GOWEX coverage analysis by BANKIA - Dec 2012


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GOWEX (GOW-MAB, ALGOW-NYSE Euronext) it’s been 13 years operating in the Telecommunication sector and it’s currently leading the creation of WiFi Cities offering Free & Premium WiFi connectivity in streets and transportation. The company is now exporting the innovative business models in many cities in Europe, Latin America, Asia and in emerging countries.

In 2010, it has become the first and only Spanish SMB to make a “dual listing”, publicly traded in the MAB (GOW) and the NYSE-Euronext (ALGOW). The company's total revenue in 2011 amounted to 66,7 million euros. On July 2011 GOWEX subscribed a 7 million € capital increase with a 100 % over-demand (doubling expectations).

With offices in Madrid, Burgos, Buenos Aires, London, San José (Costa Rica), Paris and Shanghai, GOWEX develops a sustainable business model in their WiFi networks, based in efficient and technical quality of their patented platforms: The Roaming platform, which allows users to connect freely in all the cities, the Geolocalization Content and Advertisement platform, which provides a financing business through marketing and advertisement agreements.

In 2011, GOWEX joined the Wireless Broadband Alliance and received a prize for the “Best Web Company” in the Internet Day

In February 2012, Jenaro Garcia GOWEX CEO, received the “Entrepreneur of the Year Award” by Ernst & Young in the category of Innovation

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GOWEX coverage analysis by BANKIA - Dec 2012

  1. 1. GOWE G EX Spa Telecomm ain/ munications C Company update Inv vestment Research Re eason: Estimat Revision tes 5 Decem mber 2012 Bu uy Growth a acceleratin seekin global s ng: ng scale Reco ommendation un nchanged Sha price: EU are UR 11.98 Despite the re ecently good performance (+165% during the last 12m at current market p ( g m), closing price as of 04/12/2012 g 2 price, GOWE trades at EV/EBITDA’13e 4.3x and P/E’13e 9.1x, that in ou view EX d ur Tar rget price: E EUR 15.00 does not refl lect the comppany’s growth (CAGR’11-1 +33% in sales, +36% E 14e s EBITDA from Target Price: EU m UR 10.70 and +42% ne profit), its fin et nancial health and positive ttrack-record. In our view, G GOWEX Reuter rs/Bloomberg will continue generating vaalue thanks to its scalable business mo o odel and its strategic GOW.MC/GOW SQ positioning, w which allows capturing value generated in various points of the Wi-Fi d e Daily avg. no. trad. sh. 12 mth 11,203 sector’s value chain. e Daily avg. trad. vol. 12 m (m) mth 0.08 Price high 12 mth (EUR) ) 12.70  The inteention behind the rights issue announ d i nced (of up to EUR30m, 20% of t Price low 12 mth (EUR) 4.46 current s shares) is douuble, in line with the operattions carried out in 2010-2011: 1) w o Abs. perf. 1 mth 2.0% Acceleraation of orgaanic growth: capture funds to finance its expansion s c s s strategy Abs. perf. 3 mth 77.5% (to 300 o the largest cities world-wide, via a strattegic agreeme with a part of c ent tner); 2) Abs. perf. 12 mth 165.6% Increase the shareho e older base and stock liqu uidity: Follow wing the rights issue, s Market capitalisation (E EURm) 155 the free float will inc crease from current 30% to 41%. On nce the opera ation is Curre N° of shares (m) ent 13 complete GOWEX will request the SEC approva to issue ADRs (level 1 OT ed, w e al TC). Free float 30%  Good re esults momentum and st trong financiial position. At 6m’12, re evenues Key financials (EUR) 12/11 122/12e 12/13e increased 60%, EBIT d TDA +62% an net profit 70% (to EUR nd R5.5m). The relative Sales (m) 67 100 122 weight of the internatio f onal activity co ontinues grow wing, at 1H’12 reaching 51% of the % EBITD (m) DA 17 26 32 total sale (vs. 30% in 2011), as well as recurre revenues (65% of the to es n ent ( otal). At EBITD margin DA 24.8% 266.2% 26.2% EBIT ( (m) 10 20 23 June 20 012, GOWEX accumulates EUR19m n s net cash (EU UR32m gross). Said EBIT m margin 14.2% 200.2% 18.7% financial position is one of the com mpany’s stron points, as it can negotiate co- ng Net Pr (adj.)(m) rofit 7 15 17 investme ent agreemen nts with mun nicipalities an transport companies i new nd in ROCE E 44.5% 57.8% 41.0% countries (including exclusivity, lo s e onger term co contracts etc.) and reinfor ) rces its Net deebt/(cash) (m) (22) (19) (18) Net De Equity ebt -0.6 -0.4 -0.3 capacity to continue grrowing organic cally. Net De ebt/EBITDA -1.3 -0.7 -0.6 Int. co over(EBITDA/Fin.int) (125.8) (144.7) (213.3)  Estimate revised up We have made some ad es p: m djustments, no including the rights ot e EV/Sa ales 0.6 1.4 1.1 issue. In 2013-14e, our EBITDA rises 11%, with revenues accelerating fo h a ollowing EV/EB BITDA 2.4 5.2 4.3 the receently announcced contracts We estima s. ate CAGR 20 011-14e of 333% in EV/EB BITDA (adj.) 2.4 5.2 4.3 revenues 36% in EBITDA and 42% in net profi with wireless, internation and s, % fit, nal EV/EB BIT 4.2 6.7 6.0 P/E (adj.) 8.6 10.1 9.1 recurrent revenues pro t creasing their weight on tota revenues. ogressively inc al P/BV 1.8 3.1 2.3 OpFC yield CF 45.9% 1.3% -1 0.9%  Valuatio revised to EUR15.0/sh on o hare (+40%), arising from the aforementioned Divide yield end 0.6% 1.4% 1 1.6% adjustme ents to our est timates, the ro cember 2013, and applying a lower oll-over to Dec EPS (a adj.) 0.56 1.18 1.32 WACC ( (12.5% vs. 14 4.5%), accordding to the p positive track record, the greater BVPS 2.72 3.90 5.21 liquidity aand financial strength. Our new fair valu discounts EV/EBITDA’13 5.5x ue E 3e DPS 0.08 0.17 0.20 and P/E’ 13e 11.5x, im mplying a potential of +26% over current price. Its mai peer, % in Boingo ( (US Wi-Fi agg gregator) trades at an EV//EBITDA’13e of 5.2x and P P/E’13e 24.4x, v vs. GOWEX’ EV/EBITDA’13e of 4.3x and P/E’13e of x 9.1x Buy x. 13 vvdsvdvsdy 12 recomm endation reit terated 11 10  We belie the succes eve ssful execution of the exppansion plan (to 300 cities, details , 9 8 not discl osed yet), in addition to the positive s strategic impplications (to obtain o 7 6 critical m mass, occupyin a leading position world ng elopment/exploitation d-wide in deve 5 4 of Wi-Fi cities, defenssive move vs possible ne entrants), could add a s. ew another 3 Nov 11 Dec D 11 Jan 12 Feb 12 Mar 12 Apr 12 2 May 12 Jun 12 Jul 12 Aug 12 Se 12 ep Oct 12 Nov 12 Dec 12 EUR10-1 12/share to ou FV. ur GOWEX G MAB (Rebased) Source: Factse et eholders: Jenaro Ga Share arcía 60%; Alvasebi 10%; Analyst(s): Da avid Cabeza Ja areño +3 91 4367818 34 dcabeza@b bankia.com For co ompany description ple ease see summary tab footnote bleProduced by: d All ESN re esearch is availlable on Bloom mberg (“ESNR””), Thomson- -Reuters, Capit IQ, TheMark tal kets.com, FactS SetDistribute by the Members of ESN ed(see last pag of this report) ge
