Grupa Onetslimak.onet.pl/_m/ofirmie/rapfin/gro0314a.pdf · Grupa Onet, will represent a common component of mainstream institutional portfolios in Poland (like Yahoo!, Google or e-Bay

Initiation of Coverage

Analyst: +48 22 821 87 22Sobies³aw Paj¹k, CFA [email protected]

Virtuous, not Virtual

Hold 14 March 2006

Price: PLN 114.012M EFV: PLN 124.4

Grupa Onet

REPORTPekao Research

13/2006 (460)

Please note that the important disclaimers at the back form an integral part of this report.

Hold 14 March 2006

SectorMedia

Market CapUS$ 279 m

Free Float18%

ReutersONPL.WA

12-Mth RangePLN 65.5-182.0

SRFI 5002 E6002 E7002 E8002

selaS mNLP 0.58 9.811 1.651 2.991

selaShsaC mNLP 9.07 6.401 4.141 1.481

ADTIBE mNLP 2.32 8.92 2.84 2.07

ADTIBEgnitarepO mNLP 1.62 1.92 7.64 2.76

ADTIBEhsaC mNLP 5.82 4.93 1.45 6.07

ADTIBEhsaCjdA mNLP 1.82 9.83 5.35 8.96

tiforPgnitarepO mNLP 7.41 4.02 8.43 8.45

tiforPgnitarepOjdA mNLP 6.91 5.92 0.04 3.45

.repOdeunitnoCniIN mNLP 1.31 6.41 7.62 7.34

noemocnIteNjdA.repOdeunitnoC

mNLP 2.91 8.42 2.43 1.74

tiforPteN mNLP 2.41 6.51 8.72 8.44

tiforPteNjdA mNLP 3.02 9.52 2.53 2.84

*SPE NLP 25.2 91.3 82.4 87.5

gnhcyoy*SPE % 682 62 43 53

**SPE NLP 93.2 50.3 51.4 56.5

gnhcyoy**SPE % 401 82 63 63

tbedteN mNLP 0.51- 1.34- 9.18- 1.331-

*E/P x 2.54 8.53 6.62 7.91

*EC/P x 8.13 3.62 3.91 9.41

*******ADTIBE/VE x 5.13 3.22 7.51 5.11

*******TIBE/VE x 2.54 4.92 0.12 7.41

dleiydnedividssorG % 0.0 0.0 0.0 0.0

)poe(serahsfo.oN sht 040,8 221,8 822,8 433,8

Key Data

Continued operations = Internet activities; Discontinued operations = non-Internet activities; Operating EBITDA = EBITDA after eliminating the impactof other gains/losses; Cash EBITDA = Operating EBITDA after eliminatingthe impact of IFRS2 stock option costs and the result on barter activities.Regarding the explanation of the adjustments to Company's profits, pleaserefer to the Appendix to this research report. * calculated on the basis ofadj net income. ** calculated on the basis of adj net income on continuedoperations. *** calculated on the basis of adj cash EBITDA/adj operatingprofit. **** including estimated fair value of discontinued operations.Source: Company data, CDM estimates

Virtuous, not Virtual

Grupa Onet proved that local Internet portal businessescan be deeply profitable and FCFF-positive. Whilewe initiate our coverage with a HOLD rating, we believethat the times when leading local Internet companieswill become a common component of mainstreaminstitutional portfolios in Poland are closing near.

Following lengthy, but successful, restructuring - sell-offs and close-downs of non- core (i.e. non-Internet)assets - Grupa Onet represents now practically pureexposure to the Internet portal business (onlineadvertising + user services).

The outlook for online advertising is robust, bothglobally and locally. Further proliferation ofbroadband Internet access and continued rapid influxof mainstream advertisers, resulting from theirincreased confidence in the Internet as an advertisingmedium, are likely to provide a solid groundfor strong (>20% globally, app. 40% locally) CAGRsof online ad spending in the next few years.Consequently, the Internet is expected to furtherincrease its share in total ad spend, mainly at theexpense of print.

Onet capitalized well upon its early comer advantageand the synergies resulting from its membershipin a larger media group, maintaining its no. 1 positionamong local portals, in terms of both the shareof Internet users' time spent online and the sharein online advertising. The Company appears to bewell positioned to ride on the top of the soaring waveof online ad spending in the years to come.

Price: PLN 114.012M EFV: PLN 124.4

Grupa Onet

Av. Daily TurnoverUS$ 0.15 m

Analyst: +48 22 821 87 22Sobies³aw Paj¹k, CFA [email protected]

(initiation of coverage)

Stock Performance

Source: Bloomberg

63

83

103

123

143

163

183

03.0

5

04.0

5

05.0

5

06.0

5

07.0

5

08.0

5

09.0

5

10.0

5

11.0

5

12.0

5

01.0

6

02.0

6

03.0

6

Grupa Onet

WIG20

Contents1. Investment Case ................................................................................. 3

2. Valuation ............................................................................................ 5

3. The Internet Advertising Market.................................................... 11

4. Business Model and Competitive Position ..................................... 20

5. Financials .......................................................................................... 26

6. Financial Forecast ............................................................................ 29

7. Financial Statements (Consolidated, IFRS) ..................................... 34

Appendix: Guide to Grupa Onet�s Adjusted Earnings....................... 38

3

CDM Pekao SA Grupa Onet

1. Investment Case

Almost pureexposure to theInternet business

Ø The outlook for online advertising is robust, both globally and locally,on the back of broadband proliferation, and increased confidenceof mainstream advertisers in the Internet as an advertising medium

Ø Onet capitalized well upon its early comer advantage and the synergiesresulting from its membership in a larger media group, maintainingits no. 1 position among local portals, in terms of both, the share of Internetusers� time spent online and the share in online advertising; in the yearsto come the Company appears to be well positioned to ride on the topof the soaring wave of online ad spending

Ø The Company proved that local Internet portal business can be deeplyprofitable and FCFF-positive

Ø While we initiate our coverage with a HOLD rating, we believe thatthe times when leading local Internet companies will become a commoncomponent of mainstream institutional portfolios in Poland are closingnear

Following lengthy, but successful, restructuring - sell-offs and close-downs of non-core (i.e. non-Internet) assets � Grupa Onet represents now practically pure exposureto the Internet portal business (online advertising + user services).

The outlook for online advertising is robust, both globally and locally. Furtherproliferation of broadband Internet access and continued rapid influx of mainstreamadvertisers � resulting from their increased confidence in the Internet as anadvertising medium � are likely to provide a solid ground for strong (>20% globally,app. 40% locally) CAGRs of online advertising spending in next few years. Inconsequence, online ad spending exceeded globally outdoor advertising outlaysalready last year, and is expected to outgrow radio in three years, and in Polandreached 2.4% of the total advertising pie in 2005, a share that we expect to double/triple in next three/five-to-six years. While the online ad share increase is expectedto be made at the expense of basically all remaining media (both globally and locally),the print media will probably be the prime market share loser, extending the pastfew years� tendency.

The Internet hype of the 2000 spurred an array of horizontal Internet portal projectsin Poland; the excessive number of players coupled with the shallownessof the Internet advertising market, external financing needs at the early stages(to cover high fixed costs) and the economics of the portal business favouring(i) market leaders (operating leverage argument), and (ii) players with ties withtelecommunication and media companies (synergies with ISPs and in contentsourcing area), resulted in a number of wind-ups. The survivors � including GrupaOnet�s Onet.pl - proved to be the early-comers with support of financially strongTMT groups.

Onet well capitalized upon its early comer advantage - and upon ITI�s (strategicinvestor) support at later stages - maintaining its leading position both in terms ofthe cash online advertising market share (c. 38% in 2005), and the range ofunderlying user statistics. The number of users, reach, page-views or time spent byusers on portal pages indicate Onet�s material competitive advantage over rivaldomestic portals. Moreover, the difference between monthly and weekly user and

Robust outlook foronline ad spendinggrowth, bothglobally and locally

The Internet bubbleburst survivorsproved theirbusiness model�sviability

Onet is the leaderamong the localInternet portals, bothin terms of online adspend market share...

4


reach statistics for Onet is smaller than for the competing local portals, which proveshigher user loyalty compared to competitors. With its leading market position,proved technological and new services innovation, and competitive advantagesstemming from being a part of a larger media group (content sourcing), the Companyappears to be well positioned to ride on the top of the soaring wave of onlinead spending.

However, what is the most important is that past few years proved that the Internetportal business is a business that can be valued on the basis of its cash flows andprofits, just like any other business. The past few years� growth of the onlinead spending made the bulk of the local survivor profitable. Grupa Onet is deeplyin the black at all levels of its income statement (last year�s cash EBITDA marginof 40%), debt free, and FCFF positive. While the Company�s capex may rise transientlyin the next few years, we believe that the management will take up new largeprojects only if they prove solidly value-accretive.

Our valuation of Grupa Onet�s equities indicates that their current market priceis close to the intrinsic value (12M EFV of PLN 124.4), which coupled with theCompany�s current low free float and inferior share liquidity prompts us to initiatethe coverage of its equities with a fundamental HOLD rating (and a benchmark-neutral market-relative recommended weighting), despite the businesses� robustgrowth outlook. However the share liquidity is likely to improve later this year,as ITI (a strategic investor holding 82% of the Company�s shares outstanding) maysell part of its current holding in Grupa Onet (though retaining the controllingstake) in an offer which may (though does not have to) be accompanied by a newshare issue (depending upon the Company�s capex needs, which, in turn, constitutethe function of decisions regarding various new projects scrutinized at the momentby the management). These offerings should be, in our opinion, closely watched,as it appears to us that the times when leading local Internet companies, such asGrupa Onet, will represent a common component of mainstream institutionalportfolios in Poland (like Yahoo!, Google or e-Bay do in the west already for sometime now) are closing near.

The Companyproved that Internetportal business canbe deeply profitableand FCFF-positive

Having rated GrupaOnet�s equities aHOLD, we wouldclosely watchpossible sharesecondary offering(s)later this year

...and such statisticsas users, reach,page-views andshare in time spentonline

5


2. Valuation

Ø We value Grupa Onet�s operations at PLN 124.4 per share in a 12M horizon

Ø Our valuation is (i) stock-option-diluted, (ii) adjusted for non-cash andnon-operating costs and profits, and (iii) includes NRV of discontinuedoperations

Ø Peer-relative EFVs do not diverge materially from the DCF�s

We value Grupa Onet using our standard DCF FCFF procedure and cross-checkthe findings via peer comparison exercises.

Our core valuation of Grupa Onet encompasses only the assessment of the Company�scurrent operations (both continued and discontinued). In other words, in ourvaluation exercise we have not assumed any M&As that the Company may (thoughdoes not have to) pursue. We also abstract from a possible capital increaseat the Company this year (decisions in this respect have not been reportedly madeyet), and new large projects that could be financed with its proceeds.

While we do abstract from the possible new equity issue at the Company, we doinclude in our valuation the net effect of the stock option program at Grupa Onet(present value of stock option issue cash proceeds versus full dilution for the newshares; regarding the details of the program, please refer to Chapter 5.4 of thisresearch report).

Our DCF exercise for Grupa Onet has been based upon adjusted operating profitfigures, which compared to reported numbers exclude impact of (i) non-cash costsand gains (IFRS2 stock option costs, result on the barter operations), and (ii) costsand profits of purely financial nature (e.g. interest paid and received; regardingdetailed guide to the adjustments seen necessary to get a truer and fairer pictureof the Company�s profits, please refer to Chapter 5.7 and the Appendix to thisresearch report).

Tax-wise our DCF valuation is based on cash taxes only, which � according to ourestimates � will be paid by the Company from 2Q07E onwards, i.e. after the fullutilization of the tax-loss carry-forward benefits (the reversal of previously createddeferred tax asset accrual, burdening the Company�s reported bottom line in the2006-1Q07E period, is adjusted for in our exercise). Please note that our valuationdoes not assume that the Company will move to Cracow�s SEZ (which at the momentis analyzed and contemplated by the management), in a cash corporate taxesoptimizing attempt. Should Grupa Onet down the road decide to move to Cracow�sSEZ, the resultant cash CIT savings would constitute a pure upside to our assessmentof its EFV (regarding the details, please refer to Chapter 5.6 of this research report).

In terms of WACC, we assumed (i) an all-equity-financing capital structure (in linewith current status), and unleveraged beta of 1.7 (upper bound of the foreign peers�range), resulting in 12.50%/12.65% base scenario definite/residual period WACC(close to the Company�s management 12.8% internal assessment as of the end of 2005for the purpose of goodwill impairment tests).

DCF + peercomparisons

Excluded possiblecapital increase andM&As

Our valuationis stock-option-diluted

We adjust for non-cash and non-operating costs/profits at the EBITlevel

Only cash taxesincluded

Possible moveto Cracow�s SEZ notincorporated in EFVassessment

High WACC, closeto internally usedvalues�

6


As far as the FCFF residual growth goes, we set it (in our base scenario) at 5.0%in nominal terms (3.2% in real terms), close to the expected sustainable LT growthof the Polish economy constituting a ceiling for our residual growth assumptionsacross all industries. While such a residual growth rate is visibly higher than thosewe adopt to value other electronic media businesses (3.5% for television, 3.0% forradio), we deem such differential justified (regarding the evidence on the onlinemigration of ads, please refer to Chapter 3 of this research report)1.

