Commissioned research. DDM Holding. Financials Sweden. Targets reached ambitions increased. 8 Aug Key data

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1 Commissioned research Financials Sweden 8 Aug 2017 DDM Holding Targets reached ambitions increased Q2 report: Increased investment target In the Q2 report, DDM increased its investment target from EUR 50m to EUR 120m. As the original target was already hit, some comments or change was expected. The new target clearly shows DDM s ambitions and the opportunities it sees on the market for Non-Performing Loans (NPLs) in Central and Eastern Europe. The new target leaves another EUR 36m to be invested over the rest of Future investments could be financed through increased debt. Q2 report: Solid collection quarter Even though the increased investment target and focus on further acquisitions stole most of the show in the report, collections operations showed continued improvements. Net collections increased 67% y/y. Furthermore, cash EBITDA and operating profit increased by 95% and 427% respectively y/y, showing the operating leverage the company has in scaling up the business. Key data Country Switzerland Bloomberg DDM SS Reuters DDM.ST Share price SEK 44.9 Free float 41% Market cap (m) SEK 609 Website Next report date 02 November 2017 Absolute and relative performance aug 2016 dec 2016 apr 2017 aug 2017 OMX Stockholm PI DDM What s next? Looking forward, we believe investors will focus on further portfolio acquisitions and financing given the increased investment target. Collections from the large portfolio acquisitions in Greece and Croatia will be key to the confidence in DDM s business model. DDM aims to list its shares on Nasdaq Stockholm OMX s main market in the first half of Source: Thomson Reuters Valuation approach DCF SEK 29 SEK 102 Valuation Based on our fundamental DCF approach and accounting for variations in sales growth, EBIT margin and WACC assumptions, we derive an equity value per share of SEK , an increase from SEK DDM is trading at discounts to the 2018E peer group average of 77% on P/E, 51% on EV/EBIT and 51% on P/BV. It should be mentioned, however, that the peers are significantly larger than DDM, which could justify a valuation difference Estimate revisions 2017E 2018E 2019E Sales 13% 48% 48% Adj. EPS -29% 46% 44% Source: Nordea Markets Summary table - key figures EURm E 2018E 2019E Total revenue growth n.a. 87% 24% 38% 71% 18% EBIT margin -0.5% 36.2% 28.8% 36.5% 44.4% 44.6% EPS growth n.m. n.m. 149% -37% 272% 21% DPS P/E n.a EV/EBIT n.a EV/Sales RoE n.a. 24.3% 37.0% 19.2% 43.5% 35.7% Div. yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% FCF yield -38.1% -28.7% 20.6% % -41.6% -28.5% ND/Cash EBITDA Marketing material commissioned by DDM Holding 1

2 Table of contents Factors to consider when investing in DDM Holding 3 Valuation 11 Estimates 17 Detailed estimates 20 Risk factors 21 Reported numbers and forecasts 23 Disclaimer 26 Marketing material commissioned by DDM Holding 2

3 Quarterly review In its Q2 report, DDM continued to deliver on its business model. Net collections increased by 67% y/y. The main event was the increased investment target for 2017, from EUR 50m to EUR 120m. After a few significant portfolio investments in Greece and Croatia last month, the original target had been surpassed. Increasing the investment pace makes it possible for DDM to take part in the market opportunities it sees in Central and Eastern Europe and benefit from operational leverage. Investment target for 2017 increased from EUR 50m to EUR 120m Investment target surpassed target increased DDM has made large portfolio acquisitions since last quarterly report. At the end of the second quarter, DDM made two portfolio acquisitions in Croatia (30 June 2017) for a total amount of EUR 28m. It was followed up with an even larger, EUR 50m acquisition in Greece in the beginning of the third quarter. With these acquisitions, DDM has added EUR 84m to the portfolio so far in 2017, surpassing its full year investment target of EUR 50m. In conjunction with the quarterly report, management increased the target to EUR 120m, projecting another EUR 36m in portfolio acquisitions for the remainder of DDM: Investment achievement and targets EURm Original target 5 1 Investments YTD (incl. commitments) New target Czech Rep. Slovenia Croatia Greece Solid collections and stable cost control in Q2 Even though the new portfolio acquisitions and the new acquisition target received most of the focus in the report, net collections increased 67% y/y. This shows that the company is delivering on both portfolio growth and cash flow. DDM also showed stable costs during the quarter. The operational expenses (opex) were just above EUR 1.5m, roughly in line with the full year guidance of EUR 6.0m. Net collections increased 67% y/y in the quarter and net profit turned positive In the initiation report, we argued that scaling up DDM s business model could lead to operational leverage, as the fixed costs have the potential to stay quite stable even as DDM builds a significantly larger portfolio. In Q2, the 67% y/y net collections increase led to a cash EBITDA increase of 95% and an operating profit increase of 427%. Adjusted net profit was EUR 0.7m, compared to EUR -0.5m in Q Although we do not want to draw too large a conclusion from a single quarter, we find the trend positive. In addition, the second quarter s results were burdened by debt costs and did not benefit from revenue from the recent acquisitions. We argue that as the company grows, it may be able to receive a lower cost on its debt. Marketing material commissioned by DDM Holding 3

