ERNT Model Novo.Xlsx

July 26, 2016 Communications Equipment

Company Rating Ericsson Nikola Tesla Add

Rise in sales, weaker profitability Reuters: ERNT.ZA Bloomberg: ERNTRA CZ ZSE: ERNT-R-A

Ericsson NT’s 2Q16 top line rose 7.9% yoy to HRK 399m on the back of 9.8% yoy higher sales on Ericsson’s internal market where company Last price (HRK) 1.005 recently got new responsibilities in R&D segment and notwithstanding Price target (HRK) 1.082 troubles of mother company Ericcson AB where CEO resigned under Previous target (HRK) 1.155 pressure from deteriorating results (24.0% lower net profit and 11.0% 12-month range (HRK) 940-1.150 lower sales in 2Q16). That said, 1H16sales grew 7.0% yoy to HRK730m 12-month volatility 22% largely thanks to 13.0% yoy higher sales (HRK438.6m) on Ericsson’s internal market and 15% yoy higher sales on export markets. On export Upside/downside 7,7% markets CIS region revenues soared 117.6% yoy to HRK93.4m in 1H16 and Expected dividend yield 9,8% thus managed to offset 30.5% yoy decline in SEE exports amid reduced Expected total return 17,5% telecoms' capex budget and delayed investment decisions. The latter alongside political uncertainties harmed sales on domestic market as Market capitalization (HRKm) 1.339 well where Ericsson NT saw 14.0% yoy sales decline to HRK131.9m. Free float 51% Ericsson NT total revenue now comes 60% from internal market, 21.9% from export markets and 18.1% from domestic markets.

When it comes to profitability, 2Q16 EBITDA was 16.4% yoy lower at Stock price performance 1700 ERNT -R-A (HRK, lhs) 2400 HRK34m where opex outgrew operating revenues mainly thanks to 59.6% 1600 CROBEX (rhs) 2300 yoy higher material expenses and downside pressure on pricing, while 1500 2200 EBITDA margin fell 0.1pp yoy to 9.8%. The latter is also the main culprit 1400 2100 behind 23.0% yoy EBIT decline, whereas EBIT margin fell 0.1pp yoy to 1300 2000 1200 1900 6.2%. All in, net profit declined 12.5% in 2Q16, while net profit margin 1100 1800 fell 0.1pp to 6.3%. In 1H16 EBIT declined 2.4% yoy to HRK51m while net 1000 1700 900 1600 income is on the same level as in 1H15 as a result of better financial Source: ZSE , Addiko Research 800 1500 result (+HRK2.2m vs -HRK1.1m in 1H15). Feb -11 Dec -11 Oct -12 Aug -13 Jun -14 Apr -15 Feb -16

Looking at a wider picture, Ericsson financial results defy to results of parent company, mainly due to greater acknowledgement on internal Quarterly profits (HRKm) 70 Source: Company data, Addiko market where ERNT got more advanced projects with growth more than EBITDA Research 60 enough to offset decline on domestic and SEE markets. However, bearing EBIT 50 in mind that the global wireless equipment capex should remain 40 challenging throughout 2016 and increased risk aversion after ‘Brexit’ we 30 can see industry investments suffering in the short-term. Trend could be 20 reversed when awaited ‘5g network project throughout the Europe’ 10 starts where Ericsson is expected to play important role. All in, we made 0 certain changes in our projections of sales structure and product mix and 4Q13 2Q14 4Q14 2Q15 4Q15 2Q16 given higher WACC (courtesy of slightly higher beta and Croatia equity risk premium) our target price is now slightly lower at HRK1.082 which however keeps our recommendation ADD intact.