� and residualgrowth

)mNLP( 5002 E6002 E7002 E8002 E9002 E0102 E1102 E2102 E3102 E4102 E5102 E5102>

selaShsaC 9.07 6.401 4.141 1.481 4.132 4.972 0.013 4.433 1.353 6.173 2.193

egnahcyoy %24 %74 %53 %03 %62 %12 %11 %8 %6 %5 %5

nigraMtiforPgnitarepOjdA %6.72 %2.82 %3.82 %5.92 %8.33 %5.63 %0.73 %9.63 %5.63 %3.63 %4.63

tiforPgnitarepOjdA 6.91 5.92 0.04 3.45 3.87 9.101 7.411 3.321 7.821 1.531 5.241

egnahcyoy %522 %15 %63 %63 %44 %03 %21 %8 %4 %5 %5

)T(etaRxaThsaCevitceffE %0.0 %0.0 %0.41 %0.91 %0.91 %0.91 %0.91 %0.91 %0.91 %0.91 %0.91

)T-1(*tiforPgnitarepOjdA 6.91 5.92 4.43 4.34 3.36 6.28 9.29 9.99 3.401 4.901 4.511

egnahcyoy %522 %15 %71 %62 %64 %03 %21 %8 %4 %5 %5

ADTIBEhsaCjdA 1.82 9.83 5.35 8.96 8.59 1.021 6.331 0.341 2.941 5.651 8.461

egnahcyoy %68 %83 %83 %13 %73 %52 %11 %7 %4 %5 %5

nigraMADTIBEhsaCjdA %7.93 %2.73 %9.73 %9.73 %4.14 %0.34 %1.34 %8.24 %3.24 %1.24 %1.24

A&D 6.8 4.9 5.31 5.51 4.71 2.81 9.81 7.91 5.02 4.12 3.22

,A&D+)T-1(*tiforPgnitarepOjdA 1.82 9.83 9.74 9.85 8.08 7.001 8.111 6.911 8.421 8.031 7.731

egnahcyoy %68 %83 %32 %32 %73 %52 %11 %7 %4 %5 %5

xepaC 0.211- 3.71- 5.71- 5.81- 0.02- 0.02- 8.02- 7.12- 6.22- 5.32- 5.42-

CWNniegnahC 3.0 8.1- 4.3- 9.3- 9.4- 6.4- 7.2- 0.2- 5.1- 6.1- 7.1-

sdeecorpeussiytiuqE 0.88 5.5 8.7 6.8 4.9 0.0 0.0 0.0 0.0 0.0 0.0

,seitilibaildnastessaderrefedniegnahCsexatdereffedgnidulcxe

0.4 3.2 5.2 9.2 2.3 2.3 1.2 7.1 3.1 3.1 3.1

wolFhsaCeerF 4.8 5.72 3.73 9.74 5.86 4.97 4.09 5.79 0.201 0.701 8.211

egnahcyoy %921 %622 %63 %82 %34 %61 %41 %8 %5 %5 %5 %0.5

ytiuqEfotsoC

)lanimon(etareerfksiR %9.4 %9.4 %9.4 %9.4 %9.4 %9.4 %9.4 %9.4 %9.4 %9.4 %9.4 %0.5

muimerpksiRytiuqE %5.4 %5.4 %5.4 %5.4 %5.4 %5.4 %5.4 %5.4 %5.4 %5.4 %5.4 %5.4

tnerruclautca,ateB 07.1

ateBderevelnU 07.1 07.1 07.1 07.1 07.1 07.1 07.1 07.1 07.1 07.1 07.1 07.1

egarevels'ynapmocfolevelehtrofdetsujdaateB 07.1 07.1 07.1 07.1 07.1 07.1 07.1 07.1 07.1 07.1 07.1 07.1

MPACybdetupmoCnruteRfoetaRderiuqeR %5.21 %5.21 %5.21 %5.21 %5.21 %5.21 %5.21 %5.21 %5.21 %5.21 %5.21 %6.21

tbeDfotsoC

)xaT-erP(tbeDfotsoC %5.7 %7.6 %7.6 %7.6 %6.6 %3.6 %3.6 %3.6 %3.6 %3.6 %3.6 %3.6

etaRxaThsaCevitceffE %0 %0 %7 %91 %91 %91 %91 %91 %91 %91 %91 %91

tbeDfotsoCxaT-retfA %5.7 %7.6 %2.6 %5.5 %3.5 %1.5 %1.5 %1.5 %1.5 %1.5 %1.5 %1.5

CCAW

tbeDfothgieW %0 %0 %0 %0 %0 %0 %0 %0 %0 %0 %0 %0

ytiuqEfothgieW %001 %001 %001 %001 %001 %001 %001 %001 %001 %001 %001 %001

ytiuqEfotsoC %5.21 %5.21 %5.21 %5.21 %5.21 %5.21 %5.21 %5.21 %5.21 %5.21 %5.21 %6.21

tbeDfotsoCxaT-retfA %5.7 %7.6 %2.6 %5.5 %3.5 %1.5 %1.5 %1.5 %1.5 %1.5 %1.5 %1.5

CCAW %5.21 %5.21 %5.21 %5.21 %5.21 %5.21 %5.21 %5.21 %5.21 %5.21 %5.21 %6.21

elpitluMtnuocsiD 00.1 00.1 01.1 42.1 93.1 65.1 67.1 89.1 32.2 15.2 28.2

rotcaFtnuocsiD 00.1 00.1 19.0 18.0 27.0 46.0 75.0 15.0 54.0 04.0 53.0

wolFhsaCeerFfoVP 9.33 7.83 2.94 8.05 3.15 3.94 8.54 7.24 0.04

Figure 1. Grupa Onet; DCF Model

Source: Company, CDM estimates

1 Please note that the Company�s management also uses internally 5% nominal residual growth assumption(e.g. for the goodwill impairment test purposes).

7


Discontinued operations�NRV on the top ofcontinued operations�value

DCF-derived EFVis not very sensitiveto the residualgrowth assumption

Finally, on the top of the assessment of Grupa Onet�s continued (i.e. Internet)operations, we add the estimated net realizable value (NRV) of the discontinuedoperations (tourist guide publishing Pascal subsidiary); while these assets are non-core for the Company and are destined for a divestiture, on the back of Pascal�simproving results they do have some value (c. PLN 2 per one Company�s share).

On the basis of the aforementioned assumptions, in the base-case scenario, we seethe 12-month forward fair value of Grupa Onet�s equities at PLN 120.1, close to theircurrent market price. We would like to stress that this EFV assessment is not verysensitive to the residual growth assumption; a 0.5pp change in residual growthalters the assessment of the Company�s fair share value by 4% only.

We cross-checked the aforementioned absolute valuation results by a relativevaluation exercise, comparing Grupa Onet both with local and foreign peercompanies2 . Market leadership constitutes an advantage in the Internet portalbusiness. Thus, as a market leader in Poland (regarding the evidence, please refer

)mNLP(

sVPsFFCFfomuS 8.104

doireplaudiserehtnitbedfothgieW %0

doireplaudiserehtniytiuqefothgieW %001

doirepetinifedehtniytiuqefotsocegarevA %5.21

doirepetinifedehtniCCAWegarevA %5.21

oiranecsesac-esab,doireplaudiserehtniCCAW %6.21

oiranecsesac-esab,sFFCFfohtworglaudiseR %0.5

eulavlaudiseR 7.945,1

eulavlaudiserehtfoeulavtneserP 8.945

snoitarepodeunitnocfoeulaV 6.159

)lacsaP(snoitarepodeunitnocsidfoeulaV 2.91

stessagnitarepo-noN 0.0

poeE6002-stnelaviuqednahsaC 6.34

poeE6002-sesaellaicnanifdnatbedgniraeb-tseretnI 6.0

eulavytiuqE 8.310,1

)seussierahsnoitpokcotsrofdetulid(serahsfo.oN 801,044,8

)NLP(oiranecsesac-esab,tenOapurGfoeulavriafdrawrofhtnom-21 1.021

eulavlaudiserehtfoeulavtneserpehtybdetneserperVEfo% %85

Figure 1. Grupa Onet; DCF Model (continued)


Market leader, Onet,should be pricedwith premiumto local peers

2 Similar to the DCF valuation, our peer-relative valuation of Grupa Onet (i) is diluted for stock optionissues, (ii) is based on adjusted cash profits at each level of income statement, and (iii) incorporates theNRV of discontinued operations.

htworGlaudiseR'sFFCF

muimerpksirytiuqE

%00.4 %52.4 %05.4 %57.4 %00.5

doireplaudiserehtnitbedfothgieW

%0 %0 %0 %0 %0

doireplaudiserehtniCCAW

%8.11 %2.21 %6.21 %1.31 %5.31

lanimoN laeR kcotss'tenOapurGfoeulavriafdrawrofhtnom-21deilpmI

%0.4 %2.2 4.421 9.711 0.211 7.601 9.101

%5.4 %7.2 4.921 2.221 8.511 1.011 8.401

%0.5 %2.3 1.531 2.721 1.021 8.311 1.801

%5.5 %7.3 7.141 8.231 0.521 1.811 9.111

%0.6 %2.4 5.941 4.931 6.031 9.221 1.611

Figure 2. DCF Valuation of Grupa Onet; Sensitivity Table

Source: CDM estimates

8


E6002 E7002 E8002

:selpitlums'airetnI

ADTIBE/VE 5.81 3.31 0.01

TIBE/VE 3.63 9.12 9.41

E/P 6.73 0.32 0.61

:airetnIot)tnuocsid(muimerps'tenOapurG

ADTIBE/VE %02 %81 %51

TIBE/VE %91- %4- %1-

E/P %5- %61 %42

airetnIottenOfomuimerpdemussA %52 %52 %52

:tenOapurGrofoitartegraT

ADTIBE/VE 2.32 6.61 4.21

TIBE/VE 4.54 4.72 6.81

E/P 0.74 8.82 0.02

*airetnIhtiwnosirapmocADTIBE/VEnodesabtenOapurGfoeulaverahsrepdeilpmI 6.811 5.021 5.221

*airetnIhtiwnosirapmocTIBE/VEnodesabtenOapurGfoeulaverahsrepdeilpmI 7.271 6.541 5.931

*airetnIhtiwnosirapmocE/PnodesabtenOapurGfoeulaverahsrepdeilpmI 0.641 8.121 1.511

egarevA 6.331

Figure 3. Grupa Onet's Peer-Relative Valuation; Comparison to Interia

* including the estimated net realizable value of the discontinued operations (PLN 19.2 m), multiples for GrupaOnet based on, respectively, adj cash EBITDA, adj operating income and adj net income from continued operations(regarding the definitions of adj cash EBITDA, adj operating profit and adj net income from continued operations,please refer to the Appendix to this research report).Source: CDM estimates

airetnIotmuimerpdemussA %0 %01 %02 %03 %04 %05 %06 %07 %08 %09 %001

)NLP(tenOapurGfoVFEdeilpmI 5.801 6.811 7.821 9.831 0.941 0.951 2.961 3.971 4.981 5.991 6.902

Figure 4. Valuation of Grupa Onet Relative to Local Peer Interia.pl; Implied EFV as a Function of Assumed Premium to Peer

Note: including the estimated net realizable value of the discontinued operations (PLN 19.2 m), multiples for Grupa Onet based on, respectively, adj cashEBITDA, adj operating income and adj net income from continued operations (regarding the definitions of adj cash EBITDA, adj operating profit and adj netincome from continued operations, please refer to the Appendix to this research report).Source: CDM estimates

to Chapter 4.2 of this research report), the Company should be priced with a premiumto other local portals, including WSE-listed Interia.pl. While the perceptionof a �right� size of such a premium may vary across agents, we believe 25% is notexcessive. Under this assumption, Grupa Onet�s implied EFV would be slightlyabove its current market price, and reasonably close to our DCF base-scenarioassessment.

As a pure Internet portal, the Company suffers from a scarcity of close publicly-traded peers abroad. The majority of public companies with portal exposure (Tiscali,T-Online, or even Yahoo Japan) have also large (or very large) non-online advertisingbusinesses (e.g. access provision). For this reason, they do not seem to constitutean ideal peer group for Grupa Onet. As a matter of fact, the closest foreign peer is,as we see it, Yahoo!, the world�s premiere Internet portal company. While we arefully aware of the shortcomings of such a comparison, we do believe that in principleGrupa Onet should be priced roughly in line with Yahoo! (Yahoo�s incomparablylarger scale of operations and global leadership offset, as we see it, by probablystronger mid-term growth outlook of the local market where Onet operates).

Such a foreign peer-relative valuation exercise, results in Grupa Onet�s implied EFVin the vicinity of PLN 115-120 per share (both for the comparison with Yahoo! itself,as well as for the comparison with a broader spectrum of companies with exposureto the Internet portal business), i.e. close to our DCF-based assessment of theCompany�s fair value.

Close foreign peersare lacking; Yahoo!seems to be theclosest one

9


E6002 E7002 E8002

:ADTIBE/VE

!oohaY 8.02 9.51 0.31

!oohaYot)tnuocsid(muimerp'tenOapurG %7 %1- %21-

:TIBE/VE

!oohaY 1.72 4.02 2.61

!oohaYot)tnuocsid(muimerp'tenOapurG %9 %3 %9-

:E/P

!oohaY 8.24 8.33 8.72

!oohaYot)tnuocsid(muimerp'tenOapurG %61- %12- %92-

*!oohaYhtiwnosirapmocADTIBE/VEnodesabtenOapurGfoeulaverahsrepdeilpmI 1.701 8.511 2.721

*!oohaYhtiwnosirapmocTIBE/VEnodesabtenOapurGfoeulaverahsrepdeilpmI 9.501 7.111 0.421

*!oohaYhtiwnosirapmocE/PnodesabtenOapurGfoeulaverahsrepdeilpmI 2.331 6.241 4.951

egarevA 4.911

Figure 6. Grupa Onet�s Peer-Relative Valuation; Comparison to Foreign �Pure� Portals- Yahoo!

* including the estimated net realizable value of the discontinued operations (PLN 19.2 m), multiples for GrupaOnet based on, respectively, adj cash EBITDA, adj operating income and adj net income from continued operations(regarding the definitions of adj cash EBITDA, adj operating profit and adj net income from continued operations,please refer to the Appendix to this research report).Source: Reuters, CDM estimates.

E6002 E7002 E8002

:ADTIBE/VE

ilacsiT 3.8 9.5 6.5

enilnO-T 9.9 5.7 0.8

noitaroproCnapaJoohaY 9.73 7.92 9.02

!oohaY 8.02 9.51 0.31

naideM 3.51 7.11 5.01

:TIBE/VE

ilacsiT 4.18 7.61 6.21

enilnO-T 6.51 3.11 3.01


!oohaY 1.72 4.02 2.61

naideM 2.43 6.81 4.41

:E/P

ilacsiT a.n 7.91 6.01

enilnO-T 2.82 8.42 1.72


!oohaY 8.24 8.33 8.72

naideM 8.24 3.92 5.72

:sreePngieroFrofnaideMot)tnuocsid(muimerps'tenOapurG

ADTIBE/VE %64 %43 %9

TIBE/VE %41- %31 %2

E/P %61- %9- %82-

*sreepngierofhtiwnosirapmocADTIBE/VEnodesabtenOapurGfoeulaverahsrepdeilpmI 0.18 4.88 1.601

*sreepngierofhtiwnosirapmocTIBE/VEnodesabtenOapurGfoeulaverahsrepdeilpmI 1.231 6.201 4.211

*sreepngierofhtiwnosirapmocE/PnodesabtenOapurGfoeulaverahsrepdeilpmI 2.331 9.321 4.751

egarevA 2.511

Figure 5. Grupa Onet's Peer-Relative Valuation; Comparison to Foreign Companieswith Portal Exposure

* including the estimated net realizable value of the discontinued operations (PLN 19.2 m), multiples for GrupaOnet based on, respectively, adj cash EBITDA, adj operating income and adj net income from continued operations(regarding the definitions of adj cash EBITDA, adj operating profit and adj net income from continued operations,please refer to the Appendix to this research report).Source: Reuters, CDM estimates.

