Telefnica O 2 C R Czech Hold em

Telefónica O 2 C. R. Czech Hold 'em with attractive dividend Target: CZK 398 HOLD University of Economics, Prague CFA Institute Research Challenge 2012 London, UK 15 March 2012

University of Economics, Prague 15 March 69, 41% Telefónica S. A. Major shareholder (2006) Integrated telco operator Czech incumbent Service breakdown SK market entry 1 Q 2007 Fix: 2, 8 mil. Mobile: 4, 9 mil. Mobile: 1, 1 mil. Stagnant market Growing market Target: CZK 398 HOLD Company overview Valuation drivers Valuation Risks 2

University of Economics, Prague 15 March Stable company with shares quoted on PSE and LSE Performance in 2010 1, 9 Revenues (GBP bn. ) 41 OIBDA Margin (%) 10, 4 Dividend yield (%) Source: Reuters Target: CZK 398 HOLD Company overview Valuation drivers Valuation Risks 3

University of Economics, Prague 15 March Stable company with shares quoted on PSE and LSE Share price development PX Telefónica 02 700 2500 600 2000 Stable price in last 3 years 500 1500 400 300 1000 200 500 TCZ - right axis 0 2006 100 PX - left axis 0 2007 2008 2009 2010 2011 2012 Source: Bloomberg Target: CZK 398 HOLD Company overview Valuation drivers Valuation Risks 4

University of Economics, Prague 15 March Stable company with shares quoted on PSE and LSE PX Telefónica 02 CZK 700 Profitability & Stable dividends Slovak market potential 600 Adaptation to trends Recommendation 500 HOLD Target price CZK 398 400 300 Falling market & Rising competition 200 Spanish mother problems 100 Current price 374 CZK Regulation 0 Source: Bloomberg Target: CZK 398 HOLD Target price on 23/12/2012 Company overview Valuation drivers Valuation Risks 5

University of Economics, Prague 15 March Valuation drivers Market development Analytical Profitability & Stable dividends Slovak market potential Peers comparison Adaptation to trends Recommendation HOLD Regulation Target price CZK 398 Falling market & Rising competition Technical Spanish mother problems Regulation Target: CZK 398 HOLD Company overview Valuation drivers Profitability Discount factor Valuation Risks 6

University of Economics, Prague 15 March Saturated Czech market with potential in new services Market Development Industry revenues (CZK bn. ) Market shares (%) -12% 17% 144. 7 136. 8 127. 7 21. 0 36. 3 19. 6 32. 7 19. 0 31. 0 64. 7 59. 9 55. 7 CZ Telco 2008 2009 2010 Others 2010 18% 44% 15% 14% 44% 2009 24% Traditional services penetration (%) Broadband services penetration (%) 120% 60% 90% 40% 60% 20% 30% 0% Fixed voice Fixed BB Active SIM 01 1 E 2 10 20 09 20 08 20 07 20 06 20 05 20 04 20 01 1 10 E 2 20 09 20 08 20 07 20 06 20 05 20 20 04 0% Mobile BB Source: Team analysis & estimations, ARs, Regulatory reports Target: CZK 398 HOLD Company overview Valuation drivers Valuation Risks 7

University of Economics, Prague 15 March Slovak market represents a dynamic part of portfolio Market Development Telefónica Slovak revenues (EUR mil. ) Half size of the Czech market Similar dynamics (2 Y delay) Faling revenues 35% 200 28% 21% 150 11% 100 50 New upcoming trends 0 2007 2008 2009 2010 2011 E Mobile market revenues (%) Telco market shares (%) 8% 5% 17% 34% 55% Others 44% Source: Team analysis & estimations, ARs, Regulatory reports Target: CZK 398 HOLD Company overview Valuation drivers Valuation Risks 8

University of Economics, Prague 15 March Peer comparison highlights strong and weak areas 300% P/E Peers comparison 200% CAPEX/Sales P/BV Rangerange Max 100% Averagemedian Group TCZ 0% A/Debt EV/EBITDA Div. yield EBITDA margin Source: Team analysis & estimations, data for 2010, Reuters, 34 Europe telco companies Target: CZK 398 HOLD Company overview Valuation drivers Valuation Risks 9