Hrvoje Stojić Analyst (+385) 1 603 0509 [email protected]

SEE THE DISCLOSURES APPENDIX FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATION July 26, 2016 Communications Equipment Ericsson Nikola Tesla

Quarterly Income Statement

HRKm 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 Sales 608 711 337 330 343 281 391 315 341 255 403 309 370 303 397 331 399 Other revenues 4 4 5 4 6 4 6 5 4 4 5 4 6 4 6 5 5 Operating revenues 612 715 342 334 349 285 397 320 345 259 409 313 376 307 403 335 404 Operating expenses -570 -692 -294 -283 -298 -264 -353 -278 -316 -240 -370 -277 -335 -285 -359 -293 -370 EBITDA 42 23 48 51 52 20 44 42 29 19 38 36 41 22 44 42 34 Depreciation -11 -10 -12 -9 -10 -10 -11 -11 -11 -12 -13 -12 -13 -13 -13 -13 -13 EBIT 31 13 36 42 42 10 33 31 18 7 26 24 28 9 30 29 22 Net financial result 13 0 11 7 -3 9 4 3 -3 3 4 1 -2 1 1 -1 3 Associates & extraordinaries 00000000000000000 Pre-tax profit 44 13 47 49 39 19 38 34 15 10 30 25 26 10 32 28 24 Tax 0 0-14 0 0 0 0 0 0 0-1 0 0 0-2 0-2 Net profit 44 13 33 49 39 19 38 34 15 10 29 25 26 10 30 28 23

Growth (%, yoy) 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 Sales n/a n/a n/a n/a -43,5 -60,5 16,0 -4,5 -0,7 -9,1 3,2 -2,0 8,6 18,7 -1,6 7,0 7,9 Other revenues n/a n/a n/a n/a 55,1 3,7 16,5 34,0 -35,1 0,5 -10,6 -21,5 39,4 11,7 4,2 14,2 -13,7 Operating revenues n/a n/a n/a n/a -42,9 -60,2 16,0 -4,1 -1,3 -9,0 3,0 -2,3 9,0 18,6 -1,5 7,1 7,6 Operating expenses n/a n/a n/a n/a -47,7 -61,8 19,9 -1,5 6,1 -9,0 5,1 -0,5 5,9 18,6 -3,2 5,9 10,5 EBITDA n/a n/a n/a n/a 22,6 -11,5 -8,0 -18,3 -44,3 -7,7 -13,3 -14,1 43,2 17,9 14,0 15,9 -16,4 Depreciation n/a n/a n/a n/a -10,9 0,9 -7,8 16,6 15,2 16,4 11,9 9,1 18,3 14,0 7,3 7,9 -2,2 EBIT n/a n/a n/a n/a 34,1 -21,2 -8,1 -26,1 -57,8 -31,9 -21,8 -22,2 58,7 24,7 17,3 19,8 -23,0 Net income n/a n/a n/a n/a -12,1 46,0 13,3 -30,3 -61,1 -48,6 -24,1 -26,2 69,9 -0,6 5,9 11,5 -12,5

Profitability (%, ttm) 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 EBITDA margin 4,4 5,4 8,0 8,2 10,0 13,1 12,3 11,7 10,0 10,1 9,6 9,2 9,9 9,8 10,2 10,5 9,8 EBIT margin 1,3 3,1 5,7 6,1 7,6 9,9 9,3 8,6 6,8 6,7 6,1 5,6 6,3 6,2 6,5 6,8 6,2 Net profit 4,9 5,0 6,6 7,0 7,7 10,7 10,6 9,6 7,8 7,3 6,6 5,9 6,6 6,4 6,5 6,6 6,3 ROA 5,6 7,2 9,5 10,4 10,4 12,2 13,4 12,3 11,3 11,2 10,9 10,6 13,5 13,5 13,4 13,7 13,3 ROE 8,6 11,9 16,1 18,0 18,6 19,8 20,7 18,8 18,0 18,4 18,8 19,5 28,2 28,7 29,3 30,3 32,1