10


:)NLP(nodesabeulavriafytiuqeerahsreP

*FCD 1.021

*nosirapmocairetnI 6.331

*!oohaY-slatroperup:nosirapmocsreepngierof 4.911

*)ilacsiT,enilnO-T,napaJoohaY,!oohaY(erusopxelatrophtiwseinapmoc:nosirapmocsreepngierof 2.511

egarevA 4.421

Figure 7. Grupa Onet's Valuation: Summary

* including the estimated net realizable value of the discontinued operations (PLN 19.2 m), multiples for GrupaOnet based on, respectively, adj cash EBITDA, adj operating income and adj net income from continued operations(regarding the definitions of adj cash EBITDA, adj operating profit and adj net income from continued operations,please refer to the Appendix to this research report).Source: CDM estimates.

Being fully aware of the shortcomings of exclusive use of only absolute or relativevaluation techniques with respect to fast growth companies (such as Grupa Onet),in setting our 12M forward fair value for the Company�s equities we marry theDCF and peer-relative approaches (luckily for us, their results do not diverge fromeach other materially), which yields 12M EFV assessment of PLN 124.4.

Peer-relative EFVsdo not divergematerially from theDCF�s

11


3. The Internet Advertising Market

Ø The 2003-2005 growth of global Internet ad spend had solid fundamentals;>20% growth rates to extend in the next few years

Ø On-line ads� share in total ad spend is expected to further rise, mainlyat the expense of print

Ø There are two main drivers of the Internet ad spending (both globallyand locally): (i) broadband proliferation, and (ii) increased confidenceof mainstream advertisers in the Internet as an advertising medium

Ø Globally online ad spending exceeded outdoor advertising outlays lastyear, and is expected to outgrow radio in three years

Ø Further rapid growth of broadband penetration and influx of mainstreamadvertisers expected to continue to fuel the expansion of online advertisingin Poland; our next 4-year CAGR stands at 39%

Ø Online advertising seems bound to increase its share in the overalladvertising pie � mainly at the expense of the print media - in Poland,too; with broadband penetration on a steep rise in the coming years,we forecast online advertising to double/triple its share in total ad spendin Poland in next three/five-to-six years

3.1 Global perspectiveFollowing the 2001-2002 post-Internet bubble burst demise, when global online adspend shrank by 17%, Internet advertising rebounded strongly around the globe,rising at >20% rates throughout the regions in past three years. Contrary to the1999-2000 hike in online spending, this growth had solid grounds (we discuss themin the paragraphs that follow), resulting in c. 3 pp increase of the Internet advertising(both branded and in monetized search queries) in the global advertising pie inpast three years (to visualize, please note that last year global advertising spendingexceeded outdoor advertising outlays).

Moreover, we believe a strong case can be made for the extension of the double-digit growth rates in online spending onto next few years (2006-2009E CAGR of 19%),with online advertising rising further its share in total ad spend at the expenseof other media, predominantly print (2009E share of Internet advertising/print mediaof 8.5%/40.3%, up/down from 5.5%/43.2% in 2005E and 2.8%/46.1% in 2002).

While the drivers of the online ad spending did vary to some extent in variousregions of the world, the main ones � proliferation of broadband access and adformats geared to broadband (e.g. full-motion video, keyword search, etc.), increaseduse of the Internet by mainstream advertisers and increased customers� confidencein the Internet as a transaction medium - influenced all the regions. We discussthese drivers below.

1. Broadband proliferation. Growing broadband penetration � either (i) via itsincreased affordability due to declining prices and/or bundled services and/orgovernment promotion (the EMEA, Asia/Pacific and LatAm regions), or (ii) viapremium-priced higher-speed offerings (North America) � has been the principaldriver. The broadband impact on the level of ad spending is two-faceted. First,broadband users tend to spend more time online and use more extensively search

The 2003-2005growth of globalInternet ad spendinghad solidfundamentals;double-digit growthrates to extend innext few years

Expected further riseof on-line ads sharein total ad spend,mainly at theexpense of print

Two main driversof the Internetad spending are�

�growingbroadbandpenetration, and�

12


tnemgeS 8991 9991 0002 1002 2002 3002 4002 E5002 E6002 E7002 E8002 E9002 E6002E9002-RGAC

noisiveleT 558,69 889,101 001,021 239,311 861,811 308,321 379,631 015,341 999,551 769261 643,971 584,681

egnahcyoy %3.8 %3.5 %8.71 %1.5- %7.3 %8.4 %6.01 %8.4 %7.8 %5.4 %1.01 %0.4 %8.6

tenretnI 451,2 164,5 998,01 068,9 130,9 805,11 731,61 140,12 407,52 96503 410,63 504,14

egnahcyoy %1.611 %5.351 %6.99 %5.9- %4.8- %4.72 %2.04 %4.03 %2.22 %9.81 %8.71 %0.51 %4.81

senizagaM 476,24 227,44 080,15 907,64 654,44 041,54 304,74 742,05 319,25 11455 169,75 135,06

egnahcyoy %8.4 %8.4 %2.41 %6.8- %8.4- %5.1 %0.5 %0.6 %3.5 %7.4 %6.4 %4.4 %8.4

srepapsweN 402,69 627,001 632,311 937,501 258,201 904,401 574,901 962,411 684,911 726421 429,921 892,531

egnahcyoy %8.3 %7.4 %4.21 %6.6- %7.2- %5.1 %9.4 %4.4 %6.4 %3.4 %3.4 %1.4 %3.4

oidaR 369,22 726,52 865,92 018,72 238,82 298,92 150,13 304,23 629,33 47553 042,73 699,83

egnahcyoy %9.8 %6.11 %4.51 %9.5- %7.3 %7.3 %9.3 %4.4 %7.4 %9.4 %7.4 %7.4 %7.4

roodtuO 682,31 750,41 981,61 191,61 173,61 480,71 799,71 400,91 131,02 41212 214,22 415,32

egnahcyoy %4.2 %8.5 %2.51 %0.0 %1.1 %4.4 %3.5 %6.5 %9.5 %4.5 %6.5 %9.4 %5.5

latoT 902,472 185,292 270,143 142,023 017,913 638,133 630,953 474,083 951,804 263,034 798,264 922,684

egnahcyoy %4.6 %7.6 %6.61 %1.6- %2.0- %8.3 %2.8 %0.6 %3.7 %4.5 %6.7 %0.5 %3.6

Figure 8. Global Advertising Spending by Ad Market Segment (US$ m)

Source: CDM estimates on the basis of various sources (PwC, Wilkofsky Gruen Associates, JPM, IAB, eMarketer)

Figure 9. Average Time Spent Online by an Internet User in Various Countries

Source: UCLA, World Internet Project 2004, Gemius.

0 4 8 12 16

Singapore

South Korea

China

USA

Germany

Spain

Italy

Sweden

Japan

Hungary

Poland

hours per week per user

engines than the dial-uppers; this drove up the time spent online (compared toflat time spent on watching TV and declining time devoted to readingnewspapers). Second, it gave birth to new (keyword search) and more attractive(rich media � audio and full-motion videos) � compared to the late 1990s banners- advertising formats, which broadened and revamped the Internet advertisingspectrum.

The broadband proliferation made the sponsored keyword search � a modein which advertisers pay search engine companies for positioning (either on thebasis of the per click rates or advertiser�s total spending) their listings in thesearch results � the online advertising category enjoying faster growth than thebranded advertising (sponsored keyword search represents now app. 35-40%of all online ad spending in the USA), and tripled the size of the rich-mediaadvertising in past three years. The development of the keyword search segmentspurred, in turn, the growth of local advertising, devouring print media�sclassifieds business. The broadband penetration is likely to remain the main driverof online ad spending in the next few years, on the back of its further proliferation(the 2006-2009E CAGR of broadband subscribers standing at, respectively,

13


tnemgeS 8991 9991 0002 1002 2002 3002 4002 E5002 E6002 E7002 E8002 E9002

noisiveleT %3.53 %9.43 %2.53 %6.53 %0.73 %3.73 %2.83 %7.73 %2.83 %9.73 %7.83 %4.83

tenretnI %8.0 %9.1 %2.3 %1.3 %8.2 %5.3 %5.4 %5.5 %3.6 %1.7 %8.7 %5.8

senizagaM %6.51 %3.51 %0.51 %6.41 %9.31 %6.31 %2.31 %2.31 %0.31 %9.21 %5.21 %4.21

srepapsweN %1.53 %4.43 %2.33 %0.33 %2.23 %5.13 %5.03 %0.03 %3.92 %0.92 %1.82 %8.72

oidaR %4.8 %8.8 %7.8 %7.8 %0.9 %0.9 %6.8 %5.8 %3.8 %3.8 %0.8 %0.8

roodtuO %8.4 %8.4 %7.4 %1.5 %1.5 %1.5 %0.5 %0.5 %9.4 %9.4 %8.4 %8.4

latoT %0.001 %0.001 %0.001 %0.001 %0.001 %0.001 %0.001 %0.001 %0.001 %0.001 %0.001 %0.001

Figure 10. Global Ad Market - Media Shares (1998-2009E)

Source: CDM estimates on the basis of various sources (PwC, Wilkofsky Gruen Associates, JPM, IAB, eMarketer)

12% for the USA, 21% for Western Europe, 32% for Asia/Pacific, 48% for LatAm,and 11% for Canada).

2. Changed structure of Internet advertisers. During the period preceding theInternet bubble burst the main Internet advertisers were the dot.coms themselves;such a client structure created a vicious circle which at the time of the dot.comindustry demise inescapably led to sharper shrinkage of the online advertisingspending compared to other media. However, the online advertising spendingrecovery we have been witnessing since then is even sharper (2003-2005 CAGRof 33%), and � more important � this time it is driven by the mainstreamadvertisers rather than the dot.coms themselves. Increase in the share thatthe mainstream advertisers allocate to the Internet in their marketing budgetsconstitutes the consequence of their increased confidence in this medium, which� in turn � stems from several other factors: (i) growing Internet audiences(compared to stable/dwindling audiences in other media), (ii) improvedmeasurement systems (a switch from the hit rates � which tended to materiallyoverstate the traffic � to unduplicated users or click-through rates), (iii) morevisibility on improving sales via Internet advertising exposure, and (iv) moreconfidence of users regarding online transactions, making the Internet anincreasingly accepted transaction medium (and the environment in which peopleshop is the place where advertisers want to advertise). With further growthof online audiences and e-commerce levels, mainstream advertisers are likelyto further increase their allocations to Internet advertising.

Both the broadband penetration increases and growing allocation of marketingbudgets to the Internet by the mainstream advertisers are expected tounderpin further growth of the online advertising spending across the world.

�increased confidenceof mainstreamadvertisers in theInternet as anadvertising medium

Figure 11. Global Advertising Market; Cumulative Changes in Market Sharevs. the 1998 (percentage points)

Source: CDM estimates on the basis on data by various sources (PwC, Wilkofsky Gruen Associates, JPM, IAB, eMarketer)

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

10.0

1999 2000 2001 2002 2003 2004 2005E 2006E 2007E 2008E 2009E

Perc

enta

ge

po

ints

Television

Internet

Magazines

Newspapers

Radio

Outdoor

14


Figure 12. Global Internet Advertising Market; 1998 - 2009E

Source: PwC, Wilkofsky Gruen Associates, JPM, IAB, eMarketer, CDM estimates

0

5

10

15

20

25

30

35

40

45

1998 1999 2000 2001 2002 2003 2004 2005E 2006E 2007E 2008E 2009E

US$

bill

ion

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%Global Internet Ad market (US$ billion)

Share of Internet in Global Ad Market

1998-2005E CAGR = 38%

2006E-2009E CAGR = 18%

8991 9991 0002 1002 2002 3002 4002 E5002 E6002 E7002 E8002 E9002 E9002-6002RGAC

ASU 29.1 26.4 32.8 12.7 10.6 24.7 02.01 63.31 81.61 51.91 27.22 83.62

gnhcyoy %7.041 %0.87 %3.21- %6.61- %4.32 %5.73 %0.13 %1.12 %4.81 %6.81 %1.61 %5.81

AEME 21.0 15.0 56.1 35.1 66.1 61.2 64.3 46.4 88.5 80.7 92.8 14.9

gnhcyoy %1.333 %9.222 %0.7- %1.8 %4.03 %8.95 %3.43 %6.62 %5.02 %0.71 %5.31 %3.91

cificaP/aisA 90.0 72.0 98.0 89.0 61.1 86.1 81.2 56.2 71.3 47.3 92.4 97.4

gnhcyoy %6.681 %6.232 %5.01 %5.81 %5.44 %5.92 %8.12 %6.91 %9.71 %9.41 %5.11 %9.51

aciremAnitaL 10.0 20.0 50.0 60.0 70.0 70.0 80.0 11.0 51.0 12.0 82.0 43.0

gnhcyoy %0.043 %8.131 %6.71 %3.8 %6.4 %1.91 %0.73 %7.83 %0.73 %3.13 %7.12 %0.23

adanaC 20.0 40.0 90.0 80.0 41.0 81.0 32.0 82.0 33.0 83.0 44.0 94.0

gnhcyoy %2.221 %5.211 %8.11- %0.08 %8.43 %7.42 %0.22 %1.81 %4.71 %1.41 %3.21 %5.51

latoT 51.2 64.5 09.01 68.9 30.9 15.11 41.61 40.12 07.52 75.03 10.63 14.14

gnhcyoy %5.351 %6.99 %5.9- %4.8- %4.72 %2.04 %4.03 %2.22 %9.81 %8.71 %0.51 %4.81

Figure 13. Internet Advertising Spending in Various Regions; 1998 - 2009E (US$ billion)

Source: PwC, Wilkofsky Gruen Associates, JPM, IAB, CDM estimates.

With double-digit growth rates forecasted for the next few years, online advertisingis expected to continue to increase its share in the global advertising pie, exceedingthe share of the radio in 2009E. While this market share increase is expected to bemade at the expense of practically all the remaining media, the print is likelyto remain the largest ad market share loser.

