ddm holding commissioned research 310517 - nordea markets · 2017. 5. 31. · the operating profit...

Commissioned research Financials | Sweden 31 May 2017

Marketing material commissioned by DDM Holding 1

DDM Holding Ready, set, go… off the starting blocks in CEE

Ready… to take advantage of an immature market DDM Holding is an investor and manager of distressed assets in Central and Eastern Europe (CEE) founded in 2007. With its experienced management team and board, DDM’s intention is to take advantage of the growing market for distressed asset portfolios in the region. The European market has witnessed a trend of banks selling off their distressed assets, a trend that has now also started to take off in CEE. Set… to gain scale advantage In 2014‐16, DDM’s operational expenses were quite stable, even though net collections have more than doubled, illustrating DDM’s operating leverage potential. The operating profit turned positive in 2014, followed by net profit in 2015. Between 2015 and 2016 net profit almost tripled, again showing DDM’s potential for operating leverage. New funding at the beginning of 2017 prepares DDM for new portfolio acquisitions, aiming for an all‐time high level above EUR 50m in 2017. Go… for the growth opportunity By reinvesting cash flow from existing portfolios and adding financial leverage, DDM could continue its growth track seen over the last few years. With growth comes a larger entity, which could imply lower financing costs. Also, the operating leverage also could improve DDM’s profitability as it grows. Valuation Based on our fundamental DCF approach, and accounting for

variations in sales growth, EBIT margin and WACC assumptions,

we derive an equity value per share of SEK 29‐78. Our estimates for

2019 imply valuation multiples of P/E 2.9x, EV/EBIT 4.4x and P/BV

0.7x, representing respective discounts to our peer group of larger

industry players of 71%, 42% and 57%. The peers are significantly

larger than DDM, which could justify a valuation difference.

Key data

Absolute and relative performance

Source: Thomson Reuters

Valuation approach

Source: Nordea Markets

Source: Company data and Nordea Markets

Country SwitzerlandBloomberg DDM SSReuters DDM.STShare price SEK 37.9Free float 41%Market cap (m) SEK 521Website www.ddm-group.chNext report date 03 August 2017

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maj 2016 sep 2016 jan 2017 maj 2017

OMX Stockholm PI DDM

-1M -6M -12M YTD

Absolute 3% 22% 30% 21%

Relative 0% 10% 21% 10%

SEK 78 SEK 29

10 30 50 70 90

DCF

Summary table - key figures

EURm 2014 2015 2016 2017E 2018E 2019ETotal revenue 15 28 34 42 55 64- growth n.a. 87% 24% 22% 31% 17%EBIT 0 10 10 14 22 26- margin -0.5% 36.2% 28.8% 33.5% 40.2% 40.7%EPS -1.32 0.26 0.65 0.63 1.04 1.28- growth n.m. n.m. 149% -4% 66% 23%DPS 0.00 0.00 0.00 0.00 0.00 0.00P/E n.a. 10.5 6.0 6.0 3.6 2.9EV/EBIT n.a. 5.3 6.5 6.5 4.8 4.5EV/Sales 3.7 1.9 1.9 2.2 1.9 1.8RoE n.a. 24.3% 37.0% 26.0% 30.5% 28.0%Div. yield 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%FCF yield -38.1% -28.7% 20.6% -42.0% -29.9% -20.4%ND/Cash EBITDA 2.9 1.5 1.0 1.1 1.1 1.1

DDM Holding 31 May 2017


Table of contents

Factors to consider when investing in DDM Holding 3

Valuation 7

Company overview 14

Business model 20

The distressed asset market in CEE 25

Strategy, targets and financials 33

Estimates 42

Detailed estimates 46

Risk factors 47

Reported numbers and forecasts 49

Disclaimer 52



Factors to consider when investing in DDM Holding

Investing in DDM gives exposure to the potential growth in the market for distressed assets in Central and Eastern Europe (CEE). Management has accelerated investment activities in recent years and aims for a record-high level of portfolio acquisitions during 2017. Given such increased scale, DDM could gain further from the operational leverage of its business model. Financing is a key challenge for DDM, but the company has already received funding by issuing both shares and bonds in 2017.

Key factors to consider when evaluating an investment in DDM

CEE is an immature and growing market for NPLs

Opportunities and risks We believe the following are key factors when evaluating an investment in DDM:

The trend among banks of divesting distressed asset portfolios has reached

Central and Eastern Europe

DDM’s management and board have a 50 years’ combined experience in the

purchased debt industry

DDM could take advantage of its operational leverage as the business grows,

thanks to its relatively stable operating expenses

The company has received funds by issuing both equity and bonds in early

2017, setting DDM up for new portfolio acquisitions.

We consider the following key risk factors for DDM:

Exposure to the global economic development in general and to CEE in

particular. Also, competition could put price pressure on the market, hurting

DDM’s profitability

Net collections are key to DDM’s business model. Collection problems could be

caused by a third‐party collector, for example, or by fraud related to a portfolio

investment

DDM’s business decisions depend on the competence of key personnel and on

its proprietary IT system FUSION; loss of key staff or a lack of appropriate

development into FUSION could hurt DDM’s results

Management says financing is critical; poor access to capital could hurt DDM’s

ability to take advantage of market opportunities.

The company’s issued bonds pose a refinancing risk.

NPL deal momentum in CEE The non‐performing loans (NPL) market in CEE is seeing deal momentum, according to

market studies, while DDM also says the market has grown substantially.

CEE is quite an immature market for purchased debt compared with the more mature

Western European market, for example, but there is a growing trend for banks in CEE to

sell distressed assets to strengthen their balance sheets, thus increasing deal momentum.

From a global perspective, DDM’s invested and targeted markets are, on average, in the

top 20th percentile of the World Bank’s “Ease of doing business index”.



DDM aims to increase its volumes

Experienced management team DDM is a young company, founded in 2007, with an acceleration in operations starting

in 2013. Management’s total experience in the distressed asset market, however, totals

more than 50 years. Combined, management and the board have overseen thousands of

transactions in more than 25 countries. Management also holds a combined 369,000

shares in the company, representing almost 3% of outstanding shares.

Set for operational leverage DDM’s net collections have increased far more than operational expenses in the past

three years, indicating that it can take advantage of operational leverage. As we estimate

this trend will continue, DDM’s profitability could gain from further growth.

Management’s intention to grow the business appears an obvious strategy to take

advantage of this operational leverage. DDM has mentioned several interesting markets

for new portfolio investments and has also raised funds to make this possible.

DDM: Net collections and opex


Gains from operational leverage may partly reflect recent years’ swing to net profit. The

company turned to positive numbers in 2015.

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Net collections Opex Opex/Net collections (RHS)



DDM issued both equity and debt in early 2017

DDM: Selected income statement items, 2013-2016

*after amortisations and revaluations

Source: Company data

New funds ready to be invested The company received funds by issuing both equity and bonds in early 2017. It intends

to use the proceeds for portfolio investments and for the repayments of old debt

financing. The most recent bond was issued at 9.5% interest rate and the following

tapping was corresponding to a rate about 9.0%. That is distinctly lower than the 13%

and 18% on the issuances in June and September 2013 respectively, reducing DDM’s

average interest rate costs and lowering risk in the company.

DDM aims for investing more than EUR 50m in portfolio acquisitions in 2017. Funded

for new portfolio investments DDM could potentially enable growth and take advantage

of its operational leverage.

DDM: Portfolio acquisitions


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Net revenues* Operating profit Net profit

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Portfolio acquisitions DDM's target



We discuss the risk factors in more detail at the end of the report

Risk factors DDM is exposed to the global economic development in general and that of Central and

Eastern Europe in particular. A decreasing supply of distressed asset portfolios or

increased competition could put price pressure on the market, hurting DDM’s

profitability.

As net collections are key to DDM’s business model, collection problems could have an

impact on its business. These could be caused by a third‐party collector or by investing

in portfolios affected by fraud.

DDM’s business decisions depend on the competence of key personnel and its

proprietary IT system FUSION. Any loss of key staff or lack of appropriate development

of FUSION could lead to misguided investment decisions, burdening DDM’s financials.

Management mentions financing as critical. Poor access of and the cost of capital could

affect its ability to take advantage of market opportunities and increase its business. The

company’s issued bonds also pose a refinancing risk.

Finally, when it comes to valuation we would like to mention the sensitivity in the

WACC assumptions. We review this in detail and provide sensitivity tables in the

valuation section.

We provide an extended description of identified risk factors associated with an

investment in DDM on page 47‐48 in this report.



Valuation

The main part of our valuation is based on a fundamental DCF model that provides an equity value range of SEK 29-78 per share, using a WACC of 9.2-11.2%. Our estimates imply 2019E valuation multiples of P/E 2.9x, EV/EBIT 4.4x and P/BV 0.7x. We note that our valuation is based on a long-term analysis and is not linked to a near-term assessment of the performance of the company. DDM is trading at discounts to the 2019E peer group average of 71% on P/E, 42% on EV/EBIT and 57% on P/BV, even though the different characteristics between DDM and the peer group should be mentioned, as DDM is a significantly smaller company than the peer group average.

Our valuation approach is primarily based on a DCF framework

We derive an equity value of SEK 29-78 per DDM share based on a DCF valuation

We also provide a relative valuation, but point out that the peers are significantly larger than DDM

One of the most common ways to assess the attractiveness of an investment

opportunity is the discounted cash flow (DCF) method, discounting all available cash

flows for equity, bond and non‐equity holders at the weighted average cost of capital

(WACC). In other words, WACC represents a blended cost of capital for all capital

invested in the company. In fundamental terms, a DCF framework is built on three

parts:

Discounting the company’s free cash flow at WACC

Identifying the value of debt and other non‐equity claims on the enterprise

value

Deducting all claims to determine the value of the common equity. The fair

value per share is then simply calculated by dividing the equity value by the

number of outstanding shares.

A DCF valuation is commonly considered by academics and practitioners to be the

best way to capture the underlying fundamental drivers of a company such as cost of

capital, growth rates, reinvestment rates etc. If applied correctly, it represents the best

method to approximate the true intrinsic value of a company. The main appeal of a

DCF framework compared with other valuation methodologies is that it also focuses

on streams of cash rather than accounting earnings. Its main disadvantage is its

relative sensitivity to changes in input values.

We rely primarily on our fundamental DCF framework to derive an equity valuation

range of SEK 29‐78 per share.

We also provide a relative valuation, including some of the mentioned competitors to

DDM and other European industry peers. Our relative valuation implies a range of

SEK 63‐125 per share based on our estimates for 2018E. We point out that DDM is

significantly smaller than its peers, however, with a market cap of just 5% of the peer

group average. DDM being quite different to its peer group – being a smaller

company, having lower liquidity, operating in a narrower field of operations and in

an immature market – could justify a valuation difference between DDM and the peer

group.