4 Where to acquire a delicate question DDM s target market for acquisition is Central and Eastern Europe, and the company has investments in eight different markets. As the recent acquisitions in Greece and Croatia are relatively larger than earlier investments, these markets are expected to make up a large part of DDM s net collections in the coming quarters. We expect the company mix to change frequently as DDM invests in new portfolios. Right now, Greece is the largest contributor of net collections, followed by Croatia, Slovenia, Czech Republic, Hungary and Romania. DDM: Carrying value per country, pro-forma EURm Greece Slovenia Czech Rep. 30-Jun Hungary Romania Croatia Russia Slovakia Proforma inc. recent investments (inc. commitments) DDM gets first mover advantage on the Greek NPL market The entrance of the Greek market is important for several reasons. The acquisition is the single largest acquisition in DDM s history and added a new market to DDM s portfolio. Furthermore, Greece has the highest NPL ratio in Europe and the market is still more or less untapped. In a recent study, Deloitte projected that the transaction market for Greek NPLs could amount to EUR 29bn between 2017 and This could create further investment opportunities for DDM, although adding more Greek portfolios would decrease DDM s diversification, potentially increasing risk. Management mentions Hungary, Czech Republic, Croatia, Romania and Slovenia as cornerstone markets, where it looks to make further acquisitions from some EUR 900m in potential transactions. Additional acquisitions in Greece are likely to be bolt-ons rather than purchases of major portfolios. The final terms of the Greek acquisition will be released when the deal closes. With the recent acquisitions in Croatia and Greece, DDM has taken steps to widen its operations and is now invested in a total of nine countries. Nevertheless, the company acts opportunistically in Central and Eastern Europe, rather than focusing on a specific market. Marketing material commissioned by DDM Holding 4

5 DDM: Invested markets DDM is now invested in a total of nine countries Aiming for further debt financing Financing To meet its new 2017 investment target of EUR 120m, DDM will need to find some new financing. The majority of cash on hand of EUR 68m by the end of Q will be needed for payment of the Greek acquisition. In addition, DDM is aiming for new debt financing. Management has mentioned one potential new EUR 17m Super Senior Facility and another EUR 35m in further debt financing. This would be enough for DDM to reach the new EUR 120m investment target. The risk of a rights issue and thereby dilution for existing shareholders should also be mentioned. The company could do this to take advantage of market opportunities. We believe such an issue should be done only if it could create shareholder value and therefore not to be seen as a major risk. Estimate revisions We revise our estimates from the initiation report, published on 31 May, to account for the latest portfolio acquisitions and the company s increased ambitions. We have a new price target for 2017E of EUR 120m (previously EUR 50m). Our EPS estimate for 2017 is revised down, due to one-offs in financial items and timing effects between new debt Marketing material commissioned by DDM Holding 5

6 and cash flows from purchased debt portfolios, while our numbers are up for 2018E and 2019E owing to a higher expected investment pace. Estimate revisions 2017E 2018E 2019E Sales 13% 48% 48% Adj. EPS -29% 46% 44% Source: Nordea Markets Entire commissioned research report For a deeper look into DDM, we refer to our commissioned research initiation on DDM Holding from 31 May You can find the whole initiation report here. Marketing material commissioned by DDM Holding 6

