Bank Securities. BRE Bank Securities. BRE Bank Securities. EBITDA margin 15.6% 10.0% 11.0% 13.8% 13.9%

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1 25 August 20 Update BRE Bank Securities Media Polska Poland AGOD.WA; AGO.PW Hold (Downgraded) Cena Current bieżąca price PLN Cena Target docelowa price Kapitalizacja Market cap Free float Średni Average dzienny daily trading obrót (3M) mies.) Shareholder structure PLN PLN 1311bn PLN 840m PLN 6.12m -Holding Sp. z o.o % BZ WBK AIB AM 29.07% Others 64.% Sector Outlook Advertising is a late-cycle industry dependent on GDP growth and investments. Advertisers typically have high operating leverage. In spite of a slowdown in GDP growth and a hiatus in investments, we are optimistic about the growth of advertising expenditure in the long term, as it is still considerably lower per capita and as a percentage of GDP than in EU15. Company Profile is one of the largest Polish media groups, but its business is much more diversified than that of its rivals, and includes newspaper, magazine, and book publishing, outdoor advertising and radio broadcasting. We estimate that has a 12.8% share in advertising expenses in general, a 50% share in newspaper advertising, and a ca. 27% share in outdoor advertising. Important dates Q3 20 report Positive Scenario Already Priced In? s earnings for Q2 indicate that the Company might be able to improve its earnings faster than we assumed in our previous report. Prompted by these results, we have revised our assumptions for this year s savings due to downsizing and for revenues from the sales of Gazeta Wyborcza and book collections. As a result, we are upgrading our net income forecast for FY20 to PLN 33.9m and for FY2010 to PLN 61.9m. That said, since our previous rating the share price of has increased by 57.7%, which we believe discounts the scenario of fast earnings improvement. We are therefore downgrading our rating to hold while increasing the target price to PLN 24.1 per share. Second Quarter Showed s Potential s Q2, despite the over 50% drop in operating income, surprised us on the upside. The Company was able to reduce headcount very quickly, which allows us to expect a much deeper reduction in payroll costs than previously forecasted (PLN 18m vs. PLN 10m). In addition, after excellent sales results for book collections, we are upgrading our revenue forecast in this area. We are reiterating our view that s earnings should improve y/y in the second half of the year. Dziennik Gazeta Prawna Merger a Done Deal On August 5, the competition watchdog UOKiK approved the merger of Axel Springer s Dziennik and Infor s Gazeta Prawna. On August 17, Infor took over publishing rights to Dziennik. In the early fall, a new daily called Dziennik.Gazeta Prawna will be launched. We consider this good news for and we maintain that the new daily will reduce the competitive pressure on Gazeta Wyborcza, as its main rival will be Rzeczpospolita. In our opinion, this may make 's marketing and advertising savings more lasting, and it opens the door for a cover price hike for Gazeta Wyborcza next year. Meanwhile, in the second half of 20 earnings improvement will come from reduced advertising and marketing expenditure, and from the full impact of the two price hikes already implemented. vs. WIG 30.5 PLN WIG Piotr Grzybowski (48 22) piotr.grzybowski@dibre.com.pl (PLN m) F 2010F 2011F Revenue EBITDA EBITDA margin 15.6% 10.0% 11.0% 13.8% 13.9% EBIT Net profit DPS P/E P/CE P/BV EV/EBITDA DYield 1.4% 0.0% 1.3% 2.4% 2.9% 25 BRE August Bank Securities 20 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 Financial Standing Q2 Results: Costs Cut Sooner Than Expected s Q2 earnings surprised us on the upside, which was largely a consequence of better book sales and the fact that the reduction in headcount under the turnaround program was achieved fast. Of the individual segments, outdoor advertising stood out, while online advertising performed worse than expected. The Group s revenues contracted by 13.4%, to PLN 297.8m, due to the over 25% decline in advertising revenue (from PLN 259.6m to PLN 194.1m). Two increases in the cover prices of 's publications were not enough to contain the decline in this line of revenues (by 4.0%, to PLN 47.5m). Most of this decline came from magazine sales, however (-11.7% y/y), while the revenue from the sales of Gazeta Wyborcza contracted by 2.9%. We expect that as the increase in prices starts to apply to all active subscriptions, these revenues should start increasing. The decline in advertising and copy sales revenues was partially offset by the higher income from book collection sales, which increased by the whooping 168%, to PLN 29.2m. Earnings in Q2 20 (PLN m) Q2 20 Q2 20 Change Revenues % EBITDA % margin 11.9% 14.7% - EBIT % Pre-tax income % Net income % Source:, estimates by BRE Bank securities As far as expenses are concerned, the Company, just like in Q1 20, achieved a considerable reduction in representation and marketing expenditure, due on the one hand to the lower cost of advertising services and on the other to the reduction in the number of double-price issues and the downscaled promotional campaign, which was made possible by the reduced competition in the newspaper segment. Salaries declined faster than previously expected, thanks to the rapid implementation of the restructuring program. In H1', 356 employees were laid off, including 337 under the downsizing plan (out of 400). In turn, the cost of materials and energy went up, due to the much higher than expected sales of book collections (1.8m copies vs. 0.7m a year ago) and increases in the price of electricity. The decline in expenses was not enough, however, to offset the lost revenues, and operating earnings fell by over 50%, to PLN 14.9m, which brought in a net income of PLN 12.2m, 43% less than last year s PLN 21.5m. Advertising revenue trends by segment 0% -5% Newspapers Magazines Radio Outdoor Online Total -1.5% -10% -15% -11.3% -11.2% -20% -25% -30% -27.0% -25.2% -35% -40% -35.2% Source: 25 August 20 2

