Duon. Flash Note. 41/2014/FN (155) September 30, Investment story & recommendation

Transcription

1 41/2014/FN (155) September 30, 2014 Flash Note Analyst: Łukasz Prokopiuk, CFA +48 (22) Duon Sector: Oil&Gas Market Cap.: US$ 67.1m Fundamental rating: Buy (-) Reuters code: DUO.WA Market relative: Overweight (-) Av. daily turnover: US$ 2.15m Price: PLN 2.16 Free float: 45% 12M EFV: PLN 3.0 (-) 12M range: PLN Investment story & recommendation Duon is currently the biggest natural gas provider in Poland after PGNiG. In the past three years Duon has been consequently gaining new clients and recording staggering business growth. Despite thw Company's remarkable success in the past, we still see growth opportunities for Duon and believe the equity story of the Company is still very appealing. Based on our 12M EFV of PLN 3.0 per share, we initiate the coverage of the Company with a LT fundamental Buy recommendation. Our ST market-relative bias for the stock is set at Overweight. At the core of Duon s success lies the weakness of its main competitor. PGNiG continues to pay a large premium for Russian natural gas in comparison to its peers. It is therefore hardly surprising that PGNiG s wholesale tariff prices (which are based on the weighted average cost of acquired natural gas) are usually higher than the gas prices offered on Western markets. Our impression is that the price spread between gas offered by PGNiG and gas from Western sources is unlikely to vanish anytime soon, especially since more costly Qatar imports should come online already in 2015 and because we doubt PGNiG will ever be treated with privilege by Gazprom. Such situation should continue to create growth opportunities for Duon which unburdened by costly gas imports may continue to bite away PGNiG s clients. This year, due to regulation requirements, PGNiG has started to sell half of its wholesale gas volumes on the Polish power exchange. It is probably due to regulation guidance that the gas prices offered on the exchange closely resemble the prices in Western CNG hubs adjusted for transmission costs. This has so far proved to be a game changer. It substantially raised liquidity on the gas power exchange and created opportunities for beneficial large volume trade to external parties like Duon. New LNG investments are becoming a strong driver for Duon. The launch of the Polish LNG terminal in 2015 should have a positive effect on Duon s LNG business as it may improve the Company s bargaining power against PGNiG. Already due to the launch of the 2.5 bcm LNG terminal in Lithuania, Duon is focused on replacing a part of PGNiG s supplies with cheaper LNG products. We believe that such supply changes on the LNG market should have positive effects on Duon s future LNG sale volumes and margins. Guide to adjusted profits No factors necessitating adjustments. Key data IFRS consolidated E 2015E 2016E Sales PLN m EBITDA PLN m EBIT PLN m Net income PLN m EPS PLN EPS yoy chng % FCFF PLN m Net debt PLN m P/E x P/CE x EV/EBITDA x EV/EBIT x Gross dividend yield % DPS PLN No. of shares (eop) m Stock performance Volume (m) Source: ISI WIG Duon Upcoming events 1. Release of the 3Q14 financial results: November 13, Catalysts 1. Management board upgrades its FY14 guidance figures 2. No changes in natural gas tariffs introduced by URE to PGNiG for Gas spread between PGNiG's tariff prices and PPE spot prices increases 4. Further improvement in LNG and gas TPA sale volumes 5 Obtaining cheap LNG imports from Lithuania and Kaliningrad 6. PGNiG does not negotiate lower LNG prices from Qatar 7. Additional LNG supplies positively impact Duon's negotiating power against PGNiG 8. Natural gas market liberalization accelerates in Poland Risk factors 1. Large natural gas tariff decreases introduced by URE to PGNiG for Gas spread between PGNiG's tariff prices and PPE spot prices decreases 3. PGNiG negotiates lower LNG prices from Qatar 4. PGNiG negotiates lower gas prices from Gazprom

2 Company profile Duon is currently the biggest natural gas provider in Poland after PGNiG. In the past three years Duon has been consequently gaining new clients and recording staggering business growth. In just three years the Company managed to almost quadruple its revenues. Furthermore, from net losses in 2011, Duon managed to reach net profits of PLN 6 million and PLN 10 million in 2012 and 2013, respectively. Our FY14 net income target is close to PLN 22 million which is perhaps a precise indicator as to the Company s strong earnings dynamics and remarkable success. Despite the Company's remarkable success in the past, we still see growth opportunities for Duon and we believe the equity story of the Company is still very appealing. When we think about Duon and its competition against PGNiG, we see several similarities to the former case of Netia which over the years has proved to be very successful against former monopolist Orange. It may be a distant comparison, but this may give a rough thought as to Duon s LT upside potential. Based on our 12M EFV of PLN 3.0 per share, we initiate the coverage of the Company with a LT fundamental Buy recommendation. Our ST market-relative bias for the stock is set at Overweight. The Company is active in two main business areas in Poland: (i) in natural gas and gasified LNG distribution and (ii) gas and electric energy trading. The former is represented by the infrastructure segment, while the latter by the trading