  2. 2. GOWEXCO ONTENTS SGrow accelerating ....... .................. wth .................................... ........................ 3 Details of the rights issue 3 Good results momen ntum and news flow. Estimate adjusted. s es 4 Valu uation.......................... .................. ........................ 5  ....................................DCF V Valuation: EUR R15.0/share 5 Multip comparison ples n 6 Secto Wi-Fi & M&A or 6 Poten value creat via the exp ntial tion pansion plan 7 Risks & Threats 8 GOW WEX. At a Glance ...... .................. G ........................ 9  ....................................Wi-F sector. Complemen mobile networks ................... Fi C nts ...................... 10  WEX’ Position ............ ..................GOW ...................... 11  ....................................ESN Recomme N endation Sy ystem ....... ...................... 18  .................................... Pag 2 ge
  3. 3. GOWEX Grow acce wth elerating g The int tention behin the rights issue announced (of up to EUR30m which is 20% above t nd s p m, 2 the current shares) is double: 1) accelerate the organic growth sp t c peed and 2) increase tthe shareholder base, in line wit the opera th ations carried out in 20 10 and 2011. Despite t the recently good perfformance (+1165% during the last 12 g 2m), at curre market price, GOWEX ent trades at EV/EBIT TDA’13e 4.3 and P/E’13e 9.1x, th in our v 3x hat view does not reflect t n the compa any’s growth (CAGR’11 1-14e +33% in sales, +336% EBITDA and +42% net profit), its A financial health (n cash) and positive tr net d rack-record. In our vview, GOWE will contin generating value tha EX nue anks to its sc calable busin ness model aand its stra ategic positio oning, which allows the company to capture v h e value genera ated in varioous points of the Wi-Fi sector’s valu chain. We have adjus ue sted our estiimates and valuation up by v +40% to EUR15.0/ /share, whic discounts multiples of 5.5x EV/ ch s V/EBITDA’13e and P/E’1 13e 11.5x and implies a 26% up pside potential at curren market pr nt rice. Buy re ecommendation reiterat ted, and we believe the successful execution of the expa l ansion plan (to 300 cities, n details not disclose yet), in a ed addition to th positive strategic imp he s plications (to obtain critical o mass, occupying a leading po osition world d-wide in de evelopment/e exploitation of Wi-Fi cities, defensive move vs. possible ne entrants), could add another EUR . ew R10-12/share to our FV. e Details of the rights issue s GOWE is immersed in its third rights issue in three yea The first was due to its listing to t EX d e ars. t the MAB (SSpanish Alte ernative Mark ket, March 2010, at EUR 2 R3.5/share; oobtaining EU UR6m); and t the second in July 2011 (EUR6.9 at EUR4 d 9m 4.84/share). The current rights issue is for a to e otal maximum of EUR3 30m, at EURR11.6/share (2,586m sha ares) and im mplies 20% over the curre o ent numbe of shares trading. There are two rea er re asons behind this rights iissue: d 1) Capture fund to financ its expansion strateg Said plan includes th deployme C ds ce gy. n he ent and implementation of its services (d s design, deplo oyment, explloitation and manageme d ent of Wi-Fi netw works) in 300 of the larg 0 gest, referen cities w nce world-wide, via a strateg gic agreement with a partner which impl r antial effort iin Capex. Th intention is lies a substa he ambitious, as it implies m s multiplying th companys presence by 5x (curre he ently 60 citie es, with w a smaller average siz r ze). 2) Endow its valuation w E v with greater liquidity and increase its share e eholder bas se. Reference sh R hareholders a not expe are ected to subscribe the ne rights iss ew sue. We reca all th the exec hat cutive team currently hoolds 59.6% (including 100.6% of Alvasebi, >70% %). Following th rights iss F he sue, free flo will incr oat rease from current 29.7% to 41.4% %, le eaving 49.7% in the han % nds of the executive tea and 8.9% in Alvaseb e am % bi’s. Once th he operation is completed, G c GOWEX will request the SEC appro e oval to issue ADRs (lev vel 1 OTC). The schedule to begin trading in the US is 1Q’13 (cur g rrently the co ompany trade es in the Spanish MAB and N n h NYSE Alternext in Paris). .GOW WEX. Shareho older’s base (post operatio on) GOW WEX. Agenda for the rights issue f sSource: ESN Bankia Bolsa a Source:: GOWEX Page 3