7 Factors to consider when investing in DDM Holding Investing in DDM gives exposure to the potential growth in the market for distressed assets in Central and Eastern Europe (CEE). Management has accelerated investment activities in recent years and will reach a record-high level for portfolio acquisitions in Given such increased scale, DDM could gain further from the operational leverage of its business model. Financing is a key challenge for DDM, but the company has already received funding by issuing both shares and bonds in Opportunities and risks We believe the following are key factors when evaluating an investment in DDM: Key factors to consider when evaluating an investment in DDM The trend among banks of divesting distressed asset portfolios has reached Central and Eastern Europe DDM s management and board have 50 years combined experience in the purchased debt industry DDM could take advantage of its operational leverage as the business grows, thanks to its relatively stable operating expenses The company has received funds by issuing both equity and bonds in early 2017, setting DDM up for new portfolio acquisitions We consider the following key risk factors for DDM: Exposure to the global economic development in general and to CEE in particular. The CEE region could be seen as an immature market for purchased debt, and thereby higher risk than for example the NPL market of Western Europe. Also, competition could put price pressure on the market, hurting DDM s profitability Net collections are key to DDM s business model. Collection problems could be caused by a third-party collector, for example, or by fraud related to a portfolio investment DDM s business decisions depend on the competence of key personnel and on its proprietary IT system FUSION; loss of key staff or a lack of appropriate development into FUSION could hurt DDM s results Management says financing is critical; poor access to capital could hurt DDM s ability to take advantage of market opportunities. The company s issued bonds pose a refinancing risk. NPL deal momentum in CEE The non-performing loans (NPL) market in CEE is seeing deal momentum, according to market studies, while DDM also says the market has grown substantially. CEE is an immature and growing market for NPLs CEE is quite an immature market for purchased debt compared with the more mature Western European market, for example, but there is a growing trend for banks in CEE to sell distressed assets to strengthen their balance sheets, thus increasing deal momentum. Marketing material commissioned by DDM Holding 7

8 From a global perspective, DDM s invested and targeted markets are, on average, in the top 20 th percentile of the World Bank s Ease of doing business index. Experienced management team DDM is a young company, founded in 2007, with acceleration in operations starting in Management s total experience in the distressed asset market, however, totals more than 50 years. Combined, management and the board have overseen thousands of transactions in more than 25 countries. Management also holds a combined 369,000 shares in the company, representing almost 3% of outstanding shares. DDM aims to increase its volumes Set for operational leverage DDM s net collections have increased far more than operational expenses in the past three years, indicating that it can take advantage of operational leverage. As we estimate this trend will continue, DDM s profitability could gain from further growth. Management s intention to grow the business appears an obvious strategy to take advantage of this operational leverage. DDM has mentioned several interesting markets for new portfolio investments and has also raised funds to make this possible. DDM: Net collections and opex EURm % 30% 25% 20% 15% 10% 5% 0% Net collections Opex Opex/Net collections (RHS) Gains from operational leverage may partly reflect recent years swing to net profit. The company turned to positive numbers in Marketing material commissioned by DDM Holding 8

9 DDM: Selected income statement items, EURm Net revenues* Operating profit Net profit *after amortisations and revaluations Source: Company data DDM is aiming for a total of EUR 120m in portfolio acquisitions All time high investments in 2017 aiming for more The company received funds by issuing both equity and bonds in early 2017 and has used the proceeds for portfolio investments and for the repayments of old debt financing. In the most recent report, DDM increased its target for portfolio investments in 2017 from EUR 50m to EUR 120m. The new investments were new steps in DDM s road to a larger company making it possible to take advantage of its potential operational leverage. After the most recent significant portfolio acquisitions in Greece and Croatia some more focus could be put on DDM s collection abilities. Also, the company is aiming for more portfolio acquisitions in The company has also guided that it s aiming for a listing on Nasdaq OMX Stockholm main market in the first half of Marketing material commissioned by DDM Holding 9

10 DDM: Portfolio acquisitions EURm YTD Portfolio acquisitions Slovenia and Czech Rep Croatia Greece 28 6 Source: Company data Risk factors DDM is exposed to the global economic development in general and that of Central and Eastern Europe in particular. A decreasing supply of distressed asset portfolios or increased competition could put price pressure on the market, hurting DDM s profitability. As net collections are key to DDM s business model, collection problems could have an impact on its business. These could be caused by a third-party collector or by investing in portfolios affected by fraud. DDM s business decisions depend on the competence of key personnel and its proprietary IT system FUSION. Any loss of key staff or lack of appropriate development of FUSION could lead to misguided investment decisions, burdening DDM s financials. Management mentions financing as critical. Poor access of and the cost of capital could affect its ability to take advantage of market opportunities and increase its business. The company s issued bonds also pose a refinancing risk. We discuss the risk factors in more detail at the end of the report Finally, when it comes to valuation we would like to mention the sensitivity in the WACC assumptions. We review this in detail and provide sensitivity tables in the valuation section. We provide an extended description of identified risk factors associated with an investment in DDM on page in this report. Marketing material commissioned by DDM Holding 10

