Asseco Equity Research Report: CFA Report

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RECOMMENDATION BUY
Date 11.02.2022
Current Price PLN 79.50
Target Price PLN 97
Upside 22%
Industry Technology
Sector Software
Ticker ACP.WSE
Stock Exchange Warsaw Stock exchange
Shares Outstanding 83m
Market Capitalization PLN6.6 bn
EPS (2020) PLN5.98
Free Float 55.85 m
Figure 1: Asseco ranked first among the
software development companies in R&D
Source: (Rzeczpospolita, 2021)
Figure 2: prediction of Governmental spending
on IT services.
Source: (Gartner, 2021)
Figure 3: Earning before tax increase in the last
8 years.
Source: Team Analysis, Company Data.
Figure 4: Asseco and WIG30 stock price
movement in 2021 (left), Asseco stock price
position on the PE Band (Right). (Bloomberg)
Asseco Group (“Asseco”) is a federation of companies that operates in Poland and international
markets, providing a multitude of complex IT solutions to major sectors of the economy. Such
approach allows Asseco to have strong revenue diversification and be labelled as a strategic
business partner to its customers across the world. Combined with its strategy
of developing through acquisitions and organic growth, and the high discount to the common
shares relative to its historical trading performance, it can be estimated that Asseco’s true value is
higher than its current price.
INVESTMENT SUMMARY
We issue a BUY recommendation for Asseco with a one-year target price of PLN 97, presenting
a 21% upside to the current price. The target price is based on a Discounted Cash Flow method
(DCF), MOIC Analysis, Sum-of-the-Parts analysis (SOTP) and is supported by Relative
Valuation. With 311 business units in its portfolio, the company has achieved strong revenue
diversification and commendable growth in the past 8 years (CAGR of 11.2%). While continuing to
scale at existing rates may seem challenging and history is not an indicator of future performance,
with a healthy dividend yield and positive market outlook Asseco remains an attractive technology
investment.
INNOVATION REDUCES COSTS AND LEADS TO GROWTH
Innovation can be said to be at the core of Asseco’s mission statement, allowing the
group to preserve its position as of one of the leading organizations on the IT market. Nonetheless
the group’s innovative actions seem to be underappreciated by the market. Asseco Poland, a
member of the Asseco Group, can be called a Research & Development leader, being among
companies with the highest R&D spending in Poland – not just in the software sector, but across
the whole technology industry (Figure 1). The three pillars of innovation in Asseco are based
on an innovative R&D center in Rzeszow, continuous internal development based on
customers’ needs and Asseco’s programs for startups. Innovation is of vital importance as it
allows Asseco to offer products and services at lower costs, which can lead to increased sales and
thus growth.
WITH LARGER ACQUISITIONS AHEAD, ASSECO FACES A TRADE-OFF BETWEEN SALES
GROWTH AND THE MARGIN LEVEL
Asseco is well positioned to generate large net Income margins, however acquisition-driven sales
growth is a factor limiting the level of these margins in the short term (e.g., 2018). Early stages of
post-buyout integration were characterized by falling profit margins, with operational
improvements driving the recovery. Such trend could have been observed between 2010 and 2018
by acquisition of Formula system and its aggressive growth strategy. A rise in acquisition intensity
(number of acquisitions, capital deployed, percentage of total assets) caused margin
contraction (FY2012 EBIT margin of 8.3% vs 8.9% in FY2020), however, starting from 2020, the EBIT
margin started recovering, as acquisition activity subsided. More pronounced margin swings can
be anticipated with the rising complexity of post-deal integration that can occur with larger
acquisitions. We believe that finding the middle ground between acquisition-based top-line growth
and margin upside can be challenging even for the most experienced teams.
SWIFT TECH TRANSITION ACROSS COMPANIES AS A FAVORABLE FACTOR FOR ASSECO
In 2022, increased investments in digital technologies will see governments spend 64% of total
information technology spending on IT services and software to improve responsiveness and
resilience of public services (see Figure 2). These include investments in enhancing customer and
employee experience, strengthening analytical capabilities, and scaling operational agility. Also, it
is predicted that an annual growth of 4.3% and 4.8% on Banking industry IT spending on North
America and Europe regions leads to a better financial performance for the company. As of late,
the need for ancillary revenues at established verticals saw a ramping presence in payment
processing. We believe that acquisitions of industry leading assets for the fintech vertical can see
cross-selling opportunities into related markets. Our sense is that a payments-related opportunity
could further firm the fundamentals of the key portfolio companies, driving addressable market
expansion in the short to medium term.
Three decades in pursuit of Growth

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BUSINESS DESCRIPTION
Figure 8: Asseco’s three main arms of international
growth, profit and revenue making.
Figure 5: Q1-Q3 2021 Revenue by business
sectors.
Figure 6: Q1-Q3 2021 Revenue by geographical
location.
Figure 7: Asseco’s three main sectors of
business activities with the companies involved.
Asseco Group is a global federation of companies that operates in Poland and in international
markets, providing a multitude of complex IT solutions to all sectors of the economy. It is
headquartered in Rzeszów, Poland and was founded in 1989, functioning as a joint-stock company
since 1993 with an IPO in 1998 (Appendix 1). Asseco develops proprietary software and services and
sells third-party software and hardware, employing over 29,000 people. Its products and services
are used in public and private sector markets - most notably in the banking sector and institutions
operating across various other sectors, such as healthcare, agriculture, energy, and insurance, to
name a few. In 2020 Asseco reported PLN12.2 bn in total revenue and a net profit of PLN867.9 m,
having had its operations spread across five continents.