University of Economics, Prague 15 March Revenues and profitability impacted by Regulatory Measures MTR 1. 08 Wholesale Mobile Origination Market 0. 5 0. 25 0 /1 3 E 3 Q /1 4 E 1 Q /1 5 /1 2 11 E 3 Q 1 30 Frequency Spectrum Auction 0. 79 Profit EUR/SMS 1. 10 12 0. 13 E 0 7/ 0. 11 07 / 14 0. 10 07 / 09 07 / 04 / 09 0. 13 37 42 0. 08 07 / 03 / 07 Regulatory Roaming Regulation 06 / /1 0 01 /1 06 01 / 10 Mobile Termination Rates Revenues E 3 Q 1. 96000 00000001. 66 1. 37 01 • Opportunity to extend to 4 G • Threat of new operator entry ? ? • Threat of new virtual operators entry • Network release for regulated prices Source: Team analysis & estimations, ARs & Press Releases Target: CZK 398 HOLD Company overview Valuation drivers Valuation Risks 10

University of Economics, Prague 15 March Despite stabilized revenues dividends in decreasing trend OPEX Revenues CZK bn. 70 FCFF ≈ Dividends Forecasted Revenues Crisis drop 60 50 Traditional services Profitability 40 30 Broadband services 20 10 0 2006 Slovakia 2007 2008 2009 2010 E 2011 F 2012 F 2013 F 2014 F 2015 Source: Team analysis & estimations, ARs Target: CZK 398 HOLD Company overview Valuation drivers Valuation Risks 11

University of Economics, Prague 15 March Despite stabilized revenues dividends in decreasing trend OPEX Revenues 70 60 50 FCFF ≈ Dividends Forecasted Revenues CZK bn. 40 Traditional services Broadband services 30 20 Slovakia 10 0 2006 2007 2008 2009 2010 E 2011 F 2012 F 2013 F 2014 F 2015 Running costs from operating activities CZK bn. 60 50 OIBDA margin ≈ 39% 40 Profitability Running costs incl. adj taxation 30 20 Revenues Operational Earnings After Adj. Tax 10 0 E 2011 F 2012 F 2013 F 2014 F 2015 Further restructuralization steps will help keeping profitability at the same level Source: Team analysis & estimations, ARs Target: CZK 398 HOLD Company overview Valuation drivers Valuation Risks 12

University of Economics, Prague 15 March Despite stabilized revenues dividends in decreasing trend OPEX Revenues 70 60 50 Forecasted Revenues CZK bn. 40 100 Traditional services Running costs i. . . Broadband services 30 20 0 Slovakia 10 FCFF ≈ Dividends Running costs from operating activities E 2011 F 2012 F 2013 F 2014 F 2015 0 2006 2007 2008 2009 2010 E 2011 F 2012 F 2013 F 2014 F 2015 FCFF CZK bn. 12 Depreciation 10 60 8 50 x 6 CAPEX 4 40 Profitability 2 30 0 2011 E 20 2012 F 2013 F 2014 F 2015 F 10 Total FCFF 0 E 2011 F 2012 F 2013 F 2014 F 2015 Depreciation follows decreasing trend & higher CAPEX are supported by cash from WC Source: Team analysis & estimations, ARs Target: CZK 398 HOLD Company overview Valuation drivers Valuation Risks 13

University of Economics, Prague 15 March Despite stabilized revenues dividends in decreasing trend OPEX Revenues 70 60 50 Forecasted Revenues CZK bn. 100 Traditional services 40 Running costs i. . . Broadband services 30 20 0 Slovakia 10 FCFF ≈ Dividends Running costs from operating activities E 2011 F 2012 F 2013 F 2014 F 2015 0 2006 2007 2008 2009 2010 E 2011 F 2012 F 2013 F 2014 F 2015 FCFF ≈ Dividends CZK bn. 60 50 x - 16% 40 Profitability 30 20 37 10 35 33 31 31 0 E 2011 F 2012 F 2013 F 2014 F 2015 DPS FCFF Dividends FCFF is almost exclusively paid out in the form of dividends Source: Team analysis & estimations, ARs Target: CZK 398 HOLD Company overview Valuation drivers Valuation Risks 14

University of Economics, Prague 15 March Discount rate must cover current changes in telco Notably low interest rates in medium run Major changes in European and Czech telco sector Discount factor Source: Team analysis & estimations, Reuters, Mařík, M. : Company´s Valuation Methods Target: CZK 398 HOLD Company overview Valuation drivers Valuation Risks 15

University of Economics, Prague 15 March Discount rate must cover current changes in telco Distorted yield curve 5. 0% 4. 5% 4. 0% 3. 5% 1 st phase 3. 0% 2. 5% 2. 0% 1. 5% 1. 0% 0. 5% Discount factor 0. 0% 3 M 6 M 9 M 1 Y 2 Y 3 Y 4 Y 5 Y 6 Y 7 Y 8 Y 9 Y 10 Y 12 Y 15 Y 20 Y 30 Y 50 Y Czech Government BFV Curve Standard course of the function Source: Team analysis & estimations, Reuters, Mařík, M. : Company´s Valuation Methods Target: CZK 398 HOLD Company overview Valuation drivers Valuation Risks 16