Leverage (ttm) 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 Assets/Equity 2,4 1,9 1,5 1,5 1,6 1,6 1,6 1,5 2,0 2,0 2,1 2,1 2,3 2,2 2,4 2,2 3,3 Net debt/Equity -0,7 -0,5 -0,7 -0,6 -0,4 -0,5 -0,6 -0,6 -0,3 -0,5 -0,6 -0,6 -0,3 -0,6 -0,8 -0,6 -0,3 Net debt/EBITDA -7,5 -3,8 -3,2 -2,9 -1,6 -1,7 -2,5 -2,6 -0,8 -1,2 -1,5 -1,9 -0,6 -1,2 -1,6 -1,3 -0,5

Valuation 2Q12 3Q12 4Q12 1Q13 2Q13 3Q13 4Q13 1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 P/S 1,0 0,8 0,9 1,0 1,1 1,6 1,4 1,5 1,5 1,4 1,4 1,3 1,3 1,1 1,0 1,0 0,9 P/EBITDA 23,1 14,0 11,0 12,0 11,0 11,7 11,4 12,9 15,0 14,0 14,2 14,4 12,7 10,8 9,3 8,9 9,4 P/EBIT 81,7 24,5 15,4 16,2 14,4 15,5 15,0 17,5 22,0 21,0 22,3 23,6 20,1 17,1 14,6 13,9 14,8 P/E 20,9 15,1 13,5 14,2 14,2 14,4 13,2 15,7 19,2 19,3 20,8 22,4 19,2 16,7 14,7 14,2 14,7 P/B 2,1 2,0 2,3 2,5 3,1 3,2 2,8 2,9 6,8 6,0 5,4 4,9 6,4 5,3 4,3 4,0 5,9 EV/Sales 0,7 0,6 0,6 0,8 1,0 1,3 1,1 1,2 1,4 1,3 1,2 1,2 1,2 1,0 0,8 0,8 0,9 EV/EBITDA 15,6 10,2 7,8 9,1 9,4 10,0 9,0 10,2 14,2 12,7 12,8 12,5 12,2 9,6 7,7 7,7 8,9 EV/EBIT 55,1 17,8 11,0 12,3 12,3 13,2 11,8 13,9 20,9 19,2 20,0 20,5 19,2 15,2 12,1 11,9 14,1

Source: unaudited financial reports, Addiko research

Page 2 July 26, 2016 Communications Equipment Ericsson Nikola Tesla

FY Financial Statements

Income Statement (HRKm) 2012 2013 2014 2015 2016F 2017F 2018F 2019F Sales 1.902 1.345 1.315 1.379 1.475 1.628 1.704 1.774 Other revenues 20 20 18 19 21 22 22 22 Operating revenues 1.921 1.365 1.333 1.399 1.496 1.650 1.726 1.796 Operating expenses -1.767 -1.197 -1.205 -1.256 -1.388 -1.555 -1.579 -1.627 EBITDA 155 168 128 143 108 95 146 169 Depreciation -45 -40 -46 -52 -55 -61 -64 -53 EBIT 110 127 81 91 52 34 82 116 Net financial result 30 17 7 2 2 2 2 9 Associates & extraordinaries 0 0 0 0 0 0 0 0 Pre-tax profit 140 144 88 93 54 35 84 125 Tax -14 0 -1 -2 0 0 0 0 Net profit 126 144 87 91 54 35 84 125

Balance Sheet (HRKm) 2012 2013 2014 2015 2016F 2017F 2018F 2019F Cash 494 411 187 233 260 337 465 556 Inventories 29 51 31 21 26 29 30 31 Accounts receivable 296 246 191 132 141 156 163 169 Intangible assets 4 2 5 7 7 7 7 7 Property, plant and equipment 112 131 133 389 371 350 329 355 Other assets 220 206 153 -58 200 200 192 192 Total assets 1.155 1.048 700 724 1.005 1.079 1.185 1.312 Accounts payable 155 69 53 43 53 59 62 95 Short-term debt 2 0 0 0 0 0 0 0 Long-term debt 0 0 0 0 0 0 0 0 Equity 754 671 335 308 271 252 301 342 Net debt -493 -411 -187 -233 -260 -337 -464 -556