segment. The infrastructure segment of Duon is focused primarily on distribution of natural gas and gasified LNG. It is the more defensive part of the Company s business. Duon possesses its own gas distribution network (c. 400 km of pipelines in 9 locations connected to the state transmission system) which delivers gas to over 4000 consumers. Most of the clients are individual house-hold consumers although higher distribution volumes are delivered to S&M enterprises. Additionally the Company has created a portfolio of clients at local gas networks not connected to Gaz System s transmission infrastructure where Duon delivers LNG products which are usually gasified. The prices of both network distributed natural gas and gasified LNG products are controlled by the Energy Regulator (URE). Network distributed gas is perhaps the highest margin product of the Company but due to infrastructure limitations it is not subject to meaningful yoy growth. Gas distribution volumes follow a typical pattern which resembles the heating season: the first and fourth quarter are usually the strongest with regards to EBITDA generation. The infrastructure segment sources natural gas internally from the trading segment. Contrary to the network distributed gas, LNG sales have been growing yoy at strong double digit pace in the past six quarters and we believe that the sale of this product may continue to grow at c. 15% per annum for the next three years. Currently, nearly three quarters of LNG products are purchased from PGNiG in Grodzisk and Odolanów, while the rest is sourced from the costly Zeebrugge terminal in Belgium or the unreliable Russian terminals in Kaliningrad or Sankt-Petersburg. There seems to be a lot of upside potential with regards to additional LNG supply in the future. Firstly, Duon is focused on obtaining cheaper LNG imports from the newly built terminal in Lithuania and replacing a part of PGNiG s supplies. Secondly, Duon hopes on ensuring some LNG imports from Kaliningrad which could be considered as the cheapest in the total import portfolio. Finally, we believe that the launch of the Polish LNG terminal in 2015 should have a positive effect on Duon s business as it may improve its bargaining power against PGNiG. The mentioned structural changes in LNG supply should help Duon in volume growth but could also have a meaningful impact on gasified LNG distribution margins. The trading segment is firstly responsible for obtaining natural gas that is sold by the infrastructure segment. Secondly the segment focuses on the gas wholesale markets in TPA formula. Recent regulations allow a third party (for example Duon) to access PGNiG s clients using PGNiG s own distribution infrastructure assuming the client is tempted to change its gas provider. For the past few quarters Duon was able to obtain cheaper natural gas than PGNiG s and ultimately was able to tempt PGNiG s clients by offering visible wholesale price discounts as compared to PGNiG s tariff prices. For Duon TPA gas sales have appeared only in 2013 but have revealed significant growth. Only in 2H14 did the Company recognize nearly three times as much sale volumes as in We believe that apart from LNG sales, gas TPA sales may prove to be one of the main growth drivers for Duon in the future. At the heart of Duon s success is the weakness of its main competitor. PGNiG continues to pay a large premium for Russian natural gas in comparison to its peers. It is therefore hardly surprising that PGNiG wholesale tariff prices (which are based on the weighted average cost of acquired natural gas) are usually higher than the gas prices offered on Western markets. Our impression is that the price spread between gas offered by PGNiG and gas from Western sources is unlikely to vanish anytime soon, especially since more costly Qatar imports should come online already in 2015 and because we doubt PGNiG will ever be treated with privilege by Gazprom. Such situation should continue to create growth opportunities for Duon which unburdened by costly gas imports may continue to buy gas at competitive prices and should be able to bite away PGNiG s clients. The introduction of gas trade on the Polish power exchange also proved to be vital for Duon. This year, due to regulation requirements, PGNiG had started to sell half of its wholesale gas volumes on the power exchange. It is probably due to regulation guidance that the gas prices offered by PGNiG on the exchange closely resemble the prices in Western CNG hubs adjusted for transmission costs. This has substantially raised liquidity on the gas merchandise exchange and created opportunities for beneficial large volume trade to external parties like Duon. Suddenly Duon gained a second regulator backed option to buy the cheap commodity apart from gas imports. Please note that according to the law of obligatory reserves any party importing a higher amount than 100 million cubic meters per annum needs to pay costly obligatory reserve duties tied to the full imported amount. This is the reason why Duon usually has a reserved annual import capacity of only up to c. 100 million cubic meters. The introduction of gas trade on the exchange removed this growth constraint. Even though Duon is likely to sell over 200 million cubic meters in 2014, we believe that the average price for obtained gas is still likely to be quite competitive mainly thanks to the power exchange. 2????????????????????????

