Orange Polska: Buy (Upgraded) OPL PW; OPL.WA

Friday, March 27, 2020 | update Orange Polska: buy (upgraded) OPL PW; OPL.WA | Telco, Poland

Defensive Play, Demand For FTTH Might Increase Current Price PLN 5.88

We have revised our outlook on Orange Polska ("Orange") to Target Price PLN 6.90 account for the expected consequences thus far of the current MCap PLN 7.7bn epidemic – obviously, the situation is still developing and Free Float PLN 3.8bn circumstances are subject to change. The key risks we see as facing telecoms at the moment include increased network traffic, potential ADTV (3M) PLN 31.3m customer losses, weaker sales of electronics due to subdued demand, exacerbated by quarantine store closures, reduced use of Shareholders international roaming, and, crucially for Orange, diminished Orange S.A. 50.67% prospects for selling noncore real estate at a good price. Our base- case scenario for Orange assumes that, against the backdrop Others 49.33% described above, we will see a 3% decline in eEBITDAaL, and witness FCFE of PLN 391m, in 2020. The following year, assuming the epidemic is contained, EBITDA could rebound by 5.1%, Business Profile supported by cost savings, and FCFE might increase to PLN 800m Orange Polska is a leading telecommunications provider in Poland with 14.8 million mobile users, (10.4% Yield). On updated estimates, we set our new target price 2.6 million broadband users, and 3.4 million voice for OPL at PLN 6.90, and we upgrade the stock to buy. Below we also users at the end of 2018. This was equivalent to provide a best-case earnings outlook for Orange, which considers respective market shares of 28% in mobile and 49% potential positive effects of price hikes facilitated by increasing data in fixed line. Orange controls 28% of Poland's traffic. In the worst case, we discuss the possibility of an extended broadband Internet market. It is currently in the freeze on dividends. process of buiding FTTx infrastructure.

Increased interest in FTTH, possible opportunities for price OPL vs. WIG hikes 8 Web traffic has surged as more and more people join the #stayathome movement and governments introduce increasingly strict social distancing PLN rules, to the point where streaming quality in Europe had to be reduced on 7 an intervention form the European Commission. The cable operator UPC reports a 40% increase in its Polish network traffic relative to weekly pre- epidemic levels, and we see this as an indication of increased demand for 6 broadband Internet where the are no usage caps or speed limitations. A marked rise in wired connections would add legitimacy to Orange's business 5 model, including the current investment in fiber infrastructure. At the same time, increasing phone data use should create an opportunity to raise the prices of mobile plans. 4 OPL Risks WIG There is downside risk to our current forecasts for Orange if the coronavirus 3 quarantine measures extend beyond mid-May. Further, Orange might not be

able to generate the assumed profits on planned real-estate deals, which to

Jun-19

Mar-19 Mar-20 Dec-19 a large extent determine the size of FCFE. In our worst-case scenario where Sep-19 2020 eEBITDAaL falls 8% to PLN 2,519m, the year-end net debt/eEBITDAaL ratio might be 2.52x (after assumed 5G expenditures of PLN 550m). Under such circumstances, Orange would most likely not restore a regular dividend policy from 2021 even with tailwinds on the way forward – a factor which Target Price Recommendation makes it less attractive than the rival telecom Play. Company new old new old Orange Polska 6.90 7.40 buy accumulate

Current Target Company Upside Price Price (PLN m) 2018* 2019 2020P 2021P 2022P Orange Polska 5.88 6.90 +17.3% Revenue 11,087.0 11,405.6 11,150.7 11,322.7 11,523.9 Forecast Update 2020E 2021E 2022E eEBITDAaL ** - 2,735.0 2,644.6 2,780.2 2,912.9 eEBITDAaL margin - 24.0% 23.7% 24.6% 25.3% Revenue -3.5% -3.1% -3.0% EBIT 345.0 416.8 378.4 612.9 823.8 EV/EBITDA under IFRS 16 -3.5% -3.3% +0.5% Net profit 10.0 91.3 62.7 263.3 422.4 Net Profit -75.4% -43.1% -16.0% P/E - 84.5 123.1 29.3 18.3 P/CE 3.0 2.7 2.8 2.6 2.5 P/B 0.7 0.7 0.7 0.7 0.7 EV/EBITDA 5.1 5.0 5.2 4.7 4.6 Analyst:

DPS 0.00 0.00 0.00 0.25 0.25 Paweł Szpigiel DYield 0.0% 0.0% 0.0% 4.3% 4.3% +48 22 438 24 06 * ex. IFRS 16 effects; ** EBITDA ex. leases and real-estate profits [email protected]

Revising Forecasts For a Recession numbers reported by China Mobile showed a decrease of less than 1%, or 8.1 million users, relative to a subscriber

base of 950.3 million at the end of 2019. The decline was Quarantine measures introduced by countries across the attributed mainly to users suspending some of their multiple world have drastically transformed the telecommunications SIM cards during the period of travel restrictions. In the long landscape, disrupting the business activities of hundreds of run, Polish carriers might see some loss of business on the companies. As a result, Polish telecom stocks tracked by the heels of slowing economic activity, however the potential WIG-IT index have shed 13.1% over the past month against declines in subscriber numbers in our view will be cushioned a 22.9% fall the WIG broad market benchmark. To reflect by the price hikes on mobile plans introduced in 2019. this, we have updated our outlook on the Polish mobile sector as a whole, and we have revised our models for In fact, we see potential for mobile ARPU growth driven by Orange Polska to give a comparison of three scenarios users to increasing their data plans. (base, best, and worst case) for how the current epidemic might affect the Company's value and earnings prospects. 3. Store closures