  4. 4. GOWEX Good results mo omentum a news flow. Estima adjuste and ates ed.  Goood 6m’12 results, inc creasing int ternational exposure a and recurre results. At ent 6mm’12, revenue increased 60%, EBIT es d TDA +62% and net prof 70% (to EUR5.5m). T a fit E The rela ative weight of the intern ational activity continues growing, at 1H’12 reach s hing 51% of t the tota sales (vs. 30% in 2011 as well as recurrent re al 1), s evenues (65% of the tota % al).  Poositive news flow conti s inues: GOW WEX continues announc cing agreemeents with cit ties and transport companies. T most rec d c The cent were: 1) in Dubai, in which GOW WEX has signned an agreement with the ma public transport comp ain pany (PTA) t provide free Wi-Fi in t to the cities’ busses. The agreem ment is strate egically impo opens a door to the Middle ortant as it o East; 2) in Ma arseille, sign ning an agreeement to pr rovide free W Wi-Fi to urb ban buses. WWe exppect announcements on new internat tional contrac to continu in upcoming months. cts ue  Str rong financ cial position At June 2012, GOW n: WEX accum mulates EUR R19m net ca ash (EU UR32m gros Said fina ss). ancial positio is one of the compan on ny’s strong points, as it c can neg gotiate co-in nvestment aggreements with municipa w alities and tr mpanies in new ransport com cou untries (inclu uding exclus acts etc.) and reinforces its capacity to sivity, longer term contra d y ntinue growin organicallly. con ng  Estimates revised up: We have made some adjustments, not including th rights issu e e t he ue. In 2013-14e, our EBITDA rises 11%, with revenu accelera o ues ating followin the recen ng ntly annnounced conntracts. We e estimate CAGR 2011-14 of 33% in revenues, 36% in EBITDA 4e 3 and 42% in ne profit, with wireless, international and recurre revenues progressiv d et h i ent s vely inc creasing their respective w r weight.GOW WEX. 1H’12 res sults. 9m’12 f forecasts GOWEX. Est timates adjus sted (2012-14e e) (EUR m) 9m12 3T12 1H 11 1H12 Var % 2 2011a 2012e 201 13e 2014e CAG 11-14e AGR Revenues 69.1 28.1 25.7 41.0 60% 0 Old 66.77 94.5 1177.0 145.0 30% Telecom 6.6 9.1 38% Sales New 66.77 99.9 1222.4 155.3 33% Wireless 19.1 31.9 67% 9 Dif.% 0.0%% 5.7% 4.6 6% 7.1% Old 16.55 23.7 29 9.5 36.1 30% Gross Margin 30.5 12.7 10.7 17.8 66% 8 EBITDAA New 16.55 26.1 32 2.0 41.2 36% Gross Mg % 44% 45% 42% 43% 1.5pp % Dif.% 0.0%% 10.2% 8.5 5% 14.3% EBITDA 15.7 7.6 5.0 8.1 62% Old 7.2 12.8 15 5.1 20.0 40% EBITDA Mg % E 22.7% 27.1% 19.5% 19.7% 0.2pp % Net Proffit New 7.2 15.3 16 6.9 20.8 42% EBIT 4.6 7.6 68% Dif.% 0.0%% 19.4% 12.2 2% 3.8% EBIT Mg E 17.8% 18.6% 0.9pp % Old 10.77 16.1 17 7.5 18.8 21% BAI 4.6 7.8 70% Cap ex New 10.77 18.0 22 2.0 27.9 38% Net Profit 3.2 5.5 70% Dif.% 0.0%% 11.7% 25.9 9% 48.7%GOW WEX. EBITDA margin perfo ormance GOWEX. ND/ /EBITDA 180 0 30% Sales EBITDA mg 26.2% 26.6% 160 0 26.2% 155.3 0.00 0.00 09 10 11 12e 13e 14e 24.8% 25% -0.10 -0.20 140 0 122.4 -0.20 -0.40 120 0 18.9% 99.9 20% -0.30 -0.60 100 0 -0.80 15.7% -0.40 80 0 66.7 -1.00 49.6 15% -0.50 -1.20 60 0 35.2 -0.60 40 0 9.5% -1.40 10% 24.2 -0.70 -1.60 20 0 0 5% Gear ring Debt/EBITDA (rhs) 2008 2009 2010 2011 2012e 2013e 2014eSource: ESN Bankia Bolsa a Source: ESN Bank Bolsa kia Page 4