11 Valuation We raise the valuation range from SEK to SEK per share, which means an increased upper part of our valuation range based on the higher potential from DDM s increased investment targets. Our valuation is based on a fundamental DCF model using a WACC of %. Our estimates imply 2018E valuation multiples of P/E 3.1x, EV/EBIT 5.4x and P/BV 1.1x. We note that our valuation is based on a long-term analysis and is not linked to a near-term assessment of the performance of the company. DDM is trading at discounts to the 2018E peer group average of 76% on P/E, 49% on EV/EBIT and 48% on P/BV, even though the different characteristics between DDM and the peer group should be mentioned, as DDM is a significantly smaller company than the peer group average. Our valuation approach is primarily based on a DCF framework One of the most common ways to assess the attractiveness of an investment opportunity is the discounted cash flow (DCF) method, discounting all available cash flows for equity, bond and non equity holders at the weighted average cost of capital (WACC). In other words, WACC represents a blended cost of capital for all capital invested in the company. In fundamental terms, a DCF framework is built on three parts: Discounting the company s free cash flow at WACC Identifying the value of debt and other non equity claims on the enterprise value Deducting all claims to determine the value of the common equity. The fair value per share is then simply calculated by dividing the equity value by the number of outstanding shares. We derive an equity value of SEK per DDM share based on a DCF valuation A DCF valuation is commonly considered by academics and practitioners to be the best way to capture the underlying fundamental drivers of a company such as cost of capital, growth rates, reinvestment rates etc. If applied correctly, it represents the best method to approximate the true intrinsic value of a company. The main appeal of a DCF framework compared with other valuation methodologies is that it also focuses on streams of cash rather than accounting earnings. Its main disadvantage is its relative sensitivity to changes in input values. We rely primarily on our fundamental DCF framework to derive an equity valuation range of SEK per share. We note that DDM trades at a discount to peers but that DDM is significantly smaller than its peers As a complement we also provide a relative valuation, including some of the mentioned competitors to DDM and other European industry peers. Our relative valuation implies discounts of P/E 3.1x, EV/EBIT 5.4x and P/BV 1.1x on our estimates for 2018E. We point out that DDM is significantly smaller than its peers, however, with a market cap of just 5% of the peer group average. DDM being quite different to its peer group being a smaller company, having lower liquidity, operating in a narrower field of operations and in an immature market could justify a valuation difference between DDM and the peer group. Marketing material commissioned by DDM Holding 11

12 DCF valuation approach DCF SEK 29 SEK Source: Nordea Markets Fundamental valuation The tables below show the general assumptions we use to calculate the DCF value. Based on the assumption that DDM can deliver broadly in line with our forecasts, with variations in sales growth, EBIT margin and WACC (weighted average cost of capital) assumptions, we arrive at a fair equity value range of SEK per share. In the terminal period, we model ROIC (return on invested capital) as equal to WACC and apply a 2.5% growth rate. We use a ROIC as equal to WACC and apply a growth rate of 2.5% in the terminal period DCF valuation DCF value (SEK) Value Per share NPV FCFF 643 to 1, to 118 (Net debt) Time value 29 to 67 2 to 5 DCF Value 394 to to 102 Source: Nordea Markets Time value adjusts for the fact that one euro today is worth more than one euro tomorrow DCF valuation Averages and assumptions Sust. Sales growth, CAGR 17.2% 3.5% 3.5% 3.0% 3.0% 2.0% EBIT-margin, excluding associa 43.6% 23.5% 19.0% 18.0% 17.5% 17.0% Capex/depreciation, x Capex/sales 100.9% 50.0% 50.0% 50.0% 50.0% 2.0% NWC/sales -8.6% 0.0% 0.0% 0.0% 0.0% 0.0% FCFF, CAGR -3.7% -0.9% 2.0% 2.4% 1.7% 2.5% Source: Nordea Markets WACC We apply a WACC range of % as the input for our DCF valuation, with the assumptions behind our WACC outlined in the table below. We assume a WACC of % WACC assumptions WACC components Risk-free interest rate 1.5% Market risk premium 5.5% Forward looking equity beta 1.40 to 2.15 Cost of equity 9.3% to 13.4% Cost of debt 7.5% Tax-rate used in WACC 10% Equity weight 75% WACC 8.7% to 11.7% Source: Nordea Markets Marketing material commissioned by DDM Holding 12

13 Sensitivity tables illustrate the share s sensitivity given changes in EBIT margin, sales growth and WACC DCF sensitivity In the table below, we provide a sensitivity analysis of our DCF valuation, showing varying EBIT margins and sales growth rates. Sales growth versus EBIT margin Sales growth change -1.0pp -0.5pp +0.5pp +1.0pp +1.0pp EBIT margin +0.5pp change pp pp Source: Nordea Markets Below we also illustrate how the equity value varies with changes in WACC and sales growth. WACC versus sales growth WACC 9.2% 9.7% 10.2% 10.7% 11.2% +1.0pp Sales gr. +0.5pp change pp pp Source: Nordea Markets In addition, we provide a sensitivity table to illustrate how the equity value varies with changes in EBIT margin assumptions and WACC. WACC versus EBIT margin WACC 9.2% 9.7% 10.2% 10.7% 11.2% +1.0pp EBIT marg. +0.5pp change pp pp Source: Nordea Markets Terminal year We use a stringent valuation framework, with ROIC=WACC in the terminal period, which prevents the model from extrapolating above-market returns in perpetuity. The value is distributed with a negative value in the first period as we factor in DDM using its cash for portfolio acquisitions. Marketing material commissioned by DDM Holding 13

