Thursday, December 03, 2015 | update Polska: buy (reiterated) OPL PW; OPL.WA | TMT,

FCFs Show Rebound Potential Current Price PLN 6.50

Contrary to our expectations with respect to the recently-ended Target Price PLN 9.00 LTE spectrum auction that after speculative bidding by NetNet to MCap PLN 10.66bn drive prices up to a point where the auction would have to be Free Float PLN 5.26bn canceled and redone, in the end the Administration Ministry stepped in and brought the auction to a close by effectively turning ADTV (3M) PLN 34.96m it into a tender process despite numerous protests from the bidder. As a result the total bids placed on the 4G frequencies reached Ownership PLN 9.2bn. As the winner of two of the five frequency blocks in the Orange S.A. 50.67% 800 MHz range put up for auction, Orange Polska is due to pay a (f. France Telecom S.A.) total of PLN 3.2bn for the licenses, prompting adjustments to our

valuation model formerly based on the assumption of PLN 1.5bn frequency CAPEX. Orange is currently trading at 4.4x 2016E Others 49.33% EV/EBITDA, showing discounts of 35% to the peer group and 31% to the valuation of rival Polkomtel. This is an attractive ratio in our Sector Outlook view given its high FCF yield at 13.0% (similar to 12.8% poffered The value of the Polish market by and 6.1% European telecoms), relatively low is estimated at PLN 39 billion, including PLN 26bn in mobile telephony at a penetration rate greater debt even after the pricey spectrum bookings (at 1.9x vs. 2.0x than 153%. Fixed-line penetration in 2014 was European telecoms), and the fact that within a few months from 45% (-2.0ppts y/y), and wholesale line rental and completing LTE800 coverage infrastructure it will be able to offer LLU-based line leasing has been on a decline in the widest range of B2B and B2C telecommunications services in 2015. Poland. What is more Orange's current market valuation does not yet price in the high-speed FTTx infrastructure and its potential to Company Profile take away market share from cable operators. Our new price target Orange Polska is the leader in telecommunications of PLN 9.00 for OPL implies upside potential of 38%. services. It had over 23 million customers at the end of 2014, and in 2015 its mobile and fixed-line

Even after cut, dividend potential sill above average market shares (in customer numbers) are 27% After its winning bids on LTE spectrum were confirmed in October, Orange and 52%, respectively. In addition Orange controls 30% of the Polish broadband Internet. Finally announced it was reducing the dividend payout ratio to 50% in light of the Orange is the owner of the largest upcoming expenditures. However in the future, even assuming a fall in telecommunications infrastructure in Poland. EBITDA in 2016, since the Company is aiming to achieve a 2018 target debt ratio of 1.7x, we believe it will restore the payout ratio to a higher OPL vs. WIG level (depending on the new debt/EBITDA target set to be announced in February 2016). By contrast, the rival telecom Cyfrowy Polsat's stated 12.0 2016 year-end net debt/EBITDA target is <2.5x, and its dividend policy is OPL up for a revision. According to our calculations the telecom will not be able PLN to reduce the debt ratio below 2.7x next year, and as a result it will WIG withhold distributions from shareholders in the following year. 10.5

High-speed infrastructure coming soon Orange Polska lost 4% of its share in the fixed-line broadband market between 2010 and 2014 (mostly to cable providers which control 80% of 9.0 the market for >30 Mpbs speeds compared to Orange's share of 7%), and it needs to start investing in high-speed bandwidth infrastructure if it wants

to regain its footing. In the next few years we expect Orange will invest 7.5 over PLN 2 billion in developing FTTH networks, supported by G.Fast, a technology which in test conditions achieved speeds up to 500 Mbps. We anticipate a G.Fast pilot launch still this year. By offering high-speed fixed- line Internet, Orange stands to expand its customer base and maximize the 6.0 cross-sell potential within that base, and consequently stabilize its EBITDA Nov-14 Feb-15 May-15 Aug-15 Nov-15 starting in 2016. Target Price Rating (PLN m) 2013 2014 2015E 2016E 2017E Company new old new old Revenue 12,923 12,212 11,841 11,502 11,457 EBITDA 3,904 4,076 3,535 3,430 3,496 OPL 9.00 10.20 buy buy EBITDA margin 30.2% 33.4% 29.9% 29.8% 30.5% Current Target Company Upside EBIT 788 986 626 718 934 Price Price Net profit 294 535 281 292 474 OPL 6.50 9.00 +38% DPS 0.50 0.50 0.50 0.25 0.25 P/E 29.0 15.9 30.4 29.2 18.0 Analyst: P/CE 0.7 0.7 0.7 0.7 0.7