3.2 Local perspectiveWhile the Internet advertising spending did not contract in Poland during the 2001-2002 post Internet bubble burst era, it constituted merely the consequenceof a fledgling stage of this market and its miniscule size. Nonetheless, the growthof Internet ad spending in this period lagged the expectations � partially due to therecession on the entire advertising market in Poland (we estimate the 2002 net adspend in Poland to shrink by 14% in nominal terms vs. its 2000 pre-recession level),and partially (though in much smaller extent than in the West) due to the demiseof local dot.coms which were also overrepresented among the local Internetadvertising clientele. Still, for past five years, Internet has been consistently growingits share in the local advertising market, reaching c. 2.4% in 2005.

Online advertisingrepresented 2.4%of total advertisingexpendituresin Poland last year

Double-digit growthrates and furthergrowth of the sharein the advertisingpie appear wellgrounded

15


Figure 14. Cumulative Changes in the Advertising Market Shares of Segmentsin Poland against the 2000 benchmark (percentage points)in the 2001 - 2005 period


-10.0

-8.0

-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

2001 2002 2003 2004 2005

TV

radio

outdoor press

non-free-of-charge dailies

Internet

The drivers behind the growth of the Internet advertising spending in Poland werethe same as in the west: (i) secular factors, such as proliferation of broadband (drivenby the late 2003-launched significant prices decreases to private users), growingInternet population or increasing Internet usage levels, and (ii) increased confidenceof mainstream advertisers in the Internet as an advertising medium in Poland.The broadband market in Poland is dominated by TPSA, which with 1,168 thssubscribers (Neostrada + SDI) as of the end of 2005 accounts - according to PMR- for c. 58% of all broadband subscribers3. DSL is expected to continue to be themain driver behind further proliferation of broadband in Poland; by the end of 2008Eits share - currently standing at app. 60% - is forecasted to increase to c. 75%.With broadband penetration on further rise, "safe" (i.e. dominated by mainstreamadvertisers) structure of advertising clients, continued tendency for gradualmigration of ads from traditional media to electronic media (visible both globallyand locally), and sound outlook for further growth of the overall ad spend in theeconomy (fuelled finally by the investments pick-up), continued dynamic growth

Broadbandproliferation andinflux of mainstreamadvertisers underpinthe growth of onlinead spend

Figure 15. Split of Internet Advertising Spending in Poland by Customer (Advertiser)Type in 2004

Source: IAB

Telco20%

Other20%

Financials27%

Transport & Leisure

12%

Technology6%

FMCG15%

Mainstream advertisers clearly dominate

3 The remaining 42% of the market is occupied by: (i) CATVs (app. 18%), (ii) LANs(app. 18%) and (iii) other broadband connection modes (non-TPSA�s DSLs, radioand satellite).

16


Figure 17. Broadband Internet Users in Poland; 2001 - 2008E

Source: PMR

0.210.47

0.71

1.26

2.04

2.96

4.04

5.04

0

1

2

3

4

5

6

2001 2002 2003 2004 2005 2006E 2007E 2008E

0%

20%

40%

60%

80%

100%

120%

140%The Number of Broadband Internet Users in Poland

% yoy chng

mill

ion

Figure 16. Split of Onet�s Internet Advertising Revenues by Customer (Advertiser)Type in 2005

Source: Company

Food9%

Beauty Products4%

Healthcare4%

Other6%

Interior design11%

Entertainment11%

Financials22%

Automotive & Transportation

16%Telecommunications

17%

Mainstream advertisers clearly dominate

of online advertising spending in Poland - resulting in a rising share of the Internetin the overall advertising pie - appears firmly grounded in the coming years.The important question is: how much further we can go from here, or what thetarget share of the online ad spending in the overall advertising market may be.

With broadbandpenetration on a steeprise in the comingyears, we forecastonline advertising todouble/triple its sharein total ad spend innext three/five-to-sixyears

Looking at the share of the Internet advertising in the total ad outlays in variousregions of the world as well as in various European countries, we feel reasonablycomfortable expecting supernatural growth of online ad spending in Polandpersisting as long as the broadband proliferation quickly progresses; this � in turn �is expected at least for next three-four years. Consequently, for 2009E we forecastInternet advertising to account for c. 6% of the total advertising pie, up from 2.4%in 2005 and 3.2% in 2006E (implied 2006-2009E CAGR of 39%). This would putus slightly below the EMEA average for that year (6.5%). In the long term, weperceive the vicinity of >8% as the target share of online spending in the advertisingpie in Poland.

17


Figure 18. Share of Internet in Ad Spending in Various Regions; 1998 - 2009E

Source: CDM estimates on the basis of various sources (PwC, Wilkofsky Gruen Associates, JPM, IAB, eMarketer),CDM estimates.

0%

2%

4%

6%

8%

10%

12%

1998 1999 2000 2001 2002 2003 2004 2005E 2006E 2007E 2008E 2009E

PolandUSAEMEAAsia/Pacific

Latin AmericaCanada World

3002 4002 E5002 E6002 E7002

dnalnniF %8.1 %4.3 %1.5 %5.6 %9.6

ecnarF %4.1 %4.2 %4.3 %5.4 %0.5

dnalerI %7.0 %3.1 %0.2 %6.2 %6.3

sdnalrehteN %9.1 %4.3 %2.5 %7.6 %2.7

niapS %3.1 %7.1 %1.2 %7.2 %3.3

ynamreG %2.1 %2.2 %4.3 %7.4 %4.5

dnaloP %1.1 %7.1 %4.2 %2.3 %1.4

modgniKdetinU %7.1 %9.2 %4.4 %6.5 %1.6

ylatI %6.0 %2.1 %0.2 %9.2 %7.3

Figure 19. Share of Internet in Ad Spending in Various European Countries; 2003-2007E

Source: Forrester Research, IAB, CDM estimates

Figure 20. Cumulative Changes in the Advertising Market Shares of Segmentsin Poland against the 2005 benchmark (percentage points)in the 2006E-2015E period


-6.0

-4.0

-2.0

0.0

2.0

4.0

6.0

8.0

2006E 2007E 2008E 2009E 2010E 2011E 2012E 2013E 2014E 2015E

pp

TV radio outdoor press non-free-of-charge dailies magazinesInternet

18


Figure 21. Internet Advertising Market in Poland; 2000 - 2015E


0

200

400

600

800

1 000

1 200

2000

2001

2002

2003

2004

2005

2006

E

2007

E

2008

E

2009

E

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E

0%

1%

2%

3%

4%

5%

6%

7%

8%

9%Net Cash Internet Ad Spending in Poland (PLN m)

Share of Internet in Polish Ad Market (%)

2000-2005 CAGR = 54%

2006E-2009E CAGR = 39%

2006E-2015E CAGR = 21%

PLN

m

19

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SAG

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et

)mNLP( 8991 9991 0002 1002 2002 3002 4002 5002 E6002 E7002 E8002 E9002 E0102 E1102 E2102 E3102 E4102 E5102 89915002-RGAC

6002E9002-RGAC

6002E5102-RGAC

tekramehtfoeziS

tekramdA 9.949,3 4.339,4 2.752,5 9.040,5 0.225,4 8.925,4 2.170,5 2.027,5 1.683,6 2.010,7 2.546,7 2.842,8 4.097,8 6.182,9 2.627,9 2.471,01 9.126,01 4.980,11

VT- 2.287,1 0.972,2 0.352,2 4.512,2 6.031,2 7.121,2 3.104,2 7.076,2 9.520,3 8.913,3 5.406,3 2.868,3 3.990,4 4.723,4 7.025,4 7.227,4 8.339,4 2.451,5

oidar- 9.203 5.563 2.473 1.243 5.133 3.063 9.724 9.284 7.735 1.885 8.436 3.776 7.317 3.847 8.087 8.418 2.058 1.788

roodtuo- 1.282 9.163 7.493 6.293 9.243 6.763 3.673 0.474 7.615 2.555 6.895 9.736 3.176 0.307 7.237 6.367 8.597 4.928

sserp- 7.285,1 0.729,1 3.912,2 8.660,2 0.486,1 2.036,1 7.877,1 6.459,1 9.890,2 2.752,2 1.614,2 1.655,2 4.076,2 8.177,2 8.788,2 6.800,3 5.431,3 6.562,3

tenretnI- .a.n .a.n 0.61 0.42 0.33 0.05 0.78 0.831 0.702 8.982 2.193 6.805 7.536 1.137 2.408 5.468 8.709 2.359

tekramehtniserahS

VT- %1.54 %2.64 %9.24 %9.34 %1.74 %8.64 %4.74 %7.64 %4.74 %4.74 %1.74 %9.64 %6.64 %6.64 %5.64 %4.64 %4.64 %5.64

oidar- %7.7 %4.7 %1.7 %8.6 %3.7 %0.8 %4.8 %4.8 %4.8 %4.8 %3.8 %2.8 %1.8 %1.8 %0.8 %0.8 %0.8 %0.8

roodtuo- %1.7 %3.7 %5.7 %8.7 %6.7 %1.8 %4.7 %3.8 %1.8 %9.7 %8.7 %7.7 %6.7 %6.7 %5.7 %5.7 %5.7 %5.7

sserp- %1.04 %1.93 %2.24 %0.14 %2.73 %0.63 %1.53 %2.43 %9.23 %2.23 %6.13 %0.13 %4.03 %9.92 %7.92 %6.92 %5.92 %4.92

tenretnI- .a.n .a.n %3.0 %5.0 %7.0 %1.1 %7.1 %4.2 %2.3 %1.4 %1.5 %2.6 %2.7 %9.7 %3.8 %5.8 %5.8 %6.8

egnahclanimonyoY

tekramdA %9.42 %6.6 %1.4- %3.01- %2.0 %0.21 %8.21 %6.11 %8.9 %1.9 %9.7 %6.6 %6.5 %8.4 %6.4 %4.4 %4.4 %4.5 %6.9 %8.6

VT- %9.72 %1.1- %7.1- %8.3- %4.0- %2.31 %2.11 %3.31 %7.9 %6.8 %3.7 %0.6 %6.5 %5.4 %5.4 %5.4 %5.4 %9.5 %7.9 %8.6

oidar- %7.02 %4.2 %6.8- %1.3- %7.8 %8.81 %9.21 %3.11 %4.9 %9.7 %7.6 %4.5 %9.4 %3.4 %3.4 %3.4 %3.4 %9.6 %8.8 %3.6

roodtuo- %3.82 %1.9 %5.0- %7.21- %2.7 %4.2 %0.62 %0.9 %5.7 %8.7 %6.6 %2.5 %7.4 %2.4 %2.4 %2.4 %2.4 %7.7 %7.7 %8.5

sserp- %8.12 %2.51 %9.6- %5.81- %2.3- %1.9 %9.9 %4.7 %5.7 %0.7 %8.5 %5.4 %8.3 %2.4 %2.4 %2.4 %2.4 %1.3 %9.6 %3.5

tenretnI- .a.n .a.n %0.05 %5.73 %5.15 %0.47 %6.85 %0.05 %0.04 %0.53 %0.03 %0.52 %0.51 %0.01 %5.7 %0.5 %0.5 %9.35 %6.83 %3.12

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VT- %2.91 %2.01- %8.6- %6.5- %2.1- %4.9 %9.8 %5.11 %8.6 %6.5 %1.5 %1.4 %7.3 %6.2 %6.2 %6.2 %6.2 %5.1 %2.7 %7.4

oidar- %5.21 %0.7- %4.31- %9.4- %8.7 %7.41 %5.01 %6.9 %5.6 %0.5 %5.4 %5.3 %0.3 %5.2 %5.2 %5.2 %5.2 %4.2 %4.6 %2.4

roodtuo- %5.91 %9.0- %7.5- %3.41- %4.6 %1.1- %4.32 %3.7 %6.4 %9.4 %4.4 %4.3 %9.2 %4.2 %4.2 %4.2 %4.2 %1.3 %3.5 %7.3

sserp- %5.31 %6.4 %7.11- %0.02- %0.4- %4.5 %6.7 %7.5 %7.4 %1.4 %6.3 %6.2 %0.2 %3.2 %3.2 %3.2 %3.2 %3.1- %5.4 %2.3

tenretnI- .a.n .a.n %2.24 %9.43 %3.05 %1.86 %4.55 %6.74 %3.63 %3.13 %3.72 %8.22 %0.31 %1.8 %6.5 %1.3 %1.3 %8.94 %4.53 %9.81

PDG/dnepSdAteN %7.0 %8.0 %7.0 %7.0 %6.0 %6.0 %6.0 %6.0 %6.0 %6.0 %7.0 %7.0 %7.0 %7.0 %7.0 %6.0 %6.0 %6.0

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Figure 22. The Advertising Market in Poland; 1998 - 2015E

Note: current prices, after discounts.Source: CDM estimates on the basis of various sources

20


4. Business Model and Competitive Position

Ø The post Optimus de-merger restructuring of the Company and non-coreassets divestiture process have been almost completed

Ø Portal = online advertising + user services (information, communication& community, search & transactional)

Ø Portal�s business model is similar to other media business: provide attractivecontent and services to attract and keep wide audience, charge them onselected services, and subsequently monetize via �selling� them to theadvertisers

Ø Onet capitalized well upon its early-comer advantage and the synergiesresulting from its membership in a larger media group, maintaining itsno. 1 position among local portals, in terms of both the share of Internetusers� time spent online and the share in online advertising

4.1 BackgroundThe origins of Grupa Onet date back to the operations of Optimus, the first WSElisted company from the IT sector. Succeeding in the desktop assembly area Optimusexpanded in the second half of 1990s into an array of activities � fiscal cash registers,computer accessories, notebooks, third-party hardware distribution, integrationservices, multimedia, real estate, B2B marketplaces and � last but not least� a horizontal Internet portal (Onet.pl). Without clear business strategy andundefined core competences, the increasingly diversified business portfolio ofOptimus became increasingly difficult to manage, which - in turn � put a drag on itsfinancial results. The rescue strategy for Optimus, introduced in 2001, provided forthe de-merger or split of the company into two: (i) an entity encompassing mediaassets (inclusive of Onet.pl, the Internet portal), in which ITI (the leading domesticmedia group, holding controlling stakes in WSE-listed leading commercial televisionbroadcaster TVN, and the Multikino multiplexes chain) took the controlling stake,and (ii) an entity encompassing other assets. In January 2002 the de-merger of formerOptimus became effective with the company�s two successors, Grupa Onet andOptimus Technologie, simultaneously starting their WSE-listing.

