other operating income 0.5 0.4 0.5 0.5 0.5 0.5 0% Total income 14.5 41.5 57.8 84.0 103.2 115.5 26% Costs of goods and services sold -8.9 -30.1 -41.4 -56.3 -67.3 -74.5 22% Operational expenditures -1.4 -1.8 -2.5 -4.7 -7.4 -8.9 53% Staff costs -3.1 -5.4 -8.7 -14.7 -17.8 -19.6 31% Other expenditures -0.2 -0.1 -0.2 -0.3 -0.3 -0.4 26% Operating expenses -13.6 -37.4 -52.7 -76.0 -92.8 -103.4 25% EBITDA 0.8 4.1 5.0 8.0 10.4 12.1 34% D&A -0.6 -0.7 -0.8 -1.3 -1.6 -2.0 33% EBIT 0.2 3.3 4.2 6.8 8.8 10.2 34% Finance income 0.1 0.2 0.3 0.5 1.2 1.4 59% Finance expenditures -0.1 -0.2 -0.4 -0.8 -0.9 -0.9 32% Profit before tax 0.2 3.3 4.2 6.5 9.1 10.7 37% Income taxes -0.1 -0.5 -0.7 -1.1 -1.5 -1.7 33% Profit after tax 0.1 2.8 3.4 5.4 7.6 8.9 37% Minorities 0.0 -0.1 0.0 -0.3 -0.4 -0.5 n.a. Net profit attributable to owners 0.1 2.9 3.4 5.2 7.2 8.5 36% Source: Company data, WOOD Research We note that our forecasts are above 4iG’s guidance, presented along with the 4Q20 earnings; however, we believe the difference is driven mainly by the impact of the acquisitions. 4iG’s guidance vs. WOOD’s forecasts 4iG guidance WOOD’s forecasts Above 20% in 2021E; above 10% top-line average growth beyond Revenue growth (%) 46% growth yoy in 2021E, 23-12% in 2022-23E 2021E EBITDA margin (%) 8-10% margin in the medium term (two-to-three years) 10% in 2021E, 10-11% in 2022-23E Source: Company data, WOOD Research Capex to be hiked from HUF 2.5bn in 2020 to HUF 10.2bn in 2021E, on the back of M&A. We expect 4iG’s capex in 2021E to be hiked to HUF 9.0bn, due to the Spacenet acquisition and the expected conclusion of the HDT and Poli Computer acquisitions. We assume that 4iG will pay HUF 8.5bn in total for the newly-acquired businesses, out of which HUF 5bn will be settled in 4iG shares (the payments for the 100% stake in Poli Computer and the 50% stake in HDT are about to be settled in kind) and HUF 3.5bn in cash. As a result of the share-based settlements, we expect 4iG’s number of shares to increase from 94m as of end-2020 to 102m as of end-2021E. In 2022-23E, we expect the capex to drop to HUF 2.1-2.9bn (implying a 2-2.5% capex/sales ratio), as we do not pencil in any further acquisitions, while the company’s business model is asset light. 4iG: capex and capex/sales forecasts (HUF bn, %) 4iG: FCF and FCF yield forecasts (HUF bn, %) 12.0 14.0% 10.0 15% 10.2 7.6 8.0 12.0% 6.5 10.0 5.8 10% 6.0 10.0% 8.0 4.0 5% 8.0% 6.0 2.0 0.9 6.0% 0.0 0% 4.0 2.9 2018 2019 2020 2021E 2022E 2023E 2.5 4.0% -0.8 2.1 -2.0 1.5 -5% 2.0 2.0% -4.0 0.1 0.0 0.0% -6.0 -4.9 -10% 2018 2019 2020 2021E 2022E 2023E FCF (HUFbn, lhs) FCF yield (%, rhs) Capex (HUFbn, lhs) Capex/sales (%, rhs) Source: Company data, WOOD Research 4iG 26 WOOD & Company We note that we do not include the impact of the CarpathiaSat JV in our model, due to the lack of details regarding the planned capex and financial expectations. We have also not included the potential acquisition of DIGI HU, as we see the transaction as uncertain currently, and we do not know its price. Dividend yields of 4-6% in 2020-21E, despite the growing capex needs. 