P/B 0.7 0.7 0.7 0.7 0.7 Paweł Szpigiel EV/EBITDA 3.4 3.1 3.5 4.4 4.3 +48 22 438 24 06 DYield 7.7% 7.7% 7.7% 3.8% 3.8% [email protected]

OPL Undervalued Relative to CPS Both Cyfrowy and Orange face modest EBITDA growth in the coming years despite a push into LTE, which may

explain the discount at which they are valued relative to Compared to rival Cyfrowy Polsat, Orange Polska has a European telecoms, set for EBITDA growth at average different revenue composition in that 43% of its annual annual rates of 2.5% in 2016 and 4.4% in 2017 according topline comes from the fixed-line business which relies to a to Bloomberg forecasts. Meanwhile our analyses indicate large extent on obsolete copper wire infrastructure. At that the two Polish telecoms are poised for a flat earnings Cyfrowy, 33% of the revenues are provided by the momentum from 2017 on stemming from the fact that the television business (broadcasting and DTH satellite pay- local market for telecommunications services is one of the TV). most competitive in the world. At Cyfrowy the upsell

capabilities are limited to the existing customer base, and Cyfrowy Polsat revenue composition they entail significantly reduced prices, and while the television business does show meaningful growth potential its share in the Company's total sales is only 10%.

33% DTH + TV FCF Yield projection for Cyfrowy Polsat and Orange Broadcasting Polska Mobile Telecom 20% 67% 12.9% 15.6% 15.0% 13.5% 15% 13.1% 12.3% 12.9% 12.8% 12.7% 10.2% 10% Source: Dom Maklerski mBanku 5.7% 5% Orange Polska revenue composition 0%

-5% 5%

-10% Fixed Line 43% -15% Mobile

Other -20% 52%

-25% 2016P 2017P 2018P 2019P 2020P 2021P OPL PW CPS PW Source: Dom Maklerski mBanku Source: Dom Maklerski mBanku While we agree that the differences in revenue composition should mandate a valuation premium for CPS over OPL, at Cyfrowy is expected to generate higher FCF Yield in 2016 57% on 2016E EV/EBITDA (with OPL’s multiple adjusted and 2017 than Orange, whose cash flows in the period will be affected by the PLN 3.2bn LTE spectrum payment and a for the effects of LTE frequency payments on net debt), fine imposed by the European Commission. In addition the premium is much too high looking at the following Orange is expected to invest PLN 450m per year until 2019 metrics: (1) EBITDA growth, (2) FCF Yield and DivYield, in the development of FTTx technology, and although we and (3) debt. We assign the highest weight to these factored these expenditures out of FCF calculations for metrics as they directly influence the amounts of presentation purposes, note that even with them factored distributions to shareholders. in Orange still generates higher FCF than Cyfrowy.

EBITDA growth projection for Cyfrowy Polsat and Orange Polska FCF adjustments Orange Polska 40% 37.3% 8.0%

6.0% 35%

4.0% 30% 2.0% 2.0% 25% 0.5% 0.2% 0.4% 0.6% 0.0% 20% -0.2% -2.0% -0.6% -0.4% 15% -1.5% 10% -4.0% -3.1% -3.1% 6.0% -6.0% 5% -5.6% -8.0% 0% 2016P 2017P 2018P 2019P 2020P 2021P 2016P 2017P 2018P 2019P

OPL PW* CPS PW LTE spectrum payment EU fine

Source: Dom Maklerski mBanku, * EBITDA adjusted for proceeds of property Source: Dom Maklerski mBanku sales

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Adjusted FCF Yield projection for Cyfrowy Polsat and Net Debt/EBITDA projection for Cyfrowy Polsat and Orange Polska Orange Polska

18.0% 3.0x 2.7x 15.6% 16.0% 15.0% 2.5x 2.2x 13.5% 2.0x 14.0% 13.1% 12.9% 12.9% 12.8% 12.7% 2.0x 1.9x 2.0x 12.3% 1.7x 1.7x 11.1% 11.7% 1.6x 12.0% 1.4x 1.4x 10.2% 1.5x 1.2x 1.2x 10.0% 1.0x 8.0%