BUSINESS SECTORS, SEGMENTS & GEOGRAPHIC REACH
The main industry sectors for Asseco include Banking and Finance, Public Institutions,
and General Business sectors. In Q1-Q3 2021, 41% of Asseco’s revenue originated from
the General Business sector, while Banking and Finance accounted for 35% of the company’s
revenue. The remaining 24% of Asseco’s revenue came from Public Institutions (Figure 5). Asseco’s
strong revenue diversification is visible in the spread of geographic locations which generated the
company’s operating revenues. Operating revenue generated in Q1-Q3 2021 in Israel, USA, and
Poland contributed to 39%, 16%, and 13% of Asseco’s total operating revenue respectively, while
the remaining 32% was generated in several other countries (Figure 6). Asseco is made up of 311
companies, three of which are listed on the Nasdaq, three on the Warsaw Stock Exchange, and one
on the Tel Aviv Stock Exchange, highlighting its global scope of operations. Furthermore, Asseco’s
10 largest customers account for only 10% of its revenues, emphasizing the company’s strong level
of customer diversification. Asseco’s broad geographic reach and its customer diversification are
factors contributing to relative stability of the company in times of crisis, such as the one caused by
the COVID-19 pandemic.
PRODUCT HIGHLIGHTS AND FEDERATION CONCEPT
The company distinguishes itself by its federation concept of merger and acquisition. Asseco consists
of 300+ subsidiaries (quasi-independent) including >110 acquired companies since 2004 (Appendix
1). 10 of the Asseco Group companies are listed in public equity markets (Figure 7).
Asseco Poland: This is the parent company of the Asseco Group. As a stand-alone entity, firm
develops sector-specific software for banking and finance, and executes large IT projects for
healthcare, insurance, and other sectors in public administration. In 2020, the stand-alone company
reported revenue of c.PLN 1 bn., however, given the corporate structure, stand-alone sales and
profits are a minor fraction of the Asseco group. It is listed on the Warsaw Stock Exchange with a
market cap of c. PLN 6.8 bn (as on 7th Feb 2022).
Asseco Business Solutions: It serves as a Competence Centre accountable for the development of
ERP software (including own brands like Asseco Softlab ERP), mobile reporting systems (SFA),
factoring systems and software for SMEs. The company generates most of its revenue from its ERP
Systems segment mainly in Poland. In 2020, the company reported revenue of PLN 282m, with a 3-
year historical revenue CAGR of c.10% at a 3-year average EBIT margin of c.32%. It is listed on the
Warsaw Stock Exchange with a market cap of c. PLN 1.5 bn (as on 7th Feb 2022).
Asseco South Eastern Europe: It is a provider of IT solutions, authentication solutions, online
payment settlement systems, while it is also engaged in the sale, outsourcing and maintenance of
ATMs and POS terminals, and provides integration and implementation services for IT systems and
hardware. The Group conducts business operations in the countries of Central Europe, South
Eastern Europe, Iberian Peninsula, as well as in Turkey, Colombia, Peru, and Dominican Republic. In
2020, the company reported revenue of PLN 1026m, with a 3-year historical revenue CAGR of c.22%
at a 3-year average EBIT margin of c.13%. It is listed on the Warsaw Stock Exchange with a market
cap of c. PLN 2.8 bn (as on 7th Feb 2022).
Formula Systems: Formula systems is an IT solutions and services holding company. It has 7 group
companies – Sapiens, Matrix IT, Magic software, Michpal (payroll software company), ZAP Group,
TSG (solution provider for Israel’s homeland security), Insync (staffing solution provider) of which 3
are publicly listed (Sapiens, Magic software and Matrix IT introduced below). The company reports
in USD. In 2020, the company reported revenue of USD 1934m, with a 3-year historical revenue
CAGR of c.13% at a 3-year average EBIT margin of c.8%. It is listed on the Tel Aviv Stock Exchange
(Israel) and NASDAQ (US) with a market cap of c. ILS 5.6 bn (PLN 7.2 bn as on 7th Feb 2022).
Sapiens International: Sapiens offers digital software platforms, solutions, and services for the
Insurance industry. The company reports in USD. In 2020, the company reported revenue of USD
383m, with a 3-year historical revenue CAGR of c.12% at a 3-year average EBIT margin of c.10%. It is
listed on the Tel Aviv Stock Exchange (Israel) and NASDAQ (US) with a market cap of c. USD 1.8 bn
(PLN 7.2 bn as on 7th Feb 2022).
Magic Software: It is a provider of application development, business process integration platforms,
vertical software solutions and related professional services. Platforms consist of Magic xpa (for
developing and deploying business applications), AppBuilder (deploying, and maintaining high-end,
mainframe-grade business applications), Magic xpi (Application integration), Magic xpc (PAAS),
Magic SmartUX (mobile development app) FactoryEye (real-time virtualizations and advanced
analytics). The company reports in USD. In 2020, the company reported revenue of USD 371m, with
a 3-year historical revenue cagr of c.13% at a 3-year average EBIT margin of c.11%. It is listed on the
Tel Aviv Stock Exchange (Israel) and NASDAQ (US) with a market cap of c. ILS 3.1 bn (PLN 4.0 bn as
on 7th Feb 2022).