4iG started to pay out dividends in 2020 (from its 2019 net profit): HUF 22/share, implying a 69% payout ratio. From the 2020 net profit, management has recommended paying out HUF 2.2bn, implying a DPS of HUF 24 and a dividend yield of 4%. We expect the company to continue paying out dividends, despite the temporary hike in capex, due to rapid growth of 4iG’s operating result (we expect a 2020-23E net profit CAGR of 36%), paired with its low leverage (net cash as of end-2020). From its 2021-22E results, we expect the company to pay out a DPS of HUF 26-36, implying a 50% dividend payout ratio and a 6-7% dividend yield. Going forward, we expect the dividend payout ratio to stabilise at 50%. 4iG: indebtedness and ND/EBITDA leverage 4iG: dividend forecasts 45 42 80% 25.0 2.5 19.5 19.5 19.5 40 70% 20.0 2.0 69% 36 65% 35 15.0 1.5 60% 30 26 10.0 1.0 24 50% 50% 50% 50% 4.0 25 22 5.0 1.81.6 2.2 0.5 40% 20 0.0 0.0 30% 15 -5.0 -1.0 -0.5 -3.2 20% -4.0 -5.0 10 -10.0 -1.0 -9.0 5 10% -15.0 -1.5 2018.0 2019.0 2020.0 2021E 2022E 2023E 0 0% 2019 2020 2021E 2022E 2023E Gross debt (HUFbn, lhs) Net debt (HUFbn, lhs) DPS recorded (HUF/share) Dividend pay-out rate (%) Net debt (x, rhs) Source: Company data, WOOD Research 4iG 27 WOOD & Company Financials Revenue forecasts (HUF bn) 2018 2019 2020 2021E 2022E 2023E CAGR 2020-23E Hardware and software sales 7.6 29.9 33.8 36.5 38.7 40.6 6% IT services 6.4 11.1 23.4 46.9 63.9 74.3 47% Other 0.0 0.2 0.2 0.2 0.2 0.2 0% Net sales revenues 14.0 41.1 57.3 83.5 102.7 115.1 26% Change yoy (%) Hardware and software sales -30% 292% 13% 8% 6% 5% n.a. IT services 6% 74% 111% 101% 36% 16% n.a. Other -59% 609% -11% 0% 0% 0% n.a. Net sales revenues -17% 194% 39% 46% 23% 12% n.a. Source: Company data, WOOD Research EBITDA reconciliation (HUF bn, %) 2018 2019 2020 2021E 2022E 2023E CAGR 2020-23E Net sales revenues 14.0 41.1 57.3 83.5 102.7 115.1 26% Other operating income 0.5 0.4 0.5 0.5 0.5 0.5 0% COGS -8.9 -30.1 -41.4 -56.3 -67.3 -74.5 22% Gross margin 5.5 11.4 16.4 27.7 35.9 41.0 36% Hardware and software sales 0.8 3.9 5.1 5.5 5.8 6.1 6% IT services 4.3 7.1 10.8 21.7 29.6 34.4 47% Other 0.4 0.3 0.5 0.5 0.5 0.5 0% Direct costs -4.1 -5.7 -8.3 -15.3 -20.2 -23.1 40% Segment EBIT 1.4 5.6 8.1 12.4 15.7 17.9 30% Hardware and software sales 0.1 2.7 3.7 4.0 4.2 4.4 6% IT services 1.4 2.7 3.9 7.9 11.0 13.0 50% Other -0.1 0.3 0.5 0.5 0.5 0.5 0% Unallocated OPEX -1.2 -2.3 -3.9 -5.6 -6.9 -7.8 26% Group’s EBIT 0.2 3.3 4.2 6.8 8.8 10.2 34% D&A 0.6 0.7 0.8 1.3 1.6 2.0 33% EBITDA 0.8 4.1 5.0 8.0 10.4 12.1 34% Margins (%) Gross margin 40% 28% 29% 33% 35% 36% n.a. Hardware and software sales 11% 13% 15% 15% 15% 15% n.a. IT services 67% 65% 46% 46% 46% 46% n.a. Other 1816% 189% 343% 343% 343% 343% n.a. Segment EBIT 10% 14% 14% 15% 15% 16% n.a. Hardware and software sales 1% 9% 11% 11% 11% 11% n.a. IT services 22% 24% 17% 17% 17% 17% n.a. Other -361% 189% 343% 343% 343% 343% n.a. Group’s EBIT 2% 8% 7% 8% 9% 9% n.a. EBITDA 6% 10% 9% 10% 10% 11% n.a. Source: Company data, WOOD Research P&L forecasts (HUF bn, %) 2018 2019 2020 2021E 2022E 2023E CAGR 2020-23E Net