Update PKO BP. A Strong Player

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1 20 February 2006 Update Banks Poland PKOB.WA; PKO.PW Hold (Downgraded) Current price PLN 33.4 Target price Market cap Free float Avg daily trading volume (3M) Shareholders Structure Sector Description PLN 33.0 PLN 33.4 bn PLN 12.7 bn PLN 40.5 m State Treasury 51.59% Employee stock 10.36% Others 38.05% Recommendation: The banking sector s 2005 net profit was one-third better than in 2004, confirming our projections of a good financial standing for banks. The demand in the retail sector continues, driven by the large demand for mortgage loans and the growing popularity of consumer loans. For this year, we also forecast a growing demand for investment loans, especially from mid-sized businesses. Company Profile is the largest bank in Poland in terms of the asset base (16.7% of the total sector assets) and equity. It is a universal bank which focuses mostly on retail customers. Its exposure to the retail sector is the highest, as over half of all deposits and loans are generated by individuals, and over half of the bank's revenues come from retail sales. Important Dates consolidated financial statements vs. WIG 40 PLN WIG Marta Jeżewska (48 22) marta.jezewska@dibre.com.pl A Strong Player 's stock has increased by 20% since our last report. After we had released the previous report in December, announced its strategy for the years 2006 to 2008, laying out very ambitious goals. also released its 4Q05 results. We revised our financial estimates for 2006 through 2008, taking into account the reported 2005 results. The main forecast adjustments, covering s new strategy targets and 4Q'05 results, pertained to interest income, job cut plans, and financial income and capital gains. The revised assumptions resulted in a higher income-based valuation. We also revised the comparative valuation estimates to account for the changed stock prices of 's peers. As a result, we raise the price of one PKO BP share from PLN 30.5 to PLN 33. Given the recent surge in the bank's stock prices, we change our recommendation from accumulate to hold. However, in case of volatility in the entire WIG Banki index, we think that will outperform the other stocks in the index. Higher fee and commission income We raised 's fee and commission income forecast by PLN 147m in 2006 (to PLN 1.6 bn) and by PLN 169 m in 2007 (to PLN 1.8 bn). Our previous forecast already took into account the re-pricing planned for 2006, and the projected increase in fee and commission income by PLN m against 2005 (we estimated that the increase would be by PLN 245 m). We see the reason for the further increase in the s strategic goal to achieve a target ratio of fee and commission income to costs less amortisation at 56% at the end of We project that ratio at 54% (up from the previous 50%). Employment forecast revision announced that it will be cutting jobs by 1,500 a year. That is why we revise our previous estimate of 2700 redundancies over the next two years to 3000, and project that 1500 people will be let go in We maintain our view that will be able to raise its redundancy target after it implements a central computer system (deadline scheduled for the end of 2007), and that it still can achieve considerable cost-savings by cutting jobs. Summary of 4Q'05 results 's net profit of PLN 386 m disappointed analysts: We forecasted that would report PLN 435 m in 4Q05 net profit. The disappointing result was stemmed from a loss recorded on debt securities due to high volatility of the financial markets (which also affected other banks that have already reported their financial figures). This year, we expect the markets to be much more stable, and project that will not report such a large loss againt in the future. (PLN) F 2006F 2007F 2008F Net interest income Net interest margin 4.2% 4.1% 4.0% 3.9% 3.9% 3.9% Rev. from banking oper Operating profit Gross profit Net profit ROE 20% 20% 20% 21% 20% 21% P/E P/BV D/PS Dividend yield 3.0% 3.5% 3.8% 4.1% 4.5% BRE 19 December Bank Securities 2005 does not rule out offering brokerage services to an issuer of securities being the subject of a recommendation. Information concerning a conflict of interest arising in connection with issuing a recommendation (should such a conflict exist) is located on the final page of this report.