Matrix IT: It provides mission-critical IT support services to organizations. In 2020, the company
reported revenue of ILS 3854m, with a 3-year historical revenue CAGR of c.10% at a 3-year average
EBIT margin of c.7%. It is listed on the Tel Aviv Stock Exchange (Israel) with a market cap of c. ILS 5.9
bn (PLN 7.6 bn as on 7th Feb 2022).

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Figure 9: Main source of Revenue of Asseco in
2020
Figure 11: the main sectors of Asseco
Acquisitions
Figure 12: Features of companies for acquisition
(source: company data)
Foundation, Growth and Revenue Arms of Asseco
Asseco has put into three operating missions (Figure 9). The first is proprietary software
development that the main profit comes from Asseco Poland. But the international growth arm of
the group remains with Asseco International which is currently active in more than … countries. And
the Formula System, as the largest revenue maker is the third arm of the Asseco, which is mainly
active in the markets of the United States and Israel. In our further analysis and valuations, we
implemented the same structure into our models.
Figure 10. Three arms of Asseco Poland and its main subsidiary/associate companies (source: company data).
COMPANY STRATEGY
Asseco’s main strategy is to build long-term value and operate as an international group of
technology companies. Strong business diversification is at the core of Asseco’s strategy – not only
in terms of products, but also at the level of sectors and countries. The company’s strategy is based
on two fundamental pillars – organic growth and development through acquisitions.
Organic growth – based on development of a wide range of proprietary software and services and
providing them to clients in Poland and other countries. Additionally, the experience of
international companies affiliated with Asseco is leveraged to create a broad portfolio of
products. Asseco becomes a strategic business partner to its customers by offering complex IT
solutions to all sectors of the economy.
Growth through acquisitions – Asseco increases its geographic reach and the scale of its operations
by following an acquisition policy, having finalised over 110 buyout and acquisition transactions
since 2004.
DIVIDENDS PAYMENT STRATEGY
Asseco has been known as a dividend company for a long time. The main strategy of the company
is based on a stable dividends payment policy in which the company tries to keep the value of the
Dividends around the same range annually (3 PLN per share). There are two sources for the
dividends of the shareholders of Asseco which are recurring net profit of parent company from
operations, and the dividends collected by the parent company from its subsidiaries and associates.
ACQUSITIONS
Asseco has two main criteria in doing its merger and acquisitions. First, the company focuses on the
acquisition of the companies that can lead to increase in the group’s competences in specific
sectors, and second, the companies that help the group reach into new geographical regions. The
preferred sectors of acquisition for Asseco are Banking and Finance, ERP, Healthcare, and Cyber
Security. The preferred geographical locations for Asseco are Poland, Europe, Israel and America.
With this strategy in 2021, the group had many acquisitions under Asseco international and Formula
System.
Asseco has consistently improved in its ESG performance over the past few years demonstrating a very strong drive and its commitment towards
sustainable development. It has outperformed its local peers in ESG with its transparency and commitment to different Environmental, Social and
Governmental factor and is trending towards matching and competing with its global peers.
We have identified and assessed different ESG factors that are relevant to the IT industry and have assigned scores to Asseco and its peers using our
ESG model (Appendix). The analysis is done to access the ESG performance in the short and long run by varying the relevant pillar weights to help
make better investment decision. For a company to be successful in the short run, it must have very strong Governance which drives the business
and reflects greater event risk compared to other two pillars whose effects become more visible and important in the long run as they unfold more
slowly. Hence based on a result from MSCI ESG Research for pillar weights and our own analysis, we have given a weight as E= 10%, S=20% and G=70%
which was devised by MSCI (and adjusted by us for IT industry) after back testing the significance of the average monthly correlation among different
scoring approaches to key financial variables (profitability, residual CAPM volatility and residual volatility) for the short run analysis. And for the long
run analysis, higher weights were given to Social and Environmental factors signifying their importance and the final weights were E=13.9%, S=39.8%
and G=46.3% (Refinitiv,2021).
Asseco scored a rating of B in both the short and the long run analysis which kept it behind most of its global peers while outperforming the local
ones.

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ENVIRONMENTAL, SOCIAL AND GOVERNANCE
Figure 13: ESG Score and rating for 2020
source: Company Data More details in Appendix
Figure 14: Asseco ESG Score (2016-2020)
Figure 15: Asseco Pilar Score (2016-2020)
Source: Company Data,
Figure 16: ESG Score Peer Comparison
Source: Refinitiv
Figure 17: Team A ESG Model
ENVIRONMENT
The IT sector, especially the IT Services driven businesses is characterized by relatively low
environmental impact. The company is taking active steps to help save the environment and
manage the wastes properly. The analysis is done based on the two broad factors: 1) Resource Use.
2) Emissions 
Resource Use: The company is contributing to a more sustainable environment by paying special
attention to energy efficiency and resource reduction. They focus hugely on using energy efficient
devices and appliances and conduct timely inspection of greenhouse gas emitting devices leading
to reduction of harmful gases. They also have very good waste management system including
management of e-wastes. They adhere to the environmental laws and regulations and conduct both
internal and external auditing to keep everything checked. In 2020, the company’s total electricity
consumption reduced by 4.44%, the use of fuels in vehicles reduced by around 43.92%, the water
consumption reduced by 30.61% and the total emission also reduced significantly. Although most
of the reductions this year are attributed to less resource utilization because of COVID, we have
seen the company’s commitment to environment over the past years and are confident that they
will keep on improving on it.  