Sector Outlook The closure by Poland of large shopping centers to help contain the current epidemic is going to hurt smartphone We see the following top challenges facing the telecom sales. For example, UPC Poland has closed most of its industry in the months ahead: several dozen locations except four stores in Warsaw, Gdańsk, Katowice, and Krakow. Play has opted to keep 1. Increased network traffic stores outside shopping center open for now, but with circumstances changing fast it is advising its customers to Internet traffic has spiked as more and more countries close check its Website for updates on store hours. T-Mobile and schools and encourage firms to allow their employees to Orange have implemented similar policies. Orange operates work from home. As the #stayathome movement grows, about 700 sales locations across Poland, of which about 300 and governments introduce increasingly strict social (43%) are currently closed for business. 500 of the 700 distancing rules, demand for online video streaming is stores are run by partner networks. estimated to have surged 20-30% over the recent weeks, with Europe leading the charge, represented by Austria 4. Reduced demand for international roaming (+44%), Spain (+42%), and Germany (+32%). services

The surges in activity have sparked concerns over the ability Polish MNOs earn about PLN 100m a year from international of the European network infrastructure to withstand roaming services – profits which are about to be drastically increasing traffic without outages. With the closure of movie curtailed by the current travel restrictions. theaters, distributors are opting to make new movie releases available on streaming platforms, potentially 5. 5G auction adding to the congestion, alongside live concerts and theatrical streams, and streaming content being created by France has postponed its 5G auction, originally scheduled to museums, cultural institutions, and more. begin in late April, with the local regulator Arcep saying it was not able to move forward with the spectrum sale under Earlier this month, the EU' internal market commissioner, the current circumstances. On the other hand, Arcep's Polish Thierry Breton, called on content providers like Netflix and counterpart, UKE, on 23 March confirmed the 23 April Youtube, to curtail bandwidth usage by reducing the deadline for submitting initial bids for 5G frequencies (3480- streaming quality of their videos. The companies have 3800 MHz band). "The trial auction, followed by the auction, complied, with Nefllix reducing its European service quality will take place no earlier than May 15, 2020, taking into for 30 days, expected to reduce traffic by 25%. account the current external conditions," the regulator said in a post on its Website. It is probable that the trial will get In Poland, CSPs gave assurances after reports of disruptions pushed back if Poland further escalates the current from internet users: quarantine restrictions, however our base-case scenario for . Play disclosed a 30% increase in voice traffic over the Orange assumes that the 2020 5G auction will go ahead as recent days, accompanied by a 40% surge in peak planned, with telecoms paying approximately PLN 550m daytime data traffic, which subsides in the evenings. each per frequency block. . T-Mobile Polska is seeing traffic on its network as "stabilized at new, higher levels," and it currently The Base Case handles 40% more voice calls than at the beginning of

March. The average call duration has increased by 25% . Mobile revenues: Our base case predictions for on week days and 60% during weekends. Compared to Orange's subscriber numbers have not changed; we voice, data traffic has grown less rapidly at 25% so far assume the telecom will maintain a stable presence in this month. the Polish mobile market, supported by reduced carrier . The cable operator UPC reported a 40% increase in its switching among consumers, and for fixed line we Polish network traffic last week relative to weekly pre- anticipate that any slowdown in connections from mid- epidemic levels. Nevertheless the peak load does not March to mid-May due to potential technician exceed 75% of capacity. quarantines will be made up for by the end of the year.

At the same time, we have also not changed our Our base-case scenario for telecoms assumes no major assumptions as to ARPU growth as we are not service disruptions or outages. anticipating boosts to traffic or pricing beyond what we

had modeled before the outbreak. 2. Customer losses, reduced carrier switching

Amid rapidly-growing demand for telecommunications services, we see the risk of customer losses for mobile providers as low in the near term. Looking at numbers coming out of China, the January-February subscriber

Updated Base-Case mobile sales forecast for Orange . FCFE: We expect to see free cash flow-to-equity of Polska PLN 391m this year, indicating a drop from PLN 737m a (PLN m) 2020P 2021P 2022P year ago due to reduced real-estate profits. On the Convergent Services upside, we also anticipate improved working capital in 1,486 1,603 1,720 (B2C) 2020. FCFE Yield is currently 5.1%. FTTH connections 676 833 988 Postpaid mobile users 5,895 5,809 5,724 Updated Base-Case FCFE forecast for Orange Polska ARPU, convergence 103.9 106.0 108.0 (PLN m) 2020P 2021P 2022P ARPU, broadband-only 55.4 55.7 56.2 FCFE 391 800 926 ARPU, mobile postpaid 26.5 26.7 26.9 FCFE Yield 5.1% 10.4% 12.0% Source: mBank Source: mBank