sales 14.0 41.1 57.3 83.5 102.7 115.1 26% Other operating income 0.5 0.4 0.5 0.5 0.5 0.5 0% Total income 14.5 41.5 57.8 84.0 103.2 115.5 26% Costs of goods and services sold -8.9 -30.1 -41.4 -56.3 -67.3 -74.5 22% Operational expenditures -1.4 -1.8 -2.5 -4.7 -7.4 -8.9 53% Staff costs -3.1 -5.4 -8.7 -14.7 -17.8 -19.6 31% Other expenditures -0.2 -0.1 -0.2 -0.3 -0.3 -0.4 26% Operating expenses -13.6 -37.4 -52.7 -76.0 -92.8 -103.4 25% EBITDA 0.8 4.1 5.0 8.0 10.4 12.1 34% D&A -0.6 -0.7 -0.8 -1.3 -1.6 -2.0 33% EBIT 0.2 3.3 4.2 6.8 8.8 10.2 34% Finance income 0.1 0.2 0.3 0.5 1.2 1.4 59% Finance expenditures -0.1 -0.2 -0.4 -0.8 -0.9 -0.9 32% Profit before tax 0.2 3.3 4.2 6.5 9.1 10.7 37% Income taxes -0.1 -0.5 -0.7 -1.1 -1.5 -1.7 33% Profit after tax 0.1 2.8 3.4 5.4 7.6 8.9 37% Minorities 0.0 -0.1 0.0 -0.3 -0.4 -0.5 n.a. Net profit attributable to owners 0.1 2.9 3.4 5.2 7.2 8.5 36% Source: Company data, WOOD Research 4iG 28 WOOD & Company Cash flow forecasts (HUF bn) 2018 2019 2020 2021E 2022E 2023E Profit after tax 0.1 2.8 3.4 5.4 7.6 8.9 Depreciation and impairment in the current year 0.6 0.7 0.8 1.3 1.6 2.0 Changes of the working capital -0.2 0.5 -0.2 -0.9 -0.7 -0.4 Changes in trade receivables 0.2 -8.6 -4.5 -8.0 -5.9 -3.8 Changes in inventories 0.0 -0.3 -2.9 -1.5 -1.1 -0.7 Changes in trade creditors -0.4 9.4 7.2 8.6 6.3 4.1 Other -1.2 3.2 -0.7 0.0 0.0 0.0 Net cash flow from operating activities -0.7 7.2 3.3 5.8 8.6 10.5 Capex - tangibles -0.1 -0.3 -0.7 -0.4 -0.5 -0.6 Capex - intangibles 0.0 -1.1 -1.8 -9.8 -1.5 -2.3 Other 0.0 0.0 0.1 -0.5 0.0 0.0 Net cash flow from investment activities -0.1 -1.4 -2.4 -10.7 -2.1 -2.9 Changes in debt 0.7 0.1 1.7 15.5 0.0 0.0 Repurchased own shares 0.0 0.0 -0.2 0.0 0.0 0.0 Dividend paid 0.0 0.0 -2.0 -2.2 -2.6 -3.6 Other 0.0 0.2 0.5 0.0 0.0 0.0 Net cash flow from financing activities 0.6 0.3 0.1 18.2 -2.6 -3.6 Net change of cash and cash-like items and instruments -0.1 6.1 1.0 13.3 3.9 4.0 Cash - BOP 0.3 0.2 6.2 7.2 20.5 24.5 Cash - EOP 0.2 6.2 7.2 20.5 24.5 28.5 FCF reconciliation Net cash flow from operating activities -0.7 7.2 3.3 5.8 8.6 10.5 Net cash flow from investment activities -0.1 -1.4 -2.4 -10.7 -2.1 -2.9 FCF -0.8 5.8 0.9 -4.9 6.5 7.6 Source: Company data, WOOD Research Balance sheet forecasts (HUF bn) 2018 2019 2020 2021E 2022E 2023E Tangible assets 0.1 0.3 0.8 0.8 0.8 0.8 Intangible assets 0.6 0.5 0.7 9.7 10.1 11.0 Lease rights 0.0 0.6 1.0 1.0 1.0 1.0 Deferred tax assets 0.1 0.0 0.0 0.0 0.0 0.0 Goodwill 0.7 0.4 1.3 1.3 1.3 1.3 Other investments 0.1 0.1 0.2 0.6 0.6 0.6 Non-current assets in total 1.6 1.9 4.0 13.4 13.8 14.8 Liquid assets and cash equivalents 0.2 6.2 7.2 20.5 24.5 28.5 Trade receivables 4.3 12.9 17.5 25.5 31.4 35.1 Other receivables and accrued and deferred assets 1.6 2.1 5.4 5.4 5.4 5.4 Actual income tax receivables 0.0 0.0 0.0 0.0 0.0 0.0 Securities 0.4 0.4 0.4 0.4 0.4 0.4 Inventories 0.2 0.5 3.4 4.9 6.0 6.7 Current assets in total 6.8 22.2 33.9 56.7 67.7 76.1 Assets in total 8.4 24.1 37.9 70.2 81.5 90.9 Own equity per parent company in total 2.7 5.6 7.3 15.2 19.8 24.7 Non-controlling interest 