Emissions: with the use of modern and efficient devices, they have brought emission down by a
huge extent but despite having very strong focus on the efficiency of energy and resource
utilization, the company scored lower than its global peers in this segment because of lack its
initiations to use renewable energy. There is no recorded data of the company over the past years in
using renewable energy like solar energy. We strongly believe that if the company focuses on
fulfilling its energy needs from renewable sources and implement green buildings along with its
current energy efficiency implementation, it will be in a better shape and may even surpass its peers
setting higher standards with its efforts to keep the environment safe and clean. 
SOCIAL
Asseco is committed to its social responsibilities. The company is present at 60 countries worldwide
and employs over 29,100 people.  Their active acquisition policy helps them expand geographically
while enhancing their competence in various industries. With the adaptation of the federation
model of cooperation, they acquire controlling shares in new profitable entities while maintaining
the local workforce and talents which helps them to understand their customers better and serve
them in the most effective and efficient way. 
The analysis for this pillar done based on 4 broad factors: 1) Workforce. 2) Human Rights. 3)
Community. 4) Product responsibility. 
Workforce: Asseco focuses on the wellbeing of the employees with health and safety, training and
development and several other policies in place. They have provided continuous trainings to their
employees of up to 49,287 hours to help them stay updated and competitive in the very dynamic
field of IT and conduct several programs to attract and support young potential talents. They also
have made efforts to provide equal job opportunities to people of different genders. Over the years,
the number of their women employees have consistently increased and is currently at 32.64% and
the number of women managers is at 24.62% which is around the average female gender ratio
compared to its peers. 
Human Rights: they have set policies to protect human rights, freedom of association and prevent
child labor to help the employees and support them on their human rights.  
Community: They have been helping the society over the years with their CSR initiatives like “We
Bring Help” which is their Christmas charity program and several other projects like “Our Town”, to
help the local communities and” We Will Win” program aimed at providing masks to social
workers, among others. The group have taken a lot of initiatives to fight COVID-19 to help their
employees and the community to stay safe and healthy. They have shown that they take
responsibility by their actions when they actively make efforts to improve lives of their
employees through several sports and mental health activities. 
Product responsibility: They lag in some respects compared to their peers in terms of having
important policies in place like the cyber security, responsible marketing and fair-trade policies
which are very important for the clients and the market in general which if included will make the
company perform even better in this pillar. 
GOVERNANCE
Asseco Poland has very experienced members with diversified expertise in their field which makes
us believe that the company will continue to thrive in the future. The company adopted the “Best
Practices for WSE listed companies 2016” adhering to best corporate governance practices, rules
and regulations passed by the Supervisory board of the Warsaw Stock Exchange. It has two-
tier executive management structure including the Board of Directors and the Supervisory Board.
The company scored 27.13/46.30 in this pillar which reflects slightly below average performance
compared to its global peers. This score is driven by lower women membership in the executive
positions, concentrated shareholding and other factors mentioned below in details. The company
has a free float of around 49.77% which might be concerning to most investors given liquidity issues.
We have analyzed this pillar further based on 3 board categories: 1) Management. 2) Shareholders.
3) CSR Strategy. 
Management:  Asseco Group has 10 members in the management board and led by Adam Goral
and 8 members in the supervisory Board led by Jacek Duch. The members come with great
experience, knowledge and background which will be beneficial for the company to overcome any

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Figure 18: List of the major shareholders of
Asseco Group
Source: Bloomberg, Team Analysis
Figure 19: Increase in global IT spendings
Source: (Gartner, 2021)
Figure 20: Porter's five forces analysis
Source: Company Data, Team Analysis
Figure 21: Labor hour cost and Consumer Price
Changes prediction.
Source: Team Analysis, (European Investment Bank, 2021)
Figure 22: GDP per capita and Unemployment
rate (%) of Poland Prediction.
challenge in the future. The average board tenure is around 9.11 yrs which shows their commitment
to the firm and the experience. Although having a very experienced board is beneficial, we strongly
believe that the board should be appointed by election for fixed tenors as this would help keep the
board competitive and would also help bring in new talents with fresh perspectives which is
definitely beneficial in the long run. All the board members are non-executive members which
brings in unbiased decision making which is beneficial in the long run.  
The management board has 18.8% women members, and the supervisory board has 14.2% of
women members which can be improved to have more gender diversification and bring in the
different perspective which will definitely be beneficial.  Asseco Group also has policy for fixed and
variable renumerations where the variable renumeration is capped at 90% of the annual fixed base
salary. This motivated the management to take progressive and strategic decision for the growth of
the company. This still in turn is higher than the average of the industry which is at around 70%.
High variable renumeration can also motivate the management to take higher risk to drive the
profits up which can have adverse effects in the long run with bad management practices and this
needs to be highly regulated by internal and external auditing.
Shareholders: Asseco group have a wide base of shareholders including institutional, corporate and
retail shareholders. The company has a free float of around 49.77% with 1 voting right
per share which creates liquidity concerns for the investors and is worse off compared to its peers.
The ownership is also highly concentrated with Cyfrowy Polsat S.A holding around 22.95% of the
shares, AVIVA OFE holding around 10%, Adam Grol holding around 9.74%, NN OFE holding 5.03%
and other shareholders with 52.29% of the shares. The high concentration of shareholding creates
a lot of concerns among retail and other institutional investors as there might be concerns with
critical decision making, risk of high reduction in price because of sudden sell off and other
ownership issues in the long run. We highly believe that the structure should be more diversified
for efficient control and execution over longer period.  