. Device sales: We assume a 25% fall in device sales in Best-Case Scenario 2020 based on an estimated 80% plunge in contracts signed in the period from the mid-March store closures . The best-case scenario assumes thicker sales margins until their assumed reopening in mid-May, accompanied on electronics in 2020, accompanied by upward pricing by an overall decrease in activity throughout 2020. adjustments facilitated by high mobile data use, and About a half of Orange's salons remain open as of today, higher demand for fiber internet. however with stricter social distancing rules imposed from Tuesday, 14 March, these locations are not likely Best Case scenario assumptions to see much foot traffic in the coming weeks. Consumers (PLN m) 2020P 2021P 2022P can still place orders online or by phone, but with Convergent Services (B2C) 1,503 1,632 1,759 85-90% of all contracts currently closed in person the FTTH connections 699 870 1,040 move online is going to be slow. We assume lower sales Postpaid mobile users 5,881 5,787 5,694 margin on electronic sales. ARPU, convergence 103.9 106.0 108.0

55.4 55.7 56.2 . Operating expenses: Based on an assumption of a ARPU, broadband-only 50% traffic boost in the period from mid-March to mid- ARPU, mobile postpaid 27.1 27.3 27.6 May 2020, resulting in higher interconnect revenue, we anticipate equivalent growth in traffic costs. Led by eEBITDAaL 2756.4 2915.8 3061.8 downsizing, labor costs are expected to be reduced by EBITDA margin 24.6% 25.6% 26.3% nearly PLN 90m in 2020 and PLN +60m in 2021. We also

anticipate lower marketing expenses thanks to subdued DCF Valuation (9M) 8.31 carrier switching by consumers. On the other hand we expect to see increasing write-offs of bill receivables. Source: mBank

Labor cost estimate for Orange Polska Worst-Case Scenario

(PLN m) 2020P 2021P 2022P . The worst-case scenario assumes longer store closures Employee benefits 1,402.2 1,340.4 1,319.8 and weaker sales of electronics, a decline in subscribers Source: mBank driven by subdued economic activity, and slower EBITDA growth from 2021. We also model lower profits from real . Roaming: We assume profits from roaming will drop estate at PLN 80m in 2020, and year-end net debt ex. 50% in 2020 due to subdued usage during the summer leases /eEBITDAaL of 2.52x, indicating an extended travel season. dividend freeze in 2021.

. CAPEX: Orange's original CAPEX guidance for 2020 is Worst Case scenario assumptions PLN 2.1bn, and we expect the Company to stick to the (PLN m) 2020P 2021P 2022P plan and move forward with the planned network Convergent Services (B2C) 1,462 1,571 1,682 expansion projects. In 2021 network CAPEX will most FTTH connections 644 789 938 likely decrease by ca. PLN 300m. When it comes to 5G 5,800 5,723 5,645 spectrum costs, we have revised our expectation as to Postpaid mobile users the 2020 auction price to PLN 550m per frequency block. ARPU, convergence 102.9 104.9 106.9 ARPU, broadband-only 55.4 55.7 56.2 . Real-estate profits: Orange has an estimated PLN 1bn ARPU, mobile postpaid 26.0 26.1 26.4 locked in real-estate earmarked for sale. After closing deals for PLN 500m in 2019, this year property eEBITDAaL 2519 2631 2759 transactions might not fetch more than PLN 140m (a downward revision of an initial estimate of PLN 460m). EBITDA margin 23.3% 24.1% 24.9%

DCF Valuation (9M) 6.07 Source: mBank

Valuation

We use DCF analysis and relative valuation to assess the (PLN) weight price value of Orange Polska. Note that we reduced the weight of Relative Valuation 33.3% 5.89 the relative valuation outcome in the final assessment from DCF Analysis 66.6% 6.79 50% to 33% to extreme volatility in telco stocks. The DCF model yielded a per-share valuation of PLN 6.79 per share, price 6.48 and the per-share value obtained with multiples comparison 9M target price 6.90 amounted to PLN 5.89.

DCF Valuation

Assumptions: ▪ Net debt is as of 31 December 2019 (PLN 6,182m ex. ▪ The forecast period extends from FY2020 through leases). FY2029. ▪ D&A expenses are calculated ex. depreciation of right-of- ▪ The risk-free rate in the forecast period is 3.50%. use assets and so we do not add lease payments to ▪ We assume FCF after the forecast period will grow at a expenses. rate of 0.0%. ▪ CAPEX calculations assume gains from real-estate sales.

DCF Model (PLN m) 2020P 2021P 2022P 2023P 2024P 2025P 2026P 2027P 2028P 2029P + Revenue 11,151 11,323 11,524 11,732 11,954 12,170 12,373 12,574 12,768 12,957 change 1.5% 1.8% 1.8% 1.9% 1.8% 1.7% 1.6% 1.5% 1.5%

EBIT 378 613 824 964 1,029 1,140 1,254 1,332 1,398 1,455 EBIT margin 3.4% 5.4% 7.1% 8.2% 8.6% 9.4% 10.1% 10.6% 11.0% 11.2% Tax on EBIT 72 116 157 183 195 217 238 253 266 276 Effective tax rate 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% NOPLAT 307 496 667 781 833 924 1,015 1,079 1,133 1,178

D&A expenses 2,399 2,351 2,304 2,258 2,190 2,125 2,061 2,020 1,979 1,940 CAPEX -2,639 -1,760 -2,774 -1,756 -1,860 -1,892 -1,892 -1,891 -2,359 -2,360 Working capital 19 -54 -67 -67 -66 -66 -66 -66 -61 -61

FCF 85 1,033 130 1,216 1,097 1,090 1,118 1,142 691 697 1,181 WACC 6.6% 6.7% 6.6% 6.6% 6.7% 6.7% 6.8% 6.8% 6.8% 6.8% discount factor 95.3% 89.3% 83.8% 78.6% 73.7% 69.0% 64.6% 60.5% 56.7% 53.1% PV FCF 81 923 109 956 808 752 723 691 392 370