6.0% 0.5x

4.0% 0.0x 2016P 2017P 2018P 2019P 2020P 2021P 2.0%

0.0% OPL PW CPS PW 2016P 2017P 2018P 2019P 2020P 2021P Source: Dom Maklerski mBanku CPS PW OPL PW To reiterate Cyfrowy has less dividend-paying capacity Source: Dom Maklerski mBanku than Orange due to its higher debt and lower FCF yield. The following chart presents our DivYield projections for On an adjusted basis our 2017-2021 FCF Yield projections both companies assuming they reduce and keep their are ca. 13.0% for Orange vs. 12.8% for Cyfrowy. debt/EBITDA ratios at 2.0x

After its winning bids on LTE spectrum were confirmed in DivYield projection for Cyfrowy Polsat and Orange October, Orange announced it was reducing the dividend Polska at 2.0 leverage ratio payout ratio to 50% in light of the upcoming expenditures. However in the future, even assuming a fall in EBITDA in 2016, since the Company is aiming to achieve a 2018 15% 12.6% target debt ratio of 1.7x, we believe it will restore the 12.1% payout ratio to a higher level (depending on the new net 12% 10.9% debt/EBITDA target set to be announced in February 8.4% 2016). By contrast, Cyfrowy's 2016 year-end net debt/EBITDA target is <2.5x, and its dividend policy is up 9% 10.5% 10.8% for a revision according to the most recent statements. In 5.9% our opinion the Company will not be able to reduce the 10.3% 6% debt ratio below 2.7x by the end of 2016, and as a result it 3.7% will withhold dividends in 2017. 3% 4.3% DivYield projection for Cyfrowy Polsat and Orange 0.0% 0.0% Polska 0% 14% 2016P 2017P 2018P 2019P 2020P 2021P

12% OPL PW CPS PW 10% 7.7% 7.7% 7.7% Source: Dom Maklerski mBanku 8% Net Debt/EBITDA scenario for comparison 6% 3.8% 3.8% 3.8% 3.0x 6.2% 6.6% 2.7x 4% 2.5x 4.1% 4.1% 2.2x 2% 2.0x 2.0x 2.0x 2.0x 2.0x 2.0x 2.0x 0% 0.0% 0.0% 1.5x -2%

-4% 1.0x 2016P 2017P 2018P 2019P 2020P 2021P 0.5x OPL PW CPS PW 0.0x Source: Dom Maklerski mBanku 2016P 2017P 2018P 2019P 2020P 2021P

OPL PW CPS PW

Source: Dom Maklerski mBanku

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A comparison of Cyfrowy and Orange should include their to the retail business, Cyfrowy draws significant value from respective service offers. Cyfrowy does not offer fixed-line its loyal base of customers based in rural and provincial services and for this reason it is bound to experience areas of Poland, however in metropolitan areas it is up tightening margins on B2B services under competitive against Orange which is the only carrier with the capacity pressure from Orange, T-Mobile, and . When it comes to offer mobile and fixed-line bundles.

Orange Polska service range vs. competition Fixed Line Mobile TV Internet Voice Internet Voice Orange Polska x x x x x T-Mobile x x x

Play x x

Cyfrowy Polsat x x x

Netia x x x

Vectra x x x

Multimedia x x x

UPC x x x

nC+ x

Source: Dom Maklerski mBanku

Summing up, Orange Polska generates similar FCF Yield to Polish fixed-line Internet market (millions of Cyfrowy, but at the same time thanks to lower debt it is subscribers) able to offer superior dividend yield. In spite of this OPL is 10.0 trading at a 38% discount to its non-dividend-paying and less versatile rival. 9.0 2.2 8.0 2.9 Investment in FTTx 7.0 6.0 In spite of the considerable cost, we expect Orange to intensify investment in FTTH infrastructure after a 5.0 4.3 successful pilot trial in one of the districts of as a 4.0 way of stemming churn and increasing upsell potential. 3.0 6.5 The lack of infrastructure has caused the Company to lose over 200 thousand fixed-line broadband customers since 2.0 2.9 Q1 2013, with low-speed (ADSL, CDMA) line losses much 1.0 greater at 450 thousand. 0.0 2010 VHBB (>30 FBB (< 30 2014 Orange Polska fixed-line broadband customers Mbps) Mbps)