3 Duon s trading segment predominantly purchases gas at forward gas contract prices instead of prevailing spot prices. This is a critical element in the Company s business model. The Company usually tries to hedge the gas wholesale margins instead of speculating on the spot gas spreads. If Duon signs a gas contract in the TPA formula, it will usually negotiate a flat sale price with the client for a year (at a discount to PGNiG s wholesale tariff prices) and at the same time will obtain a 1 year forward contract which will fully hedge the gas spread risk. This strategy allows for relatively stable gas wholesale margins for about 3-4 quarters for previously acquired gas contracts but may sometimes give away fat spot spread margins. The gas delivered to the infrastructure segment is also obtained using the same hedging strategy. Duon is also active in electric energy sales under the TPA formula. This product is quite similar to TPA gas sales. Higher competition on electric energy markets and full liberalization of business-to-business electric energy markets, however, implies smaller prospective margins and apparently leaves smaller opportunity for growth. Even so the trading segment has substantially increased the sales of electric energy in TPA formula in previous years and quarters. We assume this product may grow c. 5% per annum in the next three years. The additional activity of the trading segment is electric energy and natural gas wholesale trading. The segment has so far tended to exploit market inefficiency in terms of prevailing spot prices instead of conducting speculative buy and hold transactions. The Company managed to generate fat margins on these products on several occasions, however, it is rather apparent that such opportunities as in 2Q14 may not repeat in the future. Quarterly results corner: 3Q14E results preview Consolidated figures. We expect the Company to deliver PLN 6.3 million of consolidated EBITDA in the quarter vs. PLN 4.3 million recorded a year ago. The Company s net income may amount to PLN 3.6 million vs. PLN 1.8 million in 3Q13. We do not assume any oneoffs in the quarter. The infrastructure segment. We expect the segment to record PLN 2.8 million of quarterly EBITDA a similar figure in comparison to 3Q13. Even despite expected visibly higher LNG sale volumes, we anticipate only comparable yoy LNG margins which can be associated with technical troubles in obtaining cheap LNG from Kaliningrad. We assume margins on network gas sales to be comparable in yoy terms. The trading segment. We expect the segment to reveal quarterly EBITDA of PLN 3.5 million vs. PLN 1.5 million in 3Q13 and vs. PLN 9.7 million in 2Q14. We assume that in 3Q14 the Company will not record as strong gas trading margins as in 2Q14 (even though the prevailing average spot spread was rather comparable in the two quarters). At the same time we assume the Company continued to successfully grow in its gas TPA business. Financial forecast In the past three years Duon has been consequently gaining new clients and recording staggering business growth. In just three years the Company managed to almost quadruple its revenues. Furthermore, from net losses in 2011, Duon managed to reach net profits of PLN 6 million and PLN 10 million in 2012 and 2013, respectively. Our FY14 net income target is close to PLN 22 million which is perhaps a precise indicator as to the Company s strong earnings dynamics and remarkable success. Even despite our very strong FY14 estimates we think further earnings improvement is possible in the next three years, although we think earnings dynamics should surely decelerate. Moreover we expect different EBITDA contribution from different products. We expect gasified LNG sales and gas TPA sales to gradually increase business contribution, while gas trading margins may have a less meaningful impact on consolidated figures in 2015 and LNG sales have been growing yoy at strong double digit pace in the past six quarters and we believe that the sale of this product may continue to grow at c. 15% per annum for the next three years. Currently, nearly three quarters of LNG products are purchased from PGNiG in Grodzisk and Odolanów, while the rest is sourced from the costly Zeebrugge terminal in Belgium or the unreliable Russian terminals in Kaliningrad or Sankt-Petersburg. There seem