The company also lacks in having more than 2 anti-takeover defenses in place which puts the
company at further risk in case of takeover attempts.  
CSR Strategies: the company is progressively dedicated to community causes and taking care of the
employees which is good. It also reports non-financial data giving details of certain aspects related
to ESG factors and operations in general which creates a lot of transparency and helps analyze the
Company better. Although it has global sustainable activities, it would be even better to have a
dedicated CSR sustainability Committee including stakeholders for committing to the long run.  
To summarize, we consider Asseco Group’s ESG performance to be good and progressively
improving over time. We expect it to fill in the gaps in sustainable factors to match its global peers
and help the ESG conscious investors with more transparent data to make a better sustainable
investment and help contributing to make the world a better place to be in.
INDUSTRY SIZE AND GROWTH
Global IT spending for 2022 is estimated to reach USD 4.4 trillion, marking an increase of 5.3%. The
highest growth is expected to occur in enterprise software and IT services – achieving growth rates
of 11.7% and 8.5% respectively. This is a good news for Asseco (Figure 19).
In June 2021, International Data Corporation (IDC) forecasted the ICT spending in Europe to reach
USD 988 bn in 2021, seeing a 4.5% increase. IDC saw the strong demand for Human Capital
Management, customer service solutions, marketing, and advertising as factors favorable for the
growth of the software segment in 2021, with an estimated rate of growth of 6.6%. we believe that
in 2022 we can see positive growth in market size of Asseco in each of its activity sectors.
Banking and Finance: digitalization of traditional banking operations; growing importance of
cybersecurity; increased demand for advanced technologies specific to the financial services sector;
extension of services in growing areas like Business Intelligence; continued development in the
areas of payments; compliance digital solutions in areas like Anti-Money Laundering; data
warehousing are the main drivers in this sector.
General business: higher demand for ERP solutions resulting from the development of the scale of
operations; growing IT needs of businesses; development of cloud and SaaS solutions resulting from
the strategy to optimize costs; data warehousing, extension of services in growing areas like
Business Intelligence; services related to big data and analytics needed to manage huge amounts of
data.
Public sector: IT contracts in areas of social insurance; healthcare; central and local government
administration; uniformed services; legal areas; cybersecurity.
Company positioning: Asseco is one of the largest Polish companies across all
sectors, simultaneously being the largest company in Poland and Central and Eastern Europe in the
IT sector. Proprietary software and services account for 80% of Asseco’s revenue - 62% of which
comes from the Banking and Finance sector, with revenue from general businesses accounting for
the remaining 38%. The company’s growth strategy has been based on growing organically and
developing through mergers and acquisitions. Asseco’s acquisition strategy included acquiring
highly profitable companies with unique skills at a stake of over 50%, but often below 100%.
Macro-Economic Factors in Favor of Growth: according to the consensus published by EUID some
factors like GDP growth and the inflation rate helps Asseco to earn more in 2022. While at the same
time, appreciation of the Euro vs. Polish Zloty may have some adverse results for the company’s
profit margin.

6
SUPPLY DRIVERS
Higher cost of employment and competition for finding expert employees: To stay on part with
declining costs of energy and remain relevant, companies are forced to innovate frequently,
incrementally upgrading their products. This is creating a need for dynamic human resources, which
enable shorter product cycles. Service is also becoming increasingly reliant on technology and
predictive data analytics to lower maintenance costs and increase software uptime. We expect this
focus to constrain supply as merely the largest companies can afford the increasing overhead R&D
to innovate.
High barriers to entry and fierce competition further consolidate the market: The large investment
cost combined with the high specialization and great governmental connections required for IT
developers make it unfavorable to enter the market (Figure 20). Big software houses entered the
market, oversaturating the sell side.
To summarize our industry analysis, we expect the market balance to tighten in the next few years
where the booming technology demand will outpace supply. With few alternative suppliers, Asseco
is uniquely positioned to benefit through its best-in-class technology, superior Proprietary software
and IT supports.
Figure 23. prediction of PLN:USD currency rate
change.
SUPPLY DRIVERS
Higher cost of employment and competition for finding expert employees: To stay on part with
declining costs of energy and remain relevant, companies are forced to innovate frequently,
incrementally upgrading their products. This is creating a need for dynamic human resources, which
enable shorter product cycles. Service is also becoming increasingly reliant on technology and
predictive data analytics to lower maintenance costs and increase software uptime. We expect this
focus to constrain supply as merely the largest companies can afford the increasing overhead R&D
to innovate.
High barriers to entry and fierce competition further consolidate the market: The large investment
cost combined with the high specialization and great governmental connections required for IT
developers make it unfavorable to enter the market (Figure 20). Big software houses entered the
market, oversaturating the sell side.
To summarize our industry analysis, we expect the market balance to tighten in the next few years
where the booming technology demand will outpace supply. With few alternative suppliers, Asseco
is uniquely positioned to benefit through its best-in-class technology, superior Proprietary software
and IT supports.