14 Value distribution 24% 16% 11% 25% 37% 54% -68% 75% Sust. Source: Nordea Markets Valuation multiples We contend that a relative valuation based on P/E, EV/EBIT and P/BV provides the best benchmark for valuing DDM for the following reasons: P/E (price/earnings) is often used to compare companies and to consider the differences in tax rates and financing costs. However, it is biased towards lower multiples for companies with high financial gearing. We believe that certain adjustments should be applied when using P/E in order to appropriately value the company EV/EBIT (enterprise value/earnings before interest and taxes) is neutral to a companyʹs financial gearing. It captures the operationsʹ capital intensity to the extent that depreciation levels approximately correspond to sustainable capex levels P/BV (price/book value) measures the company s valuation in relation to the book value, giving a reality check of the valuation of a company s book value. In general, it is a relevant multiple for financial institutions, as the balance sheet and book value use to be a central part of a financial company We also present ROE for 2017E-19E and EPS CAGRs for E to offer a comparison between the companies. Peer group valuation We find the DCF method the most flexible and accurate when valuing most companies. However, a stringent relative valuation comparing multiples with a carefully selected peer group could provide a useful check for the DCF forecast. There are three main considerations we find necessary for an accurate relative valuation approach: Finding the right multiple We prefer enterprise value based multiples such as EV/EBIT or EV/EBITDA for comparing different companies. P/E is also commonly used but caution is needed as it does not differentiate between companies with different capital structures Consistency in calculations and adjustments of multiples Marketing material commissioned by DDM Holding 14

15 Finding the right peer group Companies selected for the peer group should have similar growth outlooks and return on capital. The most common starting point is to use industry peers We present a peer group comparison of six European companies within the purchased debt industry: We compare DDM with a peer group of six European industry peers Intrum Justitia Hoist Finance B2Holding Axactor Arrow Global Kruk All are based in Europe and operate there. We point out that DDM is significantly smaller than its peers, however, with a market cap of just 5% of the peer group average. DDM being quite different to the peer group being a smaller company, having lower liquidity, operating in a narrower field of operations and in an immature market could justify a valuation difference between DDM and the peer group. A short description of each company in the peer group can be found later in this section. Based on our estimates for 2018, DDM trades at discounts to the peer group average of 76% on P/E, 49% on EV/EBIT and 48% on P/BV. Comparison numbers suggest that DDM has a ROE of 44% on our 2018 estimates, compared with the 21% average for the peer group. The EPS CAGR for E is 41% for DDM versus a 25% median for the peer group. DDM versus European peers Market cap Share price P/E EV/EBIT P/BV ROE (%) ROIC EPS CAGR Company (EURm) (local) 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E E Intrum Justitia 3, % Hoist Finance % B2Holding % Axactor NaN % Arrow Global % Kruk 1, % Average 1, % Median % Min % Max 3, % DDM (Nordea est) % Difference vs average -95% -26% -76% -76% -27% -49% -48% -32% -48% -58% 9% 112% 92% 110% -629% Difference vs median 69% Source: Thomson Reuters and Nordea Markets Marketing material commissioned by DDM Holding 15

