Brokerage company Concorde Securities (Hungary) updated its analysis report for Digi Communications after it reported preliminary financial results for the year 2022.

The advanced target price now is RON 47 over a 12-month horizon, which translates into an impressive increase compared to the current quotation of approx. 33 lei/share, meaning an appreciation of approx. 42%.

From a financial point of view, Digi ended the year with revenues from continuing activities in the amount of EUR 1.49 billion, an increase of 16.8%, the Group also registering an increase in subscribers from 18 million in 2021 to 20.78 million at the end last year, which represents an increase from continuing activities of 15.4%, the main vectors being mobile phone services from Romania and Spain.

In the fourth quarter, EBITDA and gross profit were 127 million euros (-8% y/y) and 26 million euros (+24% y/y), respectively, due to the deconsolidation of operations in Hungary.

For the whole year, EBITDA reached 506 million euros, a figure in line with analysts’ expectations, Digi achieving an organic growth that almost compensated for the lack of sold operations in Hungary.

Basic trends: Subscriber growth (RGU) continued, DIGI added a similar amount in Q4 (708 thousand vs. 685 thousand) in Q3, of which Spain represents approx. 312 thousand.

As for the average revenue per subscriber (ARPU), it increased slightly on a year-on-year basis as Spain’s share of the total RGU increased thereby raising the average level.

It should be noted, however, that both revenue levels per user are in a downward trend: ARPU Romania -4% year/year, ARPU Spain -1% year/year.

Share price performance: DIGI’s share price has not moved significantly in 2023, while the STOXX EU Telco index has advanced around 10%.

According to analysts, the market favors telcos that have been able to pass inflation on to customers such as Austrian telco MTEL, which has gained nearly 16% since the start of the year.

As long as DIGI does not distribute a large portion of Cash flow to investors or introduce an inflation indexation clause for its services, DIGI’s share price will lag behind companies in the region and the share price will not necessarily reflect the true value of the company.

As for the net debt, it increased by approx. 70 million euros to 1 billion euros, on the basis of the expenses for the purchase of 5G licenses, bringing the net debt to 2.3x EBITDA.

DIGI purchased spectrum in the 5G auction in Romania spending approx. 45 million EUR. Compared to the 5G auction in Hungary that took place two years ago, the one in Romania was 40% cheaper under the conditions that Digi did not participate in the auction, with all bidders receiving a share of the first bid.

Details from the conference call

• Capital Expenditure (CAPEX): EUR 550 million in 2023. The breakdown of CAPEX is oriented towards Western European countries, with DIGI already starting to build a mobile and fixed network in Portugal in cooperation with Cellnex (mobile tower)

• The company could refinance the bonds maturing in 2025 depending on market conditions.

• For dividends, it could pay at least the same amount as last year – considering the evolution of EBITDA.

• The company tries to avoid price increases even though the operating margins are squeezing, trying to reduce costs and invest in renewable energy to offset the negative effect of energy prices.

• In Portugal, DIGI builds its own mobile/fixed network and meanwhile cooperates with Cellnex to put DIGI’s mobile equipment in Cellnex’s towers. In Belgium, Digi plans to build a new network.

In Romania, the telecommunications market is maturing, so the pace of growth will slow down, the strongest segment remaining the mobile one. In Spain, the growth rate will be in double digits, but will not reach the performance of 2022.

EBITDA growth in 2023 will not be able to keep pace with revenues amid cost pressures, but will be around 3-5%.

Concorde Securities’ analysis can be found here.