Table 1: Key Financial Figures
FINANCIAL ANALYSIS
Figure 24: Superior profitability to peers
Figure 25: Increasing returns to investors
We expect the EBITDA margin of Asseco to decrease significantly, as the post-COVID shortage of
talents in the market will increase labor costs, which account for 10% of the total costs. On the
other hand, we expect net income to increase by 1% in 2022 due to higher market demand, leaving
the NI margin with the same value in the coming years. Asseco’s EBIT margin can be expected to
increase, reaching 9% in 2026, because of improved efficiency and mitigating higher operating
expenses.
HIGH EARNINGS AND DIVIDENDS: GREAT INCENTIVE FOR SHAREHOLDERS
Asseco has been a strong performer over the years in comparison with its competitors. Asseco’s
ROIC and ROE have been higher than those of its competitors (Figure 24), achieving a ROIC of 8%
(as opposed to the peer average of 6.22%) and a ROE of 10% (as opposed to the peer average of
9.20%).
ROIC and ROE are expected to remain constant in 2026. We expect Asseco to deliver a CAGR of 8%
in EPS between 2020 and 2026, reaching PLN 7.6, being a favorable return for the shareholders.
Asseco’s excess earnings can be thus expected to be passed to shareholders in the form of dividends
(Figure 25). It is, however, to be noted that, according to company policy, the Dividend Payout Ratio
is expected to gradually decrease, reaching 55% in 2026.
HIGH R&D SPENDING LEADING TO A TECHNOLOGICAL EDGE
We expect Asseco’s R&D spending to increase over the next 6 years, with the most significant
increase before 2023 (Figure 26), due to the COVID-era policy of the company to increase internal
growth, while reducing acquisition-based growth. Asseco has a noticeably higher R&D spending
than its competitors, partly due to its high profitability and strong margins, which allows it to keep
a technological edge. We expect Asseco to reach an R&D spending of PLN 52m in 2025, accounting
for over 0.28% of its revenue.

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Figure 26:High R&D spending cements
leadership
Figure 27. Revenue outlook of group segments
RISING CAPEX TO GROW BIGGER
The company limited its acquisition-based growth; therefore, we expect CapEx to decrease until
2023. However, we expect CapEx to increase between 2023 and 2025, reaching PLN90bn in 2025,
marking a growth period for Asseco.
A significant cash flow growth is to be expected at the end of the forecast period, even though the
initial COVID-related cash generation up to 2023 might indicate otherwise.
ROOMS FOR GROWTH
Asseco’s 2020 book D/E ratio indicates an underleveraged capital structure, with a value of 31%
in comparison with a peer average of 49%, indicating that it can support Asseco’s further
expansions. Furthermore, the company has a large debt capacity being another factor making
future growth possible, in case customer prepayments or cash reserves ever become insufficient.
Another factor indicating flexibility in case of raising future capital is the fact that Asseco could
repay its debt in 5 months, while the peer average Debt/EBITDA multiple in 2021 equaled 0.75x.
Additionally, Asseco’s financing risk can be seen as minimal, with a current ratio of 1.51 (as
opposed to the peer average of 1.14 in 2021), that we expect to reach a value of 1.7 in 2025.
OPTIMISTIC OUTLOOK TOWARDS 2025
We see the future of Asseco in the upcoming years in a positive light, expecting its revenues to
increase from PLN 12.1 bn in 2020 to PLN 18.6 bn in 2025. Asseco’s capital structure can be
described as underleveraged, allowing it to gain benefits from international expansion, with the
firm’s strong financial liquidity aiding that process.
VALUATION
Table2: WACC inputs
Input Rate Source
Risk free rate 4%
Weighted average
based on revenue
per region
Beta 0.5
Re-levered and risk
adjusted
Equity risk
premium
8.37% Poland
Cost of equity
12.4%
CAPM
Cost of debt 3.30% FY 2020 Report
Tax rate 21%
Statutory tax
(Poland)
Market D/E ratio 40% Target level
WACC 9.2%
source: Team Analysis
Figure 28:Monte Carlo simulation
Our 12-month target price of PLN 97 presents a 22% upside potential on the closing price of PLN
79.5 on 11 February 2022, reiterating our BUY recommendation. We conducted a DCF analysis
based on the consolidated financial data, additionally performing a scenario analysis, sensitivity
analysis and the Monte Carlo simulation, confirming the robustness of the said DCF analysis.
The analyses and simulations described above were also used for outlining the investment risks
(next section). Our BUY recommendation is further verified by a SOTP analysis (DCF and MOIC) and
relative valuation.
DCF VALUATION- Consolidated
To arrive at the company’s intrinsic value our DCF valuation used the FCFF (Free Cash Flow to the
Firm) methodology. Three segments were modelled – Asseco Poland, Asseco International, and
Formula systems. The revenue generated by each segment is initially predicted as described in
Appendix. The segments were modelled separately until EBIT, while Net Debt and minorities were
adjusted for the overall group FCFF. We value the minorities at 15 times 2021E earnings, which is in
line with our fair multiple for Asseco Poland. Our explicit forecast period is from 2021E-2025E.
WACC
A WACC of 9.2% is what we arrived at for Asseco (Table 2). We also arrived at a Cost of Debt of
3.3% by taking the Total Interest Cost Incurred and dividing it by Total Debt. The Cost of Equity of
12.4% was calculated by using the CAPM formula, reflecting Poland’s equity market premium, a
beta of 0.5, and the risk-free rate . It is to be emphasized that the 2-year historical beta coefficient’s
value was 0.27, however, we believe that over time the beta coefficient should become more
aligned with the market. A target D/E ratio of 10% was used as we believe that the company will
maintain a stable debt level.
