Market does not appreciate Romanian growth stories?

• We initiate coverage on DIGI with a 12 month target price of 39 RON/share representing a 13% total return upside and assign an Accumulate recommendation.
• EBITDA growth will continue to be visible in our earnings estimates (7% CAGR until 2025 vs. 15% between 2015 and 2020) fueled mainly by RGU growth in Romania and Spain and (5% CAGR until 2025 vs. 9% between 2015 and 2020) thanks to DIGI’s value-for-money offerings and to economies of scale. By 2025 we think that EBITDA could reach EUR 660 million.
• Despite this enviable growth and cash flow generation capacity, FCF remain subdued because of the aggressive CAPEX (CAPEX/Sales ca. 28%) into mobile infrastructure development in Romania and fixed line network development in Spain. Not to mention frequency auctions in Romania. Nevertheless, dividend will grow albeit from a low basis implying a sub-sector dividend yield of 3%.
• Valuation-wise, headline numbers show us that DIGI is not necessarily undervalued compared to its CEE peer group or its own historical valuation, but we see different case for the DCF model. We believe the true upside for DIGI relies on its capacity to increase its ARPU, as the company offers the most competitive prices across the board, or to use its sub-market service offerings to gain market share. Unfortunately, market does not appreciate DIGI’s growth story and consequently its 2-3% dividend yield, which sentiment may be tested once Romania reaches emerging market status (after Hidroelectrica’s IPO in 2022Q2).
• Recently 4IG announced its intention to acquire DIGI’s Hungarian operation, and the two had already signed a non-binding agreement about the transaction. We believe the market will be surprised how much parent DIGI could receive for the Hungarian operation, if it were to occur. We expect ca. EUR 300 – 350 million, equal to 43% of DIGI’s current market capitalization, while representing only 10% of the Group’s EBITDA.