2400 800 Source: Orange Polska

2300 700 Overall the market landscape in Polish fixed broadband has 2200 600 changed dramatically in the last few years. In 2010 Orange (then called TPSA) controlled 35% of the fixed-line 2100 500 broadband market on-network plus another 8% via BSA and LLU. By 2014 these shares decreased to 31% and 6%, 2000 400 respectively. 1900 300 Polish fixed-line broadband providers by market 1800 200 share in volumes

1700 100 100% 90% 1600 0 30% 30% 80% 70% ADSLADSL (prawa (rhs) skala) 60% 27% DostępyTotal Broadband szerokopasmowe (rhs) razem (prawa skala) 34% 50% VDSLVDSL + +FTTH FTTH (lewa (rhs) skala) CDMACDMA (lewa (LHS) skala) 40% 8% 6% 30% Source: Orange Polska 20% 35% 31% Between 2010 and 2014 Orange's high-speed Internet 10% (>30 Mbps) customers, from being a marginal subscriber 0% group moved to having a 40% share in the Company's 2010 2014 total subscribers. Orange Polska BSA & LLU CATV Others

Source: Orange Polska

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The shifting competitive landscape signifies an urgent need We expect that Orange will want to take advantage of the to build high-speed data infrastructure. For example regulation-fee Market 5. by ensuring it has access to the Poland's top-four cable operators between them control 3.9 million households located there. According to UKE 80% of the market for >30 Mbs connections compared to statistics, market 5. accounts for 24% of the total Polish Orange's market share of 7%. All in all the customer base population and has about 3 million broadband users (37% for cable services increased from 1.75 million in 2010 to of the whole market). 2.50 million in 2014. In our opinion Orange has a good chance for success in sales of fixed-line Internet over FTTH In the meantime, Orange is currently working on a rollout given its unmatched service range. of G.Fast technology (a pilot launch is planned before the end of 2015) for services currently offered via FTTH Orange completed a successful FTTH pilot in Warsaw over including HDTV, VoIP, and Internet access at 300/30 Mbps. a period of fourteen months during which its market share G.Fast employs a concept called Drop Line Agnostic which in the pilot area increased from 8% to 20%, with most of provides for the deployment of the different media the customers snatched away from cable providers. The available in a customer's home that use copper or acquisition rate among new customers was 60%. 96% of concentric cable or Ethernet cables. Elsewhere in the world the services sold in the pilot area were 3P, with positive Sweden's Swisscom has started testing G.Fast technology effects on ARPU. That said, as a priority we think Orange on a small customer sample designed to offer speeds up to will want to invest in the Market 5 areas deregulated last 500Mbps over copper wire. In Austria Alcatel-Lucent jointly year where there are 3.9 million households (29% of all). with the incumbent A1 during a test last year achieved The goal is to connect 650 thousand households via optic speeds up to 1.1 Gbps (A1 is planning a commercial G.Fast fiber by the end of 2015. launch on its network in 2016).

Market 5. overview

Source: Orange Polska

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Valuation (PLN) weight price Relative Valuation 50% 8.41 Using DCF analysis and relative valuation, we set our nine- DCF Analysis 50% 8.47 month price target for Orange Polska stock at PLN 9.00 per price 8.44 share. 9M target price 9.00

DCF Valuation ° Net debt is as of year-end 2014 less PLN 656m dividend paid in July 2015 (i.e. PLN 4.90bn). DCF Model Assumptions: ° CAPEX in the residual period is higher than D&A expenses ° The forecast period extends from FY2015 through which include one-time expenditures. FY2024. ° 2015E CAPEX is adjusted for proceeds from property ° The risk- rate in the forecast period is 3.50%. sales. ° We assume FCF after the forecast period will grow at a ° We assume Orange will pay PLN 3.2bn for LTE spectrum rate of 0.0%. in 2016, pay the PLN 508m EU fine in 2017, and incur CAPEX on FTTH of PLN 2.1bn in 2015-2019.