WACC 6.6% 6.7% 6.6% 6.6% 6.7% 6.7% 6.8% 6.8% 6.8% 6.8% 6.8% Cost of debt 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% Risk-free rate 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% Risk premium 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% Effective tax rate 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% Net debt / EV 39.5% 37.7% 39.4% 38.2% 37.4% 36.5% 35.5% 34.4% 35.2% 36.0% 36.0%

Cost of equity 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% 8.5% Risk premium 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% Beta 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0

FCF growth after the forecast period 0.0% Sensitivity Analysis Terminal value 17,490 FCF growth in perpetuity Present value of terminal value 9,282 -1.0% -0.5% 0.0% 0.5% 1.0% Present value of FCF in the forecast period 5,804 WACC +1.0 p.p. 4.7 5.1 5.5 5.9 6.4 Enterprise value 15,086 WACC +0.5 p.p. 5.3 5.7 6.2 6.7 7.4 Net debt (2019 eop) 6,182 WACC 6.0 6.5 7.2 7.7 8.4 Other noncore assets 0 WACC -0.5 p.p. 6.8 7.4 8.0 8.8 9.7 Minority interests 2 WACC -1.0 p.p. 7.7 8.4 9.2 10.1 11.2 Equity value 8,902 Shares outstanding (millions) 1312 Equity value per share (PLN) 6.8 9M cost of equity 6.4% 9M target price (PLN) 7.2

EV/EBITDA('20) at target price 4.8 P/E('20) at target price 142.1 TV / EV 62%

Relative Valuation

Our valuation is based on EV/EBITDA and DYield-RFR multiples assigned weights of 67% and 33% respectively (consequently, in the absence of dividends, the DYield-RFR component amounts to PLN 0 in 2020). We assume equal weights for EV/EBITDA in 2020, 2021 and 2022 and a weight of 50% for DYield-RFR in 2021 and 2022.

Multiples Comparison EV/EBITDA DYield-RFR 2020E 2021E 2022E 2020E 2021E 2022E BT GROUP PLC 4.1 4.1 4.1 11.4% 8.2% 7.9% DEUTSCHE TELEKOM AG-REG 5.6 5.4 5.2 6.0% 6.3% 6.2% ILIAD SA 7.9 7.1 6.7 1.6% 1.6% 1.8% KONINKLIJKE KPN NV 6.4 6.3 6.1 6.5% 6.9% 7.3% MOBILE TELESYSTEMS OJSC 4.5 4.4 4.3 7.2% 4.6% 5.3% ORANGE 5.2 5.1 5.0 6.3% 6.7% 7.0% ORANGE BELGIUM 4.5 4.3 4.2 3.9% 4.3% 5.0% ROSTELECOM 4.2 4.0 3.5 0.4% 1.2% 3.0% TALKTALK TELECOM GROUP 7.5 7.2 7.0 2.6% 2.6% 3.6% TELE2 AB-B SHS 11.6 11.1 10.5 6.2% 6.3% 6.4% TELECOM ITALIA SPA 5.5 5.4 5.4 -0.3% -0.6% 1.6% TELEFONICA SA 5.4 5.4 5.3 9.0% 9.2% 8.9% TELEKOM AUSTRIA AG 4.8 4.7 4.6 3.7% 3.9% 5.2% TELENOR ASA 6.4 6.3 6.2 4.9% 5.1% 5.4% TURK TELEKOMUNIKASYON AS 3.3 3.0 2.7 -3.4% -0.1% 4.8% TURKCELL ILETISIM HIZMET AS 3.3 2.9 2.6 -6.0% -4.0% -3.3% VODAFONE GROUP PLC 6.5 6.2 6.0 6.5% 6.6% 6.8% O2 CZECH REPUBLIC AS 6.7 6.9 6.7 7.9% 7.9% 7.9% MAGYAR TELEKOM TELECOMMUNICA 3.5 3.5 3.5 5.2% 5.2% 4.7% NETIA SA 4.4 4.1 - -1.8% -1.8% 0.0% CYFROWY POLSAT SA 6.7 6.5 6.5 2.0% 2.4% 2.3% HELLENIC TELECOMMUN ORGANIZA 4.8 4.7 4.5 - - - PLAY COMMUNICATIONS SA 5.5 5.3 5.0 3.8% 3.6% 5.0%

Maximum 11.6 11.1 10.5 11.4% 9.2% 8.9% Minimum 3.3 2.9 2.6 -6.0% -4.0% -3.3% Median 5.4 5.3 5.1 4.4% 4.4% 5.1% Orange Polska 5.2 4.7 4.6 -2.2% 2.1% 2.1% premium / discount -5.1% -11.4% -9.4% - -53.5% -59.2%

Implied Valuation Median 5.4 5.3 5.1 4.4% 4.4% 5.1% Multiple weight 66.7% 33.3% Year weight 33.3% 33.3% 33.3% 0.0% 50.0 % 50.0%

Equity value per share (PLN) 5.89

Income Statement (PLN m) 2018* 2019 2020P 2021P 2022P 2023P 2024P Revenue 11,087.0 11,405.6 11,150.7 11,322.7 11,523.9 11,731.5 11,954.0 change -2.6% 2.9% -2.2% 1.5% 1.8% 1.8% 1.9%