16 DDM versus global peers Market cap Share price P/E EV/EBIT P/BV ROE (%) ROIC EPS CAGR Company (EURm) (local) 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E E Credit Corp % Encore n.a n/a % PRA Group 1, % Average 1, % Median % Min % Max 1, % DDM (Nordea est) % Difference vs average -94% -18% -79% -78% -28% -53% -51% -29% -48% -63% 11% 152% 88% 105% 277% Source: Thomson Reuters and Nordea Markets Description of peers We provide a short description of the peers, consisting of larger players within the industry: Intrum Justitia Sweden s Intrum Justitia is a leading European player in credit management services, operating across the full value chain including debt purchase and collection and other related services. Intrum Justitia has just closed its merger with Lindorff. As Intrum Justitia was already Europe s largest collector, the merged company has an even stronger position in the European market. We compile a short description of the six European peers in our peer group Hoist Finance Another Swedish company operating in purchased debt in Europe. Hoist describes itself as a leading debt restructuring partner to international banks with experience in handling complicated transactions. B2Holding Norwegian purchased debt firm B2Holding operates in CEE. It began operations in late Axactor The management team of Norway-based Axactor has previous experience from Lindorff. Axactor began operations in late It operates in the Nordic region and Central and Western Europe. Arrow Global UK debt purchaser and manager Arrow Global buys debt from a broad range of customers, including banks, credit card and telecom companies. Kruk Poland s Kruk is broadly involved in debt management services, handling both consumer and corporate debt. It began operations almost two decades ago. Since 2007, it has expanded its business into numerous European markets, including Romania, Czech Republic, Slovakia, Germany, Italy and Spain. As a complement we also provide a short description of global peers, consisting of three large players within the industry: We also compile short descriptions of three global peers, outside of our peer group Credit Corp Group Australia s largest provider of sustainable financial services Credit Corp Group operates in the credit impaired consumer segment. Encore Capital Group Encore is a US based debt purchaser operating in 14 countries in the field of consumer receivables which it buys from major banks, credit unions, utility providers, municipalities etc. PRA Group PRA is a global leader of acquisition and collection of NPLs. The company is based in the US and operates in both the Americas and Europe. Marketing material commissioned by DDM Holding 16

17 Estimates We believe DDM will increase its investments further in the coming years thanks to financing early in 2017 and taking advantage of the market opportunities it has mentioned. Our research implies that DDM could deliver a net revenue CAGR of 17.2% for 2017E-23E. We believe that opex is quite stable, so DDM could gain from operational leverage. The company will likely increase its debt continuously to make further growth possible. We estimate a net revenue CAGR of 17.2% for 2017E-23E Income statement We believe DDM could increase its net revenue to EUR 47m in 2017 and EUR 80m in 2018, with growth rates of 38% and 70% respectively. However, these numbers are a little inflated by the recent share issue. We expect revenue from the expected portfolio acquisition this year to boost the 2017 number but also to spill over into We do not include further share issues in our estimates and expect growth only through cash flow and debt financing. Therefore, we forecast a decelerating revenue growth rate from We estimate a compound annual growth rate (CAGR) for net revenue of 17.2% for 2017E-23E. Estimated net revenues EURm E 2018E 2019E 2020E 2021E 2022E 2023E Given the net revenue CAGR that we forecast of 17.2%, we expect a cash EBITDA CAGR of 17.6% and a net profit CAGR of 34% based on our estimates for 2017E-23E. Cash/EBITDA is defined as net collections and management fees minus opex. Marketing material commissioned by DDM Holding 17

18 Estimated cash EBITDA and net profit We estimate net profit to grow at a 34% CAGR for 2017E-23E EURm E 2018E 2019E 2020E 2021E 2022E 2023E -20 Cash EBITDA Net profit We believe DDM will reinvest its cash flow in new portfolio acquisitions. We estimate an increase in portfolio acquisitions (included in capex in our model) at a CAGR of 16.6% for E. This assumes a slower rate than the 30.4% for the actual period of We also forecast operational expenses increasing at a CAGR of 10% owing to some staffing up and higher consultancy costs as the business grows. However, the opex increase is from a small base. The portfolio acquisition growth in real numbers in relation to the portfolio acquisitions is supporting our assumption of the operational leverage in DDM s business model. Estimated portfolio acquisitions and opex We assume DDM to reinvest its cash flow in new portfolios EURm E 2018E 2019E 2020E 2021E 2022E 2023E Portoflio acquisitions Opex Balance sheet Net debt/cash EBITDA was 1.0x at the end of Our estimates assume net debt/cash EBITDA at 1.6x by the end of 2023E, as we estimate a continuous issuance of debt, but we also expect cash EBITDA to increase, keeping net debt/cash EBITDA stable at 1.6x from 2019E-23E. Marketing material commissioned by DDM Holding 18

19 Estimated net debt/cash EBITDA 3x We assume net debt/cash EBITDA to increase from 1.0x in 2016 to 1.6x in 2023E 2x 1x 0x E 2018E 2019E 2020E 2021E 2022E 2023E Net debt/cash EBITDA In terms of financing, we factor in interest rates on the current debt level at 9.0%, the level at which the last part of the 2017 bond issue was made. Cash flow Cash flow from operations shows the estimated cash flow after working capital changes but before capex. Capex stems mainly from portfolio acquisitions in our model. We expect DDM to reinvest its cash flow from operations and also eventually from issued bonds in new portfolios. Note that we do not include any dividends in our estimates. Estimated cash flow from operations and free cash flow EURm E 2018E 2019E 2020E 2021E 2022E 2023E Cash flow from operations Free cash flow Marketing material commissioned by DDM Holding 19

