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					                                           BRE Bank Securities S.A.


                      Special Commentary – Netia
www.brebrokers.com.pl                                                                             Warsaw, 14.05.2004

Excellent 1Q 2004 results
The company published results for 1Q, which exceeded our expectations as well as market consensus. On revenues
of PLN 212 mn, the operator reported an EBITDA of PLN 75.8 mn and net profit of PLN 32.3 mn. The highest
EBITDA margin in the company’s history (35.8%) was achieved by lower than expected operating costs, which
following the El-Net acquisition edged up only slightly. This means that the company was able to rapidly benefit
from synergy resulting from the acquisition (cutting employment, lower selling costs, lower interconnection costs)
or that not all of El-Net’s costs were reflected in the profit and loss account. In the commentary to the company’s
results, President Mądalski stated that, in connection with the El-Net acquisition, the EBITDA margin would fall in
subsequent quarters. Based on information received from the company, not all costs connected with the discussed
transaction have been booked and will weigh on results in 2Q and 3Q, which indeed will encumber the EBITDA
margin (according to our estimates, up to PLN 10 mn). As all of El-Net’s operating costs were booked in the 1Q
result (according to company assurances), we consider these costs extraordinary and expect the company to report
EBITDA margins within the next 2-3 years on a level similar to 1Q 2004.

Quarterly financial results
(PLN mn)                                IQ'02 IIQ'02      IIIQ'02 IVQ'02 IQ'03 IIQ'03      IIIQ'03 IVQ'03 IQ'04
Revenues                                 146.6 151.4        152.4 154.0 161.3 177.8          179.1 186.3 212.0
Costs                                    116.5 109.2        103.7 119.8 117.7 127.2          125.6 132.3 136.4
EBITDA                                    30.1     42.2      48.7   34.2   43.6   50.6        53.6   54.5   75.8
margin                                    21%     28%        32%    22%    27%   28%          30%    29%    36%
Amortisation of fixed assets              48.8     48.5      54.9   42.4   48.9   49.1        52.4   39.9   42.6
Amortisation of intangible fixed assets   18.3     18.3      18.2   19.2   20.2   22.2        23.4   12.3   12.6
Goodwill write-off from consolidation      0.0      0.0        0.0    0.0   0.0 -19.4          -3.1   -3.3  -2.9
Impairment                                                  108.7   40.7                     799.7 -176.9
EBIT                                     -37.0 -24.6       -133.1 -68.1 -25.5     -1.4      -818.8 182.6    23.6
Net financial costs                     -207.7 -224.6      -202.1 216.8 -54.5 -14.5            -5.6    8.9   9.0
Gross profit                            -244.7 -249.2      -335.2 148.7 -80.0 -15.9         -824.4 191.5    32.5
Income tax                                 0.7      0.7       -0.9    0.3   0.1   -0.6          0.1    0.1   0.1
Share of minorities                        0.1      0.2        8.0   -0.4   0.1    0.1          0.2    0.2   0.1
Profit                                  -245.4 -250.0      -328.1 148.6 -80.3 -15.4         -824.6 191.2    32.3
Source: BRE Bank Securities based on Netia S.A. data


Results generated by the company in 1Q clearly show the effects of synergy resulting from the takeover of another
fixed-line operator and, as a result, the effects of scale achieved. These effects can be employed to evaluate the
potential takeover of Dialog, which generated revenues 4-times higher than El-Net. Assuming that the Dialog
takeover goes forward, the new entity would generate annualised revenues of PLN 1.3 bn. With an EBITDA margin
of 35%, this corresponds to EBITDA of PLN 455 mn PLN. In 2003, Dialog’s EBITDA margin (35%) was higher
than Netia’s (30%), and therefore assumptions concerning EBITDA margins of the consolidated entity are cautious.
Assuming that Netia acquires Dialog for PLN 800 mn, at the current price of the company’s shares, this implies an
annualised EV/EBITDA ratio of 4.7. We believe that this is an attractive level from the point of view of investors
interested in opening positions.