University of Economics, Prague 15 March Discount rate must cover current changes in telco 12% Risk free rate 10% Low rates 50 y govt adjustment bond 4. 55% 8% 6% 4% 4. 56% 4. 62% 4. 55% 4. 29% 5, 04% 2% 0% 1. 11% 1. 41% 1. 52% 1. 65% 2012 F 2013 F 2014 F 2015 F 2016 F Risk free rate Discount factor Source: Team analysis & estimations, Reuters, Mařík, M. : Company´s Valuation Methods Target: CZK 398 HOLD Company overview Valuation drivers Valuation Risks 17

University of Economics, Prague 15 March Discount rate must cover current changes in telco Historical European telco Beta 2009 Stable development Eurozone problems affecting Spanish market Regulatory changes on both European and Czech level 0, 13 0, 80 0, 22 0, 44 Discount factor Unlevered beta Business risk adjustments Leverage effect Resulting beta Source: Team analysis & estimations, Reuters, Mařík, M. : Company´s Valuation Methods Target: CZK 398 HOLD Company overview Valuation drivers Valuation Risks 18

University of Economics, Prague 15 March Discount rate must cover current changes in telco WACC structure 10% 8, 93% 8% 6% 5, 41% 5, 75% 5, 79% 5, 91% 2013 F 2014 F 2015 F 4% 2% 0% 2012 F Weighted risk free part Weighted risk premium part Contribution to total value Discount factor 1 st phase (2012 – 2015) 2 nd phase (2016 – ∞) 2016 F Weighted cost of debt part Average WACC 32% 68% ≈ 8, 0% Source: Team analysis & estimations, Reuters, Mařík, M. : Company´s Valuation Methods Target: CZK 398 HOLD Company overview Valuation drivers Valuation Risks 19

Team F Student research 15 March Our final recommendation is set to HOLD Share price Discounted Cash Flow Entity Model 570 399 520 CZK bn. 14 12 10 8 6 4 2 0 2012 F Discounted Dividend Model 470 398 2013 F FCFF 52 -week average 420 DCF 2014 F 2015 F 2016 F Dividends DDM 398 Market price Market Multiples Analysis 329 – 568 370 320 374 All excessive cash is paid out in the form of dividends Source: Team analysis & estimations, ARs Target: CZK 398 HOLD Company overview Valuation drivers Valuation Risks 20

Team F Student research 15 March Our final recommendation is set to HOLD Market multiples Divi yield Share price Discounted Cash Flow Entity Model 570 399 520 EV/ EBITDA Discounted Dividend Model 470 398 P/BV 52 -week average 420 DCF 398 DDM Market price Market Multiples Analysis 329 – 568 370 374 P/E 320 Source: Team analysis & estimations, ARs Target: CZK 398 HOLD Company overview Valuation drivers Valuation Risks 21

Team F Student research 15 March Our final recommendation is set to HOLD Share price Discounted Cash Flow Entity Model 570 399 HOLD 520 Discounted Dividend Model 470 398 Target price CZK 398 52 -week average 420 DCF DDM Market price Market Multiples Analysis 329 – 568 370 398 Upside potential 374 6, 7% 320 Source: Team analysis & estimations, ARs Target: CZK 398 HOLD Target price on 23/12/2012 Company overview Valuation drivers Valuation Risks 22

Team F Student research 15 March Alternative scenarios with possible impact on future price Impact Successful frequency auction • Potential for 4 G network + Auction New technologies Regulatory pressures Spanish problems • Payment transactions • Internet TV • Advertising services New tech Likelihood • New competitor • Virtual operators • Excessive dividends • Spin-off options Parental company Regulatory - Source: Team analysis & estimations, ARs Target: CZK 398 HOLD Company overview Valuation drivers Valuation Risks 23

Team F Student research 15 March Investment risks might form up in unexpected scenarios Share price CZK 450 425 Successful frequency auction • Potential for 4 G network Auction Spanish problems • Excessive dividends • Spin-off options Regulatory pressures • New competitor • Virtual operators 400 398 Target price 427 CZK 375 Parental company Regulatory 374 Market price 372 CZK 350 339 CZK 325 Source: Team analysis & estimations, ARs Target: CZK 398 HOLD Company overview Valuation drivers Valuation Risks 24

Q&A Thank you for your attention Team of University of Economics, Prague