  5. 5. GOWEX Valu uation DCF V Valuation: EUR15.0/sh E hare Valuation revised to EUR15.0 0/share (+40%), arising from the afor rementioned adjustments to s our es stimates, the roll-over to December 2013, and applying a lower WAC (12.5% vs. e o r CC 14.5%) according to the positiv track reco the grea liquidity and financia strength. O ), ve ord, ater al Our new fa value discounts EV/E air EBITDA’13e 5.5x and P/ e /E’13e 11.5x x. We ha ave carried out a disco unted cash flow valua o h ation on 20 013-1018e, applying 12.5 a 5% WACC and 2.0% “g”. We a C assume an EBITDA ma argin in 201 8e (23%) below the 26 b 6% estimat for 2012-14e, and CA ted APEX for 20 018e of 8% over sales, in line with the amortisatio o n e ons in said year.GO OWEX DCF VALUA ATION TO 31-Dec-13CA FLOW STATE ASH EMENT FOR DCFCA FLOW (EUR m ASH m) 2011 2012e 2013e 2014e 2015e 2016e 2017e 2 20 018eNet sales t 66.7 99.9 122.4 155.3 191.3 217.4 250.9 2 2443.7EBIT 9.5 20.2 22.9 28.1 31.2 32.5 35.4 37.7 3 OPLATNO 7.1 15.1 16.9 20.8 23.1 23.7 25.5 27.2 2Dep preciations and othe provisions er -7.0 -5.9 -9.1 -13.2 -17.1 -20.9 -24.5 -1 19.5Gro operating cas flow oss sh 14.1 21.1 26.1 34.0 40.2 44.6 50.0 46.7 4Cap expenditure pital -10.7 -18.0 -22.0 -27.9 -26.8 -26.1 -25.1 -1 19.5Cha ange in net working capital g 0.0 -5.2 -2.7 -4.5 -5.2 -3.0 -4.3 -0.2 -Cas flow to be disc sh counted 3.5 -2.1 1.3 1.5 8.3 15.5 20.7 26.9 2DCF VALUATION (EU m) UR 2013e 2014e 2015e 2016e 2017e 2 Nominal yearWA ACC 12.5% 12.5% 12.5% 12.5% 12.5% 1 12 2.5%Discount Rate factor 1.00 0.89 0.79 0.70 0.62 0.55 0Discounted cash flow 1.3 1.3 6.5 10.9 12.9Cu mulated DCF 1.3 2.6 9.1 20.0 32.9WA & DCF ANAL ISYS ACCFre risk rate ee 4.50% Cumulated DCF 32.9 - Ne financial debt (Cas (12e) et sh) -18Commpany risk factor 2.00 Perpetual growt h rate (g) 2.0% - Min norities (estimated v value) 0Market risk premium 4.00% Normalised Annua CF al 27 + As ssociates 0Cos of Equity (Ke) st 12.50% Terminal Value at Nominal Year 257Cos of debt (gross) st 5.0% Disc.Rate of Term Value minal 0.55Norrmative tax rate 30.0% NPV Terminal Va alue 142.4 Equity Market Value (E m) EUR 195Cos of Debt Net (Kd st d) 3.50% Num of shares (m) mber 12.93Tar gearing (D/E) % K rget 0% Financial assets (t treasury stock) 1.1 Fai r Value per share (EUR) 15.0% Ke 100% Enterprise value (EUR m) e 176.4 Price (EUR) e 11.96WA ACC 12.5% Pote ential upside (downs side) 26%Sou urce: ESN Bankia Bollsa estimatesGO OWEX. Multip ples GOWE Sensitivit analysis EX. ty Ratios @ current Price 2010 2011 2012 2013e 201 2e 14e WAACC Perpet ual growth rate (g g) Price 4 3.4 4.8 12.0 12.0 12.0 15.03 1.0% 1.5% 2.0% 2.5% 2 3.0% 10 0.5% 17.5 18.3 19.1 20.0 2 21.1 EV / Sales 0.6xx 0.6x 1.4x 1.1x 9x 0.9 11 1.5% 15.6 16.2 16.8 17.6 1 18.4 EV / EBITDA 3.1xx 2.4x 5.2x 4.3x 3.3 3x 12 2.5% 14.1 14.5 15.0 15.6 1 16.2 EV / EBIT 4.7xx 4.2x 6.8x 6.0x 4.9 9x 13 3.5% 12.8 13.1 13.5 14.0 1 14.5 PER 7.5xx 8.6x 10.11x 9.1x 7.5 5x 15 5.5% 10.7 11.0 11.3 11.6 1 11.9Sou urce: ESN Bankia B Bolsa estimates Source: ESN Bankia Bolsa estimates Page 5