In the perspective of the next two years, we expect positive information to influence the share price of Netia. With
the improvement in the company’s results in mind, potential benefits resulting from subsequent takeovers as well as
the expected acceleration of liberalisation on the fixed line telephony market, we are upgrading our investment
recommendation for shares of Netia S.A. from hold to accumulate with a target price of PLN 4.5. Over the longer
term, we are concerned with the business model presented by the company.
Revenues
In regard to revenues, the reported result is in line with our expectations. Netia’s consolidated sales were 32% higher
than those reported one year ago, among others, due to the takeover of El-Net. The organic growth in revenues of
Netia itself was 20%, which should also be acknowledges as a good result. As in previous quarters, the main factor
stimulating the growth in revenues are services connected with pre-selection (+71%, PLN 22.8 mn) and data
transmission (+174%, PLN 20.5 mn). Despite adding an additional 79 thous. lines (+23%) to the subscriber base
(including ISDN lines; of the 79 thous. new lines, 60.2 thous. are El-Net subscribers), revenues from direct voice
services grew 11%. Our estimate of average revenue per line from direct voice services fell 1% in comparison with
1Q 2003.

Consolidated revenues by individual segments of services
(PLN mn)                                IQ'03         IIQ'03             IIIQ'03        IVQ'03         IQ'04
Revenues                                161.3         177.8               179.1          186.3         212.0
Direct services                         122.5         124.0               120.1          122.9         136.7
  installations                           0.3           0.2                 0.1            0.2           0.1
  monthly fee                            30.6          31.0                31.4           31.8          34.6
  connections                            91.6          92.7                88.6           90.9         101.9
    local                                31.3          31.1                28.8           32.7          35.8
    DLD                                  18.6          18.3                18.5           18.5          21.0
    ILD                                   7.1           7.4                 7.7            8.2           9.2
    F2M                                  28.5          30.9                29.0           26.5          29.6
    Other                                 6.1           5.0                 4.5            4.9           6.2
Non-direct services                      13.4          15.9                18.4           19.0          22.8
Data                                      7.5          13.6                14.7           15.4          20.5
Interconnection                           1.5           1.4                 1.1            1.2           7.0
Wholesale services                       11.2          13.1                13.1           14.3          10.8
Other telecom services                    2.8           7.2                 8.4           10.3          11.5
Other                                     2.5           2.5                 3.4            3.1           2.7
Other operating revenues                                4.5                 0.0            0.5           0.3
Source: Netia S.A.

Costs
Results for 1Q confirm that the company’s operating costs are under control. The increase in payroll costs is due to
the higher number of employees as a result of the El-Net acquisition (1393 in relation to 1273 at the end of
December 2003). At the end of March, the number of ringing lines per employee increased to 305 (i.e., 8% higher in
comparison with the end of 2003). Higher interconnection costs are a consequence of the increased telecom traffic
resulting from the acquisition of El-Net subscribers. The interconnection costs/ revenues from voice services ratio
remains steady, amounting to 29%.

Operating costs
(PLN mn)                                     IQ03          IIQ03         IIIQ03         IVQ03          IQ04
Wages and salaries                            29.3          32.4           35.9          35.6           38.4
Interconnection                               31.0          31.9           29.3          29.8           36.6
Amortisation                                  69.1          71.3           75.8          52.2           55.2
Line leasing and network maintenance           8.3          15.7           14.8          16.3           14.8
Sales and marketing                            7.8           5.2            5.8           9.4            6.1
Others                                        41.3          46.5           39.9          41.2           40.5
Source: Netia S.A.

Others
Financial activity, on which the company generated a positive result of PLN 9 mn, exerted a positive influence on
net profit. Primarily worth noting is the extraordinary influence of booking PLN 5.6 mn of remitted liabilities
resulting from the El-Net takeover.