Mobile-Only Services 2,726.0 2,597.5 2,545.6 2,528.0 2,522.0 2,527.8 2,536.8 Fixed-Only Services 2,441.0 2,192.5 1,992.2 1,831.3 1,710.6 1,613.6 1,531.2 Convergent Services 1,296.0 1,557.7 1,751.3 1,983.4 2,174.5 2,360.2 2,562.7 Equipment sales 1,403.0 1,554.5 1,165.9 1,218.4 1,285.4 1,330.4 1,370.3 Other income 3,221.0 3,503.4 3,695.7 3,761.6 3,831.4 3,899.6 3,953.0

Employee benefits -1,577.0 -1,490.0 -1,402.2 -1,340.4 -1,319.8 -1,310.1 -1,305.4 Third-party services -6,200.0 -6,512.7 -6,388.0 -6,444.9 -6,559.9 -6,668.3 -6,789.7 Other oper. income/losses -203.0 -1,826.7 -1,944.7 -1,917.8 -1,925.9 -1,939.4 -1,953.3 Impairment of receivables and contract assets -162.0 -590.4 -596.3 -599.4 -604.0 -608.7 -620.3 Gains on disposal of assets 192.0 -2,513.5 -2,225.5 -2,297.6 -2,387.5 -2,456.4 -2,520.9 Amortization and impairment of right-of-use assets -277.0 -1,582.0 -1,621.6 -1,630.1 -1,642.5 -1,663.7 -1,695.3 Interest expense on lease liabilities -51.0 -178.8 -152.0 -154.3 -157.1 -159.9 -163.0

eEBITDAaL** - 2,735.3 2,644.6 2,780.2 2,912.9 3,026.3 3,121.4 margin - 24.0% 23.7% 24.6% 25.3% 25.8% 26.1%

EBITDA* 2,886.0 3,165.3 3,113.0 3,304.5 3,468.3 3,562.9 3,559.3 margin 26.0% 27.8% 27.9% 29.2% 30.1% 30.4% 29.8%

D&A expenses 2,544.0 2,748.5 2,734.5 2,691.6 2,644.5 2,598.5 2,530.7

EBIT 345.0 416.8 378.4 612.9 823.8 964.4 1,028.5 margin 3.1% 3.7% 3.4% 5.4% 7.1% 8.2% 8.6%

Financing activity -305.0 -298.4 -301.1 -287.9 -302.3 -293.8 -288.9

Pre-tax income 40.0 118.3 77.4 325.0 521.5 670.6 739.7 margin 0.4% 1.0% 0.7% 2.9% 4.5% 5.7% 6.2%

Tax -30.0 -27.0 -14.7 -61.8 -99.1 -127.4 -140.5

Net Income 10.0 91.3 62.7 263.3 422.4 543.2 599.1 margin 0.8% 0.6% 2.3% 3.7% 4.6% 5.0%

Shares outstanding at eop (millions) 1,312.0 1,312.0 1,312.0 1,312.0 1,312.0 1,312.0 1,312.0 EPS 0.01 0.07 0.05 0.20 0.32 0.41 0.46 CEPS 1.95 2.16 2.13 2.25 2.34 2.39 2.39

ROAE 0.1% 0.9% 0.6% 2.5% 4.0% 5.1% 5.7% ROAA 0.0% 0.4% 0.3% 1.1% 1.7% 2.2% 2.5% * ex. IFRS16 effects, ** EBITDA ex. leases and real-estate profits

Balance Sheet (PLN m) 2018* 2019 2020P 2021P 2022P 2023P 2024P ASSETS 23,295.0 24,340.0 24,279.7 24,200.9 24,257.8 24,108.8 24,018.9 Fixed assets 19,326.0 20,847.0 21,087.4 20,496.8 20,967.1 20,465.4 20,135.3 Equity value 2,147.0 2,263.0 2,263.0 2,263.0 2,263.0 2,263.0 2,263.0 Other intangible assets 4,871.0 4,545.0 4,620.9 4,565.4 4,664.5 4,620.8 4,617.9 PP&E 10,738.0 10,402.0 10,902.0 10,707.4 11,419.1 11,301.6 11,315.0 Deferred tax asset 834.0 808.0 808.0 808.0 808.0 808.0 808.0 Other 736.0 2,829.0 2,493.5 2,153.0 1,812.5 1,472.0 1,131.5

Current assets 3,969.0 3,493.0 3,192.3 3,704.1 3,290.7 3,643.4 3,883.5 Inventory 240.0 218.0 223.8 232.9 237.1 241.3 245.9 Trade debtors 2,371.0 2,132.0 1,984.3 2,015.0 2,040.5 2,066.9 2,095.6 Other 747.0 739.0 739.0 739.0 739.0 739.0 739.0 Cash 611.0 404.0 245.2 717.2 274.1 596.2 803.1

(PLN m) 2018* 2019 2020P 2021P 2022P 2023P 2024P EQUITY & LIABILITIES 23,295.0 24,340.0 24,279.7 24,200.9 24,257.8 24,108.8 24,018.9 Equity 10,494.0 10,566.0 10,628.7 10,563.9 10,658.3 10,545.5 10,488.7