  6. 6. GOWEXMultip compa ples arisonAlthouugh there is no purely comparab compan with GOW s y, ble ny WEX (due to its particu t ularbusines model, diversificatio etc), wit ss on thin Wi-Fi/W Wireless, theere are two listed Wi-Fi ocompanies in the United Stat tes that agg gregate opeerators’ netw work to offer roaming aandinterconnection ser rvices.- Booingo: >500.000 hotspots world-wide began trading in May 2 s e, 2011 in the Nasdaq. Boin N ngo ervice provider, offering retail clients (final users) and wholesale is a international, Wi-Fi se an r clie ents access service to W s Wi-Fi points. In 2011, the company gen n c nerated USD D95m revenuues and USD28m in EBITDA. d n- iPa ass: 750,00 hotspots in 120 co 00 ffers mobile connectivit services to ountries. Of e ty bus sinesses. In 2011, iPa n ass generated USD140 revenues (falling 9%) and sm 0m s 9 mall ope erating losse with EBIT es, TDA of USD.0,2m.Boingo trades at an EV/EB o t BITDA’13e of 5.2x vs. GOWEX’ 4 o 4.3x. At our fair value ofEUR155/share (imp plying 5.5x E EV/EBITDA’113e), the dis GOWEX vs. Boingo would scount on Gdisappe in terms of EV/EBI ear s ITDA (but not P/E). During the las 6 months, GOWEX h n st hasaccumulated 94%, much better than Boingo /iPass’ -30% r o %. Com mpany Price Mkt. C Cap. EV/EBITDA A PER Mg EBITDDA Performance % (EUR) (EUR m) 2012e 201 13e 2012e 20 013e 2012e 1m 6m 12m Boin Wireless Inc. 5.32 ngo 1877 6.2x 5.2x 31.6x 244.4x 30.9% -6% -31% -16% % iPas Inc. ss 84 20 0.0x -5% -30% 30% % Gow (Bankia) wex 11.96 1866 5.2x 4.3x 10.1x 9.1x 26.2% 2% 94% 166% % Gow (Factset) wex 11.96 1866 6.4x 4.5x 12.0x 100.5x 25.1% 2% 94% 166% % Sour Facset, Bankiia Bolsa rce:Sector Wi-Fi & M&A MWi-Fi: counter-cyyclical charaacter and greater visib g bility. In rec cent months a number of soperations has take place, inc en creasing the Wi-Fi sector’s visibility: W 1) A Agreement between Goo b ogle and Bo oingo in San Francisco w with a model similar to th hat used by GOW u WEX. 2) A Argiva (engin neering firm) acquiring Spectrum Inte ) S eractive (one of the large hotspot W e est Wi- Fi F suppliers in UK) for GB i BP26m (with the intention of renting it to other operators). h n t 3) E quiring Belair Networks (indoor and outdoor Wi-Fii equipment). Ericsson acq r 4) L Listing of Ruckus (Wi-Fi t technology manufacturer on NYSE w high dem m r) with mand.M&A. Since its lis sting to the MAB, GOW WEX mention ned the pos ssible interes on behalf of st fengineering firms, although this has not bee reflected in acquisition The cash obtained fro a s en ns. h omthe rights issues and cash ge a eneration has been used to accelera the com s d ate mpany’s orgaanicgrowth (co-investm ment formulas with cities, demanding higher Cap s g pEx, etc). On the contra ary,we see greater probabilities of GOWEX being a ta e X arget (telecoommunicatio operators or oncompanies in other sectors inte r erested in gr rowing inorganically, dev veloping its presence in t p theWi-Fi ssector). In th recent br he rochure on the rights is ssue, GOWE mentions Google as a EX s sthreat, but at the same time mention hav ving spoken to the com n mpany to wo together in ork rdifferen geographic areas. nt c Page 6
  7. 7. GOWEX Poten value creation via the expansion plan ntial c a GOWE is a valu generatin story, via a business model with high retu EX ue ng a s h urn on capi ital employyed (>20%). Independe ntly of the aforementioned revised e . a estimates, we have carried w out an analysis on the pote n o ential genera ation of value proceed ing from ac ccelerating t the company’s growth during the fo d ollowing year and the rig rs ghts issue. In our opinion, the successfu executio of the ex e ul on xpansion p plan (to 300 cities, deta 0 ails according to the company’s st c trategy inclu uding outdo advertisin company not disclos oor ng y sed yet), in addition to the posit n t tive strategic implication (to obta in critical mass, GOWEX c ns m occupyying a leading position w world-wide in developmen nt/exploitatio of Wi-Fi cities, defens on sive moves vs. possib peers/ne