         Previous recommendations issued for Netia S.A.
               Recommendation                   HOLD                 HOLD
               Date issued                      19.05.2003           13.08.2003
               Price on day of recommendation 3.07                   3.95
               WIG on day of recommendation 14801.21                 18958.84
Department of Institutional Sales and Analysis:                           Analysts:

Tomasz Mazurczak tel. (+48 22) 697 47 35                                  Hanna Kędziora tel. (+48 22) 697 47 37
Investment Advisor, Director                                              Hanna.Kedziora@breinwest.com.pl
Tomasz.Mazurczak@breinwest.com.pl                                         Chemicals, pharmaceuticals, household appliances,
Strategic analysis                                                        foodstuff industry

Grzegorz Domagała tel. (+48 22) 697 48 03                                 Michał Marczak tel. (+48 22) 697 47 38
Assistant Director                                                        Michal.Marczak@breinwest.com.pl
Grzegorz.Domagala@breinwest.com.pl                                        Telecommunications, raw materials, metals, media

Sales:                                                                    Andrzej Powierża tel. (+48 22) 697 47 42
                                                                          Investment Advisor
Michał Skowroński tel. (+48 22) 697 49 68
                                                                          Andrzej.Powierza@breinwest.com.pl
Michal.Skowronski@breinwest.com.pl
                                                                          Banks, insurance, others
Emil Onyszczuk tel. (+48 22) 697 49 63
Emil.Onyszczuk@breinwest.com.pl
Marzena Łempicka tel. (+48 22) 697 48 95                                  Witold Samborski tel. (+48 22) 697 47 36
Marzena.Lempicka@breinwest.com.pl                                         Securities Broker
Grzegorz Stępień tel. (+48 22) 697 48 62                                  Witold.Samborski@breinwest.com.pl
Grzegorz.Stepien@breinwest.com.pl                                         IT, construction, others
Tomasz Roguwski tel. (+48 22) 697 48 82
Tomasz.Roguwski@breinwest.com.pl                                          Przemysław Smoliński tel. (+48 22) 697 49 64
                                                                          Przemyslaw.Smolinski@breinwest.com.pl
                                                                          Assistant Analyst, technical analysis

EV – net debt + market value (EV – economic value)
EBIT – Earnings Before Interest and Taxes
EBITDA – EBIT + Depreciation and Amortisation
PBA – Profit on Banking Activity
P/CE – price to earnings with amortisation
MC/S – market capitalisation to sales
EBIT/EV – operating profit to economic value
P/E – (Price/Earnings) – price divided by annual net profit per share
ROE – (Return on Equity) – annual net profit divided by average equity
P/BV – (Price/Book Value) – price divided by book value per share
Net debt – credits + debt papers + interest bearing loans – cash and cash equivalents
EBITDA margin – EBITDA/Sales


Recommendations of BRE Bank Securities S.A.
A recommendation is valid for a period of 3-6 months, unless a subsequent recommendation is issued within this period.
BUY – we expect that the rate of return from an investment in a company’s shares will be at least 15% higher than the WIG
ACCUMULATE – we expect that the rate of return from an investment in a company’s shares will be 5%-15% higher than the WIG
HOLD – we expect that the rate of return from an investment in a company’s shares will be within +/-5% in relation to the WIG
REDUCE – we expect that the rate of return from an investment in a company’s shares will be 5%-15% lower than the WIG
SELL – we expect that the rate of return from an investment in a company’s shares will be at least 15% lower in relation to the WIG



The present report expresses the knowledge as well as opinions of the authors on day the report was prepared.

The present report was prepared observing principles of methodological correctness and objectivity, on the basis of sources available to the
public, which BRE Bank Securities S.A. considers reliable.
However, BRE Bank Securities S.A., in no case, guarantees the accuracy and completeness of the report, in particular should sources on the
basis of which the report was prepared prove to be inaccurate, incomplete or not fully consistent with the facts.

BRE Bank Securities S.A. bears no responsibility for investment decisions taken on the basis of the present report nor for any damages incurred
as a result of investment decisions taken on the basis of the present report.

It is possible that BRE Bank Securities S.A. renders, will render or in the past has rendered services for companies and other entities mentioned
in the present report.

Copying or publishing the present report, in full or in part, or disseminating in any way information contained in the present report requires the
prior written agreement of BRE Bank Securities S.A.


Strong and weak points of valuation methods used in recommendations:
DCF – acknowledged as the most methodologically correct method of valuation; it consists in discounting financial flows generated by a
company; its weak point is the significant susceptibility to a change of forecast assumptions in the model
Multiple – based on a comparison of valuation multipliers of companies from a given sector; simple in construction, reflects the current state of
the market better than DCF; weak points include substantial variability (fluctuations together with market indices) as well as difficulty in the
selection of the group of comparable companies.

				
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