Digi Communications confirmed at BUY, TP RON 42 - No place like home

The impact of the Covid-19 crisis on Digi Communications was quite limited. Lower revenues from the sale of handsets and fewer additions during the lockdown had a limited impact on profitability, but the main challenge right now is the depreciation of RON and HUF against EUR. The obvious remedy would be price increases, but we believe that in the current market environment, we could not see price increases for at least a year from now. Otherwise, Digi is constantly beating our RGU growth estimates like a drum in Romania and Spain. The investment into the expansion of the fiber network in Romania is starting to pay dividends, having also a much wider coverage than competitors Vodafone and Telekom. The Romanian Competition Council had no objections for Digi to lease the portfolio of a smaller competitor, AKTA, after which we expect Digis market share in fixed services to be close to 60%. Moreover, if media reports about a potential purchase of Telekoms Romanian mobile subsidiary come true, than Digi could truly become the undisputed leader in integrated services in its home market. The Spanish business is also expanding beyond its MVNO into fixed services, while mobile RGUs have grown even during the lockdown. Hungary is becoming more and more the Achilles heel in the investment story, having to deal with a hostile regulatory environment. The mobile network is still in beta testing, with almost no revenue generation, and there is no clear schedule for the commercial launch. Thus, we would not be surprised if on the medium-term we could see impairments for the investments in the Hungarian mobile business. The share price recovered quite quickly to pre-Covid levels, but we reckon that we do not see short-term triggers. Nonetheless, we believe Digis strengthening position in Romania, where EBITDA margins are almost at the top of the industry (i.e. around 40%), is the main reason for maintaining our BUY recommendation, with a 12m TP of RON 42 (RON 47).