DCF Model (PLN m) 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E 2023E 2024E 2024+ Revenue 11,841 11,502 11,457 11,447 11,431 11,424 11,424 11,431 11,444 11,465

change -3.0% -2.9% -0.4% -0.1% -0.1% -0.1% 0.0% 0.1% 0.1% 0.2%

EBIT 626 718 934 1,061 1,027 1,051 1,052 1,047 1,050 1,060

EBIT margin 5.3% 6.2% 8.2% 9.3% 9.0% 9.2% 9.2% 9.2% 9.2% 9.2%

Tax on EBIT 119 136 178 202 195 200 200 199 200 201

NOPLAT 507 581 757 859 832 851 852 848 851 858

D&A 2,909 2,713 2,561 2,451 2,376 2,332 2,318 2,313 2,306 2,299

CAPEX -1,751 -5,083 -1,897 -1,895 -1,993 -1,542 -1,599 -1,600 -1,602 -1,605

Working capital -537 -152 -648 -110 -103 -96 -96 -96 -96 -96

FCF 1,129 -1,941 773 1,305 1,112 1,545 1,474 1,465 1,459 1,457 1,457 WACC 7.1% 6.6% 6.6% 6.7% 6.8% 6.9% 7.1% 7.4% 7.7% 8.1% 8.1% Discount factor 98.9% 92.8% 87.1% 81.6% 76.4% 71.4% 66.7% 62.1% 57.7% 53.4% 49.4% PV FCF 1,116 -1,801 673 1,064 849 1,104 983 910 842 777 9,515

WACC 7.1% 6.6% 6.6% 6.7% 6.8% 6.9% 7.1% 7.4% 7.7% 8.1% 8.1% 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 31.9% 43.4% 42.8% 39.9% 39.0% 35.9% 32.7% 27.3% 20.8% 12.5% 12.5%

Cost of equity 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 8.7% 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 after the forecast period 0.0% Sensitivity Analysis Terminal value 17,834 FCF growth in perpetuity Present value of terminal value 9,515 -2.0% -1.0% 0.0% 1.0% 2.0% Present value of FCF in the forecast period 6,518 WACC +1.0p.p. 6.5 7.0 7.7 8.5 9.5 Enterprise value 16,033 WACC +0.5p.p. 7.0 7.6 8.3 9.2 10.4 Net debt (year-end 2014, adj.)* 4,896 WACC 7.5 8.2 9.0 10.1 11.6 Other noncore assets 0 WACC -0.5p.p. 8.0 8.8 9.7 11.0 12.6 Minority interests 2 WACC -1.0p.p. 8.6 9.5 10.6 12.0 14.0 Equity Value 11,135

Number of shares (millions) 1,312

Equity value per share (PLN) 8.5

9M cost of equity 6.6%

Target price 9.0

EV/EBITDA('16) at target price 4.8

P/E('16) at target price 40.7

TV / EV 59% * adjusted for dividends

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Relative Valuation line telephony, incurring higher risk than carriers who We changed our approach to determining Orange's value provide mostly mobile services. In addition Orange is relative to peers. The old approach was based on trading lower than its Western European counterparts, due EV/EBITDA and P/E multiples each weighing 50%. In the probably to greater regulatory pressure and the fact that it new approach we are using EV/EBITDA and DivYield-RFR operates in a much more fragmented market. Each of the as the metric which in our view has the most bearing on forecast years 2015, 2016, and 2017 is assigned an equal Orange's market value. We continue to attach a 15% weight. The 2015 net debt estimate is adjusted for LTE discount to Orange's valuation to reflect the fact that it spectrum expenditures and dividends (PLN 0.25 per generates a major portion of annual EBITDA from fixed- share).