to be a lot of upside potential with regards to additional LNG supply in the future. Firstly, Duon is focused on obtaining cheaper LNG imports from the newly built terminal in Lithuania and replacing a part of PGNiG s supplies. Secondly, Duon hopes on ensuring some LNG imports from Kaliningrad which could be considered as the cheapest Fig. 1 Duon; 3Q14 results forecast IFRS consolidated PLN m 3Q14E 2Q14A 3Q13A qoq change yoy change 1-4Q14E 1-4Q13A yoy change Sales % 36% % EBITDA % 46% % EBITDA margin 4.5% 8.8% 4.2% % 5.3% - EBIT % 65% % EBIT margin 3.4% 7.7% 2.8% % 3.9% - Pre-tax profit % 99% % Pre-tax margin 3.2% 7.3% 2.2% % 3.3% - Net profit % 99% % Net margin 2.6% 5.8% 1.7% % 2.6% -???????????????????????? 3

4 Fig. 2 Duon; 3Q14 detailed results forecast IFRS consolidated PLN m qoq yoy 3Q14E 2Q14A 3Q13A change change 1-4Q14E 1-4Q13A yoy change Sales % 36% % Infrastructure segment % 7% % Network gas sales % 4% % LNG sales % 11% % Other % -1% % Trade segment % 50% % TPA electric energy sales % 0% % TPA natural gas sales % 936% % Wholesale electric energy trading % 0% % Wholesale gas trading % 35% % Opex (excluding D&A) % 35% % COGS (excluding D&A) % 34% % Distribution costs (excluding D&A) % 96% % G&A costs (excluding D&A) % 3% % Hedging Recurring EBITDA % 52% % Other operating items Other one-offs EBITDA % 46% % Infrastructure segment % -3% % Trade segment % 143% % D&A % 9% % EBIT % 65% % Net financial income Equity method affiliates Pre-tax % 99% % Tax expense Minority interest Net income % 99% % in the total import portfolio. Finally, we believe that the launch of the Polish LNG terminal in 2015 should have a positive effect on Duon s business as it may improve its bargaining power against PGNiG. The mentioned structural changes in LNG supply should help Duon in volume growth but could also have a meaningful impact on gasified LNG distribution margins. TPA gas sales should have an increasing contribution to total earnings. We are convinced that the price spread between gas offered by PGNiG and gas from Western sources is unlikely to vanish anytime soon, especially since more costly Qatar imports should come online already in 2015 and because we doubt PGNiG will ever be treated with privilege by Gazprom. Such situation should continue to create growth opportunities for Duon which unburdened by costly gas imports may continue to aggressively enter the Polish market. We continue to expect that the weak competition position of PGNiG in combination with the introduction of high volume gas trading on the power exchange (which allows for cheap gas purchases) and introduction of additional LNG supplies may be strong drivers for Duon s business. Duon is an active player in natural gas wholesale trading. Usually the Company s strategy was to exploit market inefficiency on gas wholesale spot markets instead of conducting speculative buy and hold transactions. This way in 2Q14 Duon generated huge margins on natural gas trading, profits which are sure to have a meaningful share in consolidated profitability in It is rather apparent that such trading opportunities as in 2Q14 may not repeat in the future and in contrast to the FY14 figures, we expect gas trading to have a minor impact on the FY15 and FY16 figures. In June management published its guidance for FY14 EBITDA and NI of PLN 30.3 million and PLN 17.5 million, respectively. Given the Company s 1H14 figures, however, we believe that such guidance is quite conservative as already in 1H14 the Company recorded almost three quarters of the management net profit guidance and c. 70% of the EBITDA guidance. Given the staggering yoy volume dynamics in 1H14, the management guidance implies that in 2H14 the volumes would need to be only flattish or slightly positive from yoy perspective. At the same time, based on our observations the prevailing spot spread in 3Q14 (spread between PGNiG s tariff prices and gas stop prices on the power exchange) was similar to the one in 2Q14 which may indicate that the Company s gas trading and gas TPA sales in 3Q14 could in theory be similarly strong as in 2Q14. We assume smaller gas trading margins in 3Q14, but our bet is that in 4Q14 management is likely to upgrade its financial guidance for 2014 (especially once management is pretty sure about the full impact of wholesale gas trading). 4????????????????????????