TERMINAL GROWTH
According to our estimations, Asseco’s terminal growth rate is expected to stabilize at 1.0% after
2024, being lower than the expected long-term nominal GDP of 3%. We believe it is
justified as the European economy, which Asseco is strongly connected with (over 70% of its
revenue), is expected to grow at a slower pace than the world GDP. Additionally, the company’s
end markets (banking, government contracts etc.) don’t tend to grow significantly faster than the
regional GDP. Nonetheless, the company’s exposure to attractive areas, such as
cybersecurity, could result in potential upside for the terminal growth rate. Our sensitivity analysis
suggests that our DCF-based TP moves by PLN 12-14 with every +/- 50 BPS movement in the stock
price (WACC remaining constant).
SCENARIO ANALYSIS and Monte Carlo Simulation
In our Scenario Analysis, we considered three potential Bear, Base and Bull scenarios. Based on the
three main investment thesis on page 1 of this equity research report, each scenario is designed
and by changing the related variables in the model the share price for each scenario is calculated.
We also performed a Monte Carlo simulation with 100k iterations by flexing key variables in order
to gain a more holistic view on Asseco’s share price trajectory under uncertainty (Figure 28;

8
Appendix). By varying the terminal growth rate, WACC, COGS (Americas, Israel, Poland and Europe
excluding Poland), we arrive at a 65% probability of reaching prices with a minimum of 10% upside.
Additionally, we perform a bull and bear case analysis to reflect the materialization of our three
investment theses. A detailed breakdown of our assumptions and the target prices corresponding
to each case can be found in Figure 29. Our Monte Carlo indicates a 10% probability of a share price
equal to or above the bull case, and 6% for the bear case.
Figure 29: Scenario Analysis based on changes in the investment thesis variables
Figure 30: 2022 Share Price Sensitivity Analysis
Source: Team Analysis
SENSITIVITY ANALYSIS
We conducted sensitivity analysis of our DCF model by changing the terminal growth rate, and
WACC values, analyzing their impact on our buy recommendation. Additionally, it is to be
emphasized that the company’s valuation is sensitive to the terminal EBIT margin - a decline of 100
BPS in the terminal EBIT margin reduces the DCF-based TP by PLN 30. Even though the company has
historically maintained its margin at 9-10%, its terminal EBIT margin sensitivity can be seen as a risk,
being a key parameter that should be monitored.
RELATIVE VALUATION: AN UNDERVALUED COMPANY IN AN ATTRACTIVE INDUSTRY
We contrasted Asseco Group with comparable listed companies with three different characteristics
of, 1. similar revenue size and market capital, 2. similar business model, and 3. Similar geographical
location of business. This multiples valuation was done to confirm our buy
recommendation. Although Asseco does not have a direct listed competitor in terms of the
organization structure, sector exposure etc., we used P/E as our relative valuation because of three
reasons: 1. The company is already profitable at the Net Income level (Asseco reported positive Net
Income for the last 8 years), hence EPS is a key parameter to analyze. 2. The IT sector is not very
capital-intensive; therefore, D&A and Interest costs don’t typically distort the Net Income
meaningfully. 3. Due to the complex organization structure and high minority leakage (over 50% of
earnings), metrics like EBIT/EBITDA/Revenue of Asseco would not be meaningfully comparable to
most of its peers, hence we implemented EV/Rev and EV/EBIDTA as base for comparable analysis.
Table 3. Comparable Analysis of Asseco Based on three Schemes with different weightings.

9
Figure 31: Football field SOTP EV projection
Source: Team Analysis, Standalone data
Figure 32. Risk Matrix of Asseco
MOIC Analysis
To double check the buy recommendation, we performed a series of MOIC analysis, firstly on the
consolidated financial data of the company and after that on each segment separately and
aggregating the results with SOTP analysis (Figure 31). In our base assumption, the target MOIC of
1.5x and net revenue exit multiple of 2x were assumed based on the base comparable analysis
calculations. To be confident about the results obtained a sensitivity analysis is done based on the
changes on MOIC and Net Revenue CAGR. The result shows a price range of 139 to 149 PLN per
share. This confirms our buy recommendation of previous DCF-Relative valuation price issued based
on consolidated data.
Table 4. MOIC Analysis for consolidated report of group
Our risk assessment model has identified four particular risk factors, that highlights exposure to
macroeconomic conditions, Immigration limitations; increasing demand for highly skilled worker,
the Nonuniform regulatory authorities and the unstable political environment of some jurisdictions
at which Asseco operates specially because of COVID 19 and Russia Ukraine tensions and high
competition faced locally and internationally.
MARKET RISKS
High competition faced locally and internationally (MR1)
Probability: Moderate - Impact: Medium
The rate of change in technology and continuous innovation – has shortened the product life cycles,
creating a severely competitive market for services. Increased competition from the international
companies bully the pricing position, that as result could negatively affect its profit margins.
Mitigations: In order to sustain in the tech industry, it’s a must to come up with “cost-effective
services”, develop strong clientele, develop promising recurring revenue solutions, and control its
internal operational infrastructure. This can happen through two possible strategies of making new
acquisitions to increase the synergy between the companies, and with more focus on customer
retention, specially on the proprietary software solution revenue sources.