We use a ROIC as equal to WACC and apply a growth rate of 2.5% in the terminal period

Time value adjusts for the fact that one euro today is of higher worth than one euro tomorrow

Summary of different valuation approaches


Fundamental valuation The tables below show the general assumptions we use to calculate the DCF value. Based on the assumption that DDM can deliver broadly in line with our forecasts, with variations in sales growth, EBIT margin and WACC (weighted average cost of capital) assumptions, we arrive at a fair equity value range of SEK 29‐78 per share. In the terminal period, we model ROIC (return on invested capital) as equal to WACC and apply a 2.5% growth rate.



WACC We apply a WACC range of 9.2‐11.2% as the input for our DCF valuation, with the assumptions behind our WACC outlined in the table below.


SEK 125

SEK 78

SEK 63

SEK 29

0 20 40 60 80 100 120 140 160

Relative Valuation

DCF

DCF valuationDCF value (SEK) Value Per shareNPV FCFF 749 to 1,158 36 to 85

(Net debt) -282 -20

Time value 19 to 39 2 to 3

DCF Value 486 to 914 36 to 67

WACC assumptionsAverages and assumptions 2017-23 2024-27 2028-32 2033-37 2038-42 2043-47 Sust.Sales growth, CAGR 13.3% 5.0% 4.0% 2.0% 2.0% 2.0%EBIT-margin, ex associates 39.8% 18.0% 18.0% 16.0% 15.0% 15.0%Capex/depreciation, x 1.85 1.00 1.00 1.00 1.00 1.00Capex/sales 93.1% 50.0% 50.0% 50.0% 50.0% 2.0%NWC/sales -8.6% 0.0% 0.0% 0.0% 0.0% 0.0%FCFF, CAGR n.a. -6.0% 4.3% 0.2% 0.7% 2.0% 2.5%

WACC assumptions

WACC componentsRisk-free interest rate 1.5%Market risk premium 5.5%Forward looking equity beta 1.55 to 2.05Cost of equity 10.0% to 12.8%Cost of debt 7.5%Tax-rate used in WACC 10%Equity weight 75%WACC 9.2% to 11.2%



We assume a WACC of 9.2-11.2%

Sensitivity tables illustrate the share’s sensitivity given changes in EBIT margin, sales growth and WACC

DCF sensitivity In the table below, we provide a sensitivity analysis of our DCF valuation, showing varying EBIT margins and sales growth rates.


Below we also illustrate how the equity value varies with changes in WACC and sales growth.


In addition, we provide a sensitivity table to illustrate how the equity value varies with changes in EBIT margin assumptions and WACC.


Terminal year We use a stringent valuation framework, with ROIC=WACC in the terminal period, which prevents the model from extrapolating above‐market returns in perpetuity. The value is distributed with a negative value in the first period as we factor in DDM using its cash for portfolio acquisitions. The first 15 years provide a net 41% of the fair value. 82% of the total value is distributed within a 30‐year period from today.

Sales growth versus EBIT margin

Sales growth change-1.0pp -0.5pp +0.5pp +1.0pp

+1.0pp 45 49 53 58 62EBIT margin +0.5pp 43 47 51 55 60change 41 45 49 53 57

-0.5pp 39 43 47 51 55-1.0pp 37 41 44 48 52

WACC versus sales growth

WACC9.2% 9.7% 10.2% 10.7% 11.2%

+1.0pp 78 67 57 49 42Sales gr. +0.5pp 72 62 53 45 38change 67 57 49 41 35

-0.5pp 61 53 45 38 32-1.0pp 57 49 41 35 29

WACC versus EBIT margin

WACC9.2% 9.7% 10.2% 10.7% 11.2%

+1.0pp 72 62 53 46 39EBIT marg. +0.5pp 70 60 51 44 37change 67 57 49 42 35

-0.5pp 64 55 47 40 33-1.0pp 61 52 44 38 32



Competitive advantages could enable DDM to generate ROIC greater than WACC

Value distribution


ROIC versus WACC Valuation wise, a company creates shareholder value when it generates a ROIC in excess of WACC; the return the company generates on its investments has to be greater than the cost of capital. For the very long run, ie in the terminal period, we assume DDM’s ROIC will be equal to WACC. From a short‐ to medium‐term perspective, however, many companies have a ROIC that exceeds WACC, often accomplished when the company has some kind of competitive advantage. For DDM, such an advantage could be management’s experience, early entry into a growing market, more accurate valuation methods for portfolio acquisitions and a business model giving operating leverage. Being a larger company also could imply lower financing costs, which could be a driver for a higher ROIC. We know from history that companies with a high ROIC tend to stay at high levels for a long time, while the same goes for companies with low ROIC. As DDM has only ten years of history and turned positive numbers as late as in 2015, the ROIC level that DDM manages to establish in the coming years will be an important measure for the company’s ability to continue creating shareholder value. In our estimates, we assume DDM will generate a ROIC that exceeds WACC for a couple of years. For 2017E‐25E, we estimate ROIC of 16.5% on average, while for the following 20 years we estimate ROIC at an average 12%. As said earlier, we estimate ROIC will be equal to WACC (10.2%) in the terminal year 2047.


-27%

39%

29%

20%

12%8%

18%

2017-23 2024-27 2028-32 2033-37 2038-42 2043-47 Sust.

82%

ROIC history and estimates

Year ROIC

2014 -5.2%

2015 26.1%

2016 21.4%2017E-2019E 21.0%2020E-2022E 16.5%2023E-2025E 11.9%

Terminal year 2047 10.2%

WACC 10.2%



We set a relative valuation range based on average discounts of P/E, EV/EBIT and P/BV

We compare DDM with a peer group of six European industry peers

Valuation multiples We contend that a relative valuation based on P/E, EV/EBIT and P/BV provides the

best benchmark for valuing DDM for the following reasons:

P/E (price/earnings) is often used to compare companies and to consider the

differences in tax rates and financing costs. However, it is biased towards

lower multiples for companies with high financial gearing. We believe that

certain adjustments should be applied when using P/E in order to

appropriately value the company

EV/EBIT (enterprise value/earnings before interest and taxes) is neutral to a

companyʹs financial gearing. It captures the operationsʹ capital intensity to the

extent that depreciation levels approximately correspond to sustainable capex

levels

P/BV (price/book value) measures the company’s valuation in relation to the

book value, giving a reality check of the valuation of a company’s book value.

In general, it is a relevant multiple for financial institutions, as the balance

sheet and book value use to be a central part of a financial company.

We also present ROE for 2017E‐19E and EPS CAGRs for 2016‐19E to offer a

comparison between the companies.

Peer group valuation We find the DCF method the most flexible and accurate when valuing most companies. However, a stringent relative valuation comparing multiples with a carefully selected peer group could provide a useful check for the DCF forecast. There are three main considerations we find necessary for an accurate relative valuation approach:

Finding the right multiple – We prefer enterprise value based multiples such

as EV/EBIT or EV/EBITDA for comparing different companies. P/E is also

commonly used but caution is needed as it does not differentiate between

companies with different capital structures

Consistency in calculations and adjustments of multiples

Finding the right peer group – Companies selected for the peer group should

have similar growth outlooks and return on capital. The most common

starting point is to use industry peers.

We present a peer group comparison of six European companies within the purchased

debt industry:

Intrum Justitia

Hoist Finance

B2Holding

Axactor

Arrow Global

Kruk

All are based in Europe and operate there. We point out that DDM is significantly

smaller than its peers, however, with a market cap of just 5% of the peer group

average. DDM being quite different to the peer group – being a smaller company,

having lower liquidity, operating in a narrower field of operations and in an immature



Smaller size, lower liquidity, narrower area of operations and an immature market could possibly justify a valuation difference to the peer group

market – could justify a valuation difference between DDM and the peer group. A

short description of each company in the peer group can be found later in this section.

To derive a fair value equity range for DDM we calculate averages for 2019E P/E,

EV/EBIT and P/BV multiples for peers, arriving at a range of 7.8‐14.2x P/E, 4.9‐16.1x

EV/EBIT and 1.2x‐2.5x P/BV for our peer group. Implying a value for DDM within the

range of the average of each multiple gives a value of SEK 63‐125 per share.

Based on our estimates for 2019, DDM trades at discounts to the peer group average of

71% on P/E, 42% on EV/EBIT and 57% on P/BV. Comparison numbers suggest that

DDM has a ROE of 28% on our 2019 estimates, compared with the 17% average for the

peer group. The EPS CAGR for 2016‐19E is 25% for DDM versus a 22% median for the

peer group.

As a complement we also provide a comparison of three large global peers, based in

the US and Australia. The 2019 estimated multiples of the international peers indicate

a discount of 63% for DDM, even though the same arguments apply for these – size,

liquidity, area of operations and market – and could justify a valuation difference

between DDM and the peer group.

Source: Thomson Reuters and Nordea Markets


DDM versus European peers

ROIC

EPS CAGR

2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2016 16-19E

Intrum Justitia 2,208 296 15.0 13.1 11.9 9.4 6.5 6.0 1.8 1.7 1.6 14.8 13.1 13.0 15.2 11%Hoist Finance 719 87 12.2 10.2 9.6 19.1 17.2 16.1 2.0 1.6 1.4 18.3 17.7 16.8 7.4 25%B2Holding 616 16 12.5 9.0 8.2 9.9 7.6 6.8 2.0 1.7 1.5 17.9 21.3 21.1 3.6 28%Axactor 302 2 48.0 13.1 7.8 24.2 8.3 4.9 1.7 1.3 1.2 4.2 12.6 18.3 -8.3 -167%Arrow Global 797 393 11.7 9.3 8.1 7.1 6.0 5.2 3.2 2.4 1.9 32.3 33.2 12.3 3.6 28%Kruk 1,342 299 19.8 17.7 14.2 10.4 8.9 7.3 3.8 3.2 2.5 22.2 20.9 20.6 12.1 20%

Average 997 19.9 12.1 10.0 13.3 9.1 7.7 2.4 2.0 1.7 18.3 19.8 17.0 5.6 -9%Median 758 13.8 11.7 8.9 10.2 8.0 6.4 2.0 1.7 1.5 18.1 19.3 17.6 5.5 22%Min 302 11.7 9.0 7.8 7.1 6.0 4.9 1.7 1.3 1.2 4.2 12.6 12.3 -8.3 -167%Max 2,208 48.0 17.7 14.2 24.2 17.2 16.1 3.8 3.2 2.5 32.3 33.2 21.1 15.2 28%

DDM (Nordea est) 54 38 6.0 3.6 2.9 6.4 4.8 4.4 1.3 1.0 0.7 26.0 30.5 28.0 11.6 25%

Difference vs average -95% -70% -70% -71% -52% -47% -42% -47% -52% -57% 43% 54% 65% 108% -378%Difference vs median 14%

ROE (%)P/E EV/EBIT P/BV

Company

Market cap

(EURm)

Share price

(local)

DDM versus global peers

ROIC

EPS CAGR

2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2017E 2018E 2019E 2016 16-19E