Since then Grupa Onet � from the practical point of view ITI�s holding vehicle of theassets inherited from Optimus� de-merger - has been consistently pursuing the non-core asset divestment process (e.g. the 2004 sale of DrQ IT company). As this processhas been already largely completed � the sole non-core business of tourist guidespublishing (Pascal) left � and the rationale for maintaining the holding structureceased to exist, this month Grupa Onet has merged with its wholly-owned subsidiaryOnet (Internet portal operator).

Grupa Onetoriginates from thede-merger ofOptimus in twoparts: the media andthe technology

Past few years havebeen devoted to non-core assetsdivestment, aprocess which islargely completed

4.2 Market position and competition issuesThe Internet hype of 2000 spurred an array of horizontal Internet portal projectsin Poland; the excessive number of players coupled with the shallowness of theInternet advertising market, external financing needs at the early stages (to coverhigh fixed costs) and the economics of the portal business favouring (i) market leaders(operating leverage argument), and (ii) players with ties with telecommunicationand media companies (synergies with ISPs and in content sourcing area),

Only the fittest localportals survived theInternet bubbleburst

21

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Figure 23. Internet Portals Market in Poland; the Big Picture

Note: Data for December 2005.Source: Companies, PBI/Gemius

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22


resulted in a number of wind-ups, with such names as Arena, Poland.com or Ahojerased from the landscape. Putting aside o2 (privately-held late-comer), survivingportals proved to be the early-comers (Onet, wp) and/or players with support offinancially strong TMT groups (Onet, wp, Interia, gazeta.pl). The past few years�growth of the online ad spending made most survivors profitable companies; Onetand Interia have already became net income positive, whereas Agora�s gazeta.plreached positive EBITDA for 2005.

Onet capitalized well upon its early entrant advantage (and upon ITI�s support atlater stages), maintaining its leading position in terms of both the cash online adver-tising market share (c. 38% in 2005 - we discuss this issue more thoroughly in theFinancial Forecast section), and the range of underlying user statistics. The numberof users, reach, page-views or time spent by users on portal pages (a measure of howInternet users divide their online time among various websites, i.e. effectively a coun-terpart of the listenership/viewership shares in radio/television) indicate Onet�s ma-terial competitive advantage over competing domestic portals; e.g. in December2005, 18.3% of local Internet users total time spent online was spent on Onet�s pages,a result better by over 50% than for the runner-up (wp), and almost three timesbetter than for the no. 3 local player (Interia).

Onet leads the localportals� pack interms of users,reach, page-viewsand share in timespent online

Figure 24. Internet Portals in Poland: Number of Users

Source: PBI/Gemius

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Figure 25. Internet Portals in Poland: Monthly Reach

Source: PBI/Gemius

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Reach measures the degree of popularity in the population of Internet users

Figure 26. Internet Portals in Poland: Number of MonthlyPage-Views

Source: PBI/Gemius

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Figure 27. Internet Portals in Poland: Page-views per user

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23


Figure 28. Internet Portals in Poland: Total Time Spent by Users on Portal's Pages

Source: PBI/Gemius

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Figure 29. Internet Portals in Poland: Average Timeper User Spent on Portal's Pages (monthly data)

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4.3 Business modelAt the moment Grupa Onet runs two businesses: (i) an Internet portal, and (ii) touristguides publishing. The former constitutes the core business that the Company wantsto keep and further develop (since the very inception of ITI�s engagement in Optimus�non-technology assets the Internet portal has constituted the sole asset of ultimateinterest). Given the strategy of the strategic investor, ITI (media group), a divestmentconstitutes the action plan for the latter, which � consequently � is presented in theCompany�s financials as a discontinued activity (we discuss more thoroughly thetechnicalities of Grupa Onet�s financial statements in the Financials section).

Continued operationsAs noted above, continued operations of the Company comprise the no. 1 localInternet portal, Onet.pl. In terms of business lines (or, more precisely speaking,revenue streams) two broad (and inter-related) service types can be mapped:(i) individual user services (thereafter user services), and (ii) marketing services(i.e. effectively online advertising services). The link between the two groupsis inherently embedded in the Internet horizontal portal business model: attractivecontent and services are offered to individual end-users in a move aimed at attractingwide (and preferably loyal) audience, and subsequently monetizing the audiencereach via �selling� it to the advertisers (marketing services).

User servicesThe Company offers Internet users three main groups of services: (i) informationservices, (ii) communication and community services, and (iii) search and transactionalservices. We discuss them briefly below.

The information services - updated political, business, weather, sport, music, tourism,feature movies, healthcare, beauty and science news (here the synergy from being apart of a multi-media capital group becomes evident) as well as topical services devotedto these areas - are offered predominantly free-of-charge to the users with the primaryaim of attracting and keeping the user in order to have him/her monetized elsewhere(i.e. in the marketing services area), though in some cases � e.g. OnetPlejer (serviceintroduced a year ago in co-operation with OD2, which enables users to legally listen,download and record more than 600 ths music clips and video-clips) or Turystyka.Onet.pl(service which on the top of travelling news base enables online purchase of tickets) �there is a direct link to monetize the user in the transactional area.

Internet = continuedoperations

Publishing =discontinuedoperations

User services andonline advertisingare inter-relatedand permanentlyembedded in anInternet portalbusiness model

Three groups of userservices�

�information,�

24

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Figure 30. Main Paid User Services of Onet

Source: Company

25


The Company�s communication and community services encompass both servicesprovided free-of-charge (e.g. blog, chat, basic email, etc.) and those renderedfor a fee (e.g. Sympatia dating service, Internet access services or telecommunicationservices, etc.).

Finally, Onet�s search services encompass search tools such as a search engine,catalogue of web pages or online corporate yellow pages, whereas in thetransactional area the Company offers such e-commerce facilitators as an auctionservice (Aukcje.Onet.pl � launched with co-operation of the local online auctionleader, Allegro), e-commerce district (Pasaz.Onet.pl), and classifieds.

The Company�s range of user services continually evolves to adjust to technologicalchanges and swings in users� tastes. The launch of new services in the access,telecommunication and entertainment area is likely in 2006-2007. In thecommunication area Grupa Onet intends to broaden the range of services connectedwith the Skype communicator. It also contemplates a launch of broadband Internetaccess service and/or becoming a MVNO (Mobile Virtual Network Operator), thoughno decisions in this regard have been made yet. In the entertainment area newaudio and video functionalities are to be added.

Marketing servicesThe second stream of Grupa Onet�s revenues comes from the marketing services.Here the advertisers pay the Company for the access to the viewers� eyeballs. In thisarea the Company targets two groups of customers: (i) advertisers promoting theirown brand or product, and (ii) entities informing about their activities with useof search tools (e.g. via the OnetBoksy service, enabling ads placement right nextto search results, increasing the probability of targeting interested users). In 4Q05the Company introduced the geo-localization service which enables advertisersto target specific customers by region (main feature on local markets). Onet hasbeen uninterruptedly a leader on the online advertising market (c. 38% share lastyear), and the Company�s leadership in this area stems � apart from portal�s supremereach and share in time spent online by Internet users � from very broad arrayof advertising tools and advertising presentation methods.

Discontinued operationsThe tourist guide publishing, conducted via Pascal subsidiary, is the last non-core(i.e. non-Internet) asset of Grupa Onet. Although a divestment constitutes theCompany�s ultimate strategy for these assets, Grupa Onet will not be pushing hardto accomplish this goal as soon as possible, due to improving financial results of Pascalcoupled with its self-financing capacity. In other words, the Company may waita few quarters more with the sell-off, as with improved financial results, the pricebids for Pascal should also go up.

� communication& community and�

� and search& transactional

The range of userservices continuallyevolves

Leading positionin online advertising

Tourist guidepublishing � the lastof non-core assets

26


5. Financials

Ø The results of Pascal (discontinued operations) shown as a net entry at thebottom of income statement

Ø Unlike the user services revenues, online advertising sales are stronglyseasonal

Ø Barter marketing sales and costs may diverge widely in quarterly intervals,distorting the underlying profitability; while for FY periods they tend tolargely offset one another, historically this offset has not been perfect

Ø The IFRS2 stock option cost impact in the 2006-2007E period will be material

Ø Financial income/costs sit in Grupa Onet�s P&L at the pre-EBITDA level;we push them below EBIT where they belong

Ø Cash taxes expected since 2Q07E; by then deferred tax assets will beamortised

Ø Some adjustments to the reported numbers are needed to get a truer andfairer picture of the Company�s earnings power

5.1 Continued vs. discontinued operationsAs noted in the preceding sections, at the moment Grupa Onet runs two businesses:(i) Internet portal Onet.pl, and (ii) tourist guide publishing (Pascal), with the latterearmarked for a divestment. Consequently, the results of the latter business do notshow up in the Company�s revenues, operating costs and operating profit, but areshown � as a net entry � at the bottom line level (net income from continuedoperations (Internet) + net income from discontinued operations (Pascal) = netincome).

Pascal�s resultsshown as a net entryat the bottomof P&L

Strong seasonalityof online ad revenuesand in tourist guidepublishing, noseasonality in userservices revenues

5.2 SeasonalityWhile talking about seasonality in the case of Grupa Onet we need to differentiatebetween: (i) marketing revenues, (ii) user services revenues, and (iii) tourist guidebusiness (discontinued operations). Marketing revenues follow the typical seasonalpattern of advertising spending, with seasonal peaks in 2Q and (especially) 4Q, andtroughs in 1Q and 3Q. The revenues from user services are not seasonal, except fromsome slowdown in the holiday season. Finally Pascal�s tourist guide publishing businessexhibits the seasonality typical for the tourism sector, with a strong seasonal peakin the April-August period, and seasonal slump during the remainder of the year.

5.3 Barter revenues and costsLast year app. 21%/17% of marketing/total revenues of Grupa Onet was derivedfrom barter marketing sales. In the Internet (similar to radio or print) promotionof the brand and services constitutes a must for attracting the users� eyes and� which follows � cash advertising budgets. The Company tends to promote its brandand services as much as possible via ad barters swaps (i.e. paying for its advertisementsin other media (television, dailies, magazines, etc.) with advertisements of thesemedia on Onet.pl�s pages. Barter ad swaps constitute a common way of promotion

Barter marketing salesand barter marketingcosts may diverge widelyin quarterly intervals,distorting the underlyingprofitability...

27


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Figure 31. Stock Option Program in Grupa Onet


of media companies. While in quarterly intervals the value of barter revenues andcosts may materially diverge (resulting in significant distortions of the reportedprofit numbers), during FY periods they tend to offset each other. However theoffset is not always perfect - e.g. in 2004 (2005), according to our estimates, barterrevenues exceeded (fell short of) barter costs by PLN 0.8 million/(PLN 0.6 million),resulting in an overstatement (understatement) of the reported profits. For thisreason, we believe it makes sense when assessing the Company�s underlyingprofitability to adjust (exclude) for the impact of these non-cash transactions.

...while for FYperiods they tend tolargely offset oneanother, historicallythis offset has notbeen perfect

The IFRS2 stockoption cost impactin the 2006-2007Eperiod will bematerial

5.4 Stock option programWithin the stock option program for the management and key employees GrupaOnet may issue � in four tranches - up to 400 ths shares. While the IFRS2 cost of thefirst tranche (PLN 2.5 million) is relatively low, according to our estimates the costof the remaining three tranches will be much larger (c. PLN 21 million), and willmaterially depress the Company�s reported profits, with the main hit coming in the2006-2007E period. We invariably believe that the IFRS2 stock option costs shouldbe adjusted for in assessing business�s underlying profitability.

5.5 Financial income and costsUnder the �other gains/losses� caption (coming at the pre-EBITDA level) Grupa Onetclassifies not only other gains/losses of operating nature (e.g. fixed assets impairmentsor receivables� write-backs), but also gains and losses of purely financial nature(e.g. interest earned and due, FX gains/losses). While such an approach is allowedby IFRS, and so far the resultant distortions of the reported EBITDA and operatingprofit figures were not large, in assessing the underlying operating profitabilityof Grupa Onet we push the financial gains and losses down where they belongbelow the EBITDA level.

Financial income/costs sit in GrupaOnet�s P&L at thepre-EBITDA level

28


5.6 Tax issuesDue to past years� losses, the Company still has c. PLN 40 million of tax loss carryforwards for utilization in 2006E and beyond. While in cash terms, we estimate thatGrupa Onet will start to pay taxes only in 2Q07E, the accrual tax burden will be seenin its income statement both in 2006E and 1Q07E (as it was in 2005), due to earlierrecognition via P&L of resultant deferred tax asset, which now needs to be reversedin line with the generation of taxable profits.

Having firmly crept out of the red, seeing soon exhaustion of the tax-loss carry-forwards, and being headquartered in Cracow, the Company investigates thefeasibility of optimizing its cash taxes via reallocating its operations to the Cracow�sTechnology Park Special Economic Zone (SEZ). At the moment, however, the benefitsrelated to such a possible move have not been quantified and, which follows, thedecision in this regard has not been made. For the purposes of our forecast ofGrupa Onet�s financial results (and valuation of its equities), we have assumed thatfrom 2Q07E (after the remaining tax-loss carry-forwards are fully utilized) theCompany starts to pay normal 19% corporate income tax. Thus, the possible cashtax savings stemming from the Company�s possible move to the Cracow�s SEZconstitute at the moment a pure upside to our forecast of the Company�s net profit(and our assessment of Grupa Onet�s EFV).

Cash taxes expectedsince 2H07E; bythen deferred taxassets will beamortised

A potential moveto Cracow�s SEZ maybe used to optimizecash corporate taxes

To get a truer andfairer picture of theCompany�s earningspower, we believesome adjustmentsto the reportedfigures are needed

5.7 Company-specific P&L technicalitiesAs explained in the preceding sections, there are a handful of factors (gains/losseson barter transactions, IFRS option costs, financial gains/costs booked at the pre-EBITDA level, etc.) that need to be adjusted for in order to get a better pictureof the Company�s underlying profitability and earnings power. This view iscorroborated by the Company�s management itself, as evidenced by additional,company-specific, EBITDA measures (operating EBITDA, cash EBITDA) shownin the published financial statements. While this is both justified and desirable, giventhe Company�s business model, we (i) find some other adjustments at the EBITDAlevel needed (e.g. the management�s �cash EBITDA� excludes all of other operatinggains/costs, including those that � as we see it � represent a recurring phenomenon(lost and/or recovered trading receivables)), and (ii) see a need for such adjustmentsalso in �lower� parts of the Company�s income statement (i.e. at the operatingprofit and net profit levels). A detailed listing of the adjustments made to Company�searnings at various levels of its income statement is presented in the Appendixto this research report.