entrants) could ad another EUR10-12/ ble ew ), dd /share to o our valuati (see tab below) ion ble Our hy ypothesis are: 1) develoopment of 300 cities in the next 5 ye t 17e, exceeding ears (2013-1 the 3 y years targete by GOWE ed EX); 2) EBIT margin from 17% in 20 T m 013e down to 12% in 20 t 018 (vs. EB mg of 20% in 2012 BIT 2 2e); 3) Capit expenditu of 16-18 o/sales in the years of tal ure 8% further expansion; 4) Rights is sue: EUR 30 M cash an issuance of 2.59 m shares (20% of nd s % current number of shares, tota shares afte capital inc t al er crease of 15 .5m); 5) cap pture of 50% of % revenues generated in geoloca lized advertis d sing (50% caaptured by th strategic partner). he pGOWEX EXPANSI ON PLAN - DCF VG VALUATION TO 31- -Dec-13CASH FLOW (EUR m)C R 2013e 2 20014e 20115e 20166e 2017e 2018e eNewN Cities 60 80 8 80 50 0 30 0Cumulated CitiesC 60 140 1 2220 2700 300 300NetN sales 113.7 1 2116.0 3011.2 329.3 343.88 318.4 Network (Roaming access, offloadin maintenance) g, ng, 53.7 5 1222.6 1888.7 226..8 246.88 241.9 Engineering, Cons sultancy & Maintenance 48.0 4 64.0 6 644.0 40.0 0 24.0 0.0 Media (Advertising aplications, servic g, ices 12.0 29.4 2 488.5 62.5 5 72.9 76.6EBITE 19.3 34.6 3 455.2 46.1 44.7 7 38.2% EBIT mg 17% 16% 15 5% 14%% 13% 12%NOPLATN 13.5 24.2 2 311.6 32.3 31.3 3 26.7Depreciations and oD other provisions -9.1 -117.3 -244.1 -26..3 -27.55 -25.5Gross operating cG cash flow 22.6 41.5 4 555.7 58.6 58.8 8 52.2Capital expenditureC -18.2 - -338.9 -544.2 -49..4 -44.77 -25.5Cash flow to be dC discounted 4.4 2.6 2 1. .5 9.2 2 14.1 26.7DCFD VALUATION (EUR m) 2013e 2 20 014e 20115e 20166e 2017e Nominal y yearWACCW 12.5% 12 2.5% 12.5% 12.5 5% 12.5%% 12.5%Discount Rate factorD r 1.00 0.89 0 0.7 79 0.70 0.62 2 0.55Discounted cash flowD w 4.4 2.3 2 1..2 6.55 8.8Cumulated DCFC 4.4 6.7 6 7..9 14.4 2 23.2WACC & DCF ANAW ALISYSFreeF risk rate 4.50% Cummulated DCF 23.2 - Net finan debt (Cash) ( 12e) ncial -30Company risk factorC r 2.00 Perp petual growth rate (g) e 0.0%Market risk premiumM m 4.00% Normmalised Annual CF 27Cost of Equity (Ke)C 12.50%% Term Value at Nomin Year minal nal 214CostC of debt (gross) ) 5.0% Disc.Rate of Terminal V Value 0.55Normative tax rateN 30.0% NPV Terminal Value 118.7 Equity Ma arket Value (EUR m m) 172Cost of Debt Net (Kd)C 3.50% Number o shares (m) of 15.5Target gearing (D/E % KT E) 0% Finan assets (treasury stock) ncial Fair Val per share (E lue EUR) 11.1% Ke 100% Ente erprise value (EUR m) R 141.9WACCW 12.5%Source: ESN Bankia Bolsa estimatesS Page 7
  8. 8. GOWEXRisks & ThreatsWe poi out the following risks int s: 1) Execution of strategy plan (x5 vs. current citie not attain y es), ning the critic mass. cal 2) New entra ants: GOWE business model is un EX’ nique (neutra positioning technological al g, apturing vari ous parts of the value ch platform, ca hain), howeve it could be copied. er e 3) Position of telecom o f operators (t that could become dire competito b ect ors). Althouggh, initially trad ditional opera ators see GO OWEX as a threat, they can use the company as a s partner to save operatin costs by extending the network/u s ng e eir users, thus finally achieve a e complemen ntary charactter. 4) Position in cities/muunicipals: not renewing contracts. In our view said playe w, ers consider GOWEX a n G neutral infrastructure manager that gives supp port to vario ous operators and as a way to reduce costs/maximise profits, ra a y c ather than a threat. t 5) Key personnel (depen ndence on its CEO, Mr. Jenaro García s a); 6) Risk of obsolescence technology network se e y, ecurity. Page 8