2 Summary of 4Q2005 results Forecasts and figures: 4Q 05 and full-year 2005 (PLN m) 4Q'05F difference 4Q'05 change 4Q' F difference 2005 change 2004 Net interest income % % % % 3515 Interest margin 4.0% 3.9% 4.1% 4.0% 4.0% 4.1% Revenue from banking operations % % % % 5508 Pre-provision operating profit % % % % 2017 Gross profit % % % % 1870 Net profit % % % % 1507 Source:, 's fourth-quarter results were below expectations. Our forecast assumed net profit 12.6% higher than reported by the bank. In our opinion, the disappointing results were mainly due to a PLN 116 m loss on debt securities recorded in the fourth quarter alone. However, earned PLN 30 m on its security investments, and, as a result, reported a loss of PLN 85 m on its financial and investing activities, vs. our forecasted profit of PLN 78 m. This means that there is a PLNN 179 difference between our forecasted revenue from banking operations and the reported figure. It is difficult to tell whether the results after subsequent quarters will be as weak. We think that the key factor which led to such disappointing figures was the high volatility of the bond market observed in the third and fourth quarter of Other banks which have already released their financial reports also reported lower-than-expected financial income and capital gains. We forecast that the situation in the financial markets will improve in the coming years. However, we revise our previous assumptions as to 's financial income and capital gains down by ca. 20% for 2006 and Interest income was PLN 12 m below our forecast, but the effect of the decline was offset by higher fee and commission income (+ PLN 22 m). We expect the fee and commission income to continue to grow in the coming years. Breakdown of revenue from banking operations (PLN m) Q'04 2Q'04 3Q'04 4Q'04 1Q'05 2'Q05 3Q'05 4Q'05 Interest income F&C income Financial income and capital gains Net gains from foreign currency dealing Source:, Other operating income was higher than we had expected. Like in the third quarter of 2005, this was an effect of the revenues generated by the real-estate development subsidiary "PKO Inwestycje (for more information on the subsidiary, refer to our December report on ). Other net operating income amounted to PLN 257 m, and was 30% higher qoq and 48% higher yoy. We had not expected that the real-estate subsidiaries would operate on such a large scale. That operating scale is also the cause of the differences in the estimates of PKO BP's operating costs. The bank reported costs 11% over our 4Q 2005 forecast. Other net operating income PLN 103 m over forecasted, and costs PLN 112 higher than our estimates, set each other off. 20 February

3 The biggest surprise was the loss reported on securities measured at fair value through profit and loss. This is the reason behind the deterioration in ' pre-provision operating profit in the fourth quarter of Breakdown of revenue from banking operations (PLN m) Q'04 2Q'4 3Q'04 4Q'04 1Q'05 2'Q05 3Q'05 4Q' Source:, The sale of the NPL portfolio resulted in disclosure of a positive provision balance of PLN 55 m in 4Q2005, which, however, was not enough to compensate for the loss on debt securities. Basic commercial figures on a quarterly basis (PLN m) Pre-provision operating profit Operating profit including provisions Net provisions 4Q'04 1Q'05 2'Q05 3'05 4'Q05 4Q/4Q 4Q/3Q Net loans % 4.8% Deposits % -2.7% Balance-sheet total % -0.6% Net interest income % -0.7% Net fee and commission income % 8.9% Net gains from foreign currency dealing % -4.1% Financial income and capital gains % % Revenue from banking operations % -16.6% Other net operating income % 29.6% Banking revenue % -11.3% Operating costs and amortisation&depreciation % 7.4% Pre-provision operating profit % -40.6% Net provisions % % Gross profit % -26.9% Tax % -54.9% Net profit % -20.5% Source:,, as leader in the retail segment, benefited from the good climate in terms of its volumes. The gross loan volume grew by 17% yoy, and deposits increased by 4.4. yoy. Home loans increased by 26.2%, and consumer loans by 19.2%. We had forecasted a 17% increase in the net loan