Concepts and methods which are used in the valuation process

Target price of a security is the fair price usually expected to be met within a 12-month investment horizon (if not state otherwise)
derived by employing either absolute valuation tools & methods such as Discounted Cash-Flow model (DCF), Discounted Dividend
model (DDM), Residual income (RI), sum-of-parts method or relative models such as peer group multiples.

All valuation methods are based on either top-down or bottom-up integrated models for every stock included in AFR coverage
universe and imply a minimum 5-year period of detailed forecasts (Income Statement, Balance Sheet, Cash Flow Statement)
constructed based on a comprehensive analysis of all relevant publicly available information and analyst’s best judgment at the date
of the report. Frequently used assumptions refer to (and are by no means exhaustive) earnings KPIs (prices/tariffs, volumes,
market positioning, sector evolution, investment plans, working capital needs etc.) which may differ depending on the companies’
specifics. However, by using Excel standardised modeling tools we ensure consistency and comparability within our coverage and
peer group. Valuation conclusions are not disclosed prior to the public issuance of AFR research reports.

Most commonly used valuation methods

1. Discounted Cash-flow Model (DCF)

DCF valuation tool is used to derive the value of a firm and asses the attractiveness of the investment. The tool takes into
consideration time value of money and, thus, discounts future cash flow projections using an appropriate discount factor – usually
the weighted average cost of capital (WACC)- to arrive at a present value, frequently compared to the cost of an immediate
investment. Should fair value of the firm be higher than current cost of the investment, it may prove to be a good investment
opportunity.

As a standard model, we use a Free Cash Flow to Firm (FCFF) model. FCFFs are modeled based on financial theoretical guidelines:

Free Cash Flow = NOPLAT + Depreciation & Amortisation - gross investment in PPE & Intangibles +/- change in Working Capital
+/- change in long-term provisions

Net operating profit less adjusted taxes (NOPLAT) is a financial metric that refers to total operating profits generated by the
company's core operations after adjusting for income taxes related to those operations.

We compute terminal value as:

Terminal value (TV) = Last explicitly forecast FCFF*(1+sustainable earnings growth)/(WACC – sustainable earnings growth).

The discount factor is based on the cost of capital, most specifically on the cost of each component weighted by its relative market
value (Weighted Average Cost of Capital – WACC). Please note that the company may choose to finance its operations via either
own capital or a mix of equity and debt.

For modeling the company’s cost of debt, we usually consider the market rate that it currently pays on its long-term debt and base
our longer term assumptions on the underlying yield curve.

Cost of equity, on the other hand, is based on the Capital Asset Pricing Model (CAPM), a model that describes the relationship
between systematic risk (Beta) and expected returns of the stocks. Based on CAPM guidelines, we add to our risk free rate
assumption an equity market premium adjusted with the company’s levered beta. Risk free rates used reflect Romanian benchmark
government bond yield curve at the time of the report. Furthermore, we base our beta (β) assumption on a Blume-adjusted two-
year weekly benchmarked-to-BET assessment. Levered beta is adjusted for the company’s specific financing structure.

An alternative to Free Cash Flow to the Firm model is Free Cash Flow to Equity. This version discounts all future cash flow
projections available to equity holders at the cost of equity (not weighted average cost of capital).

2. Dividend Discounted Model (DDM)

DDM is a valuation tool based on the general principle that the value of the stock should be the present value of expected
dividends. The model requires two basic inputs – expected dividends and cost of equity used as discount factor. Projected dividends
rely on assumptions of future earnings’ growth rates and payout ratios whereas the cost of equity is based on CAPM model.
Furthermore, we estimate terminal values (after our explicitly forecast period) based on Gordon Growth Model:

Terminal value (TV) = Last explicitly forecast DPS*(1+ sustainable earnings growth)/(cost of equity – sustainable earnings growth).
3. Sum-of-parts valuation method

The sum-of-parts valuation method is the process of valuing the company by aggregating the standalone value of its business
units/divisions/lines in order to determine a single total enterprise value (EV) which is afterwards adjusted for net debt, other non-
operating assets and minorities. Each division can be separately valued using a different valuation model/method. The method is
recommended for conglomerates comprised of business units in different industries or performing different core operations. It can
be used as a defense tool against a hostile takeover by highlighting that the company’s value exceeds its sum-of-parts value due to
presence of synergies and economies of scale.

4. Relative valuation

Relative valuation method uses current valuation ratios of comparable companies (in terms of size, financing structure, operations
etc.) to derive a fair value estimate for a company. Most frequently, valuation ratios refer to trading multiples which are compared
with those of the peer group. Peer group companies are listed companies which analysts see as a comparable proxy of the company
under review. Usually companies from the same industry are seen as peers although there can be a wide range of criteria used in
the selection process: size, growth prospects, financing structure, similar end-customer markets etc.