20 Detailed estimates DDM - Detailed estimates EURm E 2018E 2019E 2020E 2021E 2022E 2023E Net revenue growth (%) 87% 24% 38% 71% 18% 12% 6% 5% 4% Cash EBITDA margin (%) 67.6% 78.9% 85.6% 91.5% 94.4% 94.6% 94.6% 94.3% 93.9% 93.3% Net income EPS Portfolio acquisitions ERC Amortizations and reval Opex Net financials Marketing material commissioned by DDM Holding 20

21 Risk factors An economic downturn, globally or specifically in CEE, could affect DDM s ability to collect debt. We also identify company-specific risks relating to IT and modelling tools. In terms of financial risks, currency fluctuations and refinancing of debt are among the most obvious. Lastly, DDM is also exposed to different regulatory risks as it operates in many different jurisdictions. Risk of economic downturn, globally or in CEE Price pressure could hurt profitability Market risks and competition DDM is exposed to the global economic development and to market conditions in general and to CEE in particular. A general economic downturn could affect DDM s asset portfolios such that debtors are not able to fulfil payments, which in turn could mean lower debt collection for DDM. Furthermore, an increase in personal insolvencies may lead to lower portfolio values for DDM. The market for purchasing debt assets is fragmented, with many domestic and international competitors wherever DDM operates. In some acquisition processes DDM faces bidding competition, which could put price pressure on the assets. Competitors may have greater financial resources and lower financing costs than DDM, implying a lower return requirement. This can push prices higher than DDM finds attractive. Currently, we believe distressed assets are on the increase in CEE. A decrease in the supply of distressed assets on the market could hurt DDM s ability to find attractive portfolio acquisitions. Misjudging in modelling could lead to unfavourable decisions Acquisition and collection risks As DDM s business model is to buy distressed asset portfolios at a discount to face value and then collect the outstanding debt, there is a risk that assets in its portfolios cannot be collected to the estimated extent. DDM may have overestimated the expected amounts of collection during the acquisition process or underestimated the costs for collecting. There is also a risk of misjudging the quality of the assets. In a bad scenario, the acquired assets, or part of them, could be uncollectible. There is also a risk that DDM is subject to fraud; for example, via a so-called phantom portfolio that is sold to more than one acquirer. Operational risks IT, models and employees DDM s proprietary IT system, FUSION, and its ability to make correct estimates of distressed asset portfolios is essential for DDM s success. Poor maintenance and development of the system could lead to bad business decisions, both with acquisitions of new portfolios and the management of existing portfolios. Few employees implies some sensitivity DDM is a small company in terms of staff, totalling just over 20 as of the end of 2016, making it is highly dependent on a few employees. Key changes in the workforce could have a big impact on the company s operations. Only a few employees could focus on key business relationships, which may have negative consequences should one such employee leave. As DDM does not collect the debt itself, but outsources this to third parties, it is dependent on these others to deliver on determined agreements. That includes the third parties efficiency in collection and their acting with integrity and compliant. Violation by a third party could damage DDM s reputation in addition to hitting it financially. Currency risks DDM s financials are affected by fluctuations in a number of currencies. The current portfolio composition exposes it to the euro, Hungarian forint, Czech koruna, Croatian kuna, Romanian leu and Russian rouble. We expect DDM to acquire asset portfolios in Marketing material commissioned by DDM Holding 21

22 new countries, which would change the exposure. Operational expenses are mainly in CHF, as the head office is in Switzerland. Currency fluctuations may affect net profit in specific periods or the balance sheet when fluctuations are translated into euros, DDM s reporting currency. DDM s largest bond matures in 2020, meaning a refinancing risk DDM operates in different jurisdictions Interest rate risks Financing as an important aspect of DDM s business. The company is largely financed by bonds, the largest of which matures in January Its ability to refinance this bond at maturity is important. Failure to refinance could have a negative financial impact on the company. Also refinancing is a question of price. Although DDM strives to lower the interest rates, there is a risk that refinancing has to be carried out at higher interest rate levels. Regulatory and legal risks DDM s operations take place in many different jurisdictions in CEE and the company is thus exposed to a raft of different laws, regulations, licenses etc. There is a risk that its processes do not prevent breaches in a specific jurisdiction. Also, regulatory changes in one specific jurisdiction may change the conditions for the debt collection industry in general and for DDM s business specifically. Being headquartered in Switzerland obligates DDM to follow Swiss law. Litigation and investigations may also hurt DDM s business; for example, consumer credit disputes, government audits or contract disputes could disturb DDM s operations. Risk in valuation assumptions Finally, we highlight the risk of the valuation assumptions where we find the WACC as a sensitive factor for the share price, among others. The sensitivity of the WACC assumption can be studied further in the Valuation section. Marketing material commissioned by DDM Holding 22