5 Valuation We value Duon using a 75%/25% combination of a DCF and relative valuation. The weights have been assigned similarly as in the case of PGNiG: we give a greater weight to our DCF valuation as we believe it is much more indicative. Our ultimate 12M EFV for Duon s equities is PLN 3.0 per share. Our DCF valuation points to the target value of PLN 3.11 per share. Our implied target EFV based on our peerrelative exercise is PLN 2.66 per share. In our DCF model we have used unlevered Beta of 1 and a risk free rate of 4.5% for calculation of the required rate of return. In calculation of the Company s residual value we assumed a residual increase in FCFF of 2% per annum. Fig. 3 Duon; Valuation relative to peers P/E EV/EBITDA EV/EBIT P/CE 2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E 2014E 2015E 2016E Average for peers E.ON Enagas SA ENI SPA Gas Natural SDG SA GDF Suez PGNiG RWE AG Snam SPA Duon Duon's premium (discount) to average -27% -33% -33% -3% -11% -19% -26% -32% -39% 23% 16% 14% Duon's implied EFV per share Weight 0.0% 12.5% 12.5% 0.0% 12.5% 12.5% 0.0% 12.5% 12.5% 0.0% 12.5% 12.5% Duon' overall implied EFV per share 2.66 Duon' NI, EBITDA, EBIT, NI + D&A (PLN m) Duon' net debt (PLN m), Number of shares (m) Multiples priced as of the close of September 29, Source: Bloomberg, DM BOŚ SA estimates Fig. 4 Duon; Weighted average overall valuation DCF Peer-relative valuation valuation Weights 75% 25% Valuation (PLN per share) Weighted average overall valuation (PLN per share) 3.00 Source: DM BOŚ SA estimates???????????????????????? 5

6 Fig. 5 Duon; DCF model PLN m 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E >2021E Sales y/y change 45% 15% 9% 7% 0% 0% 0% 0% EBIT y/y change 89% 6% 3% 9% -1% 0% -1% -1% EBIT margin 5.1% 4.7% 4.4% 4.5% 4.5% 4.5% 4.4% 4.4% Effective cash tax rate (T) 21% 19% 19% 19% 19% 19% 19% 19% EBIT*(1-T) y/y change 82% 8% 3% 9% -1% 0% -1% -1% EBITDA y/y change 68% 5% 4% 9% 0% 0% 0% 0% EBITDA margin 6.1% 5.6% 5.3% 5.4% 5.4% 5.4% 5.4% 5.4% Depreciation & amortisation (D) EBIT*(1-T) + D y/y change 60% 8% 4% 8% 0% 0% 0% 0% Capex NWC change Other FCFF y/y change 230% -74% 32% 13% 30% 0% 0% 0% 2.0% Cost of equity Risk free rate (nominal) 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% 4.5% Equity risk premium 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% Unlevered beta Beta adjusted for leverage Required rate of return 9.6% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% Cost of debt Cost of debt (pre-tax) 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% Effective tax rate 21.2% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% 19.0% After-tax cost of debt 3.9% 4.1% 4.1% 4.1% 4.1% 4.1% 4.1% 4.1% 4.1% WACC Weight of equity 98% 100% 100% 100% 100% 100% 100% 100% 100% Cost of equity 9.6% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% Weight of debt 2% 0% 0% 0% 0% 0% 0% 0% 0% After-tax cost of debt 3.9% 4.1% 4.1% 4.1% 4.1% 4.1% 4.1% 4.1% 4.1% WACC 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% 9.5% Discount multiple Discount factor PV FCF Residual growth of FCFFs, (%) 2.0% WACC in the residual period (%) 9.5% Residual value Present value of the residual value Sum of FCFFs PVs Enterprise value Cash and equivalents, eop 2014E 41.1 Interest-bearing debt, eop 2014E 48.5 Minority interest, eop 2014E 2.8 Dividend paid between now and valuation horizon 0.0 Equity value No. of shares (m) M EFV of Duon, (PLN per share) 3.11 Source: DM BOŚ SA estimates 6????????????????????????