Multiples Comparison EV/EBITDA Div Yield - RFR 2015E 2016E 2017E 2015E 2016E 2017E Bt Group Plc 7.7 7.6 6.8 0.8% 1.1% 1.4% Deutsche Telekom Ag-Reg 7.2 6.8 6.5 2.6% 3.0% 3.3% Elisa Oyj 12.8 12.6 12.3 3.2% 3.3% 3.4% Iliad Sa 9.3 8.1 7.2 -0.6% -0.6% 0.1% Koninklijke Kpn Nv 8.5 8.4 8.4 2.2% 2.8% 3.4% Mobile Telesystems Ojsc 4.2 4.1 4.0 1.9% 1.8% 2.3% Orange 6.0 5.9 5.8 3.0% 3.1% 3.3% 3.9 4.0 3.9 -5.8% -4.3% -4.2% Swisscom Ag-Reg 8.3 8.0 8.0 4.7% 4.8% 4.9% Talktalk Telecom Group 11.8 9.9 7.8 4.0% 4.8% 5.0% Tdc A/S 5.8 6.2 6.3 5.9% 4.3% 4.3% Ab-B Shs 8.8 8.8 7.7 5.2% 5.6% 6.0% Telecom Italia Spa 6.9 6.8 6.7 -0.7% -0.3% 0.0% Telefonica Sa 8.3 8.1 7.8 5.0% 5.0% 5.1% Telekom Austria Ag 4.6 4.6 4.5 0.2% 1.9% 2.7% Telenor Asa 6.5 6.1 5.9 3.7% 4.2% 4.7% Teliasonera Ab 7.6 7.6 7.6 6.2% 6.1% 6.2% Turk Telekomunikasyon As 5.6 5.3 5.0 -5.0% -1.0% 0.4% Turkcell Iletisim Hizmet As 5.9 5.5 5.0 -1.2% -5.2% -5.1% Vimpelcom Ltd-Spon Adr 2.5 2.6 2.8 0.5% 0.6% 2.3% Vodafone Group Plc 7.7 7.9 7.6 3.3% 3.4% 3.6% Magyar Telekom Telecommunica 5.0 4.8 4.8 5.6% 5.9% 5.9% Maximum 12.8 12.6 12.3 6.2% 6.1% 6.2% Minimum 2.5 2.6 2.8 -5.8% -5.2% -5.1% Median 7.2 6.8 6.7 2.6% 3.0% 3.3% Orange Polska 3.5 4.4 4.3 4.8% 0.9% 0.9% premium / discount -50.9% -35.4% -36.3% 80% -69% -73% Source: Bloomberg, Dom Maklerski mBanku

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Income statement (PLN m) 2013 2014 2015E 2016E 2017E 2018E 2019E Revenue 12,923 12,212 11,841 11,502 11,457 11,447 11,431 change -8.4% -5.5% -3.0% -2.9% -0.4% -0.1% -0.1%

Mobile Telephony 6,110 5,713 5,484 5,371 5,378 5,428 5,455 Mobile Devices 149 427 639 639 639 639 639 Fixed-Line Services 607 552 629 629 629 629 629 Other 6,057 5,520 5,089 4,862 4,811 4,751 4,708

EBITDA 3,904 4,076 3,535 3,430 3,496 3,511 3,403 margin 30.2% 33.4% 29.9% 29.8% 30.5% 30.7% 29.8%

EBITDA (adjusted) 4,084 3,921 3,527 3,330 3,396 3,411 3,403 margin 31.6% 32.1% 29.8% 29.0% 29.6% 29.8% 29.8%

D&A 3,107 3,073 2,909 2,713 2,561 2,451 2,376

EBIT 788 986 626 718 934 1,061 1,027 margin 6.1% 8.1% 5.3% 6.2% 8.2% 9.3% 9.0%

Financing activity -478 -405 -279 -357 -349 -313 -303

Pre-tax profit 310 581 347 360 585 747 724 margin 2.4% 4.8% 2.9% 3.1% 5.1% 6.5% 6.3%

Tax -16 -46 -66 -68 -111 -142 -138

Net profit 294 535 281 292 474 605 587 margin 2.3% 4.4% 2.4% 2.5% 4.1% 5.3% 5.1%

Shares at year-end (millions) 1312 1312 1312 1312 1312 1312 1312 EPS 0.22 0.41 0.21 0.22 0.36 0.46 0.45 CEPS 2.59 2.75 2.43 2.29 2.31 2.33 2.26

ROAE 1.3% 2.4% 1.3% 1.3% 2.0% 2.7% 2.6% ROAA 2.3% 4.3% 2.3% 2.4% 3.9% 4.9% 4.7%

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Balance Sheet (PLN m) 2013 2014 2015E 2016E 2017E 2018E 2019E ASSETS 22,802 22,104 21,682 23,567 22,844 22,405 22,330 Fixed assets 20,725 19,888 18,692 21,040 20,374 19,818 19,433 Goodwill 3,940 3,940 3,940 3,940 3,940 3,940 3,940 Other intangible assets 3,081 3,215 3,056 3,426 3,342 3,273 3,216 Fixed assets 12,768 11,715 10,716 12,715 12,135 11,648 11,322 Derivatives 4 70 36 36 36 36 36 Deferred tax asset 923 934 910 888 887 886 885 Other 9 14 34 34 34 34 34

