Future Fixed Connectivity Expansion May Support Rising Margins And Long-Term Earnings Potential

Catalysts

About Digi Communications

Digi Communications is a converged telecom operator providing mobile, fixed broadband, pay TV and telephony services across several European markets, with a focus on Romania, Spain and Portugal.

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

• Continued rapid migration to high speed fixed connectivity in Spain, supported by Digi's low cost FTTH build at around EUR 48 per home passed and a planned expansion toward 20 million homes, is cited as a factor that may sustain double digit RGU growth and support higher group revenue over the medium term.
• The structural shift toward data heavy mobile usage and convergence is being monetized through Digi's move from MVNO to MNO economics in Spain, which has already lowered mobile OpEx by EUR 10.6 million in Q3 and is viewed as a support for rising EBITDA and earnings as the base scales.
• Growing customer preference for value, transparent pricing and unlimited data aligns with Digi's positioning, with strong NPS above 60 and low churn in its own footprint indicating durable share gains that may underpin stable ARPUs and expanding net margins.
• Ongoing network sharing, spectrum acquisitions and use of wholesale access, including the SOTA and Telefonica agreements, are shifting the cost base from variable to more fixed and scalable, which may translate into operating leverage and higher EBITDA margins as usage and RGUs increase.
• Disciplined capital deployment, evidenced by a step down in group CapEx from 2024 peaks and the completion of large one off projects and spectrum buys, combined with refinancing of 2028 notes into longer dated 2031 paper, is expected to support improved free cash flow and reduced net leverage alongside revenue growth.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming Digi Communications's revenue will grow by 10.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.0% today to 3.1% in 3 years time.
• Analysts expect earnings to reach €93.3 million (and earnings per share of €0.98) by about December 2028, up from €44.4 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting €129.1 million in earnings, and the most bearish expecting €52.1 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 28.7x on those 2028 earnings, down from 42.1x today. This future PE is lower than the current PE for the RO Telecom industry at 42.1x.
• 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 15.03%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company is still in an intensive investment phase across multiple markets, with group CapEx guided at around EUR 800 million to EUR 820 million in 2025 and only a modest decline in 2026. This creates execution risk on network rollouts and integration projects in Spain, Portugal and Belgium that could pressure free cash flow and delay deleveraging, negatively impacting earnings and net margins.
• Digi is relying heavily on Spain as a growth engine, targeting long term EBITDA margins of 30% from below 20% today. Any slowdown in Spanish RGU growth, weaker than expected take up on its smart FTTH footprint or intensified price competition in value segments could curb revenue expansion and stall the planned uplift in EBITDA and group earnings.
• The transition from MVNO to MNO economics in Spain and the broader shift from variable to more fixed and scalable cost structures increase operational leverage. If traffic growth, convergence uptake or unlimited data adoption disappoint relative to expectations, the more fixed OpEx and added spectrum related CapEx could compress gross margins and reduce operating profit.
• Newer markets such as Portugal and Belgium are still sub scale, with Portugal currently generating around EUR 52 million of revenue versus approximately EUR 88 million of OpEx over nine months and CapEx of roughly EUR 120 million. If customer additions or ARPUs do not ramp as planned, prolonged losses could drag on consolidated net margins and slow overall earnings growth.

Valuation

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

• The analysts have a consensus price target of RON92.92 for Digi Communications based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of RON110.01, and the most bearish reporting a price target of just RON81.97.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be €3.0 billion, earnings will come to €93.3 million, and it would be trading on a PE ratio of 28.7x, assuming you use a discount rate of 15.0%.
  
• Given the current share price of RON99.8, the analyst price target of RON92.92 is 7.4% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.