Non-current liabilities 6,846.0 9,682.0 9,602.0 9,522.0 9,442.0 9,362.0 9,282.0 Trade payables 473.0 348.0 268.0 188.0 108.0 28.0 -52.0 Loans from related party 5,258.0 6,431.0 6,431.0 6,431.0 6,431.0 6,431.0 6,431.0 Other financial obligations 123.0 1,696.0 1,696.0 1,696.0 1,696.0 1,696.0 1,696.0 Other 992.0 1,207.0 1,207.0 1,207.0 1,207.0 1,207.0 1,207.0

Current liabilities 5,946.0 4,092.0 4,049.1 4,114.9 4,157.4 4,201.2 4,248.2 Trade payables 2,469.0 2,367.0 2,324.1 2,389.9 2,432.4 2,476.2 2,523.2 Loans from related party 2,074.0 11.0 11.0 11.0 11.0 11.0 11.0 Other financial obligations 95.0 429.0 429.0 429.0 429.0 429.0 429.0 Provisions 217.0 185.0 185.0 185.0 185.0 185.0 185.0 Other 1,091.0 1,100.0 1,100.0 1,100.0 1,100.0 1,100.0 1,100.0

Debt* 7,550.0 8,567.0 8,567.0 8,567.0 8,567.0 8,567.0 8,567.0 Net debt* 6,939.0 8,163.0 8,321.8 7,849.8 8,292.9 7,970.8 7,763.9 Net debt ex. IFRS16 - 6,182.0 6,340.8 5,868.8 6,311.9 5,989.8 5,782.9 Net Debt / Equity 0.7 0.8 0.8 0.7 0.8 0.8 0.7 Net Debt/ EBITDA 2.4 2.6 2.7 2.4 2.4 2.2 2.2 Net Debt ex. leases / EBITDAaL - 2.3 2.4 2.1 2.2 2.0 1.9 BVPS 8.0 8.1 8.1 8.1 8.1 8.0 8.0 *2018 figures are before IFRS 16

Cash Flow (PLN m) 2018* 2019 2020P 2021P 2022P 2023P 2024P Cash flow from operating activities 1,812.0 2,776.0 2,410.7 2,440.5 2,509.2 2,604.3 2,693.1 Net Income 10.0 91.0 62.7 263.3 422.4 543.2 599.1 D&A (ex. right-of-use assets) 2,544.0 2,448.0 2,399.0 2,351.1 2,304.0 2,258.0 2,190.2 Change in working capital and other 142.0 173.0 19.0 -53.9 -67.2 -66.8 -66.3 Other -884.0 64.0 -70.0 -120.0 -150.0 -130.0 -30.0

Cash flow from investing activities 2,066.0 1,919.0 2,569.4 1,640.5 2,624.3 1,626.3 1,830.2 CAPEX 2,282.0 2,140.0 2,709.4 1,880.5 2,924.3 1,886.3 1,890.2 Other -216.0 -221.0 -140.0 -240.0 -300.0 -260.0 -60.0

Cash flow from financing activities 219.0 -1,064.0 0.0 -328.0 -328.0 -656.0 -656.0 Debt 219.0 -826.0 0.0 0.0 0.0 0.0 0.0 Dividends/Buyback 0.0 0.0 0.0 -328.0 -328.0 -656.0 -656.0 Other 0.0 -238.0 0.0 0.0 0.0 0.0 0.0

Change in cash -35.0 -207.0 -158.8 472.0 -443.1 322.0 206.9 Cash at eop 611.0 404.0 245.2 717.2 274.1 596.2 803.1

DPS (PLN) 0.00 0.00 0.00 0.25 0.25 0.50 0.50 FCF -470.0 636.0 -298.8 560.0 -415.1 718.0 802.9 (CAPEX/Sales) 20.6% 18.8% 24.3% 16.6% 25.4% 16.1% 15.8% *2018 figures are before IFRS 16

Trading Multiples 2018* 2019 2020P 2021P 2022P 2023P 2024P P/E - 84.5 123.1 29.3 18.3 14.2 12.9 P/CE 3.0 2.7 2.8 2.6 2.5 2.5 2.5 P/B 0.7 0.7 0.7 0.7 0.7 0.7 0.7 P/S 0.7 0.7 0.7 0.7 0.7 0.7 0.6

FCF/EV -3.2% 4.0% -1.9% 3.6% -2.6% 4.6% 5.2% EV/EBITDA 5.1 5.0 5.2 4.7 4.6 4.4 4.4 EV/EBIT 42.5 38.1 42.4 25.4 19.4 16.3 15.1 EV/S 1.3 1.4 1.4 1.4 1.4 1.3 1.3

DYield 0.0% 0.0% 0.0% 4.3% 4.3% 8.5% 8.5%

Price (PLN) 5.88 5.88 5.88 5.88 5.88 5.88 5.88 Shares outstanding at eop (millions) 1,312.0 1,312.0 1,312.0 1,312.0 1,312.0 1,312.0 1,313.0 MC (PLN m) 7,714.6 7,714.6 7,714.6 7,714.6 7,714.6 7,714.6 7,720.4 EV (PLN m) 14,653.6 15,877.6 16,036.3 15,564.4 16,007.4 15,685.4 15,484.4 *2018 figures are before IFRS 16

List of abbreviations and ratios contained in the report: EV – net debt + market value EBIT – Earnings Before Interest and Taxes EBITDA – EBIT + Depreciation and Amortisation P/CE – price to earnings with amortisation MC/S – market capitalisation to sales EBIT/EV – operating profit to economic value P/E – (Price/Earnings) – price divided by annual net profit per share ROE – (Return on Equity) – annual net profit divided by average equity P/BV – (Price/Book Value) – price divided by book value per share Net debt – credits + debt papers + interest bearing loans – cash and cash equivalents EBITDA margin – EBITDA/Sales