volume and a 8% increase in deposits. The slower deposit growth did not have a considerable impact on 's financial figures. Investors' expectations are rather directed toward volumes, which means that the good 2005 sales results and the expected continuation of the uptrend are already discounted by the market. We described loans and deposits at more length in our December report on. For now, we see no reason to change the assumptions regarding loan volume and deposit growth in the coming years. For the forecast years 2006 through 2008, we project a sustainable growth in the balancesheet total at 6.2% annually, taking into account 's position as leader of the retail segment. 20 February

4 Forecast revision We revised our estimates of net fee and commission income and personnel costs for 2006 through 2008 (to account for the updated redundancy plans and the management's targets provided in 's strategy for the next three years). The revised figures and their impact on 's financial results are shown in the table below income statements, forecasts (PLN m) INCOME STATEMENT (PLN m) 2005F 2006F 2006F 2007F 2007F 2005 old change new old change new old change 2008F Net interest income % % % Interest income % % % Interest expense (2 118) (2 117) 0.0% (2 198) (2 243) -2.0% (2 274) (2 322) -2.1% (2 388) Non-interest income % % % Net fee and commission income % % % Net gains from foreign currency dealing % % % 709 Financial income and capital gains % % % 292 Revenue from banking operations % % % Other net operating income % % % 525 Total banking income % % % Non-interest expense (4 145) (4 032) 2.8% (4 218) (4 219) 0.0% (4 419) (4 431) -0.3% (4 660) Personnel costs (2 005) n.a. (2 056) (2 060) -0.2% (2 100) (2 115) -0.7% (2 141) Amortisation and depreciation (504) n.a. (530) (530) 0.0% (572) (572) 0.0% (772) Other expenses (1 523) n.a. (1 633) (1 630) 0.2% (1 747) (1 744) 0.2% (1 747) Pre-provision operating profit % % % Net provisions (86) (195) -55.9% (251) (251) 0.1% (285) (284) 0.1% (322) Gross profit % % % Tax (416) (457) -9.0% (454) (440) 3.1% (487) (468) 4.1% (544) Net profit % % % Source:, We raise our net fee and commission income forecast for 2006 and 2007 by 10%. We also present our current forecast of 's financial performance in We reduce financial income and capital gains and foreign exchange gains (by ca. 20% and 4% per year respectively). The full-year 2005 figures reported under those items prompted us to issue a conservative rating of the bank's ability to generate profit. We project that the ratio of fee and commission income to pre-provision operating costs at the end of 2008 will be well below the bank's strategic minimum target of 56%. The chart below shows how that ratio will change over the forecast horizon. In our opinion, the re-pricing planned for early 2006, and the plans to acquire a 25% stake in PKO/Credit Suisse from Credit Suisse Asset Management, will contribute to an improvement in the fee and commission income. Our projected ratio of fee and commission income to operating costs less amortisation and depreciation at the end of 2008 will 54% (i.e. below the bank's target). will be able to achieve 56% only if it carries out a cost streamlining effort. But, for now, we have no basis to conclude that expenses are going to be reduced. Job reductions at will be higher than we had expected (1500 people per year to be let go vs. out forecast of 1350 people), which means that personnel costs will be 0.2% and 0.7% lower in 2006 and 2007 respectively. We maintain our view that will be able to raise its job-cutting target after it implements the central computer system (deadline scheduled for the end of 2007) and during the system testing period, achieving considerable cost savings. 20 February