3 Outlook for H2 20: Revised Assumptions s earnings for Q2 20 have convinced us to revise some of our earlier assumptions. In our July report, we forecasted that downsizing will be implemented more gradually, with most notices handed in at the last possible moment to meet the deadline of 31 October. The second quarter has shown, however, that the pace at which headcount it being cut is not slowing down; as a result, we upgrade the forecasted savings on this account from PLN 10m to PLN 18m. We have also revised our forecast for newspaper and magazine sales, increasing it in the case of Gazeta Wyborcza and decreasing it for magazines, for a net reduction of ca. 1.5%, to PLN 211.7m. We have on the other hand increased our projections for book collections. While we doubt that the spectacular results recorded in this area in 2007 can ever be repeated, we now acknowledge that this source of revenues has not dried out completely, which seemed likely after the disappointing FY20. We are increasing our forecast in this area to PLN 80.3m, which is a conservative move as it assumes that the disappointing results from H2 20 will merely be repeated in the second half of the current year. The final revision concerns the costs of materials and energy, which increased very fast, due in particular to the excellent sales results in the area of book collections. As a result, the Company will not be able to achieve a y/y reduction in this line of expenses. Dziennik Gazeta Prawna Merger In early August, the competition watchdog UOKiK approved the Merger of Dziennik and Gazeta Prawna. On 17 August, Infor took over publishing rights to Dziennik. In early fall, a new, combined publication will be launched called Dziennik.Gazeta Prawna, which its publishers hope will sell 110,000 copies per day. The new paper will comprise three colorcoded sections: white for topics hitherto covered by Dziennik, salmon business news and yellow for legal and tax matters. We are reiterating our view that the merger de facto entails a reduction in the competitive pressure on Gazeta Wyborcza, as the new publication will compete primarily with Rzeczpospolita. Daily sales of Gazeta Wyborcza, Dziennik and Gazeta Prawna Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Gazeta Wyborcza Dziennik Gazeta Prawna Source: ZKDP ABC Poland 25 August 20 3