OVERWEIGHT (OW) – a rating which indicates that we expect a stock to outperform the broad market NEUTRAL (N) – a rating which indicates that we expect the stock to perform in line with the broad market UNDERWEIGHT (UW) – a rating which indicates that we expect the stock to underperform the broad market

Recommendations of Biuro maklerskie mBanku: A recommendation is valid for a period of 9 months, unless a subsequent recommendation is issued within this period. Expected returns from individual recommendations are as follows: BUY – we expect that the rate of return from an investment will be at least 15% ACCUMULATE – we expect that the rate of return from an investment will range from 5% to 15% HOLD – we expect that the rate of return from an investment will range from -5% to +5% REDUCE – we expect that the rate of return from an investment will range from -5% to -15% SELL – we expect that an investment will bear a loss greater than 15% Recommendations are updated at least once every nine months. mBank S.A. with its registered office in Warsaw at Senatorska 18 renders brokerage services in the form of derived organisational unit – Brokerage Office which uses name Biuro maklerskie mBanku. mBank S.A. as part of the Exchange's Analytical Coverage Support Programme (“Programme”, https://www.gpw.pl/eacsp) prepares analytical reports for the following companies: Cognor Holding, Comarch, VRG. These documents are prepared at the request of Giełda Papierów Wartościowych w Warszawie S.A. (‘WSE’), which is entitled to copyrights to these materials. mBank S.A. receives remuneration from the WSE for the preparation of the reports. All documents prepared for the Programme are available at: https://www.mdm.pl/ui-pub/site/market_and_analysis/analysis_and_recommendations/analytical_coverage_support_programme

This document has been created and published by Biuro maklerskie mBanku. The present report expresses the knowledge as well as opinions of the authors on day the report was prepared. The opinions and estimates contained herein constitute our best judgment at this date and time, and are subject to change without notice. The present report was prepared with due care and attention, observing principles of methodological correctness and objectivity, on the basis of sources available to the public, which Biuro maklerskie mBanku considers reliable, including information published by issuers, shares of which are subject to recommendations. However, Biuro maklerskie mBanku, in no case, guarantees the accuracy and completeness of the report, in particular should sources on the basis of which the report was prepared prove to be inaccurate, incomplete or not fully consistent with the facts. mBank S.A. bears no responsibility for investment decisions taken on the basis of the present report or for any damages incurred as a result of investment decisions taken on the basis of the present report.

This document does not constitute an offer or invitation to subscribe for or purchase any financial instruments and neither this document nor anything contained herein shall form the basis of any contract or commitment whatsoever. It is being furnished to you solely for your information and may not be reproduced or redistributed to any other person This document does not constitute investment, legal, accounting or other advice, and mBank is not liable for damages resulting from or related to the use of data provided in the documents. This document may not be copied, duplicated and/or be directly or indirectly distributed in the United States, Canada, Australia or Japan, nor transferred to citizens or residents of a state where its distribution may be legally restricted, which does not limit the possibility of publishing materials prepared for the Programme on Cognor Holding, Comarch, VRG, mBank or WSE websites. Persons who disseminate this document should be aware of the need to comply with such restrictions.

Recommendations are based on essential data from the entire history of a company being the subject of a recommendation, with particular emphasis on the period since the previous recommendation.

Investing in shares is connected with a number of risks including, but not limited to, the macroeconomic situation of the country, changes in legal regulations as well as changes on commodity markets. Full elimination of these risks is virtually impossible.

It is possible that mBank S.A. in its brokerage activity renders, will render or in the past has rendered services for companies and other entities mentioned in the present report. mBank S.A. does not rule out offering brokerage services to an issuer of securities being the subject of a recommendation. Information concerning a conflict of interest arising in connection with issuing a recommendation (should such a conflict exist) is located below.

Nothing in this Publication is intended as a comment on any report, opinion, or view expressed by media outlets as regards an apparent intention on the part of Bank Pekao S.A. to approach Commerzbank with a preliminary offer to buy shares in mBank (the "Alleged Transaction"). Furthermore, nothing in this Publication shall be construed as an attempt to measure the impact of such an Alleged Transaction on the valuation or the financial results of Bank Pekao S.A. Any recommendations made herein, and all financial forecasts, reflect the present status of Bank Pekao S.A. as of this date and represent our expectations as to Bank Pekao S.A.'s growth on an organic basis. Similarly, nothing in this Publication shall be construed as a comment on how the Alleged Transaction could impact PZU S.A., which is part of our coverage universe and which holds interest in Bank Pekao S.A.

The present report was not transferred to the issuer prior to its publication.

The production of this recommendation was completed on March 27, 2020, 8:27 AM. This recommendation was first disseminated on March 27, 2020, 8:27 AM. mBank S.A., its shareholders and employees may hold long or short positions in the issuer's shares or other financial instruments related to the issuer's shares. mBank S.A. has a phone subscription agreement in place with Orange Polska S.A.

Copying or publishing the present report, in full or in part, or disseminating in any way information contained in the present report requires the prior written consent of mBank S.A.

Recommendations are addressed to all Clients of Biuro maklerskie mBanku.