5 Fee and commission income to costs 60% 50% 40% 30% 20% 10% 34% 30% 42% 36% 46% 40% 33% 29% 54% 47% 43% 45% 41% 38% 0% P 2006P 2007P 2008P Fee and commission income to total costs Fee and commission income to costs net of amortisation and depreciation Source:, Latest news is interested in acquiring two banks: the Serbian Vojvodjanska Banka and the Croatian Splitska Banka. Vojvodjanska Banka The final bids to acquire Vojvodjanska Banka (VB) will be submitted in April or May. expressed its interest in buying VB together with 10 other European banks. The estimated price of the fifth largest Serbian bank is EUR 260 m, i.e. 3.3 times its book value. We can only wait for details of the final bids and for a shortlist of the bidders. Until then, it is difficult to predict how much 's rivals will offer. If offers EUR 260 m (equivalent to almost PLN 1 bn), it will most probably not pay out dividends. Splitska Banka is also interested in acquiring Splitska Banka (SB) in Croatia. SB has to be sold by UCI and HVB because the Croatian supervising authorities did not allow for SB's merger with another Croatian bank, the Zagrebecka Banka, also owned by UCI. The following banks also expressed their interest in the acquisition: Postanska Banka, KBC, Societe Generale, OTP, BCP, NBG and GE Capital. Given that the Croatian supervisors prefer an investor who is not yet present on the Croatian market, has a greater chance of being accepted as the acquirer than the Belgian KBC or Hungarian OTP. Analysts estimate that SB may be worth EUR m. We should know the details of the acquisition in the first quarter of We have some reservations about 's international expansion ambitions. The bank has a considerable exposure to Poland's most dynamically developing sector of retail customers. It is also about to launch implementation of an integrated IT system. We believe that the bank can secure growth for itself by focusing on its Polish operations. Expansion into international markets entails risks. 20 February

6 Valuation Long-Term Valuation Valuation: ROE P/BV We based our valuation on the Gordon model formula P/BV=(ROE-g)/(COE-g), which we used to calculate the implied price to book value ratio. The P/BV ratio depends on our assumed ROE (return on equity), cost of equity (COE) which is the sum of the risk-free rate and the risk premium entailed in the purchase of the bank s shares, and a long-term growth rate (g). Dividend Policy We project that will pay out dividends equal to 66% of the net profits over the forecast horizon of 2005 to Because we do not take into account 's equity investments in Central and Easter Europe in our model, we project that, if there are no targets for takeover, the bank will pay out higher dividends. We take the risk-free rate to be the return on 10-year bonds, which was 4.702% at 16 February The market risk premium is 5%, and the long-term growth rate is 4%. We leave long-term ROE at 22%, higher than the return on equity projected for (20% %). We stand by our opinion expressed in the previous report that the effects of implementation of the central system will not yet be visible in In a longer term, can improve the returns on its equity by making cost savings. So, we leave ROE at 22%, as bonus for 's high and sustainable returns on equity, and the potential for improvement in the long term (steady growth in the net figures achieved through business growth, which has a high potential for acceleration if streamlines its personnel costs and administrative expenses). 2005F 2006F 2007F 2008F + Risk-free rate 4.70% 4.70% 4.70% 4.70% 4.70% Risk premium 5% 5% 5% 5% 5.0% beta Cost of equity 9.7% 9.7% 9.7% 9.7% 9.7% EPS BVPS ROE forecast 19.9% 20.7% 20.4% 21.2% Long-term ROE 22.0% Growth rate (g) 4% Implied P/BV 3.2 Price per share at the end of Price per share at the end of Price per share at the end of Price per share at the end of DPS discounted DPS Total discounted dividends (year-end 2005) 3.5 Fair value of one share at February price (9-mo target) 33.1 Source:, risk-free rate: 10Y bond yield at 16th January In our ROE P/BV valuation, we estimated 's fair value at February 2006 at PLN The nine-month target price of one share is PLN February