Credit Corp 558 18 15.2 13.0 11.6 12.0 10.2 8.9 3.4 3.0 2.6 23.2 24.4 25.1 15.0 20%Encore 877 38 11.2 10.2 8.7 11.3 9.9 9.5 1.5 1.3 n.a. 13.2 15.5 n.a. 0.5 10%PRA Group 1,510 36 12.5 17.8 11.3 14.7 12.0 10.0 1.6 1.5 1.3 15.4 11.4 13.7 3.1 4%

Average 982 12.9 13.7 10.5 12.7 10.7 9.5 2.2 1.9 1.9 17.3 17.1 19.4 6.2 11.0%Median 877 12.5 13.0 11.3 12.0 10.2 9.5 1.6 1.5 1.9 15.4 15.5 19.4 3.1 9.7%Min 558 11.2 10.2 8.7 11.3 9.9 8.9 1.5 1.3 1.3 13.2 11.4 13.7 0.5 3.5%Max 1,510 15.2 17.8 11.6 14.7 12.0 10.0 3.4 3.0 2.6 23.2 24.4 25.1 15.0 19.8%

DDM (Nordea est) 54 38 6.0 3.6 2.9 6.4 4.8 4.4 1.3 1.0 0.7 26.0 30.5 28.0 11.6 25%

Difference vs average -95% -54% -74% -72% -49% -55% -53% -41% -51% -63% 51% 78% 45% 87% 131%

P/E EV/EBIT P/BV ROE (%)

Company

Market cap

(EURm)

Share price

(local)



We compile a short description of the six European peers in our peer group

We also compile short descriptions of three global peers, outside of our peer group

Description of peers

We provide a short description of the peers, consisting of larger players within the

industry:

Intrum Justitia – Sweden’s Intrum Justitia is a leading European player in credit

management services, operating across the full value chain including debt

purchase and collection and other related services. Intrum Justitia is in a process

of merging with Lindorff – awaiting approval by competition authorities.

Intrum Justitia is already Europe’s largest collector, merged with Lindorff it

would take an even stronger position in the European market.

Hoist Finance – Another Swedish company operating in purchased debt in

Europe. Hoist describes itself as a leading debt restructuring partner to

international banks with experience in handling complicated transactions.

B2Holding – Norwegian purchased debt firm B2Holding operates in CEE. It

began operations in late 2011.

Axactor – The management team of Norway‐based Axactor has previous

experience from Lindorff. Axactor began operations in late 2015. It operates in

the Nordic region and Central and Western Europe.

Arrow Global – UK debt purchaser and manager Arrow Global buys debt from

a broad range of customers, including banks, credit card and telecom

companies.

Kruk – Poland’s Kruk is broadly involved in debt management services,

handling both consumer and corporate debt. It began operations almost two

decades ago. Since 2007, it has expanded its business into numerous European

markets, including Romania, Czech Republic, Slovakia, Germany, Italy and

Spain.

As a complement we also provide a short description of global peers, consisting of three

large players within the industry:

Credit Corp Group – Australia’s largest provider of sustainable financial

services Credit Corp Group operates in the credit impaired consumer segment.

Encore Capital Group – Encore is a US based debt purchaser operating in 14

countries in the field of consumer receivables which it buys from major banks,

credit unions, utility providers, municipalities etc.

PRA Group – PRA is a global leader of acquisition and collection of NPLs. The

company is based in the US and operates in both the Americas and Europe.



Company overview

Founded in 2007 with accelerated operations during the last three years, DDM is a relatively new player on the market for investing in distressed assets. The management and board have more than 50 years of combined experience in the market, however, and manage about 2.3 million cases. In early 2017, DDM issued new equity as well as bonds worth EUR 11m and EUR 85m, respectively. With the new funds in place, DDM aims to acquire more portfolios of distressed assets in the company’s target markets of Central and Eastern Europe.

DDM is a specialist acquirer and manager of distressed asset portfolios in Central and Eastern Europe

Net collections CAGR of 53% in 2013-16

Portfolio acquisition decisions based on the proprietary IT system FUSION

Has made share and bond issue in 2017

DDM was founded in 2007

DDM was listed on Nasdaq First North in August 2014

DDM is a specialist acquirer and manager of distressed asset portfolios in Central and

Eastern Europe (CEE), managing distressed assets with a nominal value of more than

EUR 2bn, spread over 2.3 million cases. That implies an average face value per case of

EUR 870 in the company’s portfolio. At the end of 2016, DDM had 22 employees

operating from its headquarters in Switzerland.

DDM has grown net collections from less than EUR 10m in 2013 to close to EUR 35m in

2016, indicating a CAGR of 53%. It reached positive operating profit in 2014 and positive

net profit in 2015. The majority of DDM’s distressed asset portfolio can be split

geographically between Slovenia, Hungary, Romania and the Czech Republic.

DDM makes its portfolio acquisitions using its proprietary IT system FUSION, which is

continuously developed based on the company’s experiences. Collections are made by

local agencies, where DDM can tailor a solution for each single portfolio investment.

DDM’s geographical focus is on Central and Eastern Europe, a market where the

company sees a strong trend for increased transaction volumes, a trend it believes will

continue in the coming years. Combined with DDM’s market experience, its thorough

understanding of the collection process and its established contacts with sellers and

collecting agencies, DDM seems to have an advantage in the market.

New funds added in early 2017 DDM mentions financing as a key challenge to taking advantage of opportunities it has

identified in the market. In early 2017, the company finished a fully subscribed equity

issuance of EUR 11m as well as a bond issuance of EUR 85m.

DDM history: Young company with in-house experience DDM started in 2007, when a group of individuals with previous experience from

building a similar business decided to start a new company. Even though the company

has a history of only ten years, management and the board’s total experience in the

distressed asset market is more than 50 years. Combined, management and the board

have overseen thousands of transactions in more than 25 countries.

After an initial startup phase, DDM made its first investment in Russia during 2008. That

was followed by a recruitment process for key personnel, the creation of business

processes and the development of IT systems, as well as entering new markets –

Romania, the Czech Republic and Slovakia.

Since 2013, the company’s focus has been on scaling up the business. This was also the

year when CEO Gustav Hultgren joined the company. In August 2014, the DDM stock

was listed on Nasdaq First North in Stockholm, enabling further expansion. Since then,

the company has invested in distressed asset portfolios in a number of different

countries in Central and Eastern Europe. A number of debt issues have also taken place

in the last few years to make the expansion possible.



DDM aims for a listing on the main market in H1 2018

DDM’s headquarters are in Switzerland

Has invested in eight countries and targets more CEE countries

In April 2017, the company announced its intention to apply for a listing on the Nasdaq

OMX Stockholm’s main market. Management mentions increased institutional and

international ownership as a possibility, if the company change its listing. It also

considers the seal of quality that is associated with a Nasdaq OMX main listing a positive

injection for the company’s business and one that could improve its relationships with

sellers and other stakeholders. The company’s target is to move from First North to the

main list during H1 2018.

Since its first investment in 2008, the company has added numerous portfolios in

different countries and accumulated data to its IT system FUSION. Central functions and

the business model are up and running and the company sees additional opportunities

in the Central and Eastern Europe market for distressed asset portfolios, hence the focus

on scaling up the business continues to this day.


DDM on the European map Taking a geographical journey in the footsteps of DDM would be an exclusively

European trip, starting in Baar, in the canton of Zug in Switzerland, where the company

is headquartered and where its central operations take place. Zug is strategically located

near collectors across Eastern Europe, providing fast access to meetings with sellers. The

canton of Zug is also home to industry peers like Intrum Justitia. Switzerland is popular

amongst industry peers due to its stable regulatory environment and VAT efficiency to

the debt collection industry.

After the company’s first portfolio investment in Russia, its focus has broadened from

Eastern Europe to also include Central Europe. The expansion has continued and in

addition to Russia, DDM has invested in Slovenia, Poland, Hungary, the Czech Republic,

Romania, Slovakia and Macedonia. Central and Eastern Europe remain the key region

for DDM when targeting new opportunities for portfolio investments. The company is

aiming at existing markets as well as some neighbouring countries including Estonia,

Latvia, Lithuania, Croatia, Serbia and Bulgaria.

The banking sector in the region is subject to stricter capital ratio requirements, so the

divestment of distressed assets on banks’ balance sheets appears advantageous. For

DDM, this is a desirable development, as the supply of investable assets will likely

continue to increase. Thanks now to ten years of experience, the company has started to

build up crucial relationships within these markets. Furthermore, a number of financial

institutions, such as banks operating in Central and Eastern Europe, are reconsidering

their ongoing presence in the region, according to market studies. As some of these

institutions decide to leave, the supply of investable portfolios with distressed assets

increases for DDM.

DDM: Historical key events, 2007-2017

Year Event

2007 DDM was founded2008 First portfolio acquisition (Russia)2009 Build up of team, processes, IT system etc starts2009 Enters three new markets (Romania, Czech Republic and Slovakia)2010 Enters Macedonia2013 First bond issue (SEK 300m)2014 IPO on Nasdaq First North2014 Enters Poland and Slovenia2015 Enters Hungary (two acquisitions)2016 Share capital increase and first Euro bond issued2016 Landmark acquisition in Slovenia2017 Share capital increase and largest debt issuance so far in the company's history



DDM has close ties to Sweden

Despite DDM’s headquartering in Switzerland and its operations in Eastern Europe, a

geographical study of the company also requires a journey to the Nordics, as DDM has

strong ties to Sweden. Several board members and members of the executive

management, including the chairman of the board, the CEO and the CFO, are Swedes.

Numerous large shareholders are Swedish, and so Stockholm seemed to be a natural

choice for the listing of the DDM share in 2014. In addition, a number of bond issues

have been carried out in Sweden.

DDM: Market entries




Experienced management and board

Proposal to elect new main owners to the board of directors

Executive management The track record of todays’ management composition is still only a few years old. With

each year of solid performance, however, another piece is added to the puzzle, offering

the potential for increased confidence in the management team and thus also in DDM.

The management and board have experience from several thousand transactions via

portfolio acquisitions in more than 25 countries.


Board of directors Besides distressed asset industry experience, the Board of Directors includes experts in

tax law, business management, M&A and financial markets.

Chairman Kent Hansson and Dr Manuel Vogel are two of the founders of DDM and are

large shareholders.

At the AGM on 31 May 2017, the members will vote on a proposal to admit the new

main owners, Erik Fällström and Andreas Tuczka, to the board of directors. We provide

more information about the new main owners below.



Aldridge EDC Speciality Finance Partners stepped in as new largest shareholder in April 2017


Shareholders The picture of DDM’s shareholding has changed significantly this year, with Aldridge

EDC Specialty Finance Partners emerging as its largest shareholder. AEDC is run by Erik

Fällström, co‐founder of Hoist Finance, and Andreas H Tuczka, a former partner at Lone

Star Europe. Aldridge aims to purchase operating businesses and assets within the

financial services sector in Europe and CEE. It is investing in consumer lending

platforms, financial solutions and regulated financial institutions such as banks. In April

2017, DDM announced that Aldridge owns 48.8% of the shares, citing DDM’s disciplined

cost structure, recently well diversified funding base and clear focus on CEE as key

reasons for taking a large ownership in the company. The new owners have significant

experience in the financial industry in general and the NPL industry in particular, which

could be a positive injection for DDM.