4 Valuation Valuation overview PLN m Weight 9MTP DCF valuation % Relative valuation % based on P/E % EV/EBITDA % Average per share 24.1 Model Assumptions 1. Our valuation is based on the forecast of s earnings in In the forecast horizon and beyond, our assumed risk-free rate is 6.2% (yield on 10Y T-bonds). 3. Expected FCF growth rate after the forecast horizon is 3.0%. 4. We subtract the number of treasury shares held at the end of 20 (2.54m) from the total number of shares issued. Relative valuation Our relative valuation is based on EV/EBITDA and P/E multiples for foreign media companies for 20, 2010 and 2011, weighted at 25%, 45% and 30%, respectively. P/E and EV/EBITDA estimates for comparable media companies EV/EBITDA P/E Price 20F 2010F 2011F 20F 2010F 2011F Promotora de information (Prisa) Gruppo Editoriale L'Esspresso Axel Springer AG Daily Mail McClatchy Corp New York Times Corp Naspers Ltd RCS Mediagroup Arnoldo Mondadori Editore Maximum Minimum Median Premium/discount 4.4% -14.0% -17.9% 173.2% 28.8% 66.1% 25 August 20 4

5 DCF Valuation Model (PLN m) 20F 2010F 2011F 2012F 2013F 2014F 2015F 2016F 2017F 2018F Revenue change -10.9% 0.9% 6.3% 7.0% 6.5% 5.7% 4.7% 3.7% 2.7% 2.6% EBITDA EBITDA margin 11.0% 13.8% 13.9% 14.4% 14.4% 14.3% 14.3% 14.3% 14.3% 14.3% Amortization and depreciation EBIT EBIT margin 3.6% 6.4% 6.9% 7.8% 8.3% 8.5% 8.7% 8.9% 9.0% 9.1% Tax rate on EBIT NOPLAT CAPEX Working capital Other FCF WACC 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% discount factor 96.5% 86.8% 78.1% 70.2% 63.1% 56.8% 51.1% 45.9% 41.3% 37.1% PV FCF WACC 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 0.0% Cost of debt 7.2% 7.2% 7.2% 7.2% 7.2% 7.2% 7.2% 7.2% 7.2% 7.2% 7.2% Risk-free rate 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% Risk premium 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% 1.0% Effective tax rate 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 0.0% Net debt / EV 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Cost of Equity 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% 11.2% Risk premium 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% Beta FCF growth after the forecast horizon 3.0% Sensitivity analysis Terminal value FCF growth in perpetuity Present value of the terminal value (PV TV) % 2.0% 3.0% 4.0% 5.0% Present value of FCF in the forecast horizon WACC +1.0pp Equity value (EV) WACC +0.5pp Net debt -1.5 WACC Other non-operating assets 0.0 WACC -0.5pp Minority interests 0.0 WACC -1.0pp Equity value Number of shares (millions) 52.4 Equity value per share (PLN) 22.8 Cost of equity (9M) 8.4% Target Price 24.7 EV/EBITDA(') for the target price 8.7 P/E(') for the target price 38.2 TV to EV 52% 25 August 20 5

6 Income Statement (PLN m) F 2010F 2011F 2012F 2013F Revenue change 12.2% 0.4% -10.9% 0.9% 6.3% 7.0% 6.5% Advertising Revenues Book sales Book collections Other sales Operating Expenses Materials, energy and goods Salaries Incentive program Amortization and depreciation Representation and advertising One-off events Other EBIT change 203.9% -62.9% -7.9% 79.1% 14.8% 20.9% 12.7% EBIT margin 9.5% 3.5% 3.6% 6.4% 6.9% 7.8% 8.3% Profit on financing activity Equity in income of associates Pre-tax income Tax Minority interests Net income change 3.0% -76.7% 44.9% 82.6% 21.7% 24.4% 15.0% margin 7.9% 1.8% 3.0% 5.4% 6.2% 7.2% 7.8% Amortization and depreciation EBITDA change 170.4% -35.3% -2.4% 26.2% 7.1% 10.7% 7.1% EBITDA margin 15.6% 10.0% 11.0% 13.8% 13.9% 14.4% 14.4% Shares at year-end (millions) EPS CEPS ROAE 8.4% 2.0% 2.9% 5.1% 5.9% 7.1% 7.8% ROAA 6.4% 1.5% 2.1% 3.8% 4.5% 5.4% 6.0% 25 August 20 6