7 stock sensitivity to risk-free rate and premium risk fluctuations Risk premium Risk-free rate % 4.0% 4.5% 4.702% 5.0% 5.5% 6.0% 6.5% 3.5% % % % % % Source: stock sensitivity to risk-free rate and growth rate (g) fluctuations Risk-free rate % 4.0% 4.5% 4.702% 5.0% 5.5% 6.0% 6.5% 3.5% Growth rate 4.0% % % % % Source: Comparative Valuation We also valuated by measuring its P/E and P/BV ratios with the same ratios of its peer banks listed on the Warsaw Stock Exchange. In case of banks for which there are no current net profit and book value forecasts available covering the next two years, we applied the market consensus published by PAP on 31st January Those are: Pekao, BPH, Millennium and Bank Handlowy. The net profit and book value forecasts for the other banks are derived from our previous analytical reports. The prices used to calculate the P/E and P/BV ratios are the closing prices at the date immediately preceding the report date. : Comparative Valuation P/BV P/E Bank 2005F 2006F 2007F 2005F 2006F 2007F Pekao BPH BZ WBK Bank Handlowy ING BSK Millennium Kredyt Bank average median weights 5% 5% 5% 20% 30% 35% 's multiples at current stock prices* Premium/discount to average 37.4% 31.5% 30.5% 16.7% 0.0% 4.3% BVPS EPS Value based on the average Source:, PAP As a result of the surge in 's prices in the recent weeks, the discount we had applied to the P/E ratios in 2005 and 2006 changed to a premium. But 's fundamental valuation is close to its comparative valuation, which we consider to be its strength. The P/BV premium was already in place before, but we still think that it is justified with the high and sustainable returns brought by 's equity. The final multiples valuation calculated as a weighted average of the valuations based on the multiples forecasted for the years 2005 through 2007 for 's peers (a 15% weight for 20 February

8 P/BV and a 85% weight for P/E) resulted in a price per one share of PLN This is ca. 5% more than the outcome of our previous comparative valuation of December In that period, the WIG Banki index (which comprises more stocks that we used in our comparative valuation, as well as ), increased by ca. 10%. This means that the higher comparative valuation is mainly a result of the appreciation in the prices of all banks, and the update of the average financial forecasts for banks for which we have not published analytical reports in the last few months. P/BV vs. ROE (2006F) 22,0% 20,0% Pekao 18,0% BZ WBK BPH ROE 2006E 16,0% Kredyt Bank 14,0% ING Bank Slaski 12,0% Handlowy Millenium 10,0% 1,00 2,00 3,00 P/BV 2006E Source:, banks The outcomes of the comparative valuation and the multiples valuation show that, given our forecast of financial results for the next few years, is one of the few banks whose fundamental valuation is close to its multiples valuation. To us, this is proof of 's strength despite the price hikes in the recent weeks. In case of volatility of the entire WIG Banki index, will outperform the other stocks in the index. If there is a correction, the fundamental valuation will be our benchmark for stock prices. 's stock has got the potential to survive possible fluctuations without losing too much of its value. If the index keeps growing, the bank has the capacity to improve its stock value faster than the index. Valuation Summary Valuation Results Valuation Summary weights Value (PLN m) Gordon s Model 50% 30.8 Comparative valuation 50% 30.7 Fair value at February month target price of one share 33.0 Source: We used two methods to value s stock: the Gordon model and comparative valuation. The former yielded a fair value of PLN 30.8 at December 2005, and the second produced a price per share of PLN Based on our 9-month forecast, we value one share at PLN 33.0 and, given the current prices, recommend to hold the stock. 20 February

9 INCOME STATEMENT (PLN m) F 2006F 2007F 2008F Net interest income Interest income Interest expense (3 274) (1 672) (1 798) (2 118) (2 198) (2 274) (2 388) Non-interest income Net fee and commission income Net gains from foreign currency dealing Financial income and capital gains (63) Revenue from banking operations Other net operating income Total banking income Non-interest expense (3 570) (3 694) (3 744) (3 994) (4 218) (4 419) (4 660) Personnel costs (1 781) (1 841) (1 933) (2 005) (2 056) (2 100) (2 141) Amortisation and depreciation (447) (516) (520) (504) (530) (572) (772) Other expenses (1 342) (1 337) (1 291) (1 484) (1 633) (1 