At the end of 2016, DDM had approximately 244 shareholders. Kent Hansson, the

chairman of the board and co‐founder, was the largest owner with 25.4% of total capital

and votes, followed by Dr Manuel Vogel, vice chairman and co‐founder, holding 18.9%

of total capital and votes. After the principal owner change in April 2017, their stakes

were reduced to 4.3% and 3.5%, respectively. Management holds a combined 369,000

shares in the company.




Corporate structure DDM’s current corporate structure is illustrated below.

DDM Group AG is the company where the operations take place, while DDM Holding

AG is the parent company whose outstanding shares are listed on Nasdaq First North in

Stockholm.

DDM Debt AB was founded in 2016 with the purpose to fund the DDM Group’s growth

by issuing corporate bonds. DDM Finance AB is a financing company, acting as a

holding company for DDM Debt AB with the purpose of providing credit support for

financing. Also DDM Treasury is a Swedish subsidiary with the same purpose as DDM

Debt AB.

DDM: Corporate structure


DDM: Largest shareholders as of 30 April 2017

Owner No. of shares Capital and votes (%)

Aldridge EDC Specialty Finance 6,618,263 48.8%Praktikertjänst Pensionsstiftelse 795,000 5.9%Strategic Investments 670,077 4.9%Hansson, Kent 584,027 4.3%Vogel, Manuel 469,070 3.5%Göransson, Richard 447,760 3.3%J.P. Morgan Europe Limited 425,000 3.1%Nordnet Pensionsförsäkring AB 317,533 2.3%Hultgren, Gustav 263,571 1.9%Förvaltnings AB Hummelsboholm 224,215 1.7%Total; largest owners 10,814,516 79.8%Summary others 2,745,931 20.2%Total 13,560,447 100.0%



Business model

There are several reasons for banks to divest distressed asset portfolios, but the two main reasons are that distressed asset management is a non-core activity for most banks and that distressed assets are expensive for banks to keep on their balance sheets due to required capital adequacy ratios. DDM buys such assets from banks and other financial institutions at large discounts, thus making its net revenue from the difference between the purchasing price and the final amount collected. Management and the board’s market experience and the company’s proprietary IT system FUSION, which includes data on about 2.3 million active cases, are two key success factors that make DDM a competitive player on the market.

Distressed assets are expensive assets for banks due to required capital adequacy ratios

Banks’ rationale to divest There are a series of reasons for banks to divest debt portfolios – amongst them

distressed assets is not a banks’ core activity and the assets are expensive on the banks’

balance sheets in terms of capital adequacy ratios. We list the main reasons for banks’ to

divest distressed asset portfolios:

Non‐core activity for the bank

Non‐core customers with limited additional income

Monetise on already written down assets

Reduce operational costs and improving liquidity

Regulatory pressure to increase capital ratios

Limited in‐house collection activity and expertise, or too small to get scale

advantages.

When a bank decides to sell, that offers DDM the chance to opportunistically buy the

assets it finds attractive and take over the collection process.

Business model overview Since its start in 2007, DDM’s management and has used its experience in the European

NPL (non‐performing loans) market to build up processes for analysing, pricing and

managing acquired portfolios. When a consumer or corporation fails to make payments

on time, the debt is termed “distressed”. In cases where a customer with a bank loan

becomes distressed and, in some cases, stops paying on their loans, the bank usually

makes some efforts to collect the money. Sooner or later, however, the bank may choose

to divest its distressed assets. This creates a market where DDM can operate

opportunistically by calculating valuations of distressed assets and buying when the

expected return is attractive. Value is created for the banks, which can focus on their core

business, and debtors can find support to settle their debts under terms they can afford.

Roughly speaking, DDM’s process consists of three parts: acquisition, asset management

and debt collection. DDM’s expertise is in the two first steps, while it outsources the

collection part to different companies within its collection network. It outsources to local

agencies, as DDM considers the first two steps more profitable. DDM can hire different

agencies depending on the portfolio’s unique characteristics. Regardless of the final

outcome, all data generated from the operations can be used as input to FUSION,

increasing the precision of the data models for future operations.



DDM monetises on the difference between price paid and actual collections

FUSION was created using information based on managements’ industry experience. Its

advanced models are used to evaluate potential acquisitions and manage current

distressed asset portfolios.

Overview of the distressed assets value chain (orange is where DDM operates)

Source: Company image

Acquisitions Acquisitions are made at a significant discount to the face value. Greatly simplified,

DDM evaluates the estimated cash flow from a specific portfolio and compares that with

the price tag of the portfolio and DDM’s internal return requirements. If DDM assesses

the opportunity as attractive enough, a portfolio acquisition can take place.

The difference between net collections made from a portfolio minus the price paid for the

portfolio will give the revenue on invested assets. This difference is the key to the

monetisation of the industry and for DDM. Net collections also take into account the fees

paid to the collection agencies. The illustrative example below shows how revenue

occur, although note that these are illustrative numbers and do not relate to DDM.

Illustrative example of net collection generation


In the wider market for distressed assets, DDM is targeting some specific characteristics

when evaluating potential portfolio acquisitions. DDM is looking mainly for investment

portfolios in the range of EUR 3‐30m in Central and Eastern Europe. DDM is focusing

primarily on financial institutions as sellers. When it comes to the type of assets, the

DDM model is quite flexible, able to accept debt from the consumer and corporate

segments, secured and unsecured, and performing and non‐performing debt.

Face

value

Purchase

price Net collections

Revenue on

invested assets

10 % 20 %

10 %



Targets EUR 3-30m portfolios

DDM: Key portfolio characteristics


DDM’s acquisitions have historically been made through three kinds of methods: open

tender, direct sales or forward‐flow transactions.

Open tender – DDM is a bidder in a portfolio offered for an open tender

Direct sales – DDM engages with a seller and negotiates tailored terms. Direct

sales are in general more attractive for DDM. Some sellers prefer direct sales to

give the deal less attention, as some transactions may be sensitive

Forward‐flow transactions – In forward‐flow transactions, deals are struck on an

ongoing basis. These transactions may lead to the development of long‐term

relationships and help to keep transaction costs low. However, such acquisitions

account for only a small part of DDM’s transactions historically.

DDM: Acquisition method (based on acquired nominal value)


Asset management When the portfolio acquisition is complete, DDM’s focus will shift to the asset

management part of the process, focusing on collecting the portfolio values. Efficiency,

fair and ethical treatment of the debtor, and data confidentiality are essential in this part

of the process.

A portfolio’s performance depend on the different characteristics it possesses, DDM

mentions that collections can generally start a few weeks after acquisition and typically

peak within the first 12 months, before starting to decelerate. DDM’s estimated

remaining gross collections was EUR 79.8m as of 31 December 2016, of which DDM

estimates 37% is to be collected during 2017, 25% in 2018 and 16% in 2019. This is

broadly in line with the company’s cash flow distribution guidance for new portfolios. It

can give a picture of what is a typical collections distribution from an existing portfolio,

although we note that this specific portfolio composition are a bit more “short tailed”

than usual, because some of DDM’s most recent portfolio acquisitions consist of

performing loans.

Geography Central and Eastern EuropeSeller Financial institutionsType Consumer and CorporateCollateral Secured and un-securedUnderlying assets Performing and non-performingPortfolio size EUR 3-30m

Open tender60%

Direct sales30%

Forward-flow transactions

10%



IT system FUSION is used to evaluate potential acquisitions and current portfolios

Streamlines the accounting process

DDM: ERC Distribution as of 31 December 2016


Referral As DDM outsources the collections, its focus is on choosing the right partner for

collecting a particular debt, benefiting from different agencies’ relative strengths. DDM’s

experience as a relatively early player in some Central and Eastern European markets

and its robust relationships with around 40 different agencies are advantages. DDM can

select the collector based on criteria such as size, age, type and geography.

Monitoring Once DDM has chosen an agency, focus can shift towards monitoring the collection,

which is done through daily updates. Daily data files are sent from the agencies to DDM,

including information on the collection’s status. DDM can evaluate the collector’s

progress and if applicable, take actions by changing agency if the expected results are

not fulfilled.

IT system – experience supports company’s decisions The last but no means least important step in the process is the transfer of data input to

DDM’s proprietary data system, FUSION. Different kinds of data, such as investment,

case, payment and activity data, will be sent to the database. Over ten years, DDM has

accumulated a significant amount of data. FUSION is based on more than 50 years of

combined industry experience, 2.3 million active cases and 38 connected debt collection

agencies. This makes FUSION an important asset in DDM’s business model.

The company gives a list of advantages gained from FUSION, including higher accuracy

in pricing and evaluation of portfolios, lower credit risk as collection data gives more

predictable cash flows, managing and controlling collection agencies and improving

collection efficiency as the best‐fitting agency can be chosen for each specific case. In

other words, DDM can use FUSION to as a support for future business decisions.

As illustrated below, FUSION has input data from vendors (sellers such as financial

institutions) and debt‐collecting agencies (DCAs). DDM feed the data into its model and

the results help it to select which portfolios to invest in and which DCAs it will choose.

Furthermore, the IT system is linked to the company’s accounting software, streamlining

that process.

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15

20

25

30

35

2017 2018 2019 2020 2021 2022 2023-2025

EU

Rm

ERC Distribution as of 31 Dec 2016



Overview of IT system FUSION main data flows

Source: Company image



The distressed asset market in CEE

Central and Eastern Europe is quite an immature market for the purchased debt industry, compared with the more mature Western Europe market, for example. However, an accelerating number of market opportunities may come to light as more countries in the region report a growing number of distressed asset deals. Studies find an improved momentum of NPL deals in the region, as more financial institutions follow the trend of divesting distressed asset portfolios. Romania and Hungary, where DDM has already invested, stand out as the two countries with the highest deal activity in the past few years. Studying DDM’s invested and targeted markets from a global perspective puts the median in the top 20th percentile in the World Bank’s “Ease of doing business index”.

NPLs’ development typically follow a cyclical path

Cyclicality of debt collection In a typical credit cycle for NPLs and distressed assets, credit growth occurs and

distressed assets decrease during the macroeconomic expansion phase. At the peak, the

borrower has the leverage and so do the banks, stretching their lending. When the

economic climate cools down, consumers and corporates alike might struggle to make

payments. Even though credit growth decreases, the amount of distressed debt

increases. During the repair phase, the market for sold NPL portfolios takes off. When

the economic cycle has returned to the expansion phase, a larger amount of the

distressed debt can be paid back.

After researching this area, we assume the credit cycle in Central and Eastern Europe is

somewhere between phase 4 and phase 1, as shown below, because we can see increased

activity in the sale of NPL portfolios, but also signs of credit growth and increased bank

profitability. This implies a phase where we could see a favourable environment for NPL

debt collection.