29


6. Financial Forecast

Ø While further erosion of Onet�s share in online ad spending seemsinevitable in longer term, its pace is likely to be slow; Onet�s no. 1 positionon the domestic online advertising scene seems unrivalled in theforeseeable future

Ø The growth of user services sales depends upon the average �maturity�of the service portfolio; bulk of Onet�s user services will be in the growthphase of their respective lifecycles for the next few years

Ø Due to a hike in IFRS2 stock option costs, reported EBITDA and NI for 2006Ewill be depressed, showing only moderate yoy increase

Ø The imminent growth of HR, content, bandwidth, marketing and rentalcosts coupled with increased investments are likely to result in dilutionof cash EBITDA margin in the next two-three years below the 40% level;in longer-term, however, the Company should return above 40% at thecash EBITDA level

Ø Notwithstanding the mid-term margin dilution, we forecast brisk growthof the Company�s adj. cash EBITDA and adj. NI from continued operations(the two fairest � in our opinion � indicators of its business model inherentprofitability) in the coming years, with 2006-2009E CAGRs of, respectively,36% and 37%

Our forecast of Grupa Onet�s financial results encompasses only the organic growthof the business, without the impact of the acquisitions which the Company may(though does not have to) conclude. We also abstract from the new equity issueat Grupa Onet, which again may � though does not have to � take place this year.

6.1 RevenuesWhile forecasting the Company�s revenues we have differentiated between(i) marketing revenues (which � in turn � we disaggregate into cash revenuesand barter sales) and (ii) user services sales (without further decomposition intoparticular services).

Our forecast of the Company�s cash marketing revenues constitutes the functionof the assumed share in online advertising in Poland. For 2006E we assume � in linewith the management�s guidance � flat yoy share (i.e. growth in line with the market).In the short term we see this assumption justified, given developed tools (e.g. geo-localization) to benefit from the keyword search advertising growth (the fastestgrowing segment of the online advertising, both globally and locally4) � last yearOnet�s keyword search ad revenues soared 62%, largely due to CPC-based (Cost PerClick) solutions. However beyond 2006E we assume the Company�s share in onlineadvertising to slowly decline, from current 38% to c. 30% in seven years. This would

Differentiate between(i) cash/ barter, and(ii) marketing/ userrevenues

Cash marketing sales= function of assumedshare in onlineadvertising market

4 The share of keyword search advertising in total online advertising spending in Poland (c. 10-15%)is much lower than in the USA (35-40%). While this share is likely to grow locally in the coming years,such gap (relative to US) is characteristic for all Europe, and we rather find it unlikely to cease to exit(due to much heavier use of Internet for business purposes by local-market-oriented SMEs overseas).

30


While the Company�s barter marketing revenues have been rising for last few yearsin absolute terms, their share in total marketing revenues was on a steep decline(to c. 21% last year), which � obviously � was a favourable phenomenon, given their�no-margin� nature. We expect this trend to continue; assuming barter marketingrevenues to rise at inflation rate, we see their share in the Company�s total marketingrevenues declining to c. 10% in 2008E and c. 6% in 5-year time.

The yoy dynamics of the Company�s user services sales depends upon the stagein the lifecycle of the overall portfolio of services, the balance (or lack of thereof)between new paid service launches and mature paid service wind-ups, as well as theactual growth of the services positioned in the growth phase of their lifecycle.As noted in the Business Model section, aside from OnetModem and OnetSatelitaaccess services (and perhaps also hosting), the current range of the Company�s userservices is positioned at the growth phase of the lifecycle (and additionally newservice launches are planned). For this reason, we assume Grupa Onet�s user servicessales to grow broadly in line with the cash marketing sales (brisk growth in nextfive years, and deceleration thereafter).

Gathering the above bits together, we forecast Grupa Onet�s this year�s total (cash)sales at PLN 119 million (PLN 105 million), up 40% (47%) yoy, seeing the next five-year CAGR at app. 28% (32%); we assume the Company�s consolidated top-linegrowth to decelerate to a single-digit rate in five-six years (when the broadbandpenetration growth decelerates).

Barter marketingsales fairly stablein coming years

The growth of userservices sales dependsupon the average�maturity� of theservice portfolio; bulkof Onet�s user serviceswill be in the growthphase for next fewyears

be, as we see it, a natural tendency (as a matter of fact, as an early comer to themarket, Onet faces such a trend since its inception), resulting from the Company�sdominant market position coupled with an increasing number of players fightingfor a share in the growing pool of online advertising money. Nonetheless, we believeOnet�s online ad market share erosion will be slow, on the back of the Company�s(i) proven edge in broadening the scope of ad formats ahead of local competitors,(ii) proven skills in optimizing online ad campaign models, and (iii) developmentof local sales forces (aimed at winning new clients on the local markets).

Figure 32. Onet�s Share in Internet Cash Advertising Spending in Poland


Next five-year CAGRof cash revenuesseen at >30%

In LT decline of Onet�sshare seems inevitable,though simultaneouslythis expected declineshould not pose a threatto the Company�sunrivalled position

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

2001

2002

2003

2004

2005

2006

E

2007

E

2008

E

2009

E

2010

E

2011

E

2012

E

2013

E

2014

E

2015

E

31


)mNLP( 4002 5002 E6002 E7002 E8002 E9002 E0102 E1102 E2102 E3102 E4102 E5102

:selaslatoT 4.36 0.58 9.811 1.651 2.991 8.642 1.592 9.523 7.053 6.963 5.883 4.804

seuneverremusnoC- 0.41 6.81 0.62 2.53 8.54 2.85 2.17 0.08 5.78 7.39 3.99 3.501

:secivresgnitekraM- 5.94 5.66 9.29 9.021 4.351 6.881 9.322 9.542 2.362 9.572 2.982 1.303

hsaC- 2.63 4.25 6.87 2.601 3.831 2.371 2.802 9.922 9.642 4.952 3.272 9.582

sretraB- 3.31 1.41 3.41 7.41 1.51 4.51 7.51 0.61 3.61 6.61 9.61 2.71

rehtO- 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

seuneverhsaC- 1.05 9.07 6.401 4.141 1.481 4.132 4.972 0.013 4.433 1.353 6.173 2.193

seuneverretraB- 3.31 1.41 3.41 7.41 1.51 4.51 7.51 0.61 3.61 6.61 9.61 2.71

Figure 33. Grupa Onet�s Sales Split; 2004 � 2015E


5002 E6002 E7002 E8002 E9002 E0102 E1102 E2102 E3102 E4102 E5102

:selaslatoT %43 %04 %13 %82 %42 %02 %01 %8 %5 %5 %5

seuneverremusnoC- %33 %04 %53 %03 %72 %22 %21 %9 %7 %6 %6

:secivresgnitekraM- %43 %04 %03 %72 %32 %91 %01 %7 %5 %5 %5

hsaC- %54 %05 %53 %03 %52 %02 %01 %7 %5 %5 %5

sretraB- %6 %2 %3 %3 %2 %2 %2 %2 %2 %2 %2

rehtO- .m.n .m.n .m.n .m.n .m.n .m.n .m.n .m.n .m.n .m.n .m.n

seuneverhsaC- %24 %74 %53 %03 %62 %12 %11 %8 %6 %5 %5

seuneverretraB- %6 %2 %3 %3 %2 %2 %2 %2 %2 %2 %2

Figure 34. Grupa Onet�s Sales yoy Change; 2005 � 2015E


4002 5002 E6002 E7002 E8002 E9002 E0102 E1102 E2102 E3102 E4102 E5102

:selaslatoT %001 %001 %001 %001 %001 %001 %001 %001 %001 %001 %001 %001

seuneverremusnoC- %22 %22 %22 %32 %32 %42 %42 %52 %52 %52 %62 %62

:secivresgnitekraM- %87 %87 %87 %77 %77 %67 %67 %57 %57 %57 %47 %47

hsaC- %75 %26 %66 %86 %96 %07 %17 %17 %07 %07 %07 %07

sretraB- %12 %71 %21 %9 %8 %6 %5 %5 %5 %4 %4 %4

rehtO- %0 %0 %0 %0 %0 %0 %0 %0 %0 %0 %0 %0

seuneverhsaC- %97 %38 %88 %19 %29 %49 %59 %59 %59 %69 %69 %69

seuneverretraB- %12 %71 %21 %9 %8 %6 %5 %5 %5 %4 %4 %4

Figure 35. Grupa Onet�s Sales Structure; 2004 � 2015E


6.2 Operating costsWhile forecasting the Company�s margins and profits the main categories of theoperating costs need to be scrutinized. In our cost exercise we looked at the possibledrivers of eight operating cost components: (i) marketing costs (barter), (ii) marketingcosts (cash), (iii) HR costs (IFRS2 stock option costs), (iv) HR (cash), (v) office spacerentals, (vi) content costs, (vii) bandwidth transmission costs, and (viii) D&A.We discuss them briefly below.

1. Barter marketing costs. As explained in the Financials section in annual periodsbarter marketing costs tend to almost perfectly match barter marketing revenues.In our forecast we assume a perfect match throughout the entire period.Such an assumption not only constitutes a very close proxy on reality, but alsoimplies zero impact of the barter transactions on the Company�s FY reportedprofits.

2. Cash marketing costs. For the last few years Grupa Onet�s cash expenses formarketing have been fairly low. In the coming years, however, they are expectedto increase, largely due to planned launches of new services.

We look at a rangeof the Company�soperating costs

Barter marketingcosts should matchbarter marketingrevenues�

�but cashmarketing costs willrise

32


6.3 Profits and marginsOur forecasts of the Company�s margins and profits constitute a straightforwardconsequence of marrying the revenues and operating cost assumptions presentedabove. Two main remarks seem warranted here.

First, due to a hike in IFRS2 stock option costs this year (according to our tentativeestimates c. PLN 10.3 million vs. PLN 1.8 million last year), Grupa Onet�s reportedEBITDA and NI for 2006E will be depressed, showing only moderate yoy increases.Adjusting for this non-cash costs (i.e. at the adj cash EBITDA and adj NI levels),we would expect to see yoy growth in the vicinity of 30-40%.

D&A on the rise dueto growing capex

2006E reportedEBITDA and NIdepressed on the backof IFRS2 option costs

3. IFRS2 stock option costs. As scrutinized in the Financials section, the cost of thecurrent stock option program at the Company will materially impact its financialresults in the coming years, with the largest hits � of, respectively, PLN 10.3 millionand PLN 7.4 million (according to our estimates) - in 2006E and 2007E. Beyond2007E, the impact of IFRS2 stock option expensing will decline, and cease from2010E onwards (unless another option program is implemented).

4. Cash HR costs. This is one of the most important operating cost categories,accounting for app. 38% of Grupa Onet�s cash operating costs in past few years.Last year the headcount at Grupa Onet increased materially (from 288 peopleat the beginning of the year, to 407 people at the end of the year). In 2006E andbeyond we expect the continuation of this trend, due to (i) needs related to newservices launches, and (ii) further build-up of the local markets sales team. Hence,cash HR costs are bound to be on a fairly steep rise.

5. Office space rentals. These costs are a fairly simple function of the Company�sheadcount (more people require more space). Consequently, they are expectedto increase in line with the headcount increases (new employee hiring willnecessitate increases in office space rented both in Cracow and Warsaw).

6. Content costs. Two trends need to be accounted for in the context of this costcategory. First, the share of user-generated content increases across the world(Poland inclusive). For portals such content is basically cost-free. Second, however,in the paid-content domain the share of multi-media content (i.e. audio & video)clearly rises, and such content is more expensive.

7. Bandwidth transmission costs. Again, two opposite considerations need to beaccounted for here. First, the unit bandwidth costs are on decline and thistendency will continue in foreseeable future. Second, however, increased shareof multi-media content (see preceding point) requires more bandwidth. Marryingthe two tendencies together, we expect Grupa Onet�s bandwidth needs toincrease significantly, which � however � after accounting for declining unit pricesof bandwidth should result in only moderate growth of transmission costs invalue terms.

8. D&A. D&A charges constitute a simple consequence of the Company�s capex.Two factors need to be considered here. First, following last year�s write-offof part of the intangible assets, this year�s D&A should fall yoy, putting asideincremental depreciation and amortisation from this year�s capital expenditures.These, however, are likely to increase materially in 2006E and beyond, both inthe fixed assets (IT hardware) and intangibles (software) area, due to new servicelaunches and the pursuit of the service quality improvement. Hence, in comingyears we are looking for growing D&A.

�which will increasethe Company�s officespace needs

There will be more(i) user-generated(free) content, and(ii) multi-media(expensive) content

Despite falling unitprices, overallbandwidth costs mayrise as more multi-media content requiresmore bandwidth

IFRS2 stock optioncosts will hikein 2006-2007E

Further significantincrease inheadcount seemsimminent�

33


2006-2008E OPEXgrowth may resultin cash EBITDAmargin dilution; in LT,however, >40% levelseems sustainable

Second, imminent growth of a number of operating cost categories (HR, content,bandwidth, marketing, rental) coupled with increased investments (part of whichwill simply take the form of increased operating expenses) in new services and qualityimprovement is likely to result � in our opinion � in (probably transient) dilutionof Grupa Onet�s cash EBITDA margin in next two-three years below the 40% level.In the longer term, however, the Company should � in our opinion � return to the>40% level of its cash EBITDA margin, which � given the Company�s business model,market position and profitabilities of peers operating at more developed markets� we perceive LT sustainable.

Notwithstanding the mid-term margin dilution, we forecast brisk growth of theCompany�s adj. cash EBITDA and adj. NI from continued operations (the two fairest� in our opinion � indicators of its business model inherent profitability) in thecoming years, with 2006-2009E CAGRs of, respectively, 36% and 37%.