7 Financial statements (IFRS consolidated) Fig. 6 Duon; Balance sheet PLN m E 2015E 2016E 2017E 2018E 2019E 2020E 2021E Fixed assets Intangibles Tangible fixed assets Equity method affiliates Deferred tax assets Other LT assets Current assets Inventories ST receivables Cash & equivalents Other ST assets Total assets Equity Minority interest Liabilities and reserves Reserves Interest-bearing liabilities ST Interest-bearing liabilities LT Interest-bearing liabilities Trade liabilities Other liabilities Total liabilities & equity Fig. 7 Duon; Income statement PLN m E 2015E 2016E 2017E 2018E 2019E 2020E 2021E Sales Infrastructure segment Network gas sales n.a LNG sales n.a Other n.a Trade segment n.a TPA electric energy sales n.a TPA natural gas sales n.a Wholesale electric energy trading n.a Wholesale gas trading n.a Opex (excluding D&A) COGS (excluding D&A) Distribution costs (excluding D&A) G&A costs (excluding D&A) Hedging Reccuring EBITDA Other operating items Other one-offs EBITDA Infrastructure Trading D&A EBIT Net financial income Other Pre-tax income Tax expense Minority interest Net income ???????????????????????? 7

8 Fig. 8 Duon; Cash flow PLN m E 2015E 2016E 2017E 2018E 2019E 2020E 2021E Net income (loss) Minority interest Depreciation and amortization Other adjustments CFO before changes in NWC Changes in net working capital: Change in inventories Change in receivables Change in payables Operating cash flow Capital expenditures Other Investing cash flow Equity issue proceeds Change in interest-bearing debt Dividends Interest paid Other Financing cash flow Total cash flow Fig. 9 Duon; Ratios E 2015E 2016E 2017E 2018E 2019E 2020E 2021E Sales growth (yoy) n.m. 121% 56% 45% 15% 9% 7% 0% 0% 0% 0% Gross profit growth (yoy) n.m. 106% 63% 61% 16% 10% 8% 0% 0% 0% 0% EBITDA growth (yoy) n.m. 189% 55% 68% 5% 4% 9% 0% 0% 0% 0% EBIT growth (yoy) n.m. n.m. 77% 89% 6% 3% 9% -1% 0% -1% -1% Net income growth (yoy) n.m. n.m. 66% 108% 14% 6% 12% 2% 3% 3% 2% A/R turnover days Inventory turnover days A/P turnover days Current ratio Quick ratio Interest bearing debt/equity 27% 22% 24% 22% 20% 18% 16% 15% 13% 12% 11% Net debt / (adjusted EBITDA) 646% 239% 55% 20% n.m. n.m. n.m. n.m. n.m. n.m. n.m. (adjusted EBITDA) / Interest paid NWC / sales 17% 6% 3% 4% 4% 4% 4% 4% 4% 4% 4% CFO before changes in NWC / EBITDA 14% 121% 118% 82% 85% 84% 84% 83% 83% 82% 82% CFO / reccuring EBITDA -251% 120% 131% 48% 70% 79% 78% 83% 83% 82% 82% EBITDA margin 4.1% 5.4% 5.3% 6.1% 5.6% 5.3% 5.4% 5.4% 5.4% 5.4% 5.4% EBIT margin 0.0% 3.4% 3.9% 5.1% 4.7% 4.4% 4.5% 4.5% 4.5% 4.4% 4.4% Pretax margin -0.8% 2.1% 3.3% 4.8% 4.6% 4.4% 4.6% 4.7% 4.9% 5.0% 5.1% Net margin -2.7% 2.5% 2.6% 3.8% 3.7% 3.6% 3.7% 3.8% 3.9% 4.0% 4.1% ROE -1.7% 3.3% 5.1% 9.6% 9.8% 9.4% 9.5% 8.9% 8.4% 7.9% 7.5% ROA -1.2% 2.3% 3.4% 6.5% 6.6% 6.5% 6.7% 6.4% 6.2% 6.0% 5.8% 8????????????????????????