The credit cycle of NPLs


•Borrower leverage

•Bank leverage

•Bank LDRs

•NPLs

•Credit growth

•Credit growth

•Bad debtrecoveries

•NPLs

•Asset prices

•Bank profitability

•Provisions

• System leverage

•Bank capital

•NPL portfolios sold

4 Repair

1 Expansion

2 Peak

3 Downturn



An immature NPL market implies low prices, but also high spreads between buyers and sellers

CEE accounts for around 5% of the total European NPL market

CEE – an immature NPL market Debt collection is far from a new phenomenon. It is actually as old as the history of debt

itself. However, during the savings and loans crisis of the 1980s, the number of

foreclosures and written‐off accounts increased heavily, boosting the debt collection

industry. The CEE market was established even later. As an example the first

professional debt collection agency in Russia was founded in 2005.

In Deloitte’s research into the NPL market in CEE, most countries in the region fit into

the criteria of an introduction or a growth market, according to the diagram below,

implying some cultural barriers and large discrepancies between buyers and sellers. On

the positive side, prices are generally lower in an introduction market and market

opportunities should get larger as markets approach the growth phase. DDM mentions

that it sees an untapped potential in the CEE market.

NPL markets growth and maturity cycle


NPL market in CEE is gaining deal momentum Deloitte estimates the total market for NPL volumes in CEE, including the Baltic states,

at EUR 51bn at the end of 2015. In another study, PwC suggests NPL volumes for Europe

amount to around EUR 1,100bn. Based on the numbers combined, CEE accounts for

around 5% of the European NPL market. The NPL volumes at banks increased each year

from 2011 to 2013 according to Deloitte. In 2014 and 2015, this level turned downward,

showing falling NPL volumes among the banks. All CEE countries covered in Deloitte’s

study achieved positive real GDP growth in 2015, indicating a healthy economic

environment in the region. This may be one reason for decreasing NPL volumes among

the banks. An increased trend of banks selling their distressed assets to specialised

players, such as DDM, may be another reason.



Banks and NPL investors are approaching each other

The CEE region consists of a wide range of countries with fairly different characteristics.

In the NPL market there is a divergence between the CEE countries, observed in the

Deloitte study; the NPL ratios (ie non‐performing loans as a share of total outstanding

loans) are significantly lower among the northern than the southern countries in the

region. Among the northern countries, including Poland, the Czech Republic, Slovakia,

Estonia, Latvia and Lithuania, NPL ratios are between 5% and 10%, while in the

southern countries, including Hungary, Romania, Slovenia, Croatia, Bulgaria and Serbia,

the levels are between 10% and 22%. In total, the trend for NPL ratios is down, and

Deloitte assumes it will resume, given the region’s improving economics and the

increased interest from NPL investors in purchasing portfolios from the banks.

The increased deal activity for distressed assets in CEE shown by Deloitte saw the total

face value of completed deals until October 2016 at EUR 5.2bn versus EUR 4.3bn for all

of 2015. The estimated value of ongoing deals totals an additional EUR 5.4bn. Deloitte

assumes the increasing number of active NPL investors in the region is a reason for the

increasing deal volumes, as well as greater willingness by banks to divest NPL

portfolios. The largest activity over the past two years has been in Romania and

Hungary, two markets where DDM is already present. Among ongoing transactions the

largest are in Hungary and Croatia. DDM has not yet invested in Croatia, but it has

stated that it is among a group of countries where it is currently evaluating portfolios.

The higher market activity reported by Deloitte is also confirmed by DDM, the company

mentioning a strong trend of increased transaction volumes that it expects to continue.

NPL markets growth and maturity cycle

Source: Deloitte and Nordea Markets

Key market trends identified by DDM In addition to the regulatory changes to bank capital requirements and the general state

of the economy in Europe, DDM identifies four major industry trends:

Increased adoption of selling loan portfolios Banks continue to strengthen their balance sheets by deleveraging and cutting costs so as

to improve their capital adequacy ratios and cash positions. Also, the European‐wide

banks stress test results released in 2016 indicate several banks need to strengthen their

balance sheets further. DDM considers this a clear driver for increased activity in the

debt asset market. The company has also noted an increased willingness among the

banks to sell NPLs in smaller parts, making the market more accessible for smaller

investors.

0

1

2

3

4

5

Romania Hungary Croatia Slovenia Poland Serbia Bulgaria Lithuania CzechRepublic

EU

Rb

n

2015 2016 (until Oct) Ongoing



DDM sees post financial crisis regulations as a key factor driving NPL deal volumes

DDM expects “bad banks” to increase their sales activity of distressed assets

Slovenia, Hungary, Romania and the Czech Republic account for 97% of DDM’s portfolio

Implementation of regulations The increase in regulations in the financial industry in the wake of the financial crisis is

obvious, including stricter capital requirements, as Basel III, which is to be gradually

phased in towards 2019, making it more expensive for banks to keep high‐risk assets on

their balance sheets. DDM identifies this as a key factor driving NPL deal volumes.

Improved portfolio pricing DDM expects the mismatch between the expectations of buyers and sellers of distressed

assets to improve, leading to a more efficient environment for deal‐making in CEE. This

is usually one of the largest challenges for closing NPL deals.

The creation of “bad banks” and government reforms The financial crisis has revived the concept of “bad banks”. They are designed to take

bad debt from commercial banks, moving these debts to government‐supported banks as

an economic aid during tough years, such as in the recovery from the financial crisis.

DDM expects an increase in sales activity from these banks.

DDM’s invested and targeted markets DDM has a flexible approach to what countries it invests in, although it focuses on CEE.

Its investment style takes more of a bottom‐up approach, with DDM looking for the

most profitable investments, rather than focusing on expansion in a particular market. It

is currently invested in Slovenia, Hungary, Romania, the Czech Republic, Russia and

Slovakia – the first four together accounting for 97% of its total portfolio. These four

economies offer fairly good economic development and a clear trend of lower NPL ratios

among their banks, thanks to the strong trend of cleaning up NPLs by selling to

specialised bad debt purchasers.

Moreover, DDM is currently evaluating portfolio investments in Croatia, Serbia,

Bulgaria and the Baltic countries. A portfolio including more countries could mean a

lower country specific risk, as political risks and currency risks get diversified, for

example.

Credit and NPL profile of DDM's largest markets

Credit growth NPL clean up trend in banks

SloveniaHungaryRomania n/aCzech Republic



DDM targets the currently invested markets and some neighbouring countries

Corporate NPLs within banks decreased 20% in 2015

DDM: Current invested and targeted markets


Slovenia – seeing the trend of banks’ NPL divestments Slovenia’s economy has been quite stable in recent years, with real GDP growth around

2.5%. Public debt is 83.7%, placing Slovenia among the most indebted countries in CEE.

Its banking sector is still recovering. Retail loan volumes increased by 1.1% in 2015,

reflecting the banks’ appetite for household lending. Corporate loans decreased by as

much as 10% in 2015, but corporate loan demand is expected by Deloitte to increase in

the near future.

NPL volumes among Slovenian banks decreased heavily in 2015, by more than 10% for

retail and 20% for corporates, partly owing to the ongoing trend of selling off debt

portfolios.



Retail NPL ratio was 17.7% in 2015

GDP up 3.8% and unemployment rate was 6.8% in 2015


Hungary – highest retail NPL ratio in CEE Hungary has shown solid real GDP growth in recent years, helped by domestic

consumption and net exports. The unemployment rate of 6.8% is far below the average

rate in CEE. Bank loan volumes decreased by more than 12% in 2015, in both the retail

and corporate segments. However, lending to small and medium‐sized enterprises grew

by 3.6% in 2015 and is expected by Deloitte to continue growing, also thanks to an

initiative by the central bank to increase market‐based corporate lending. Negative credit

growth in the retail segment has been influenced by the Settlement Act and credit

growth is suggested by Deloitte to remain somewhat light.

NPL volumes among Hungarian banks declined heavily in 2015, largely explained by a

deal through which MKB divested a large non‐performing real estate portfolio. This

example shows the distressed asset divestment trend for the banks. NPL volumes in the

retail segment have also decreased, but at 17.7% this is still the highest of the 12 countries

in the Deloitte study. Resolution of retail mortgage NPLs is a big challenge for

regulators. The recent positive real estate market should help this clean‐up. NPL activity

has gained some momentum, as several banks are selling their portfolios to NPL

investors.


Romania – healthy economic measures Romania’s real GDP grew by 3.8% in 2015, fuelled by domestic consumption. The

unemployment rate was 6.8% in Romania, which fares well in an international

comparison. The fairly positive economic environment is also reflected among the banks,

with a clear improvement in profitability and credit growth, especially in the retail

segment.

Slovenia: Loan and NPL profile

2014 2015 Change (% or % point)

MacroGDP (% real y/y) 2.4% 2.6% 0.2%Recorded unemployment 9.6% 9.0% -0.6%Bank loans (EUR mn)Retail loans 8,762 8,856 1.1%Corporate loans 11,191 10,068 -10.0%NPL volumes (EUR mn)Retail NPLs 464 416 -0.6%Corporate NPLs 1,981 1,550 -2.3%NPL ratios (%)Retail NPL ratio 5.3% 4.7% -0.6%Corporate NPL ratio 17.7% 15.4% -2.3%

Hungary: Loan and NPL profile


MacroGDP (% real y/y) 3.6% 2.9% -0.7%Recorded unemployment 7.9% 6.8% -1.0%Bank loans (HUF bn)Retail loans 6,724 5,884 -12.5%Corporate loans 6,760 5,929 -12.3%NPL volumes (HUF bn)Retail NPLs 1,289 1,040 -19.4%Corporate NPLs 1,056 579 -45.2%NPL ratios (%)Retail NPL ratio 19.2% 17.7% -1.5%Corporate NPL ratio 15.6% 9.8% -5.9%



Portfolio prices around 20% of face value implies mature NPL market

“Ease of doing business” ranks DDM markets in the top global quintile

Sales of non‐performing loans continued in 2015, but the level is hard to distinguish after

a methodology change by NBR, the central bank. However, Romanian banks did remove

a considerable amount of NPLs from their balance sheets in 2014 and 2015, taking NPL

ratios to 13.6%, which is around the average for the region.


The Czech Republic – credit growth suggests long term NPL growth The Czech economy is doing well, with real GDP growing by 4.3% in 2015, the best level

in the region. Moreover, the unemployment rate dropped to 6.5%. Among the banks, the

low interest rate environment and improving economic conditions triggered growth in

loans, especially retail loans.

NPL ratios fell, attributable to lower NPL volumes after write‐offs, but strong credit

growth suggests an increase in NPLs in the medium to long term. The market for debt

sales in the Czech Republic is undoubtedly high, with the 2015 nominal value offered for

sale more than double that in 2014. The average sales price is ~20% of face value, placing

the Czech Republic among the relatively mature markets for debt sales, unlike many

other CEE countries, reflecting the country’s strong and relatively well developed

economy.


Economic overview of invested and targeted markets An overview of the World Bank’s “Ease of doing business” and Transparency

International’s “Corruption perception” rankings gives a picture of DDM’s current

invested and targeted markets. Here, low numbers are positive, indicating a high

ranking. In ‘Ease of doing Business’, DDM’s invested and targeted markets achieve a

median of 35, among the 190 countries. ‘Corruption perception’ ranks DDM’s markets at

a median of 55, among 176 countries.