0.0 -0.1 0.4 0.6 1.1 1.5 Own equity in total 2.7 5.5 7.7 15.9 20.9 26.2 Provisions 0.0 0.1 0.1 0.1 0.1 0.1 Deferred tax liabilities 0.0 0.0 0.0 0.0 0.0 0.0 Long-term credits and loans 0.0 0.0 0.0 15.5 15.5 15.5 Finance lease liabilities 0.0 0.3 0.5 0.5 0.5 0.5 ESOP liabilities 0.0 0.0 0.5 0.5 0.5 0.5 Long-term liabilities in total 0.0 0.4 1.1 16.5 16.5 16.5 Trade creditors and other accounts payable 2.2 11.6 18.9 27.5 33.9 37.9 Short-term credits and loans 1.8 1.5 3.0 3.0 3.0 3.0 Other short-term liabilities and accrued liabilities 1.7 4.8 6.7 6.7 6.7 6.7 Dividend liability towards the owners 0.0 0.0 0.0 0.0 0.0 0.0 Finance lease liabilities 0.0 0.4 0.5 0.5 0.5 0.5 Short-term liabilities in total 5.7 18.2 29.1 37.8 44.1 48.1 Liabilities and own equity in total 8.4 24.1 37.9 70.2 81.5 90.9 Source: Company data, WOOD Research 4iG 29 WOOD & Company Important disclosures This investment research is published by WOOD & Company Financial Services, a.s. 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WOOD&Co is not affiliated with Brasil Plural or any other U.S. registered broker-dealer.The views and sentiments expressed in this investment research and any findings thereof accurately reflect the analyst’s truthful views about the subject securities and or issuers discussed herein. 4iG 32 WOOD & Company This page has been left blank intentionally 4iG 33 WOOD & Company This page has been left blank intentionally 4iG 34 WOOD & Company This page has been left blank intentionally 4iG 35 WOOD & Company CONTACTS Czech Republic Poland UK Italy Kristen Andrasko namesti Republiky 1079/1a Skylight Zlote Tarasy City Point, 11th Floor Via Luigi Settembrini, 35 Head of Equities Palladium Zlota 59 1 Ropemaker Street 20124 Milan +420 222 096 253 110 00 Praha 1 00 120 Warszawa London EC2Y 9HT Italy [email protected] Czech Republic Poland Tel +420 222 096 111 Tel +48 22 222 1530 Tel +44 20 3530 0691 Tel +39 02 36692 500 Fax +420 222 096 222 Fax +48 22 222 1531 Bloomberg page WUCO Romania www.wood.com Metropolis Center 89-97 Grigore Alexandrescu St. 010624 Bucharest 1 Tel.: +40 316 30 11 81 Research Co-Head of Research/ Head of Research Co-Head of Research/Head of Greek Head of Consumer/Industrials Macroeconomics Poland Research Lukasz Wachelko Raffaella Tenconi Marta Jezewska-Wasilewska Alex Boulougouris +48 22 222 1560 +44 20 3530 0685 +48 22 222 1548 +30 211 106 9447 [email protected] [email protected] [email protected] [email protected] Head of Turkey Research Head of Russia Research Head of Romania Research Macroeconomics Atinc Ozkan Ildar Davletshin Iuliana Ciopraga Alessio Chiesa +90 542 202 3632 +44 203 530 0631 +40 316 30 1185 +44 75177 06102 [email protected] [email protected] [email protected] [email protected] Head of Financials Head of TMT Energy Utilities/Mining/Pharma Can Demir Piotr Raciborski Jonathan Lamb Bram Buring +44 20 3530 0623 +48 22 222 1551 +44 20 3530 0621 +420 222 096 250 [email protected] [email protected] [email protected] [email protected] Consumer/Real Estate Energy/Utilities Poland Consumer Jakub Caithaml Ondrej Slama Pawel Wieprzowski