9 BASIC DEFINITIONS A/R turnover (in days) = 365/(sales/average A/R)) Inventory turnover (in days) = 365/(COGS/average inventory)) A/P turnover (in days) = 365/(COGS/average A/P)) Current ratio = ((current assets ST deferred assets)/current liabilities) Quick ratio = ((current assets ST deferred assets inventory)/current liabilities) Interest coverage = (pre-tax profit before extraordinary items + interest payable/interest payable) Gross margin = gross profit on sales/sales EBITDA margin = EBITDA/sales EBIT margin = EBIT/sales Pre-tax margin = pre-tax profit/sales Net margin = net profit/sales ROE = net profit/average equity ROA = (net income + interest payable)/average assets EV = market capitalization + interest bearing debt cash and equivalents EPS = net profit/ no. of shares outstanding CE = net profit + depreciation Dividend yield (gross) = pre-tax DPS/stock market price Cash sales = accrual sales corrected for the change in A/R Cash operating expenses = accrual operating expenses corrected for the changes in inventories and A/P, depreciation, cash taxes and changes in the deferred taxes DM IDM S.A. generally values the covered non bank companies via two methods: comparative method and DCF method (discounted cash flows). The advantage of the former is the fact that it incorporates the current market assessment of the value of the company s peers. The weakness of the comparative method is the risk that the valuation benchmark may be mispriced. The advantage of the DCF method is its independence from the current market valuation of the comparable companies. The weakness of this method is its high sensitivity to undertaken assumptions, especially those related to the residual value calculation. Please note that we also resort to other valuation techniques (e.g. NAV-, DDM- or SOTP-based), should it prove appropriate in a given case. KEY TO INVESTMENT RANKINGS This is a guide to expected price performance in absolute terms over the next 12 months: Buy fundamentally undervalued (upside to 12M EFV in excess of the cost of equity) + catalysts which should close the valuation gap identified; Hold either (i) fairly priced, or (ii) fundamentally undervalued/overvalued but lacks catalysts which could close the valuation gap; Sell fundamentally overvalued (12M EFV < current share price + 1-year cost of equity) + catalysts which should close the valuation gap identified. This is a guide to expected relative price performance: Overweight expected to perform better than the benchmark (WIG) over the next quarter in relative terms Neutral expected to perform in line with the benchmark (WIG) over the next quarter in relative terms Underweight expected to perform worse than the benchmark (WIG) over the next quarter in relative terms Banks Net Interest Margin (NIM) = net interest income/average assets NIM Adjusted = (net interest income adjusted for SWAPs)/average assets Non interest income = fees&commissions + result on financial operations (trading gains) + FX gains Interest Spread = (interest income/average interest earning assets)/ (interest cost/average interest bearing liabilities) Cost/Income = (general costs + depreciation + other operating costs)/ (profit on banking activity + other operating income) ROE = net profit/average equity ROA = net income/average assets Non performing loans (NPL) = loans in substandard, doubtful and lost categories NPL coverrage ratio = loan loss provisions/npl Net provision charge = provisions created provisions released DM IDM S.A. generally values the covered banks via two methods: comparative method and fundamental target fair P/E and target fair P/BV multiples method. The advantage of the former is the fact that it incorporates the current market assessment of the value of the company s peers. The weakness of the comparative method is the risk that the valuation benchmark may be mispriced. The advantage of the fundamental target fair P/E and target fair P/BV multiples method is its independence of the current market valuation of the comparable companies. The weakness of this method is its high sensitivity to undertaken assumptions, especially those related to the residual value calculation. Assumptions used in valuation can change, influencing thereby the level of the valuation. Among the most important assumptions are: GDP growth, forecasted level of inflation, changes in interest rates and currency prices, employment level and change in wages, demand on the analysed company products, raw material prices, competition, standing of the main customers and suppliers, legislation changes, etc. Changes in the environment of the analysed company are monitored by analysts involved in the preparation of the recommendation, estimated, incorporated in valuation and published in the recommendation whenever needed. The recommendation tracker presents the performance of DM BOŚ S.A. s recommendations. A recommendation expires on the day it is altered or on the day 12 months after its issuance, whichever comes first. Relative performance compares the rate of return on a given recommended stock in the period of the recommendation s validity (i.e. from the date of issuance to the date of alteration or in case of maintained recommendations from the date of issuance to the current date) in a relation to the rate of return on the benchmark in this time period. The WIG index constitutes the benchmark. For recommendations that expire by an alteration or are maintained, the ending values used to calculate their absolute and relative performance are: the stock closing price on the day the recommendation expires/ is maintained and the closing value of the benchmark on that date. For recommendations that expire via a passage of time, the ending values used to calculate their absolute and relative performance are: the average of the stock closing prices for the day the recommendation elapses and four directly preceding sessions and the average of the benchmark s closing values for the day the recommendation expires and four directly preceding sessions. Distribution of DM BOŚ's current recommendations Buy Hold Sell Suspended Under revision Numbers Percentage 40% 43% 12% 4% 0% Distribution of DM BOŚ's current market relative recommended weightings Overweight Neutral Underweight Suspended Under revision Numbers Percentage 35% 42% 19% 4% 0% Distribution of DM BOŚ's current recommendations for companies that were within the last 12 months DM BOŚ's or IDM's customers in investment banking Buy Hold Sell Suspended Under revision Numbers Percentage 40% 40% 10% 10% 0% Distribution of DM BOŚ's current market relative recommended weightings for the companies that were within the last 12 months DM BOŚ's or IDM's customers in investment banking Overweight Neutral Underweight Suspended Under revision Numbers Percentage 20% 60% 10% 10% 0%