Romania: Loan and NPL profile


MacroGDP (% real y/y) 3.0% 3.8% 0.8%Recorded unemployment 6.8% 6.8% 0.0%Bank loans (RON mn)Retail loans 102,117 107,953 5.7%Corporate loans 105,468 106,006 0.5%NPL volumes (RON mn)Retail NPLs 7,918 9,823 n/a*Corporate NPLs 19,694 27,971 n/a*NPL ratios (%)Retail NPL ratio 7.8% 9.1% 1.3%Corporate NPL ratio 18.7% 26.2% 7.5%

*not comparable due to methodology change

Czech Republic: Loan and NPL profile


MacroGDP (% real y/y) 2.0% 4.3% 2.3%Recorded unemployment 7.7% 6.5% -1.2%Bank loans (CZK mn)Retail loans 1,228,149 1,323,657 7.8%Corporate loans 874,855 883,898 1.0%NPL volumes (CZK mn)Retail NPLs 58,116 53,873 -7.3%Corporate NPLs 57,873 50,559 -12.6%NPL ratios (%)Retail NPL ratio 4.7% 4.1% -0.6%Corporate NPL ratio 6.6% 5.7% -0.9%



DDM mentions three different kinds of competitors

This puts DDM’s invested and targeted countries in the top 20 percentile in “Ease of

doing business” and in the top third in “Corruption perception”.

Source: The World Bank: Doing Business 2017, Transparency International 2016* and Nordea Markets

Competition DDM differs from most of its competitors as it does not collect the debt using an own

collection organisation, but outsources collection to specialised agencies in the different

markets. Even though the business models differ somewhat among debt purchase

companies, DDM mentions three types of debt investors among its competitors:

Local investors – Small local debt purchasers and collection agencies in each

countries

International NPL investors – Intrum Justitia, B2Holding, Lindorff and EOS

Group, for example

Large international financial institutions – Deutsche Bank and AnaCap Financial

Partners among them.

Alternative economic indicators

Country DDM's statusEase of doing

businessCorruption

perception*(rank out of 190) (rank out of 176)

Slovenia Invested 30 31Hungary Invested 41 57Romania Invested 36 57Czech Republic Invested 27 47Russia Invested 40 131Slovakia Invested 33 54Croatia Targeted 43 55Serbia Targeted 47 72Bulgaria Targeted 39 75Estonia Targeted 12 22Latvia Targeted 14 44Lithuania Targeted 21 38Median 35 of 190 55 of 176



Strategy, targets and financials

DDM has a scalable business model, where a larger amount of net collection can be conducted without any substantial impact on operational expenses. Consequently, DDM’s growth strategy is a natural route to take. Its net collection CAGR of 53% for 2013-16 means DDM is already on the growth path. Financing is a key challenge for DDM to be able to deliver further on its growth ambitions and take advantage of both its identified market opportunities and the operational leverage of its business.

DDM is working to build up its record

Opex has been EUR 5-6m last years, while net collections have more than doubled

DDM has been in the market for distressed assets for ten years now, and the company

emphasises the strength of its experience. For every year that passes, DDM builds

trust among both sellers of distressed assets and debt collection agencies. It sees itself

increasingly as a market player that can handle large and complex transactions in the

debt market, providing it with an increasing number of invitations to participate in

sales processes in both existing markets and new geographies. This fits well with

DDM’s growth ambitions.

Growth strategy to enjoy operational leverage With a broadly flat cost structure DDM’s business model could take advantage of

operating leverage. The company has a small team of only 22 employees, as of the end

of 2016, all located in Switzerland. The personnel costs constitute the clearly largest

part of DDM’s opex, followed by consulting costs. As illustrated in the chart below,

larger amounts of net collections do not seem to require substantially more opex. In

other words, DDM has a high share of fixed costs, a condition essential to gaining

operational leverage.

IT system FUSION, contributes further to the company’s operational leverage, as it

allows for a higher amount of data at more or less the same cost. The operational

leverage can be illustrated by the company numbers for the past three years. Despite

net collections more than doubling from 2014 to 2016, operational expenses have been

quite stable at EUR 5‐6m.

DDM: Net collections and opex


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Net collections Opex Opex/Net collections (RHS)



Net collections CAGR of 53% in 2013-16

Management guides for opex to be about EUR 6.0m in 2017, which is broadly in line

with the opex level in 2016.

DDM: Opex structure


A scale‐up of the business seems to be an obvious direction for management to take

and the company guides for portfolio investments to exceed EUR 50m in for 2017.

Net collections and the debt portfolio DDM’s net collections in 2016 were EUR 34.2m, indicating a growth rate of 24%

compared with last year. For 2013‐2016, the CAGR has been 53%. Net collections are

undoubtedly the main revenue category, representing 97% of the income. However,

from 2016, the company also started reporting income from management fees, which

occur when DDM co‐invests in portfolios with other companies. DDM takes a fee for

the management of the portfolios on the behalf of other investors and the expertise it

contributes. Although this is a small part of total revenue, it illustrates the market’s

trust in DDM as a qualified specialist in the CEE distressed asset market.

DDM: Net collections, 2013-16


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CAGR: 53 %

Net collections



In 2016 DDM made its largest collections in Hungary

During 2016, the largest net collections came from Hungary, followed by Slovenia, the

Czech Republic and Romania. Given DDM’s ongoing expansion, the geographical mix

of the incomes is likely to fluctuate over time, as newly acquired portfolios may lead

to big swings. If portfolios from new countries are added, diversification will increase.

However, DDM’s strategy is to buy portfolios where the company finds the most

attractive risk/reward, regardless of the country.

DDM: Net collections weight by country, 2015 and 2016


Slovenia is the largest market in DDM’s existing portfolio

During Q1 2017, these four countries still made up a large part of the collections, but

with Slovenia as the largest contributor.

DDM: Net collections by country, Q1 2017


The existing mix of DDM’s distressed asset portfolio (as of 31 March 2017) is shown in

the following chart. Slovenia is DDM’s largest market in terms of portfolio size, followed

by Hungary, the Czech Republic and Romania. Together, the four countries comprise

97% of the total portfolio. The existing portfolio indicates that net collections from Czech

Republic are likely to increase in the next few quarters, while Slovenia will likely

continue to decrease, but new portfolio acquisitions in a particular market could quickly

cause this to change.

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Hungary Slovenia Czech Republic Romania Russia

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Rm

2015 2016

Slovenia40%

Hungary25%

Czech Republic18%

Romania15%

Other2%



DDM aims for portfolio acquisitions to exceed EUR 50m in 2017

DDM: Distressed assets by country (as of 31 March 2017)


DDM aims for portfolio acquisitions worth of more than EUR 50m in 2017. So far it has invested EUR 5m in the Czech Republic and EUR 1m in Slovenia. If the company achieves its guidance, it would mean thrash last year’s EUR 34m.

DDM: Portfolio acquisitions


Net profit has turned positive In 2014, DDM’s operating profit turned positive and in 2015, net profit turned positive as

well.

Slovenia33%

Hungary23%

Romania18%

Czech Republic23%

Russia2%

Slovakia1%

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Portfolio acquisitions DDM's target



ERC has increased at a 15% CAGR in 2014-16

DDM: Selected income statement items, 2013-16

*after amortisations and revaluations


Beside the net revenue and profit measures, a common measure in the debt collection

industry is estimated remaining collections (ERC): the collections the company estimates to

receive. It is defined as a total amount of all future projected cash collections from

acquired portfolios before collection costs. Even though this is not a balance sheet item, it

is provided by DDM and industry peers. DDM has seen a steady increase in ERC in

recent years. As can be seen in the chart below the ERC has increased from EUR 60m to

EUR 80m from 2014 to 2016, representing a CAGR of about 15%.

A higher ERC implies higher net collections in the coming years, assuming the

company’s estimations are correct. Further portfolio investments are the key driver to

increasing the ERC.

DDM: Gross ERC development, 2014-16


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Cash/EBITDA is defined as net collections and management fees minus opex

Financial KPIs The company identifies seven key financial KPIs within four categories – profitability,

balance sheet, leverage and cash flow – to highlight the company’s financial

performance.

Profitability The trends from the past three years show that DDM is growing its earnings as cash

EBITDA is on a stable rise and net profits turned positive in 2015.

Profitability KPI’s: Cash EBITDA and net profit/(loss), 2014-16


Balance sheet The balance sheet has expanded last years and so has the total equity.

Balance sheet KPI’s: Total assets and total equity, 2014-16


Leverage Net debt/cash EBITDA has decreased from almost 3x at the end of 2014 to 1x at the end

of 2016. The equity ratio also indicates a stronger balance sheet, having increased from

13% at the end of 2014 to 31% at the end of 2016. Both KPIs imply a strengthened

financial position for 2014‐16.

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Equity ratio has strengthened in 2014-16

Cash flow from operations increased to EUR 20m in 2016

Leverage KPI’s: Net debt/cash EBITDA and equity ratio, 2014-16


Cash flow Finally, not only have earnings increased, but cash flow from operating activities has

also improved. The better cash flows make it possible for DDM to reinvest in new

distressed asset portfolios, which is a key to growing the business further. This allows

DDM to take advantage of the identified market opportunities and benefit from the

operational leverage of the business model.

Cash flow KPI: Cash flow from operating activities vs. cash EBITDA, 2014-16


Financing Financing is important as interest rate costs represent a relatively large part of total costs.

In fact, in 2016, financial expenses made up more than the operating expenses.

Assuming that DDM’s business grows via further bond issuances, while the operational

leverage keeps operating expenses quite stable, this implies that financial costs will make

up an even larger part of total costs in the future, all else being equal.

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DDM has issued a total of EUR 85m in bonds in 2017

DDM: Financial costs versus opex split, 2016


Management’s intention to increase the business is essential to executing on the business

strategy. The company aims to be financed through bond issues, combined with equity

and reinvested cash flows. These financing sources should be the base for further

portfolio acquisitions, and with that, the upscaling of DDM’s business. So far in 2017, the

company has issued a total of EUR 85m in senior secured bonds and EUR 11m in equity.

The company has also announced its intention to establish a revolving credit facility,

which could act as a flexible kind of financing for the company.

Equity Following the rights issue in late March 2017, DDM has strengthened its share capital.

The share issue was fully subscribed, adding approximately EUR 11m in equity to DDM.

Increased equity may allow the company to also increase its debt financing, making

share issuance an efficient way to expand the balance sheet.

Bonds Bonds, denominated in SEK and EUR, have made up an important part of DDM’s

financing in recent years. The EUR 50m issuance in January 2017 was the largest bond

issuance in the company’s history. It was made at a 9.5% interest rate, distinctly lower

than the 13% and 18% on the issuances in June and September 2013 respectively. The

EUR 50m bond issuance was followed up by an additional EUR 35m bond tap in March

2017. The tap was issued at 101.5%, representing an interest rate of 9%, continuing the

trend of lowered interest rates seen in the past few years.