Jakub Mician +420 222 096 481 +420 222 096 484 +48 22 222 1549 +420 222 096 320 jakub.caithaml @wood.com [email protected] [email protected] [email protected] Financials Greece Russia Gaming/Mid-caps David Lojkasek Fani Tzioukalia Dmitry Vlasov Maria Mickiewicz +420 222 096 256 +30 211 106 9449 +44 750 714 6702 +48 602 450 718 [email protected] [email protected] [email protected] [email protected] Sales Head of Sales Kristen Andrasko Jan Koch Piotr Kopec Ioana Pop +420 222 096 253 +48 22 222 1616 +48 22 222 1615 +44 20 3530 0693 [email protected] [email protected] [email protected] [email protected] Grzegorz Skowronski Jarek Tomczynski Kostas Tsigkourakos Tatiana Sarandinaki +48 22 222 1559 +44 203 530 0688 +30 694 082 5810 Brasil Plural in association with WOOD&Co. [email protected] [email protected] [email protected] 1 212 388 5613 [email protected] Sales Trading and Execution Services Zuzana Mora Ermir Shkurti Vladimir Vavra +420 222 096 283 +420 222 096 847 +420 222 096 397 [email protected] [email protected] [email protected] RECENTLY PUBLISHED REPORTS Date Company/Sector Title Analyst 25/05/21 Wizz Air Do you want to go to the seaside? Jakub Caithaml, Alex Boulougouris 20/05/21 EME Macro/Strategy Poland – pressing the growth pedal Raffaella Tenconi, Alessio Chiesa 18/05/21 Titan Cement Hidden value Alex Boulougouris, Fani Tzioukalia 17/05/21 Allterco +60% sound good? Not yet, not for us Pawel Wieprzowski, Piotr Raciborski 14/05/21 WOOD's Universe Seeking ESG alpha among CEE/SEE utilities Bram Buring, Ondrej Slama 13/05/21 Raiffeisen Bank International Riding the recovery Marta Jezewska-Wasilewska, David Lojkasek 11/05/21 Bittnet Systems High growth for a high price Piotr Raciborski, Iuliana Ciopraga 11/05/21 Siauliu Bankas A return to the growth path Alex Boulougouris, David Lojkasek 10/05/21 Astarta Holding Sweet rebirth at the peak of the cycle Pawel Wieprzowski, Maria Mickiewicz 07/05/21 Kety Strong stuff (40%+)… but we want more Pawel Wieprzowski, Maria Mickiewicz 05/05/21 EME Macro/Strategy: Greece The state of play Raffaella Tenconi, Alessio Chiesa 05/05/21 Greece A fresh comeback Alex Boulougouris, Raffaella Tenconi 04/05/21 EME Macro/Strategy: Turkey Modest growth prospects, with worrying inflation Raffaella Tenconi, Alessio Chiesa 04/05/21 The Rear-View Mirror – EME markets Greece performs well again, but volumes down Research Team 04/05/21 North Macedonian Banks Growth story to continue after COVID-19 David Lojkasek, Alex Boulougouris 30/04/21 EME Macro/Strategy: Czech Republic Improving and prudent, deep labour market divide Raffaella Tenconi, Alessio Chiesa Although the information contained in this report comes from sources WOOD & Company believes to be reliable, we do not guarantee its accuracy, and such information may be incomplete or condensed. All opinions and estimates included in this report constitute our judgment as of this date and are subject to change without notice. This report is for information purposes only and is not intended as an offer or solicitation with respect to the purchase or sale of any security.