Price multiples

Price multiples refer to any ratio that uses the share price of the company in conjunction with any other per-share financial metric.
Most frequently used price multiples are P/E (Price-to-earnings), P/B (Price-to-book), P/S (Price-to-sales), P/CF (Price-to-CashFlow).

Price-to-Earnings (P/E) is a valuation ratio comparing the stock price of a company to its earnings per share, underscoring how
much investors are willing to pay for the company’s earnings. The fair value per share is derived by multiplying the estimated
earnings per share by the peer group P/E (average peers’ P/E).

Price-to-Book (P/B) is a valuation ratio comparing the price stock of a company to its book value per share, indicating how much
investors are willing to pay for the book value of a company. The fair value per share is derived by multiplying the estimated book
value per share by the peer group P/B.

Enterprise Value (EV) multiples

Enterprise Value multiples consider the impact of a company’s financing structure (leverage). Most frequently used Enterprise Value
(EV) multiples are EV/Sales (Enterprise Value-to-Sales), EV/EBITDA (Enterprise value-to-Earnings before Interest, Tax, Depreciation
and Amortisation) or EV/EBIT (Enterprise Value-to- Earnings before Interest and Tax). The multiples are computed by dividing
Enterprise Value by the respective Sales, EBIDTA and EBIT figures and indicate how many times an investor are willing to pay for
the company’s sales, EBITDA and EBIT. In any of the three cases, the fair value per share is derived by multiplying the estimated
Sales, EBITDA or EBIT by the respective peer group EV multiple (deducting the market value of net debt, minority interests and
other adjustments) and dividing by the total number of shares outstanding.

Frequently used Abbreviations

Abbreviations Full Name Description

Measure of volatility (systematic risk) used frequently in CAPM models calculated
using regression analysis. Beta =1 indicates that security's price moves in line with
Beta Beta the market
Beta < 1 indicates that a security has a lower volatility than the market
Beta > 1 indicates that a security has a higher volatility than the market.
BVPS Book Value Per Share Total shareholders’ equity / Number of shares outstanding
Mean annual growth rate over a specified period of time longer than one year.
Compound Annual Growth Rate
CAGR CAGR is determined by the formula: (Ending Value/Beginning Value)^(1/number of
years-1)
Capital Expenditures Funds used by companies to acquire new assets (property, equipment etc.) or to
CAPEX
upgrade assets in order to maintain or increase activity.
CDS Credit Default Swap

CEO Chief Executive Officer

CFO Chief Financial Officer
COE Cost of Equity
 Represents return on equity required by investors in exchange of owning the assets
and bearing the risk of ownership.
Dividend per Share Dividends declared by the company for each share outstanding. Determined by
DPS
dividing total dividends by total shares outstanding.
Dividend Yield
DY Dividend per share/End of period closing price unless otherwise stated
Earnings Before Interest and
EBIT
Taxes
Earnings Before Interest, Taxes,
EBITDA
Depreciations and Amortisation
EBT Earnings Before Tax
EOP End of Period
Earnings per Share
EPS Net profit after minorities/Weighted number of shares during a period
Enterprise Value Total company value determined as market capitalization plus net debt (Total debt
EV
less cash and cash equivalents) plus minority interests.
Represents cash available to investors after the company has paid all costs incurred
FCFF Free Cash Flow to the Firm
during normal activity, working capital and investments in long term assets.
FY Financial/Fiscal Year
FX Foreign Exchange Other currency than the local or reporting currency
Total debt of a company (long and short term interest bearing liabilities) less cash
Net Debt
and cash equivalents
Net operating profit less Financial metric that refers to total operating profits generated by the company's
NOPLAT
adjusted taxes core operations after adjusting for income taxes related to those operations.
OPEX Operating Expenditures Total operating expenditures related to normal business operations.
PBT Profit Before Tax
Price Book Value
P/B Price/Book Value per Share
Price Earnings Ratio
P/E Price/Earnings per Share
Price to Sales
P/S Price/Sales
PPE Property Plant and Equipment
ROaA Return on average Assets Net profit TTM / Average Assets over a period
ROaE Return on average Equity Net profit TTM / Average Shareholders’ Equity over a period
TP Target Price Fair share price established via different valuation models with a 12 month horizon
TTM Trailing Twelve Months Past 12 months
Present value of all future cash flows that will occur after the forecasted period,
TV Terminal Value
determined at a future point in time, usually considering a stable growth rate.
Weighted Average Cost of Firm cost of capital computed based on the weight and cost of each source of
WACC
Capital capital (common stock, preferred stock, debt).
YTD Year to Day Measuring performance from the first day of current year
Y/Y Year to Year Measuring performance over the last 12 month horizon