Financial expenses

52%

Personnel expenses

31%

Consulting expenses

10%

Other operating expenses

7%



Bonds have been issued at continuously lower levels

DDM says reinvestments will be prioritised ahead of dividends

EUR-denominated bonds is matching EUR collections and EUR as reporting currency

DDM: Financial costs versus opex split, 2016


Improving its track record for every year that passes, building its reputation among

investors, and growing its business could be important factors for DDM to be able to get

debt financing at continually better terms. As the company has mentioned, bond issues

are an important part of the financing plan, in order to further expand with additional

distressed asset portfolio acquisitions.

Cash flow Beside the equity and bond financing, cash flow from ongoing operations is planned to be re‐invested in acquisitions of new portfolios. DDM has mentioned that no dividend should be expected for the next few years; instead, it prefers to exploit identified market opportunities.

Currency exposures Besides the euro which stands for 45% of DDM’s asset portfolio as of 31 March 2017, DDM has exposures to a row of Central and Eastern Europe currencies: 23% to the Hungarian forint, 23% to the Czech koruna, 7% to the Romanian leu and 2% to the Russian rouble. These exposures are also subject to change depending on changes in the geographical split of the company.

In 2016, DDM made its first EUR‐denominated bond, creating some advantages from a currency exposure perspective. The euro bond issue provides DDM with some interest rate expenses in EUR. As DDM’s reporting currency is EUR and a great part of the collections are made from Slovenia (also in EUR), the EUR‐denominated bonds decrease the currency mismatch.

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DDM’s portfolio has exposure to EUR, HUF, CZK, RON and RUB

DDM: Distressed asset portfolios per currency, 31 March 2017


Apart from the Russian rouble, which is only 2% of the currency exposure, the other

currencies have been quite stable against the euro over the past five years, as described in the chart below. The Czech National Bank (CNB) has been under a 27.00 CZK floor to the EUR, with the intention of avoiding deflation and stimulating the Czech industry. However, on 6 April the central bank said that the currency floor should end with immediately effect, leading to a strengthened Czech koruna against the euro, implying a small positive effect on DDM’s asset portfolio.

DDM’s exposure to currencies versus the euro


EUR45%

HUF23%

CZK23%

RON7%

RUB2%

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HUF CZK RON RUB



Estimates

We believe DDM will increase its investments further in the coming years thanks to financing early in 2017 and taking advantage of the market opportunities it has mentioned. Our research implies that DDM could deliver a revenue CAGR of 13.3% for 2017E-23E. We believe that opex is quite stable as DDM could gain from operational leverage and since it will increase its debt continuously to make further growth possible.

We estimate a net revenue CAGR of 13.3% for 2017E-23E

We estimate net profit to grow at a 20.6% CAGR for 2017E-23E

Income statement We believe DDM could increase its net revenue to EUR 42m in 2017 and EUR 55m in

2018, growth rates of 28% and 31% respectively. However, these numbers are a little

inflated by the recent share issue and we expect revenue from the expected portfolio

acquisition this year to boost the 2017 number but also to spill over into 2018. As we

do not include further share issues in our estimates but expect growth only through

cash flow and debt financing, we forecast a decelerating revenue growth rate from

2019. We estimate a net revenue CAGR (compound annual growth rate) of 13.3% for

2017E‐23E.

Estimated net revenues


Given the net revenue CAGR that we forecast of 13.3%, we expect a Cash EBITDA

CAGR of 13.6% and a net profit CAGR of 20.6% based on our estimates for 2017E‐23E.

Cash/EBITDA is defined as net collections and management fees minus opex.

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We assume DDM to reinvest its cash flow in new portfolios

Estimated cash EBITDA and net profit


We believe DDM will reinvest its cash flow in new portfolio acquisitions. We estimate

an increase in portfolio acquisitions (included in capex in our model) at a CAGR of

5.0% for 2017E‐23E. This assumes a slower rate than the 30.4% for the actual period of

2014‐16. We also forecast operational expenses increasing at a CAGR of 10% owing to

some staffing up and higher consultancy costs as the business grows. However, the

opex increase is from a small base. The portfolio acquisition growth in real numbers in

relation to the portfolio acquisitions is supporting our assumption of the operational

leverage in DDM’s business model.

Estimated portfolio acquisitions and opex


Balance sheet Net debt/cash EBITDA was 1.0x at the end of 2016. Our estimates assume net debt/cash EBITDA at 1.1x by the end of 2023E, as we estimate a continuously issuance of debt, but we also expect cash EBITDA to increase, keeping net debt/cash EBITDA stable at 1.1x. in 2017E to 2023E.

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Portoflio acquisitions Opex



We assume net debt/cash EBITDA to increase from 1.0x in 2016 to 1.1x in 2023E

Estimated net debt/cash EBITDA


In terms of financing we factor in interest rates on the current debt level at 9.5%, the level at which the major part of the 2017 bond issue was made.

Cash flow Cash flow from operations shows the estimated cash flow after working capital changes but before capex. Capex stems mainly from portfolio acquisitions in our model. We expect DDM to reinvest its cash flow from operations and also eventually from issued bonds in new portfolios. Note that we do not include any dividends in our estimates.

Estimated cash flow from operations and free cash flow


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Net debt/Cash EBITDA

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Detailed estimates


DDM - Detailed estimates

EURm 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023ENet revenue 15 28 34 42 55 64 71 78 83 88 growth (%) 87% 24% 22% 31% 17% 12% 9% 7% 6%Cash EBITDA 10 22 29 37 49 58 65 70 75 79 margin (%) 67.6% 78.9% 85.6% 88.5% 90.2% 90.7% 90.8% 90.6% 90.2% 89.8%Net income -7 2 5 8 14 17 20 21 23 24EPS -1.32 0.26 0.65 0.63 1.04 1.28 1.45 1.58 1.68 1.76Portfolio acquisitions 20 31 34 55 58 61 64 67 70 74ERC 60 72 80 113 137 155 170 183 195 206Amortizations and reval. -10 -12 -19 -23 -27 -32 -36 -39 -42 -44Opex -5 -6 -6 -6 -7 -7 -8 -9 -10 -11Net financials -6 -6 -7 -5 -6 -7 -7 -8 -8 -9



Risk factors

An economic downturn, globally or specifically in CEE, could affect DDM’s ability to collect debt. We also identify company-specific risks relating to IT and modelling tools. In terms of financial risks, currency fluctuations and refinancing of debt are among the most obvious. Lastly, DDM is also exposed to different regulatory risks as it operates in many different jurisdictions.

Risk of economic downturn, globally or in CEE

Price pressure could hurt profitability

Misjudging in modelling could lead to unfavourable decisions

Few employees implies some sensitivity

Market risks and competition DDM is exposed to the global economic development and to market conditions in general and to CEE in particular. A general economic downturn could affect DDM’s asset portfolios such that debtors are not able to fulfil payments, which in turn could mean lower debt collection for DDM. Furthermore, an increase in personal insolvencies may lead to lower portfolio values for DDM.

The market for purchasing debt assets is fragmented, with domestic and international competitors where DDM operates. In some acquisition processes DDM faces bidding competition, which could put price pressure on the assets. Competitors may have greater financial resources and lower financing costs than DDM, implying a lower return requirement and this can push prices higher than DDM finds attractive.

Currently, we believe distressed assets are on the increase in CEE, but we cannot take that for granted. A decrease in the supply of distressed assets on the market could hurt DDM’s ability to find attractive portfolio acquisitions.

Acquisition and collection risks As DDM’s business model is to buy distressed asset portfolios at a discount to face value and then collect the outstanding debt, there is a risk that assets in its portfolios cannot be collected to the estimated extent. DDM may have overestimated the expected amounts of collection during the acquisition process or underestimated the costs for collecting. There is also a risk of misjudging the quality of the assets. In a bad scenario, the acquired assets, or part of them, could be uncollectible. There is also a risk that DDM is subject to fraud; for example, via a so‐called “phantom portfolio” that is sold to more than one acquirer.

Operational risks – IT, models and employees DDM’s proprietary IT system, FUSION, and its ability to make correct estimates of distressed asset portfolios, is essential for DDM’s success. Bad maintenance and development of the system could lead to bad business decisions, both with acquisitions of new portfolios and the management of existing portfolios.

DDM is a small company in terms of staff, totalling just over 20 as of the end of 2016, making it is highly dependent on a few employees. Key changes in the workforce could have a big impact on the company’s operations. Only a few employees could focus on key business relationships, which may have negative consequences should one such employee leave.

As DDM does not collect the debt itself, but outsources this to third parties, it is dependent on these others to deliver on determined agreements. That includes the third parties’ efficiency in collection and their acting with integrity and compliant. Violation by a third party could damage DDM’s reputation in addition to hitting it financially.

Currency risks DDM’s financials are affected by fluctuations in a number of currencies. The current portfolio composition exposes it to the Euro, Hungarian forint, Czech koruna, Romanian leu and Russian rouble. We expect DDM to acquire asset portfolios in new countries,



DDM’s largest bond matures in 2020, meaning a refinancing risk

DDM operates in different jurisdictions

which would change the exposure. Operational expenses are mainly in CHF, as the head office is in Switzerland. Currency fluctuations may affect net profit in specific periods or the balance sheet when fluctuations are translated into Euros, DDM’s reporting currency.

DDM: Distressed asset portfolios per currency, 31 March 2017


Interest rate risks DDM mentions financing as an important aspect of its business and it is largely financed by bonds. Currently, the company’s largest bond matures in January 2020. Its ability to refinance this bond on maturity is important. Failure to refinance could have a negative financial impact on the company. Also refinancing is a question of price. Although DDM strives to lower the interest rates, there is a risk that refinancing has to be carried out at higher interest rate levels.

Regulatory and legal risks DDM’s operations take place in many different jurisdictions in CEE and the company is thus exposed to a raft of different laws, regulations, licenses etc. There is a risk that its processes do not prevent breaches in a specific jurisdiction. Also, regulatory changes in one specific jurisdiction may change the conditions for the debt collection industry in general and for DDM’s business specifically. Being headquartered in Switzerland obligates DDM to follow Swiss law.

Litigation and investigations may also hurt DDM’s business; for example, consumer credit disputes, government audits or contract disputes could disturb DDM’s operations.

Risk in valuation assumptions Finally, we highlight the risk of the valuation assumptions where we find the WACC as a sensitive factor for the share price, among others. The sensitivity of the WACC assumption can be studied further in the Valuation section.