23 Reported numbers and forecasts Income statement EURm E 2018E 2019E 2020E 2021E 2022E 2023E Net revenue Revenue growth n.a. 87% 24% 38% 71% 18% 12% 6% 5% 4% Cash EBITDA Depreciation, impairments and amortisation EBIT of which associates Associates excl. from EBIT Net financials Pre-Tax Profit Reported taxes Net profit from cont. operations Discontinued operations Minority interest Net profit to equity EPS DPS of which ordinary of which extraordinary Profit margin in percent Cash EBITDA 67.6% 78.9% 85.6% 91.5% 94.4% 94.6% 94.6% 94.3% 93.9% 93.3% EBIT -0.5% 36.2% 28.8% 36.5% 44.4% 44.6% 44.6% 44.3% 43.9% 43.3% Performance metrics CAGR last 5 years Net revenue n.a. n.a. n.a. n.a. 53.0% 36.3% 32.7% 24.4% 10.0% 6.5% Cash EBITDA n.a. n.a. n.a. n.a. 66.3% 42.7% 36.1% 25.3% 9.9% 6.1% EBIT n.a. n.a. n.a. n.a. n.a. 43.6% 48.1% 30.5% 9.7% 5.7% EPS n.a. n.a. n.a. n.a. n.a. 63.0% 34.2% 53.0% 11.2% 6.4% DPS 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Average EBIT margin n.a. n.a. n.a. n.a. 35.6% 40.5% 42.0% 43.6% 44.3% 44.1% Average Cash EBITDA margin n.a. n.a. n.a. n.a. 88.2% 91.4% 93.3% 94.2% 94.3% 94.1% Valuation ratios EURm E 2018E 2019E 2020E 2021E 2022E 2023E P/E n.a EV/Cash EBITDA EV/EBIT n.a Valuation ratios/reported earnings P/E n.a EV/Sales EV/Cash EBITDA EV/EBIT n.a Dividend yield (ord.) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% FCF yield -38.1% -28.7% 20.6% % -41.6% -28.5% -17.3% -13.0% -10.5% -9.5% Payout ratio 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% Marketing material commissioned by DDM Holding 23

24 Balance sheet EURm E 2018E 2019E 2020E 2021E 2022E 2023E Intangible assets of which R&D of which other intangibles of which goodwill Tangible assets Shares associates Interest bearing assets Deferred tax assets Other non-int. bearing assets Other non-current assets Total non-current assets Inventory Accounts receivable Other current assets Cash and bank Total current assets Assets held for sale Total assets Shareholders equity of which preferred stock of which Equity of hyb. debt Minority interest Total Equity Deferred tax Long term int. bearing debt Pension provisions Other long-term provisions Other long-term liabilities Convertible debt Shareholder debt Hybrid debt Total non-curr. liabilities Short-term provisions Accounts payable Other current liabilities Short term interest bearing debt Total current liabilities Liab.for assets held for sale Total liabilities and equity Balance sheet and debt metrics Net debt Working capital Invested capital Capital employed ROE n.a. 24.3% 37.0% 19.2% 43.5% 35.7% 29.6% 24.0% 20.0% 16.9% ROIC -5.2% 26.1% 21.4% 17.0% 20.1% 18.7% 17.3% 15.8% 14.4% 13.2% Net debt/cash EBITDA Interest coverage Equity ratio 13.0% 15.0% 31.0% 20.9% 25.8% 30.5% 35.8% 40.4% 44.5% 48.0% Net gearing 406.1% 403.1% 139.9% 279.5% 225.5% 179.2% 142.9% 118.1% 100.5% 87.7% Marketing material commissioned by DDM Holding 24

25 Cash flow statement EURm E 2018E 2019E 2020E 2021E 2022E 2023E Cash EBITDA Paid taxes Net financials Change in Provisions Change in other LT non-ib Cash flow to/from associates Dividends paid to minorities Other adj. to reconcile to cash flow Funds from operations (FFO) Change in NWC Cash flow from op. (CFO) Capital Expenditure Free Cash Flow before A&D Proceeds from sale of assets Acquisitions Free cash flow Dividends paid Equity issues / buybacks Net change in debt Other financing adjustments Other non-cash adjustments Change in cash Cash flow metrics Capex/D&A Capex/Sales Key information Share price year end (current) Market cap Enterprise value Diluted no. of shares, year-end (m) Marketing material commissioned by DDM Holding 25

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