Digi Communications : The Hungarian expansion should not weigh on credit metrics

After having focused on mobile in Romania with the launch of competitive rate plans and the deployment of its own mobile network, Digi is now attacking the Hungarian market both in fixed (with the pending acquisition of Invitel’s residential business) and in mobile (it is preparing the launch of a mobile product probably for next year). Digi is now benefitting from its mobile push in Romania, which is one the main contributor to EBITDA growth. We are confident that this positive development, together with the continued growth of the cable business in Romania, will mitigate the impact of the expansion plans in Hungary and maintain the leverage around its current level of 2.8x. We keep our Buy recommendation on the 2023 secured notes (ticker: CBLCSY), which offer an attractive spread premium of >55 bp over SFRFP 2024 secured notes and UNITY 2025 secured notes. - >Support factors - ? Leading market positions in Romania, its core market representing 73% of total revenues and 77% of total EBITDA in 1H17. Digi ranks #1 for TV and fixed Internet services, #2 for fixed-telephony services and #4 for mobile services.? Well invested cable network providing a competitive advantage. 86% of its cable footprint (4.7m homes in Romania, 1.1m homes in Hungary) is upgraded to FTTH/B, enabling to offer download speeds of up to 1 Gb/s.? Positive macroeconomic prospects in the mid-term, but higher volatility in the past. In Romania, the Bloomberg consensus forecasts GDP growth of +5.0% in 2017 and +3.5% in 2018. ? Competitive pricing supports market share gains, but limits ARPU growth.? Lower leverage compared to European cable peers. Pro-forma the Invitel acquisition, the net leverage stands at 3.1x at end-June 2017 vs 4.0x for United Group, 4.1x for SFR, 4.8x for Unitymedia and 3.7x for Altice International.? Positive operating results since 2015. EBITDA grew by +11% in 2016 and by +8% to in 1H17 on higher scale in mobile in Romania/Spain. We forecast a +9% increase in EBITDA to EUR 286m in 2017e.Points to watch - ? FCF is constrained by material capex requirements. We expect EUR 31m of FCF in 2017, up from EUR -10m in 2016. ? Intense competition given the significant overlap of fixed networks in Romania and the presence of several DTH platforms in Romania and in Hungary.? Currency mismatch between operations and debt, although it was reduced by the 2016 refinancing. 90% of total revenues are generated in Romanian Leu and in Hungarian Florint, while 46% of debt is denominated in Euro.? Lower mobile network coverage and lack of frequencies in the low bands in Romania compared to its rivals. Digi’s 4G coverage in Romania reached 50% at end-June 2017, vs. 87% for Orange Romania.? M&A risk, no obvious target in sight. Digi may wish to pursue its expansion in Hungary. In Romania, a large acquisition seems unlikely.