Inflationary & Foreign Exchange risk | Exposure to macroeconomic conditions (MR2)
Probability: Moderate - Impact: Medium
Asseco’s operations are correlated to inflationary risks, that directly and inevitably affect its
performance and capital expenditure, making it also sensitive to fluctuation in the foreign exchange
rate. The currency used by the Asseco, functional currencies of the Group’s foreign subsidiaries are
the local currencies of the countries where they operate, assets of such subsidiaries convert into
PLN, and therefore their values presented in the consolidated financial statements may change as
they remain under the influence of foreign exchange rates against PLN.
Mitigations: knowing that in the coming years, there is a huge chance of appreciation of PLN versus
USD, EURO and ISL, using currency hedging policies, investment in currency hedges, and protections
into commercial contracts seems to be a reasonable solution.
Ethnological change and development | Capacity to respond (MR3)
Probability: Moderate - Impact: High
Rapid tech innovation, digital transformation and data analytics, the integration of AI and all the
contemporary solutions have expanded market sizes giving arise to more competition, furthermore
companies are developing the technological changes, adapting innovative business models offering
solutions and services demanded in the markets. With low entry barriers, software solution market
is highly competitive, where potential customers may prefer suppliers larger, better known or
companies with a greater global reach than Asseco.
Mitigation: The acquisition of smaller competition by the Asseco roots in a greater global reach.
Asseco’s capacity to respond to market changes and develop and deploy new products and services
into existing and emerging markets is critical to its operating outcomes.
Impact of the COVID – 19 on business (MR4)
Probability: Moderate - Impact: Moderate
Risk Analysis

10
Figure 33. Asseco’s Risks and Mitigations
The outbreak of the COVID -19 pandemic continues to impact global economic activity.
Governments have had to impose restrictions and implement measures to control the outbreak that
will have a negative effect on the operations, causing difficulties in the ability to generate revenues,
order cancellations, delays, incapability of timely sales, support to customers, on-site services. For a
business that depends on its current customers and prospective customers’ ability to and willingness
to invest money in IT systems and services – that are dependent on the overall economic health ,
negative economic conditions in the world especially the United states and Israel could drop a
significant percentage of corporate spending on product and services sold by Asseco’s . “In 2019,
62% of our revenues were generated from Israel, 27% of our revenues generated from North
America, and 11% from the rest of the world”
Additionally, Delayed payments worsen the economic conditions the in the end affect Asseco’s
revenues disproportionately.
Mitigation: In 2022, the company should mainly focus on internal processes improvement, cost
control and lowering its growth through acquisition.
OPERATIONAL RISKS
Increasing cost of labor affects profitability (OR1)
Probability: High - Impact: High
Software solution providers heavily rely on qualified research and development personnel, and,
Increasing the salaries and cost of work, the company has to ensure that they not only hire and
retain quality, but yield revenues on the investments from increased revenues given the high
competition the company operates in. This is the main risk of the business of Asseco as mentioned
in the equity research reports and the board members report.
Mitigation: the company should focus on incentives and programs for increasing the retention of
employees.
Regulation Risk | Differing privacy regulations (OR2)
New regulations imposed affect privacy and security measures and could lead to disasters as a result
of abuse or errors made by employees of the Asseco Group, the company may suffer damage to its
property. Regulations affecting the privacy and security may impose additional liability and cost that
could limit the use of information.
Mitigation: Preparation of legal frameworks and routine update of them by a legal mitigation group.
Fiscal and Tax policies’ Negative or uncertain consequences (OR3)
As a multinational group Asseco is subject to tax regulation, where many tax positions and tax
determination is uncertain. Additionally Asseco’s tax obligations and tax rates could adversely be
affected by changes in the relevant tax and accounting laws, regulations, principles and
interpretations -resulting in tax losses, lower anticipated earnings in jurisdictions. Recognizing tax
losses where we have lower statutory rates and higher than anticipated earnings in jurisdictions
where we have higher statutory rates, changes in foreign currency exchange rates, or changes in the
valuation of our deferred tax assets and liabilities.
Mitigation: Therefore tax audits or litigations show how historical tax provisions and accruals
significantly and materially affect the operating results.
INDIVIDUAL FIRM’S RISK
Geopolitical effect on Operations in Israel (IR 1)
Political, economic, and military conditions in Israel and specially recently by the tensions between
Russia and Ukraine in the Central and Eastern Europe could negatively impact the business. the
principal research and development facilities being located in Israel with 60% and 62% of
consolidated revenues in 2018 and 2019, directly exposing the firm to political and military
turmoil and economic conditions affecting Israel. Conflicts and political instability in the Middle East
could prove to have a direct negative impact on the business and operations.
Mitigation: Focus on diversifying the client bases and focusing on revenue generation from western
European counties can lead to a lower risk.
Market Expansion in emerging markets and high risk of Post-acquisition integration (IR2)
Probability: Moderate - Impact: Low
Conducting business in new regions, especially like Africa, proves to be very complex for the group
and shows to have raised the question of manageability & transparency. The threat of inadequate
protection against crime, corruption, lack of due process, and regulation in the processes creates
gaps of inconsistency with the international regulatory requirements followed by the firm, (anti-
corruption and anti-bribery laws regulations). Furthermore, inconsistency and ineffective business
regulation in the local operations could adversely lead to value dilution.
Mitigation: Focus on less acquisitions on regions with low stability in the period of uncertainty due
to COVID and Political situations and focus on developing a unified technology for further expansion

Asseco Equity Research Report: CFA Report

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