Cash Flow Statement (HRKm) 2012 2013 2014 2015 2016F 2017F 2018F 2019F Operating cash flow 280 159 176 272 165 181 216 267 Net capital expenditures -28 -59 -45 -64 -37 -41 -43 -80 Net increase in debt -2 -2 0 0 0 0 0 0 Dividends paid -226 -226 -425 -90 -91 -54 -35 -84 Other investing/financing cash flow -56 45 69 -8 -10 -9 -11 -11 Net cash flow -31 -83 -224 110 27 77 127 92 Change in working capital 21 0 120 0 22 30 15 44

Growth (%) 2012 2013 2014 2015 2016F 2017F 2018F 2019F Sales 64,1 -29,3 -2,3 4,9 6,9 10,4 4,7 4,1 EBITDA 325,1 8,4 -23,8 12,2 -24,9 -11,9 54,4 15,6

EBIT -1.030,0 15,7 -36,0 12,2 -42,9 -35,6 145,0 40,9

Profitability (%) 2012 2013 2014 2015 2016F 2017F 2018F 2019F EBITDA margin 8,0 12,3 9,6 10,2 7,2 5,7 8,5 9,4 EBIT margin 5,7 9,3 6,1 6,5 3,5 2,0 4,8 6,5 Net profit 6,6 10,6 6,6 6,5 3,6 2,1 4,9 7,0 ROA 10,9 13,1 10,0 12,8 6,2 3,4 7,4 10,0 ROE 16,7 20,3 17,4 28,3 18,6 13,6 30,4 38,8

Leverage 2012 2013 2014 2015 2016F 2017F 2018F 2019F Assets/Equity 1,5 1,6 2,1 2,4 3,7 4,3 3,9 3,8 Net debt/Equity -0,7 -0,6 -0,6 -0,8 -1,0 -1,3 -1,5 -1,6 Net debt/EBITDA -3,2 -2,5 -1,5 -1,6 -2,4 -3,6 -3,2 -3,3

Source: unaudited financial reports, Addiko research

Page 3 July 26, 2016 Communications Equipment Ericsson Nikola Tesla

Valuation

FCF calculation (HRKm) 2013 2014 2015 2016F 2017F 2018F 2019F 5Y CAGR Sales 1.345 1.315 1.379 1.475 1.628 1.704 1.774 6,2 EBITDA 168 128 143 108 95 146 169 5,8 Depreciation -40 -46 -52 -55 -61 -64 -53 2,8 EBIT 127 81 91 52 34 82 116 7,3 Implied income tax 0 0 0 0 0 0 0 - Net capex -59 -45 -64 -37 -41 -43 -80 12,1 Change in WC 0 120 0 22 30 15 44 -18,1 Depreciation 40 46 52 55 61 64 53 2,8 Free Cash Flow 109 203 79 93 84 118 134 -8,0

COE calculation (%) Sensitivity analysis Risk-free rate 3,3 Perpetual growth rate (%) Equity risk premium 9,7 0,5% 1,0% 1,5% 2,0% 2,5% 3,0% 3,5% Forecast beta (x) 0,8 8,1% 1.504 1.605 1.725 1.868 2.045 2.267 2.554 Cost of equity 11,1 9,1% 1.310 1.382 1.466 1.563 1.679 1.818 1.989 10,1% 1.162 1.216 1.277 1.347 1.428 1.523 1.635 11,1% 1.047 1.088 1.135 1.082 1.246 1.314 1.393

DCF valuation (HRKm) (%) COE 12,1% 954 987 1.023 1.063 1.108 1.159 1.216 Perpetual growth rate (%) 2,0 13,1% 878 904 933 965 1.000 1.039 1.082 Implied exit EV/Sales multiple (x) 0,8 14,1% 815 836 859 885 913 943 977 Implied exit EV/EBITDA multiple (x) 8,9 Enterprise value 1.374 Net debt -67 Equity value 1.441 Equity value per share (HRK) 1.082 Last price (HRK) 1.080 Upside / downside (%) 0,2