747) (1 747) Pre-provision operating profit Net provisions (704) (297) (169) (86) (251) (285) (322) Gross profit Tax (393) (433) (362) (416) (454) (487) (544) Net profit Dividends paid 0 0 (1 000) (1 161) (1 264) (1 355) (1 514) CORE RATIOS Net interest margin (total assets) 4.3% 4.2% 4.1% 4.0% 3.9% 3.9% 3.9% Net interest margin (interest-bearing assets) 4.5% 4.4% 4.4% 4.3% 4.1% 4.1% 4.2% Interest spread 4.2% 4.2% 4.2% 4.1% 3.9% 3.9% 3.9% Cost / income 62.4% 65.7% 66.2% 64.8% 61.7% 61.1% 59.7% Cost / assets 4.4% 4.4% 4.6% 4.7% 4.5% 4.4% 4.2% Personnel costs / income 31.1% 32.7% 32.4% 31.3% 30.1% 29.0% 27.4% Net provisions / Operating Profit 32.7% 15.4% 8.4% 3.8% 9.6% 10.1% 10.2% Net provisions / Total loans 2.2% 0.8% 0.4% 0.2% 0.5% 0.5% 0.5% Non-interest income / Total income 38.2% 36.0% 41.0% 44.0% 46.5% 45.8% 46.4% Operating profit / Assets 2.7% 2.3% 2.4% 2.5% 2.8% 2.8% 3.0% ROE 22% 20% 20% 20% 21% 20% 21% ROA 1.3% 1.4% 1.8% 2.0% 2.0% 2.0% 2.1% ANNUAL GROWTH RATE Net profit 18.5% 13.3% 26.5% 16.7% 8.9% 7.2% 11.7% Pre-provision operating profit (10.5%) (10.4%) 4.5% 11.9% 15.9% 7.8% 11.8% Total banking income 1.1% (1.8%) 6.0% 7.4% 6.8% 5.9% 7.9% Net interest income (8.5%) (0.0%) 1.5% 2.1% 1.9% 7.3% 6.8% Non-interest income 20.4% (4.4%) 13.1% 15.0% 13.0% 4.4% 9.3% Non-interest expense 9.6% 3.5% 6.8% 5.1% 1.8% 4.8% 5.5% 20 February

10 BALANCE SHEET (PLN m) F 2006F 2007F 2008F Cash and Central Bank balances Receivables from financial institutions Debt securities Loans Equity investments Fixed assets Other assets Total assets Liabilities to financial institutions Deposits Securities outstanding Subordinated debt Other liabilities Equity Share capital Total equity and liabilities ASSET ANALYSIS NPLs to total loans 13.5% 11.8% 9.0% 8.1% 7.5% 6.9% 5.6% NPL /Assets 5.8% 5.7% 4.4% 4.3% 4.3% 4.3% 4.0% Provisions / NPL 63.4% 66.6% 81.9% 63.6% 66.6% 69.9% 78.0% Provisions / Total loans 8.6% 7.8% 7.3% 5.1% 5.0% 4.8% 4.3% Provisions / Assets 3.7% 3.8% 3.6% 2.8% 2.9% 3.0% 3.1% Non-provisioned NPLs / Equity 31.9% 25.2% 7.8% 16.4% 14.5% 12.7% 8.6% BALANCE SHEET RATIOS Equity /Assets 6.7% 7.6% 10.3% 9.6% 9.9% 10.1% 10.2% Loans /Assets 40.1% 45.4% 46.6% 51.0% 54.8% 58.3% 62.0% Deposits / Assets 85.2% 84.6% 85.0% 83.1% 82.2% 81.3% 80.3% Loans / Deposits 47.0% 53.7% 54.8% 61.4% 66.7% 71.8% 77.2% Growth rate of loans 15.7% 16.5% 4.3% 17.1% 14.0% 13.0% 13.0% Growth rate of deposits 12.9% 2.0% 2.2% 4.4% 5.0% 5.0% 5.0% Growth rate of assets 19.4% 2.8% 1.7% 6.9% 6.2% 6.2% 6.2% 20 February

11 Institutional Sales and Research Department: Tomasz Mazurczak tel. (+48 22) Director Strategic Analysis Analysts: Michał Marczak tel. (+48 22) Deputy Director Telco, mining, metals, media, hotels Marta Jeżewska tel. (+48 22) Banks Andrzej Lis tel. (+48 22) IT Krzysztof Radojewski tel. (+48 22) Pharmaceuticals, construction, utilities Jacek Borawski tel. (+48 22) Technical analysis Przemysław Smoliński tel. (+48 22) Technical analysis Sales and Trading: Grzegorz Domagała tel. (+48 22) Deputy Director Salesmen: Michał Skowroński tel. (+48 22) Marzena Łempicka tel. (+48 22) Traders: Emil Onyszczuk tel. (+48 22) Grzegorz Stępien tel. (+48 22) Joanna Niedziela tel. (+48 22) Aleksander Mazur tel. (+48 22) Michał Świtakowski tel. (+48 22) Dom Inwestycyjny BRE Banku S.A. ul. Wspólna 47/ Warszawa 20 February

12 List of abbreviations and ratios contained in the report: EV net debt + market value EBIT Earnings Before Interest and Taxes EBITDA EBIT + Depreciation and Amortisation P/CE price to earnings with amortisation MC/S market capitalisation to sales EBIT/EV operating profit to economic value P/E (Price/Earnings) price divided by annual net profit per share ROE (Return on Equity) annual net profit divided by average equity P/BV (Price/Book Value) price divided by book value per share Net debt credits + debt papers + interest bearing loans cash and cash equivalents EBITDA margin EBITDA/Sales Recommendations of A recommendation is valid for a period of 6-9 months, unless a subsequent recommendation is issued within this period. Expected returns from individual recommendations are as follows: BUY we expect that the rate of