Current assets 1,852.0 2,216.0 2,990.2 2,526.5 2,469.6 2,587.4 2,896.7 Inventory 200.0 198.0 221.5 217.4 214.3 213.5 213.2 Trade receivables 1,199.0 1,510.0 1,852.4 1,851.5 1,835.3 1,831.0 1,829.5 Prepayments 88.0 71.0 119.0 119.0 119.0 119.0 119.0 Other 167.0 189.0 189.0 189.0 189.0 189.0 189.0 Cash 198.0 248.0 608.4 149.7 112.0 235.0 546.0

Fixed assets held for sale 225.0 0.0 0.0 0.0 0.0 0.0 0.0

(PLN m) 2013 2014 2015E 2016E 2017E 2018E 2019E EQUITY AND LIABILITIES 22,802 22,104 21,682 23,567 22,844 22,405 22,330 Equity 12,631 12,398 12,023 11,987 12,133 12,410 12,341

Long-term liabilities 2,800.0 4,997.0 4,455.3 5,027.3 5,205.7 5,000.0 5,098.0 Trade creditors 921.0 866.0 865.0 849.0 836.6 833.4 832.3 Loans and bonds 1,236.0 3,288.0 2,868.0 3,468.0 3,668.0 3,468.0 3,568.0 Employee benefits 296.0 345.0 276.8 270.4 265.5 264.2 263.7 Reserves 313.0 303.0 310.5 304.9 300.5 299.4 299.0 Other 34.0 195.0 135.0 135.0 135.0 135.0 135.0

Current liabilities 7,333.0 4,709.0 5,203.8 6,552.8 5,505.2 4,994.9 4,891.3 Trade creditors 1,921.0 2,006.0 1,922.3 1,785.2 1,656.5 1,549.0 1,446.4 Loans and bonds 3,343.0 1,143.0 1,677.0 3,177.0 2,777.0 2,377.0 2,377.0 Employee benefits 187.0 179.0 230.0 230.0 230.0 230.0 230.0 Reserves 899.0 790.0 762.5 748.5 229.7 226.9 225.9 Deferred income 427.0 402.0 407.0 407.0 407.0 407.0 407.0 Deferred taxes payable 95.0 58.0 28.0 28.0 28.0 28.0 28.0 Other 461.0 131.0 177.0 177.0 177.0 177.0 177.0

Debt 4,771.0 4,488.0 4,597.0 6,697.0 6,497.0 5,897.0 5,997.0 Net debt 4,573.0 4,240.0 3,988.6 6,547.3 6,385.0 5,662.0 5,451.0 (Net debt / Equity) 0.4 0.3 0.3 0.5 0.5 0.5 0.4 (Net debt / EBITDA) 1.1 1.1 1.1 2.0 1.9 1.7 1.6

BVPS 9.6 9.4 9.2 9.1 9.2 9.5 9.4

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Cash Flows (PLN m) 2013 2014 2015E 2016E 2017E 2018E 2019E Cash flow from operating activities 3,292 2,753 2,555 2,752 2,287 2,846 2,860 Net profit 294 535 281 292 474 605 587 D&A 3,107 3,073 2,909 2,713 2,561 2,451 2,376 Financing activity -75 -255 -476 -148 -122 -106 -102 Change in working capital and other -34 -600 -159 -104 -626 -104 -1 Other

-2,166 -1,745 -1,653 -4,983 -1,797 -1,795 -1,993 Cash flow from investing activities -2,180 -2,153 -1,849 -5,183 -1,997 -1,995 -1,993 CAPEX 14 408 196 200 200 200 0 Other

-1,324 -965 -542 1,772 -528 -928 -556 Cash flow from financing activities -606 -309 114 2,100 -200 -600 100 Debt 0.0 0.0 0.0 0.0 0.0 0.0 0.0 Share issue -258 -656 -656 -328 -328 -328 -656 Dividend/buyback -460 0 0 0 0 0 0 Other

-198 43 360 -459 -38 123 311 Change in cash 198 248 608 150 112 235 546 Cash at period-end