All investment recommendations and strategies issued by mBank S.A. over the last 12 months are available at: http://www.mdm.pl/ui-pub/site/market_and_analysis/analysis_and_recommendations/fundamental_analysis/recommendations?recent_filter_active=true&lang=en

The activity of mBank S.A. is subject to the supervision of the Polish Financial Supervision Commission.

Individuals who did not participate in the preparation of recommendations, but had or could have had access to recommendations prior to their publication, are employees of Biuro maklerskie mBanku authorised to access the premises in which recommendations are prepared and/or individuals having to access to recommendations based on their corporate roles, other than the analysts mentioned as the authors of the present recommendations.

This publication constitutes investment research within the meaning of Art. 36.1 of Commission Delegated Regulation (EU) 2017/565.

The compensation of the research analysts responsible for preparing investment research is determined independently of and without regard to the compensation of or revenue generated by any other employee of the Bank, including but not limited to any employee whose business interests may reasonably be considered to conflict with the interests of the persons to whom the investment research prepared by the Research Department of Biuro maklerskie mBanku is disseminated. With that being said, since one of the factors taken into consideration when determining the compensation of research analysts is the degree of fulfillment of annual financial targets by customer service functions, there is a risk that the adequacy of compensation offered to persons preparing investment research will be questioned by a competent oversight body.

For U.S. persons only: This research report is a product of mBank SA which is the employer of the research analyst(s) who has prepared the research report. The research analyst(s) preparing the research report is/are resident outside the United States (U.S.) and are not associated persons of any U.S. regulated broker-dealer and therefore the analyst(s) is/are not subject to supervision by a U.S. broker-dealer, and is/are not required to satisfy the regulatory licensing requirements of FINRA or required to otherwise comply with U.S. rules or regulations regarding, among other things, communications with a subject company, public appearances and trading securities held by a research analyst account. This report is intended for distribution by mBank SA only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the U.S. Securities and Exchange Act, 1934 (the Exchange Act) and interpretations thereof by U.S. Securities and Exchange Commission (SEC) in reliance on Rule 15a 6(a)(2). If the recipient of this report is not a Major Institutional Investor as specified above, then it should not act upon this report and return the same to the sender. Further, this report may not be copied, duplicated and/or transmitted onward to any U.S. person, which is not the Major Institutional Investor. In reliance on the exemption from registration provided by Rule 15a-6 of the Exchange Act and interpretations thereof by the SEC in order to conduct certain business with Major Institutional Investors, mBank SA has entered into an agreement with a U.S. registered broker-dealer, Cabrera Capital Markets. ("Cabrera"). Transactions in securities discussed in this research report should be effected through Cabrera or another U.S. registered broker dealer.

Strong and weak points of valuation methods used in recommendations: DCF – acknowledged as the most methodologically correct method of valuation; it consists in discounting financial flows generated by a company; its weak point is the significant susceptibility to a change of forecast assumptions in the model. Relative – based on a comparison of valuation multipliers of companies from a given sector; simple in construction, reflects the current state of the market better than DCF; weak points include substantial variability (fluctuations together with market indices) as well as difficulty in the selection of the group of comparable companies. Economic profits – discounting of future economic profits; the weak point is high sensitivity to changes in the assumptions made in the valuation model. Discounted Dividends (DDM) – discounting of future dividends; the weak point is high sensitivity to changes in the assumptions as to future dividends made in the valuation model. NAV - valuation based on equity value, one of the most frequently used method in case of developing companies; the weak point of the method is that it does not factor in future changes in revenue/profits of a company. mBank issued the following investment recommendations for the Company in the 12 months prior to this publication Orange Polska

recommendation accumulate buy accumulate hold

date issued 2019-11-29 2019-09-05 2019-08-02 2019-06-19

target price (PLN) 7.40 7.50 7.50 7.50

price on rating day 6.46 6.12 6.70 7.29

mBank S.A. Senatorska 18 00-950 Warszawa http://www.mbank.pl/

Research Department

Kamil Kliszcz Michał Marczak Michał Konarski director +48 22 438 24 01 +48 22 438 24 05 +48 22 438 24 02 [email protected] [email protected] [email protected] strategy banks, financials energy, power generation

Jakub Szkopek Paweł Szpigiel Piotr Bogusz +48 22 438 24 03 +48 22 438 24 06 +48 22 438 24 08 [email protected] [email protected] [email protected] industrials, chemicals, metals media, IT, telco retail, gaming

Aleksandra Szklarczyk Piotr Poniatowski Mikołaj Lemańczyk +48 22 438 24 04 +48 22 438 24 09 +48 22 438 24 07 [email protected] [email protected] [email protected] construction, real-estate development industrials banks, financials

Sales and Trading

Traders

Piotr Gawron Krzysztof Bodek Tomasz Jakubiec director +48 22 697 48 89 +48 22 697 47 31 +48 22 697 48 95 [email protected] [email protected] [email protected]

Adam Prokop Magdalena Bernacik Andrzej Sychowski +48 22 697 47 90 +48 22 697 47 35 +48 22 697 48 46 [email protected] [email protected] [email protected]

Sales, Foreign Markets

Bartosz Orzechowski Jędrzej Łukomski +48 22 697 48 47 +48 22 697 49 85 [email protected] [email protected]

Private Client Sales

Kamil Szymański Jarosław Banasiak director deputy director +48 22 697 47 06 +48 22 697 48 70 [email protected] [email protected]