10 LT fundamental recommendation tracker Recommendation Issue date Reiteration date Expiry date Performance Duon Buy Not later than Relative performance Price at issue/ reiteration (PLN) 12M EFV (PLN) Market-relative recommendation tracker Relative recommendation Issue date Reiteration date Expiry date Duon Overweight Not later than Price at issue/ reiteration (PLN) Relative performance

11 Institutional sales Bartek Godlewski tel.: +48 (22) Bartosz Janczy tel.: +48 (22) Tomasz Grabowski tel.: +48 (22) Marcin Kozerski tel.: +48 (22) Bartłomiej Chorzępa tel.: +48 (22) Łukasz Mitan tel.: +48 (22) Research Sobiesław Pająk, CFA (Equity strategy, TMT) tel.: +48 (22) Sylwia Jaśkiewicz, CFA (Construction materials, Consumer staples & discretionary, Health care) tel.: +48 (22) Maciej Wewiórski (Commodities, Residential construction, Real estate) tel.: +48 (22) Michał Sobolewski, CFA (Financials) tel.: +48 (22) Jakub Viscardi (Telco, Consumer staples & discretionary, IT hardware distribution) tel.: +48 (22) Łukasz Prokopiuk, CFA (Chemicals, Mining, Oil & gas) tel.: +48 (22) DM BOŚ S.A. notifies that upon the agreement of copyright transfer signed with DM IDM S.A., DM BOŚ S.A. is fully entitled to copyrights and related rights regarding works authored or compiled by former employees or contractors of DM IDM S.A. in particular to results of analytical works including analysis and recommendations crafted by those individuals during their employment at DM IDM S.A. or upon the contract with DM IDM S.A. The transfer of copyrights and related rights encompasses also a title to elaboration of aforementioned works, in particular entitlements to their translations and adaptations. This report is for information purposes only. Neither the information nor the opinions expressed in the report constitute a solicitation or an offer to buy or sell any securities referred herein. The opinions expressed in the report reflect independent, current judgement of DM BOŚ S.A. This report was prepared with due diligence and scrutiny. The information used in the report is based on all public sources such as press and branch publications, company s financial statements, current and periodic reports, as well as meetings and telephone conversations with company s representatives prior to the date of report's release. We believe the above mentioned sources of information to be reliable, however we do not guarantee their accuracy and completeness. All estimates and opinions included in the report represent our judgment as of the date of the issue. The legal entity supervising DM BOŚ S.A. is Financial Supervision Commission in Warsaw (KNF in Polish abbreviation). DM BOŚ does not take any responsibility for decisions taken on the basis of this report and opinions stated in it. Investors bear all responsibility for investment decisions taken on the basis of the contents of this report. The report is intended exclusively for private use of investors customers of DM BOŚ. No part or excerpt of the report may be redistributed, reproduced or conveyed in any manner or form written or oral without the prior written consent of DM BOŚ. This report is released to customers the moment it is issued and the whole report is made available to the public one month after the issuance. The analyst(s) responsible for covering the securities in this report receives compensation based upon the overall profitability of DM BOŚ which includes profits derived from investment banking activities, although the analyst compensation is not directly related thereto. DM BOŚ releases analytical reports via mail or electronic mail to selected clients (professional clients). Apart from mentioned above, there are no ties of any kind between DM BOŚ S.A., the analyst/analysts involved in the preparation of the report and his/her relatives and the company/ companies analyzed in this publication, especially in the form of: i) offering of financial instruments in the primary market or/and Initial Public Offer within 12 months preceding the issue of this report, ii) purchasing and selling of financial instruments for own account due to tasks connected with organization of the regulated market, iii) purchasing and selling of financial instruments due to underwriting agreements and iv) the role of a market maker for securities analysed by DM BOŚ. The analysed company/ companies does/do not possess DM BOŚ S.A. shares. DM BOŚ has not signed with the company/companies any contracts for recommendation writing. Investors should assume that DM BOŚ S.A. is seeking or will seek business relationships with the company/companies described in this report. The report was not shown to the analyzed company/companies before the distribution of the report to clients. Andrzej Bernatowicz (Construction, Video games, Utilities) tel.: +48 (22) a.bernatowicz@bossa.pl Tomasz Rodak, CFA (Equity research) t.rodak@bossa.pl Michał Stalmach (Equity research) tel.: m.stalmach@bossa.pl Copyright 2014 by DM BOŚ S.A. Dom Maklerski Banku Ochrony Środowiska Spółka Akcyjna ul. Marszałkowska 78/ Warszawa Information: (+48)