Source: unaudited financial reports, Bloomberg, Addiko research

Page 4 July 26, 2016

Disclosures Appendix

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HT 6; Viadukt 6; Tehnika 6; Belje 6; Atlantic Grupa 8; Ericsson Nikola Tesla 8; Podravka 8;

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Research published prior to 31/12/2008 were based on the following three-tier recommendation system: Buy: Expected total return (including dividends) of 15% or more over a 12-month period; Hold: Expected total return (including dividends) between -15% and 15% over a 12-month period; Sell: Expected total return (including dividends) of -15% or worse over a 12-month period.

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Restricted: The coverage of the company has been suspended temporarily due to market events that make coverage impracticable or to comply with applicable regulations and/or firm policies in certain circumstances including where Addiko Bank is acting as an advisor in a merger or strategic transaction involving the company. Under review: Financial forecasts and/or target are not disclosed owing to circumstances such as changes in the research team and other market events that require additional efforts to determine the value of the company based on the used valuation methods. July 26, 2016

Our company valuations are based on but not limited to the following valuation methods: Multiple-based models (P/E, P/cash flow, EV/sales, EV/EBIT, EV/EBITA, EV/EBITDA, etc.), peer-group comparisons, historical valuation approaches (e.g acquisition multiple comparisons), discount models (DCF, DVMA, DDM), break-up value approaches or asset-based evaluation methods. Furthermore, recommendations may be also based on the Economic profit approach. Although the definition and application of these methods are based on generally accepted industry practices and models developed in the financial economics literature, please note that there is a range of reasonable variations within these models. Valuation models are dependent on macroeconomic factors, such as interest rates, exchange rates, commodities, and on assumptions about the economy that are subject to uncertainty and also may change over time. Any valuation is dependent upon inputs that are based on the subjective opinion of the analysts carrying out this valuation. Investors and other recepients of this research may request further information and details with respect to the valuation models or assumptions applied to the models. Furthermore, market sentiment and the overall liquidity situation affect the valuation of companies. The valuation is also based on expectations that might change rapidly and without notice, depending on industry- specific developments. Our recommendations and target prices derived from the models might consequently change accordingly. Recommendations generally relate to a 12-month horizon. They are, however, also subject to market conditions and can only represent a snapshot. The ratings may in fact be achieved more quickly or slowly than expected, or need to be revised upward or downward.

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3.750

Date Rating Target Price Source: Bloomberg, Addiko Research

19.3.2008. Buy HRK 3.245 3.250 25.4.2008. Hold HRK 2.866 28.7.2008. Buy HRK 2.866 13.3.2009. Buy HRK 1.520 29.5.2009. Add HRK 1.690 2.750 25.11.2009. Add HRK 1.425 25.2.2010. Hold HRK 1.425 27.7.2010. Hold HRK 1.301 2.250 21.2.2011. Hold HRK 1.462 28.07.2011. Hold HRK 1.269 20.10.2011. Restriction N/A 7.3.2012. U/R N/A 1.750 25.1.2013. Reduce HRK 1.204 20.2.2013. Reduce HRK 1.204 26.7.2013. Reduce HRK 1.204 13.2.2014. U/R N/A 1.250 28.7.2014. U/R N/A 29.10.2014. Hold HRK 1.194 13.02.2015. Hold HRK 1.208 750 29.04.2015. Reduce HRK 1.100 2008 2009 2010 2011 2012 2013 2014 2015 2016 28.07.2015 Hold HRK1.140 29.10.2015 Add HRK1.149 19.2.2016 Add HRK1.149 28.4.2016 Add HRK1.155 Addiko Bank d.d. 26.7.2016 Add HRK1.082 Slavonska avenija 6, 10000 Zagreb [email protected] phone: +385-1-603-3405