Heavy Network Investment And Margin Pressure Will Constrain Future Returns

Catalysts

About Digi Communications

Digi Communications is a telecom operator focused on mobile, broadband, pay TV and fixed telephony across Romania, Spain and several other European markets.

What are the underlying business or industry changes driving this perspective?

• The rapid build out of FTTH in Spain to a smart footprint of roughly 30 million homes passed at an average historical cost of €48 per home, together with a target to reach 20 million own homes passed over the next 3 to 4 years, risks tying the group to high, recurring capital needs if take up or pricing power weaken. This could pressure future free cash flow and keep net leverage elevated.
• The shift from an MVNO model to an MNO model in Spain, including 60 megahertz spectrum purchases and gradual RAN deployment, introduces higher fixed costs that may not be fully offset if ARPU continues to dilute as the company leans on very aggressive pricing. This could cap future EBITDA growth even as RGUs expand.
• Ongoing reliance on wholesale agreements in Spain, such as bitstream access following the sale of part of the FTTH network to SOTA, introduces a structural OpEx layer that may limit future gross margin expansion should wholesale tariffs rise or regulatory terms change. This could weigh on long term net margins.
• Ambitious mobile and fixed network rollouts in newer markets like Portugal and Belgium, with thousands of mobile sites and more than 2.1 million homes passed in Portugal, require sustained CapEx and operating investment while these operations are still working toward profitability. This may constrain group earnings and delay any material improvement in free cash flow.
• Group wide focus on rapid RGU growth in mobile, broadband and pay TV, combined with price sensitive offers that have contributed to ARPU dilution in Spain, increases the risk that future revenue growth is volume heavy but margin light. This could translate into weaker earnings quality and more volatile EBITDA and net income.

Assumptions

This narrative explores a more pessimistic perspective on Digi Communications compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Digi Communications's revenue will grow by 10.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will shrink from 2.0% today to 1.8% in 3 years time.
• The bearish analysts expect earnings to reach €53.6 million (and earnings per share of €0.62) by about January 2029, up from €44.4 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as €132.8 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 46.4x on those 2029 earnings, down from 56.5x today. This future PE is lower than the current PE for the RO Telecom industry at 56.1x.
• The bearish analysts expect the number of shares outstanding to grow by 0.22% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.52%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The group is still adding a large number of RGUs in core markets such as Romania and Spain, with Spain described as having its fastest growth year for both fixed and mobile services. This could keep revenue moving higher rather than lower.
• Management repeatedly highlights that economies of scale from the FTTH footprint and the shift to an MNO model in Spain are already reducing mobile OpEx by €10.6 million in Q3 2025. They also expect further efficiency benefits from a more fixed cost structure, which could support EBITDA and net margins.
• Long term fibre deployment in Spain, Portugal and Belgium, along with network partnerships like SOTA and the Andalusia project, is framed as largely past the peak investment phase in some areas. This may ease CapEx intensity and leave more room for free cash flow and earnings to improve over time.
• Management refers to Spain as a mature and successful operation that can access its own debt and equity markets, and they discuss potential partial IPO options. This suggests they see sufficient earnings quality and growth prospects to support independent financing and possibly group level de-leveraging.
• The company has refinanced €400 million of notes with a new €600 million issue due in 2031 at a 4.625% interest rate and indicates net leverage at 2.95x, together with undrawn facilities and expected SOTA proceeds of around €125 million. This could reduce balance sheet risk and support future net income if interest costs remain manageable.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Digi Communications is RON87.62, which represents up to two standard deviations below the consensus price target of RON109.68. This valuation is based on what can be assumed as the expectations of Digi Communications's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of RON165.11, and the most bearish reporting a price target of just RON87.62.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be €3.0 billion, earnings will come to €53.6 million, and it would be trading on a PE ratio of 46.4x, assuming you use a discount rate of 14.5%.
  
• Given the current share price of RON134.2, the analyst price target of RON87.62 is 53.2% lower. Despite analysts expecting the underlying business to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.