34


7. Financial Statements (Consolidated, IFRS)

)mNLP( 4002 5002 E6002 E7002 E8002 E9002 E0102 E1102 E2102 E3102 E4102 E5102

stessAdexiF 8.14 7.861 5.271 0.671 5.081 6.481 9.781 3.191 7.491 3.891 9.102 7.502

selbignatnI 9.9 7.4 8.8 9.01 7.31 3.71 5.91 7.12 0.42 2.62 5.82 9.03

lliwdooG 4.1 8.241 8.241 8.241 8.241 8.241 8.241 8.241 8.241 8.241 8.241 8.241

stessAdexiFelbignaT 2.01 2.31 7.81 2.22 9.32 4.42 5.52 7.62 9.72 2.92 5.03 9.13

selbavieceRTL 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

stnemtsevnITL 6.51 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0 1.0

stessAderrefeDTL 6.4 9.7 1.2 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

stessAtnerruC 9.43 2.13 5.56 2.111 4.071 0.252 1.643 1.054 6.265 3.186 8.708 4.349

seirotnevnI 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

selbavieceRTS 3.52 4.51 6.12 3.82 1.63 8.44 6.35 2.95 6.36 1.76 5.07 1.47

stnemtsevnITS 3.9 6.51 6.34 4.28 7.331 5.602 7.192 0.093 0.894 2.316 2.637 2.868

hsaC 9.8 5.9 6.73 4.67 7.721 5.002 7.582 0.483 0.294 2.706 2.037 2.268

seitiuqE 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

stnemurtsnItbeD 4.0 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6 0.6

stessAderrefeDTS 3.0 2.0 3.0 4.0 5.0 7.0 8.0 9.0 9.0 0.1 0.1 1.1

snoitarepOdeunitnocsiDotdetaleRstessA 1.71 9.61 9.61 9.61 9.61 9.61 9.61 9.61 9.61 9.61 9.61 9.61

stessAlatoT 8.39 8.612 9.452 0.403 8.763 4.354 8.055 2.856 2.477 4.698 6.620,1 9.561,1

ytiuqE 0.27 6.491 0.622 0.962 7.523 2.404 9.394 2.695 9.707 8.628 7.359 7.980,1

tseretnIytironiM 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

sevreseRdnaseitilibaiL 0.31 0.61 7.22 8.82 9.53 1.34 7.05 9.55 1.06 5.36 7.66 1.07

sevreseR 0.0 3.0 3.0 5.0 6.0 7.0 9.0 0.1 0.1 1.1 1.1 2.1

seitilibaiLTL 8.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0 6.0

gniraeB-tseretnI-noN 3.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0

gniraeB-tseretnI 5.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0 4.0

seitilibaiLTS 2.7 2.9 5.31 9.61 8.02 6.42 7.82 6.13 1.43 1.63 0.83 9.93

gniraeB-tseretnI-noN 0.7 1.9 4.31 7.61 7.02 4.42 6.82 5.13 9.33 9.53 8.73 7.93

gniraeB-tseretnI 1.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0 2.0

seitilibaiLderrefeD 1.5 9.5 3.8 9.01 9.31 2.71 5.02 7.22 4.42 7.52 0.72 4.82

snoitarepOdeunitnocsiDot.leRseitilibaiL 8.8 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6 2.6

ytiuqEdnaseitilibaiLlatoT 8.39 8.612 9.452 0.403 8.763 4.354 8.055 2.856 2.477 4.698 6.620,1 9.561,1

Figure 36. Balance Sheet


35


)mNLP( 4002 5002 E6002 E7002 E8002 E9002 E0102 E1102 E2102 E3102 E4102 E5102

:selaS 4.36 0.58 9.811 1.651 2.991 8.642 1.592 9.523 7.053 6.963 5.883 4.804

:hsaC 1.05 9.07 6.401 4.141 1.481 4.132 4.972 0.013 4.433 1.353 6.173 2.193

gnitekraM 2.63 4.25 6.87 2.601 3.831 2.371 2.802 9.922 9.642 4.952 3.272 9.582

secivresresU 0.41 6.81 0.62 2.53 8.54 2.85 2.17 0.08 5.78 7.39 3.99 3.501

sretraB 3.31 1.41 3.41 7.41 1.51 4.51 7.51 0.61 3.61 6.61 9.61 2.71

:stsocgnitarepO 5.74- 9.85- 8.98- 4.901- 0.231- 8.051- 0.471- 3.191- 6.602- 2.912- 9.032- 4.242-

:hsaC 8.43- 5.24- 2.56- 3.78- 5.311- 8.431- 3.851- 3.571- 3.091- 7.202- 0.412- 2.522-

RH 0.81- 8.22- 1.92- 0.53- 9.93- 5.44- 3.94- 4.45- 9.95- 0.56- 1.96- 6.27-

rehtO 8.61- 7.91- 1.63- 3.25- 6.37- 3.09- 0.901- 9.021- 4.031- 7.731- 9.441- 6.251-

:hsac-noN 7.21- 4.61- 6.42- 1.22- 5.81- 0.61- 7.51- 0.61- 3.61- 6.61- 9.61- 2.71-

sretraB 6.21- 7.41- 3.41- 7.41- 1.51- 4.51- 7.51- 0.61- 3.61- 6.61- 9.61- 2.71-

)2SRFI(stsocnoitpokcotS 1.0- 8.1- 3.01- 4.7- 4.3- 6.0- 0.0 0.0 0.0 0.0 0.0 0.0

:hcihwfo,)sessol(sniagrehtO 6.0 9.2- 7.0 6.1 1.3 8.4 5.6 2.9 2.21 6.51 1.91 9.22

:hcihwfo,erutangnitarepofo 1.0- 1.4- 5.0- 6.0- 7.0- 9.0- 0.1- 1.1- 1.1- 1.1- 2.1- 2.1-

gnirrucer 1.0- 3.0- 5.0- 6.0- 7.0- 9.0- 0.1- 1.1- 1.1- 1.1- 2.1- 2.1-

gnirrucer-non 0.0 8.3- 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

:hcihwfo,erutanlaicnaniffo 7.0 2.1 1.1 2.2 8.3 6.5 5.7 3.01 3.31 7.61 3.02 1.42

gnirrucer 7.0 2.1 1.1 2.2 8.3 6.5 5.7 3.01 3.31 7.61 3.02 1.42

gnirrucer-non 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

ADTIBE 5.61 2.32 8.92 2.84 2.07 8.001 6.721 8.341 4.651 9.561 7.671 9.881

sessol/sniagrehto- 6.0- 9.2 7.0- 6.1- 1.3- 8.4- 5.6- 2.9- 2.21- 6.51- 1.91- 9.22-

ADTIBEgnitarepO 9.51 1.62 1.92 7.64 2.76 1.69 1.121 6.431 1.441 4.051 6.751 0.661

stsocnoitpo2SRFI- 1.0 8.1 3.01 4.7 4.3 6.0 0.0 0.0 0.0 0.0 0.0 0.0

sretrabnossol/niag- 8.0- 6.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

ADTIBEhsaC 3.51 5.82 4.93 1.45 6.07 6.69 1.121 6.431 1.441 4.051 6.751 0.661

ADTIBEhsaCjdA 2.51 1.82 9.83 5.35 8.96 8.59 1.021 6.331 0.341 2.941 5.651 8.461

A&D 1.9- 6.8- 4.9- 5.31- 5.51- 4.71- 2.81- 9.81- 7.91- 5.02- 4.12- 3.22-

tiforPgnitarepO 4.7 7.41 4.02 8.43 8.45 4.38 4.901 9.421 7.631 4.541 4.551 6.661

tiforPgnitarepOjdA 0.6 6.91 5.92 0.04 3.45 3.87 9.101 7.411 3.321 7.821 1.531 5.241

xaTemocnI 4.1 6.1- 8.5- 0.8- 0.11- 0.61- 8.02- 7.32- 0.62- 6.72- 5.92- 7.13-

snoitarepOdeunitnoCnoemocnIteN 7.8 1.31 6.41 7.62 7.34 4.76 6.88 2.101 7.011 8.711 8.521 9.431

snoitarepOdeunitnoCnoemocnIteNjdA 1.8 2.91 8.42 2.43 1.74 0.86 6.88 2.101 7.011 8.711 8.521 9.431

deunitnocsidno)ssoL(emocnIteN:hcihwfo,snoitarepo

9.81 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1 1.1

sffo-eno 5.22 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

emocnIteN 6.72 2.41 6.51 8.72 8.44 5.86 7.98 2.201 8.111 8.811 9.621 0.631

emocnIteNjdA 5.4 3.02 9.52 2.53 2.84 1.96 7.98 2.201 8.111 8.811 9.621 0.631

Figure 37. Income Statement

Continued operations = Internet activities; Discontinued operations = non-Internet activities; Operating EBITDA = EBITDA after eliminating the impact ofother gains/losses; Cash EBITDA = Operating EBITDA after eliminating the impact of IFRS2 stock option costs and the result on barter activities.Adj cash EBITDA = EBITDA after eliminating the impact of IFRS2 stock option costs, the result on barter activities, all of financial income and financial costsbooked in other gains/losses (at the pre-EBITDA level) and one-off gains and losses of operating nature booked in other gains/losses (e.g. intangibles write-offs). Putting it another way, adj cash EBITDA = cash EBITDA after inclusion of the impact of non-one-off gains and losses of operating nature (e.g. lost orrecovered receivables) booked in other gains/losses, which are excluded from the calculation of cash EBITDA.Adj operating profit = operating profit after eliminating the impact of IFRS2 stock option costs, result on barter activities, all of financial income andfinancial costs booked in other gains/losses (at the pre-EBITDA level) and one-off gains and losses of operating nature booked in other gains/losses(e.g. intangibles write-offs). Putting it another way, adjusted operating profit is adj cash EBITDA less D&A.Adj net income on continued operations = net income on continued operations after eliminating the impact of IFRS2 stock options, the result on barteractivities, and one-off gains and losses of operating or financial nature booked in other gains/losses (e.g. intangibles write-offs).Net income = net income on continued operations plus profit/loss on discontinued operations.Adj net income = net income after eliminating IFRS2 stock option costs, result on barter activities, one-off gains and losses of operating or financial naturebooked in other gains/losses (e.g. intangibles write-offs), and one-off gains and losses on discontinued operations (e.g. profits/losses on the divestituteof business lines).Source: Company, CDM estimates

36


)mNLP( 4002 5002 E6002 E7002 E8002 E9002 E0102 E1102 E2102 E3102 E4102 E5102

)ssoL(emocnIteN 6.72 2.41 6.51 8.72 8.44 5.86 7.98 2.201 8.111 8.811 9.621 0.631

setailiffAfo)sessoL(emocnInierahS 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

noitasitromAdnanoitaicerpeD 1.9 6.8 4.9 5.31 5.51 4.71 2.81 9.81 7.91 5.02 4.12 3.22

lliwdooGnoitadilosnoCfonoitasitromA 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

:egnahCCWN 4.3- 3.0 8.1- 4.3- 9.3- 9.4- 6.4- 7.2- 0.2- 5.1- 6.1- 7.1-

seirotnevnIniegnahC 4.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

selbavieceRniegnahC 7.4- 6.0- 1.6- 8.6- 8.7- 6.8- 8.8- 6.5- 5.4- 4.3- 4.3- 6.3-

selbayaPniegnahC 9.0 9.0 3.4 4.3 9.3 7.3 2.4 9.2 5.2 0.2 9.1 9.1

stsocnoitpokcotS 1.0 8.1 3.01 4.7 4.3 6.0 0.0 0.0 0.0 0.0 0.0 0.0

snoitarepodeunitnocsidnossol)tiforP( 4.1- 1.1- 1.1- 1.1- 1.1- 1.1- 1.1- 1.1- 1.1- 1.1- 1.1- 1.1-

skcab-etirwdnasffo-etirW 0.0 9.3 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

rehtO 9.91- 1.1 5.6 1.2 2.1- 7.2- 6.4- 5.8- 1.21- 8.51- 4.91- 1.32-

wolFhsaCgnitarepO 1.21 7.82 9.83 4.64 4.75 8.77 7.79 9.801 3.611 0.121 3.621 4.231

serutidnepxelatipaC 8.7- 0.211- 3.71- 5.71- 5.81- 0.02- 0.02- 8.02- 7.12- 6.22- 5.32- 5.42-

rehtO 4.61 4.82- 1.1 2.2 8.3 7.5 5.7 3.01 4.31 7.61 3.02 1.42

wolFhsaCgnitsevnI 6.8 4.041- 3.61- 3.51- 7.41- 3.41- 5.21- 5.01- 3.8- 9.5- 2.3- 4.0-

sdeecorPeussIytiuqE 0.0 0.88 5.5 8.7 6.8 4.9 0.0 0.0 0.0 0.0 0.0 0.0

tbeDgniraeB-tseretnIniegnahC 5.21- 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

tnemyaPsdnediviD 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

)elas(esahcrupserahsnwO 6.0- 3.52 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

tseretnI 4.0- 1.0- 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

rehtO 1.0- 9.0- 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

wolFhsaCgnicnaniF 6.31- 3.211 5.5 7.7 5.8 4.9 0.0 0.0 0.0 0.0 0.0 0.0

wolFhsaClatoT 2.7 6.0 1.82 8.83 3.15 9.27 2.58 3.89 0.801 2.511 0.321 0.231

Figure 38. Cash Flow


37


4002 5002 E6002 E7002 E8002 E9002 E0102 E1102 E2102 E3102 E4102 E5102

)yoy(htworGselaS %43 %04 %13 %82 %42 %02 %01 %8 %5 %5 %5

)yoy(htworGselaShsaC %24 %74 %53 %03 %62 %12 %11 %8 %6 %5 %5

)yoy(htworGADTIBE %14 %82 %26 %64 %44 %72 %31 %9 %6 %7 %7

)yoy(htworGADTIBEgnitarepO %46 %11 %06 %44 %34 %62 %11 %7 %4 %5 %5

)yoy(htworGADTIBEhsaC %68 %83 %73 %03 %73 %52 %11 %7 %4 %5 %5

)yoy(htworGADTIBEhsaCjdA %68 %83 %83 %13 %73 %52 %11 %7 %4 %5 %5

)yoy(htworGtiforPgnitarepO %99 %93 %17 %85 %25 %13 %41 %9 %6 %7 %7

)yoy(htworGtiforPgnitarepOjdA %522 %15 %63 %63 %44 %03 %21 %8 %4 %5 %5

snoitarepOdeunitnoCnoemocnIteN)yoy(htworG

%05 %11 %48 %36 %45 %13 %41 %9 %6 %7 %7

deunitnoCnoemocnIteNjdA)yoy(htworGsnoitarepO

%831 %92 %83 %83 %44 %03 %41 %9 %6 %7 %7

)yoy(htworGemocnIteN %05 %11 %48 %36 %45 %13 %41 %9 %6 %7 %7

)yoy(htworGemocnIteNjdA %153 %72 %63 %73 %34 %03 %41 %9 %6 %7 %7

syaDrevonruTR/A 46 75 85 95 06 16 36 46 56 56 56

syaDrevonruTyrotnevnI 0 0 0 0 0 0 0 0 0 0 0

syaDrevonruTP/A 05 64 05 25 55 65 75 85 85 85 85

syaDelcyChsaC 41 11 8 7 5 5 6 6 6 6 6

oitaRtnerruC 4.3 8.4 6.6 2.8 3.01 0.21 2.41 5.61 9.81 3.12 7.32

oitaRkciuQ 4.3 8.4 6.6 2.8 3.01 0.21 2.41 5.61 9.81 3.12 7.32

ytiuqE/tbeDgniraeBtseretnI 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0