EUR45%

HUF23%

CZK23%

RON7%

RUB2%



Reported numbers and forecasts



Income statement

EURm 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E

Net revenue 15 28 34 42 55 64 71 78 83 88

Revenue growth n.a. 87% 24% 22% 31% 17% 12% 9% 7% 6%

Cash EBITDA 10 22 29 37 49 58 65 70 75 79

Depreciation, impairments and amort -10 -12 -19 -23 -27 -32 -36 -39 -42 -44

EBIT -0 10 10 14 22 26 29 32 33 35

of which associates 0 0 0 0 0 0 0 0 0 0

Associates excl. from EBIT 0 0 0 0 0 0 0 0 0 0

Net financials -7 -8 -5 -5 -6 -7 -7 -8 -8 -9

Pre-Tax Profit -7 2 5 9 16 19 22 24 25 27

Reported taxes 0 -0 0 -1 -2 -2 -2 -2 -3 -3

Net profit from cont. operations -7 2 5 8 14 17 20 21 23 24

Discontinued operations 0 0 0 0 0 0 0 0 0 0

Minority interest 0 0 0 0 0 0 0 0 0 0

Net profit to equity -7 2 5 8 14 17 20 21 23 24

EPS -1.32 0.26 0.65 0.63 1.04 1.28 1.45 1.58 1.68 1.76

DPS 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

of which ordinary 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

of which extraordinary 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Profit margin in percent

Cash EBITDA 67.6% 78.9% 85.6% 88.5% 90.2% 90.7% 90.8% 90.6% 90.2% 89.8%

EBIT -0.5% 36.2% 28.8% 33.5% 40.2% 40.7% 40.8% 40.6% 40.2% 39.8%

Performance metrics

CAGR last 5 years

Net revenue n.a. n.a. n.a. n.a. 38.8% 23.5% 20.2% 16.8% 11.2% 8.4%

Cash EBITDA n.a. n.a. n.a. n.a. 49.2% 27.9% 22.0% 17.5% 11.2% 8.2%

EBIT n.a. n.a. n.a. n.a. n.a. 27.1% 31.1% 22.5% 11.2% 7.8%

EPS n.a. n.a. n.a. n.a. n.a. 48.9% 22.3% 26.0% 12.8% 8.3%

DPS 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Average EBIT margin n.a. n.a. n.a. n.a. 32.2% 36.8% 38.0% 39.6% 40.5% 40.4%

Average Cash EBITDA margin n.a. n.a. n.a. n.a. 85.1% 87.9% 89.6% 90.3% 90.5% 90.4%

Valuation ratios

EURm 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E

P/E n.a. 10.5 6.0 6.3 3.8 3.1 2.7 2.5 2.3 2.2

EV/Cash EBITDA 5.5 2.4 2.2 2.5 2.2 2.0 1.9 1.9 1.8 1.8

EV/EBIT n.a. 5.3 6.5 6.6 4.9 4.5 4.3 4.2 4.1 4.1

Valuation ratios/reported earnings

P/E n.a. 10.5 6.0 6.3 3.8 3.1 2.7 2.5 2.3 2.2

EV/Sales 3.7 1.9 1.9 2.2 2.0 1.9 1.8 1.7 1.7 1.6

EV/Cash EBITDA 5.5 2.4 2.2 2.5 2.2 2.0 1.9 1.9 1.8 1.8

EV/EBIT n.a. 5.3 6.5 6.6 4.9 4.5 4.3 4.2 4.1 4.1

Dividend yield (ord.) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

FCF yield -38.1% -28.7% 20.6% -40.2% -28.7% -19.6% -14.3% -11.3% -10.0% -9.6%

Payout ratio 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%




Balance sheet

EURm 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E

Intangible assets 5 6 6 6 6 6 6 6 6 6

of which R&D 0 0 0 0 0 0 0 0 0 0

of which other intangibles 2 2 2 2 2 2 2 2 2 2

of which goodwill 3 4 4 4 4 4 4 4 4 4

Tangible assets 34 41 44 76 106 135 163 191 220 249

Shares associates 0 1 1 1 1 1 1 1 1 1

Interest bearing assets 0 0 0 0 0 0 0 0 0 0

Deferred tax assets 0 0 1 0 0 0 0 0 0 0

Other non-int. bearing assets 0 0 0 0 0 0 0 0 0 0

Other non-current assets 0 0 1 0 0 0 0 0 0 0

Total non-current assets 40 47 53 82 113 141 169 197 226 255

Inventory 0 0 0 0 0 0 0 0 0 0

Accounts receivable 4 4 2 2 3 3 3 4 4 4

Other current assets 1 0 1 1 2 2 2 3 3 3

Cash and bank 9 3 11 25 20 14 12 11 10 10

Total current assets 14 8 13 28 24 19 17 17 17 17

Assets held for sale 0 0 0 0 0 0 0 0 0 0

Total assets 54 55 66 111 137 161 187 214 243 273

Shareholders equity 7 8 21 39 53 71 90 112 134 158

of which preferred stock 0 0 0 0 0 0 0 0 0 0

of which Equity of hyb. debt 0 0 0 0 0 0 0 0 0 0

Minority interest 0 0 0 0 0 0 0 0 0 0

Total Equity 7 8 21 39 53 71 90 112 134 158

Deferred tax 0 0 0 0 0 0 0 0 0 0

Long term int. bearing debt 37 30 31 56 66 71 76 81 86 91

Pension provisions 0 1 0 0 0 0 0 0 0 0

Other long-term provisions 0 0 0 0 0 0 0 0 0 0

Other long-term liabilities 0 0 0 0 0 0 0 0 0 0

Convertible debt 0 0 0 0 0 0 0 0 0 0

Shareholder debt 0 0 0 0 0 0 0 0 0 0

Hybrid debt 0 0 0 0 0 0 0 0 0 0

Total non-curr. liabilities 37 31 32 56 66 71 76 81 86 91

Short-term provisions 0 0 0 0 0 0 0 0 0 0

Accounts payable 5 6 2 2 2 3 3 4 4 4

Other current liabilities 4 4 4 5 7 8 9 9 10 11

Short term interest bearing debt 0 7 8 8 8 8 8 8 8 8

Total current liabilities 9 16 14 15 17 19 20 21 22 23

Liab.for assets held for sale 0 0 0 0 0 0 0 0 0 0

Total liabilities and equity 54 55 66 111 137 161 187 214 243 273

Balance sheet and debt metrics

Net debt 28 33 29 39 55 65 73 79 84 89

Working capital -4 -5 -3 -4 -5 -6 -6 -7 -7 -8

Invested capital 35 42 50 79 108 136 163 191 219 248

Capital employed 44 39 52 96 120 142 167 193 221 250

ROE n.a. 24.3% 37.0% 26.0% 30.5% 28.0% 24.5% 21.2% 18.5% 16.3%

ROIC -5.2% 26.1% 21.4% 20.9% 22.1% 19.9% 18.0% 16.4% 15.0% 13.8%

Net debt/Cash EBITDA 2.9 1.5 1.0 1.1 1.1 1.1 1.1 1.1 1.1 1.1

Interest coverage -0.0 1.7 1.5 2.6 3.5 3.9 4.0 4.1 4.1 4.1

Equity ratio 0.1 0.1 0.3 0.4 0.4 0.4 0.5 0.5 0.6 0.6

Net gearing 406.1% 403.1% 139.9% 100.5% 102.7% 92.3% 80.6% 70.6% 62.6% 56.4%




Cash flow statement

EURm 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E 2023E

Cash EBITDA 10 22 29 37 49 58 65 70 75 79

Paid taxes 0 0 0 -1 -2 -2 -2 -2 -3 -3

Net financials -8 -8 -5 -5 -6 -7 -7 -8 -8 -9

Change in Provisions 0 1 0 0 0 0 0 0 0 0

Change in other LT non-IB 0 0 -3 3 0 0 0 0 0 0

Cash flow to/from associates 0 0 0 0 0 0 0 0 0 0

Dividends paid to minorities 0 0 0 0 0 0 0 0 0 0

Other adj. to reconcile to cash flow 1 -17 -1 0 0 0 0 0 0 0

Funds from operations (FFO) 4 -2 -2 1 -8 -6 -4 -10 -9 -9

Change in NWC 2 0 0 1 1 1 1 1 0 0

Cash flow from op. (CFO) 6 -3 20 34 42 50 56 61 65 69

Capital Expenditure -16 -3 -22 -55 -58 -61 -64 -67 -70 -74

Free Cash Flow before A&D -10 -6 -2 -21 -15 -10 -8 -6 -5 -5

Proceeds from sale of assets 0 0 9 0 0 0 0 0 0 0

Acquisitions 0 0 0 0 0 0 0 0 0 0

Free cash flow -10 -6 7 -21 -15 -10 -8 -6 -5 -5

Dividends paid 0 0 0 0 0 0 0 0 0 0

Equity issues / buybacks 13 0 6 11 0 0 0 0 0 0

Net change in debt -8 0 0 25 10 5 5 5 5 5

Other financing adjustments 0 0 0 0 0 0 0 0 0 0

Other non-cash adjustments 0 0 -7 0 0 0 0 0 0 0

Change in cash -5 -6 7 14 -5 -5 -3 -1 0 0

Cash flow metrics

Capex/D&A 159% 27% 115% 240% 212% 190% 178% 172% 169% 167%

Capex/Sales 108% 12% 65% 132% 106% 95% 89% 86% 84% 83%

Key information

Share price year end (current) 3.65 2.73 3.88 3.94 3.94 3.94 3.94 3.94 3.94 3.94

Market cap 26 19 35 53 53 53 53 53 53 53

Enterprise value 54 53 64 93 108 119 126 132 138 143

Diluted no. of shares, year-end (m) 7.1 7.1 9.0 13.6 13.6 13.6 13.6 13.6 13.6 13.6


Disclaimer

Nordea Markets is the commercial name for Nordea’s international capital markets operation.

The information provided herein is intended for background information only and for the sole use of the intended

recipient. The views and other information provided herein are the current views of Nordea Markets as of the date

of this document and are subject to change without notice. This notice is not an exhaustive description of the

described product or the risks related to it, and it should not be relied on as such, nor is it a substitute for the

judgement of the recipient.

The information provided herein is not intended to constitute and does not constitute investment advice nor is the

information intended as an offer or solicitation for the purchase or sale of any financial instrument. The

information contained herein has no regard to the specific investment objectives, the financial situation or

particular needs of any particular recipient. Relevant and specific professional advice should always be obtained

before making any investment or credit decision

The document has not been prepared in accordance with legal requirements designed to promote the

independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination.

Nordea Bank AB (publ), Company registration number/VAT number 516406‐0120/SE663000019501. The board is

domiciled in Stockholm, Sweden.

Conflict of interest

Readers of this document should note that Nordea Markets has received remuneration from the company

mentioned in this document for the production of the marketing material. The remuneration is predetermined and

is not dependent on the content.

It is important to note that past performance is not indicative of future results.

Nordea Markets is not and does not purport to be an adviser as to legal, taxation, accounting or regulatory matters

in any jurisdiction.

This document may not be reproduced, distributed or published for any purpose without the prior written

consent from Nordea Markets.

Issuer review

This report has been reviewed, for the purpose of verification of fact or sequence of facts, by the issuer of the

relevant financial instruments mentioned in the report prior to publication. The review has led to changes of facts

in the report.

Completion date: 31 May 2017, 08:56 CET

ddm holding commissioned research 310517 - nordea markets · 2017. 5. 31. · the operating profit...

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