return from an investment will be at least 15% ACCUMULATE we expect that the rate of return from an investment will range from 5% to 15% HOLD we expect that the rate of return from an investment will range from 5% to +5% REDUCE we expect that the rate of return from an investment will range from -5% to -15% SELL we expect that an investment will bear a loss greater than 15% Recommendations are updated at least once every nine months. This document has been created and published by S.A. The present report expresses the knowledge as well as opinions of the authors on day the report was prepared. The opinions and estimates contained herein constitute our best judgement at this date and time, and are subject to change without notice. The present report was prepared observing principles of methodological correctness and objectivity, on the basis of sources available to the public, which S.A. considers reliable, including information published by issuers, shares of which are subject to recommendations. However, S.A., in no case, guarantees the accuracy and completeness of the report, in particular should sources on the basis of which the report was prepared prove to be inaccurate, incomplete or not fully consistent with the facts. This report is for information purposes, it is not intended to be and should not be construed as a recommendation, offer or solicitation to acquire, or dispose of, any of the securities mentioned in this report. S.A. bears no responsibility for investment decisions taken on the basis of the present report or for any damages incurred as a result of investment decisions taken on the basis of the present report. Recommendations are based on essential data from the entire history of a company being the subject of a recommendation, with particular emphasis on the period since the previous recommendation. Investing in shares is connected with a number of risks including, but not limited to, the macroeconomic situation of the country, changes in legal regulations as well as changes on commodity markets. Full elimination of these risks is virtually impossible. It is possible that S.A. renders, will render or in the past has rendered services for companies and other entities mentioned in the present report. The present report was not transferred to the issuer prior to its publication. S.A., its shareholders and employees may hold long or short positions in the issuer's shares or other financial instruments related to the issuer's shares. S.A., its affiliates and/or clients may conduct or may have conducted transactions for their own account or for account of another with respect to the financial instruments mentioned in this report or related investments before the recipient has received this report. Copying or publishing the present report, in full or in part, or disseminating in any way information contained in the present report requires the prior written agreement of S.A. Recommendations are addressed to all Clients of S.A. This report is not for distribution to third parties. Individuals who did not participate in the preparation of this recommendation, but had or could have had access to the recommendation prior to its publication, are employees of S.A. authorised to access the premises in which recommendations are prepared, other than the analysts mentioned as the authors of the present recommendation. Strong and weak points of valuation methods used in recommendations: DCF acknowledged as the most methodologically correct method of valuation; it is based in discounting financial flows generated by a company; its weak point is the significant susceptibility to a change of forecast assumptions in the model. Comparative based on a comparison of valuation multipliers of companies from a given sector; simple in construction, reflects the current state of the market; weak points include substantial variability (fluctuations together with market indices) as well as difficulty in the selection of the group of comparable companies Previous recommendations issued for Recommendation Accumulate Date issued Price on day of recommendation WIG on day of recommendation February