tseretnI/ADTIBE 63 .m.n .m.n .m.n .m.n .m.n .m.n .m.n .m.n .m.n .m.n

selaSlaurccA/selaShsaC %101 %501 %401 %401 %401 %301 %201 %101 %101 %101 %101

selaS/CWN %8 %7 %7 %8 %8 %8 %8 %8 %8 %8 %8

tiforPgnitarepOjdA/wolFhsaCgnitarepO %741 %231 %611 %601 %99 %89 %59 %49 %49 %39 %39

nigraMADTIBE %0.62 %3.72 %1.52 %9.03 %3.53 %9.04 %2.34 %1.44 %6.44 %9.44 %5.54 %3.64

nigraMADTIBEgnitarepO %1.52 %7.03 %5.42 %9.92 %7.33 %9.83 %0.14 %3.14 %1.14 %7.04 %6.04 %6.04

nigraMADTIBEhsaC %5.03 %1.04 %6.73 %3.83 %3.83 %8.14 %3.34 %4.34 %1.34 %6.24 %4.24 %4.24

nigraMADTIBEhsaCjdA %2.03 %7.93 %2.73 %9.73 %9.73 %4.14 %0.34 %1.34 %8.24 %3.24 %1.24 %1.24

nigraMgnitarepO %6.11 %2.71 %1.71 %3.22 %5.72 %8.33 %1.73 %3.83 %0.93 %3.93 %0.04 %8.04

nigraMgnitarepOjdA %0.21 %6.72 %2.82 %3.82 %5.92 %8.33 %5.63 %0.73 %9.63 %5.63 %3.63 %4.63

snoitarepOdeunitnoCnonigraMteN %8.31 %4.51 %3.21 %1.71 %9.12 %3.72 %0.03 %0.13 %6.13 %9.13 %4.23 %0.33

snoitarepOdeunitnoCnonigraMteNjdA %1.61 %1.72 %7.32 %2.42 %6.52 %4.92 %7.13 %6.23 %1.33 %4.33 %9.33 %5.43

snoitarepOdeunitnoCnoEOR %1.21 %8.9 %9.6 %8.01 %7.41 %5.81 %7.91 %6.81 %0.71 %3.51 %1.41 %2.31

snoitarepOdeunitnoCnoEORjdA %2.11 %4.41 %8.11 %8.31 %8.51 %6.81 %7.91 %6.81 %0.71 %3.51 %1.41 %2.31

snoitarepOdeunitnoCnoAOR %7.11 %5.9 %7.6 %2.01 %7.31 %1.71 %3.81 %2.71 %8.51 %4.41 %3.31 %5.21

Figure 39. Ratios

Cash EBITDA margin, adj cash EBITDA margin, adj operating margin and adj net margin on continued operations calculated in relation to cash sales (ratherthan total - i.e. cash and barter - sales).Source: Company, CDM estimates

38


Appendix:Guide to Grupa Onet�s Adjusted Earnings

To facilitate the navigation through the Company�s income statement, below wepresent a short listing of adjustments made to the Company�s earnings at variouslevels of P&L in order to obtain a fairer and truer picture of the underlying profitcapacity.

1. Operating EBITDA = EBITDA after eliminating the impact of other gains/losses.

2. Cash EBITDA = Operating EBITDA after eliminating (i) the impact of IFRS2 stockoption costs and (ii) the result on barter activities.

3. Adj cash EBITDA = EBITDA after eliminating (i) the impact of IFRS2 stock optioncosts, (ii) the result on barter activities, (iii) all of financial income and financialcosts booked in other gains/losses (at the pre-EBITDA level) and (iv) one-off gainsand losses of operating nature booked in other gains/losses (e.g. intangibleswrite-offs). In other words, adj cash EBITDA = cash EBITDA after inclusion of theimpact of non-one-off gains and losses of operating nature (e.g. lost or recoveredreceivables) booked in other gains/losses, which are excluded from the calculationof cash EBITDA.

4. Adj operating profit = operating profit after eliminating (i) the impact of IFRS2stock option costs, (ii) result on barter activities, (iii) all of financial income andfinancial costs booked in other gains/losses (at the pre-EBITDA level) and (iv)one-off gains and losses of operating nature booked in other gains/losses (e.g.intangibles write-offs). Putting it another way, adjusted operating profit is adjcash EBITDA less D&A.

5. Adj net income on continued operations = net income on continued operationsafter eliminating (i) the impact of IFRS2 stock options, (ii) the result on barteractivities, and (iii) one-off gains and losses of operating or financial nature bookedin other gains/losses (e.g. intangibles write-offs).

6. Net income = net income on continued operations plus profit/loss on discontinuedoperations.

7. Adj net income = net income after eliminating (i) IFRS2 stock option costs, (ii)result on barter activities, (iii) one-off gains and losses of operating or financialnature booked in other gains/losses (e.g. intangibles write-offs), and (iv) one-offgains and losses on discontinued operations (e.g. profits/losses on the divestitureof business lines).

This report is for information purposes only. Neither the information nor the opinions expressed in the report constitute a solicitation or an offer to buy or sell any securities referredherein. The opinions expressed in the report reflect independent, current judgement of CDM Pekao S.A. Securities. This report was prepared with due diligence and scrutiny. The informationused in the report is based on all public sources such as press and branch publications, company's financial statements, current and periodic reports, as well as meetings and telephoneconversations with company's representatives. We believe the above mentioned sources of information to be reliable, however we do not guarantee their accuracy and completeness.All estimates and opinions included in the report represent our judgment as of the date of the issue. The legal entity supervising CDM Pekao SA is Securities and Exchange Commissionin Warsaw. CDM does not take any responsibility for decisions taken on the basis of this report and opinions stated in it. Investors bear all responsibility for investment decisions taken onthe basis of the contents of this report. The report is intended exclusively for private use of investors - customers of CDM. No part or excerpt of the report may be redistributed,reproduced or conveyed in any manner or form written or oral without the prior written consent of CDM. This report is released to customers the moment it is issued and the wholereport is made avaible to the public one month after the issuance.

The analyst(s) responsible for covering the securities in this report receives compensation based upon the overall profitability of UBM and CDM which includes profits derived frominvestment banking activities, although the analyst compensation is not directly related thereto.

During the last 12 months CDM Pekao SA was/or has been an issue sponsor of the bearer shares issue for Grupa Onet.During the last 12 months CDM Pekao SA held/or has held an investment account for Grupa Onet.During the last 12 months CDM Pekao SA signed/or has signed and agreement with Grupa Onet for preparation and conduct of the Company's stock option program, series I sharesoffering inclusive.Apart from mentioned above, there are no ties of any kind between CDM Pekao SA, the analysts involved in the preparation of the report and his/her relatives and the companiesanalyzed in this publication, especially in the form of: i) offering of financial instruments in the primary market or/and Initial Public Offer within 12 months preceding the issue of thisreport, ii) purchasing and selling of financial instruments for own account due to tasks connected with organization of the regulated market, iii) purchasing and selling of financialinstruments due to underwriting agreements and iv) the role of a market maker for securities analysed by CDM. The analysed company does not possess CDM Pekao SA shares.CDM Pekao is wholly owned by Bank Pekao SA. Furthermore, CDM has not signed with the company any contracts for recommendation writing. Investors should assume that CDM Pekao SAis seeking or will seek business relationships with the company described in this report. The report was not shown to the analysed company before the distribution of the report to clients.

BASIC DEFINITIONSA/R turnover (in days) = 365/(sales/average A/R))Inventory turnover (in days) = 365/(COGS/average inventory))A/P turnover (in days) = 365/(COGS/average A/P))Current ratio = ((current assets - ST deferred assets)/current liabilities)Quick ratio = ((current assets - ST deferred assets - inventory)/current liabilities)Interest coverage = (pre-tax profit before extraordinary items + interest payable/interest payable)Gross margin = gross profit on sales/salesEBITDA margin = EBITDA/salesEBIT margin = EBIT/salesPre-tax margin = pre-tax profit/salesNet margin = net profit/salesROE = net profit/average equityROA = (net income + interest payable)/average assetsEV = market capitalization + interest bearing debt - cash and equivalentsEPS = net profit/ no. of shares outstandingCE = net profit + depreciationDividend yield (gross) = pre-tax DPS/stock market priceCash sales = accrual sales corrected for the change in A/RCash operating expenses = accrual operating expenses corrected for the changes in inventories and A/P, depreciation, cash taxes and changes in the deferred taxes

CDM Pekao SA values the covered non bank companies via two methods: comparative method and DCF method (discounted cash flows). The advantage of the former is the factthat it incorporates the current market assessment of the value of the company�s peers. The weakness of the comparative method is the risk that the valuation benchmark may bemispriced. The advantage of the DCF method is its independence from the current market valuation of the comparable companies. The weakness of this method is its high sensitivityto undertaken assumptions, especially those related to the residual value calculation.

BanksNet Interest Margin (NIM) = net interest income/average assetsNIM Adjusted = (net interest income adjusted for SWAPs)/average assetsNon interest income = fees&commissions + result on financial operations (trading gains) + FX gainsInterest Spread = (interest income/average interest earning assets)/ (interest cost/average interest bearing liabilities)Cost/Income = (general costs + depreciation + other operating costs)/ (profit on banking activity + other operating income)ROE = net profit/average equityROA = net income/average assetsNon performing loans (NPL) = loans in �substandard�, �doubtful� and �lost� categoriesNPL coverrage ratio = loan loss provisions/NPLNet provision charge = provisions created - provisions released

CDM Pekao SA values the covered banks via two methods: comparative method and modified DDM method (discounted dividend model). The advantage of the former is the factthat it incorporates the current market assessment of the value of the company�s peers. The weakness of the comparative method is the risk that the valuation benchmark may bemispriced. The advantage of the modified DDM method is its independence of the current market valuation of the comparable companies. The weakness of this method is its highsensitivity to undertaken assumptions, especially those related to the residual value calculation.

Assumptions used in valuation can change, influencing thereby the level of the valuation. Among the most important assumptions are: GDP growth, forecasted level of inflation,changes in interest rates and currency prices, employment level and change in wages, demand on the analysed company products, raw material prices, competition, standing of themain customers and suppliers, legislation changes, etc.

Changes in the environment of the analysed company are monitored by analysts involved in the preparation of the recommendation, estimated, incorporated in valuation andpublished in the recommendation whenever needed.

Key to Investment Rankings

This is a guide to expected price performance in absolute terms over the next 12 months:Buy � expected to appreciate in absolute terms by 15 or more percentage points;Accumulate � expected to appreciate in absolute terms by 5-15 percentage points;Hold � expected to remain within a 5 percentage point range of the current price;Reduce � expected to fall in absolute terms by 5-15 percentage points;Sell � expected to fall in absolute terms by more than 15 percentage points.

This is a guide to expected price performance:Overweight � expected to perform better than the benchmark over the next quarter in relative termsNeutral � expected to perform in line with the benchmark over the next quarter in relative termsUnderweight � expected to perform worse than the benchmark over the next quarter in relative terms

Note: Recommendation system changed on 2nd June 2003.

Recommendation tracker: Grupa Onet

The recommendation tracker presents the performance of Pekao Securities� recommendations expiring after December 31, 2001. A recommendation expires on the day it is altered or onthe day 12 months after its issuance, whichever comes first. Relative performance compares the rate of return on a given recommended stock in the period of the recommendation�svalidity (i.e. from the date of issuance to the date of alteration or � in case of maintained recommendations � from the date of issuance to the current date) in a relation to the rateof return on the benchmark in this time period. The WIG/WIG20 index constitutes the benchmark for recommendations issued before/ after December 31, 2001. For recommendationsthat expire by an alteration or are maintained, the ending values used to calculate their absolute and relative performance are: the stock closing price on the day the recommendationexpires/ is maintained and the closing value of the benchmark on that date. For recommendations that expire via a passage of time, the ending values used to calculate their absolute andrelative performance are: the average of the stock closing prices for the day the recommendation elapses and four directly preceding sessions and the average of the benchmark�s closingvalues for the day the recommendation expires and four directly preceding sessions.

noitadnemmoceR etadeussI etadnoitaretieR etadyripxE ecnamrofreP evitaleRecnamrofrep

ecirPnoitaretier/eussita

VFE)shtnom21(

dloH − 6002.30.41 - nahtretalton7002.30.41

- - 0.411 4.421 −

*Includes Buy and Accumulate**Includes Sell and Reduce

*Includes Buy and Accumulate**Includes Sell and Reduce

snoitadnemmocerMDCtnerrucfonoitubirtsiD

*yuB dloH **lleS

rebmun 5 62 61

latotfo% %11 %55 %43

tsalehtnihtiwerewtahtseinapmocrofsnoitadnemmocerMDCtnerrucfonoitubirtsiDgniknabtnemtsevninisremotsucMDCshtnom21

*yuB dloH **lleS detartoN dednepsuS

rebmun 1 8 1 1 0

latotfo% %9 %37 %9 %9 %0

Research Department:

Director Sobies³aw Paj¹k, CFA (IT, Media) +48 22 821 87 22 [email protected]

Sylwia Ja�kiewicz (Industrials) +48 22 856 17 50 [email protected]

Artur Szeski (Banks) +48 22 856 18 17 [email protected]

Maciej Wewiórski (Industrials, Real Estate) +48 22 856 17 18 [email protected]

Micha³ Sobolewski (Research associate) +48 22 856 18 26 [email protected]

Rafa³ Lerski (Investment advisor) +48 22 856 18 26 [email protected]

Renata Kania (Publishing) +48 22 856 17 40 [email protected]

Institutional Sales +48 22 821 87 75

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Fax: (48 22) 640 28 00; (48 22) 640 26 00

Copyright © 2006 by CDM PEKAO S.A. Securities

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