7 Balance Sheet (PLN m) F 2010F 2011F 2012F 2013F ASSETS Fixed assets Property, plant and equipment Intangible assets Long-term financial assets Equity in associates Long term receivables and prepayments Deferred income tax assets Current assets Inventories Trade receivables and prepayments Current tax receivables Short-term financial assets Cash (PLN m) F 2010F 2011F 2012F 2013F LIABILITIES EQUITY Share capital Reserves Retained earnings Minority interests Long-term liabilities Loans Reserves Long-term accruals Short-term liabilities Loans Trade creditors Other debt Reserves Prepayments Debt Net debt (Net debt / Equity) -16.3% -9.3% -8.5% -14.1% -17.9% -21.8% -25.5% (Net debt / EBITDA) BVPS August 20 7

8 Cash Flows (PLN m) F 2010F 2011F 2012F 2013F Cash flows from operating activities Pre-tax income Interest Amortization and depreciation Working capital Tax Other Cash flows from investing activities CAPEX Capital investments Other Cash flows from financing activities Debt Stock offering Dividends/share buy-back Interest Other Change in cash Cash at the end of period DPS (PLN) FCF (CAPEX / Sales) 4.1% 9.1% 7.5% 6.1% 6.0% 5.8% 5.7% Market multiples F 2010F 2011F 2012F 2013F P/E P/CE P/BV P/S FCF/EV 7.7% 1.6% -0.5% 7.7% 7.3% 8.7% 10.2% EV/EBITDA EV/EBIT EV/S DYield 1.4% 0.0% 1.3% 2.4% 2.9% 3.6% 4.1% Price (PLN) Shares at year-end (millions) MC (PLN m) Equity attributable to minority shareholders (PLN m) EV (PLN m) August 20 8

9 Michał Marczak tel. (+48 22) Managing Director Head of Research Strategy, Telco, Mining, Metals, Media Research Department: Marta Jeżewska tel. (+48 22) Deputy Director Banks Analysts: Kamil Kliszcz tel. (+48 22) Fuels, Chemicals, Retail Piotr Grzybowski tel. (+48 22) IT, Media Maciej Stokłosa tel. (+48 22) Construction, Developers Sales and Trading: Piotr Dudziński tel. (+48 22) Director Marzena Łempicka-Wilim tel. (+48 22) Deputy Director Traders: Emil Onyszczuk tel. (+48 22) Grzegorz Stępien tel. (+48 22) Tomasz Dudź tel. (+48 22) Michał Jakubowski tel. (+48 22) Tomasz Jakubiec tel. (+48 22) Grzegorz Strublewski tel. (+48 22) "Private Broker" Jacek Szczepański tel. (+48 22) Director Paweł Szczepanik tel. (+48 22) Sales Dom Inwestycyjny BRE Banku S.A. ul. Wspólna 47/ Warszawa 25 August 20 9

10 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 BRE Bank Securities 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 BRE Bank Securities 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 with due care and attention, observing principles of methodological correctness and objectivity, on the basis of sources available to the public, which BRE Bank Securities S.A. considers reliable, including information published by issuers, shares of which are subject to recommendations. However, BRE Bank Securities 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. BRE Bank Securities 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. This document does not constitute an offer or invitation to subscribe for or purchase any financial instruments and neither this document nor anything contained herein shall form the basis of any contract or commitment whatsoever. It is being furnished to you solely for your information and may not be reproduced or redistributed to any other person. This document nor any copy hereof is not to be distributed directly or indirectly in the United States, Australia, Canada or Japan. 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 BRE Bank Securities 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. BRE Bank Securities S.A. receives remuneration from the issuer for services rendered. BRE Bank Securities 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. BRE Bank Securities 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 BRE Bank Securities S.A. Recommendations are addressed to all Clients of BRE Bank Securities S.A. This report is not for distribution to third parties. The activity of BRE Bank Securities S.A. is subject to the supervision of the Polish Financial Supervision Commission. 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 BRE Bank Securities 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 ratings issued for Rating Buy Date issued Price on rating day WIG on rating day August 20 10