0.50 0.50 0.50 0.25 0.25 0.25 0.50 DPS (PLN) 1,126 1,008 902 -2,231 490 1,051 867 FCF 16.9% 17.6% 15.6% 45.1% 17.4% 17.4% 17.4% (CAPEX/Sales) 3,292 2,753 2,555 2,752 2,287 2,846 2,860

Trading Multiples 2013 2014 2015E 2016E 2017E 2018E 2019E P/E 29.0 15.9 30.4 29.2 18.0 14.1 14.5 P/CE 0.7 0.7 0.7 0.7 0.7 0.7 0.7 P/BV 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 0.7

FCF/EV 8.6% 7.9% 7.2% -14.8% 3.3% 7.4% 6.2% EV/EBITDA 3.4 3.1 3.5 4.4 4.3 4.0 4.1 EV/EBIT 16.6 13.0 20.0 21.0 16.0 13.4 13.6 EV/S 1.0 1.0 1.1 1.3 1.3 1.2 1.2

DYield 7.7% 7.7% 7.7% 3.8% 3.8% 3.8% 7.7%

Price (PLN) 6.50 6.50 6.50 6.50 6.50 6.50 6.50 Shares at year-end (millions) 1,312.0 1,312.0 1,312.0 1,312.0 1,312.0 1,312.0 1,312.0 MC (PLN m) 8,528 8,528 8,528 8,528 8,528 8,528 8,528 EV (PLN m) 13,101 12,768 12,517 15,075 14,913 14,190 13,979

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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

Recommendations of Dom Maklerski mBanku: A recommendation is valid for a period of 6-9 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.

This document has been created and published by Dom Maklerski mBanku S.A. 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 Dom Maklerski mBanku S.A. considers reliable, including information published by issuers, shares of which are subject to recommendations. However, Dom Maklerski mBanku S.A., 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. Dom Maklerski mBanku 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 nor any copy hereof is not to be distributed directly or indirectly in the United States, Australia, Canada or Japan.

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 Dom Maklerski mBanku S.A. renders, will render or in the past has rendered services for companies and other entities mentioned in the present report.

Dom Maklerski mBanku 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 on the final page of this report.

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Recommendations are addressed to all Clients of Dom Maklerski mBanku S.A. Dom Maklerski mBanku S.A. has a subscription agreement in place with Orange Polska S.A.

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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 Dom Maklerski mBanku S.A. 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.

Strong and weak points of valuation methods used in recommendations: DCF – acknowledged as the most methodologically correct method of valuation; it is based 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; weak points include substantial variability (fluctuations together with market indices) as well as difficulty in the selection of the group of comparable companies.

Previous ratings issued for Orange Polska rating Buy rating day 2015-08-06 price on rating day 8.12 WIG on rating day 53694.88

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Michał Marczak member of the management board tel. +48 22 438 24 01 [email protected] strategy, resources, metals

Research Department: Traders:

Kamil Kliszcz Krzysztof Bodek director tel. +48 22 697 48 89 tel. +48 22 438 24 02 [email protected] [email protected] energy, chemicals, power generation Michał Jakubowski tel. +48 22 697 47 44 Michał Konarski [email protected] tel. +48 22 438 24 05 [email protected] Tomasz Jakubiec banks, financials tel. +48 22 697 47 31 [email protected] Jakub Szkopek tel. +48 22 438 24 03 Szymon Kubka , CFA, PRM [email protected] tel. +48 22 697 48 16 industrials [email protected]

Paweł Szpigiel Anna Łagowska tel. +48 22 438 24 06 tel. +48 22 697 48 25 [email protected] [email protected] media, IT, telco Jędrzej Łukomski Piotr Zybała tel. +48 22 438 24 04 tel. +48 22 697 48 46 [email protected] [email protected] construction, real-estate development Paweł Majewski Piotr Bogusz tel. +48 22 697 49 68 tel. +48 22 438 24 08 [email protected] [email protected] retail Adam Prokop tel. +48 22 697 47 90 [email protected] Sales and Trading: Michał Rożmiej Piotr Gawron tel. +48 22 697 49 85 director [email protected] tel. +48 22 697 48 95 [email protected]

Marzena Łempicka-Wilim deputy director tel. +48 22 697 48 82 [email protected]

"Private Broker”

Jarosław Banasiak director, active sales tel. +48 22 697 48 70 [email protected]

Dom Maklerski mBanku S.A. Research Department ul. Senatorska 18 00-082 Warszawa www.mDomMaklerski.pl

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