vodafone group plc company report · 2019-05-30 · vodafone group plc company report page 5/53...

MASTER IN FINANCE

THIS REPORT WAS PREPARED EXCLUSIVELY FOR ACADEMIC PURPOSES BY MARIA BEATRIZ RODRIGUES AND MARTA DE LA FUENTE, MASTER IN FINANCE STUDENTS OF THE NOVA SCHOOL OF BUSINESS AND ECONOMICS. THE REPORT WAS SUPERVISED BY A NOVA

SBE FACULTY MEMBER, ACTING IN A MERE ACADEMIC CAPACITY, WHO REVIEWED THE VALUATION METHODOLOGY AND THE FINANCIAL

MODEL.

/53

Vodafone had a down moment for the past 3 years in

terms of revenue growth, -2% in 2018, yet it is believed that the

company will reverse the current trend and be able to grow

revenue around 1% in the future.

The group is one of the main players in the Telecom

industry and has the second most valuable brand in Europe. The

industry overall spending is expected to grow in the next years at a

CAGR of 1%, as demand increases. However, an intensive

competitive environment presents challenges to operators.

One of the main concerns with the company’s current

strategy is the ability to continuously increase dividends in the

future as earnings might not be sufficient to cover it.

Company description

VODAFONE GROUP PLC COMPANY REPORT

TELECOMMUNICATION 4 JANUARY 2019

MARIA BEATRIZ RODRIGUES & MARTA DE LA FUENTE [email protected]

A transforming Industry

Vodafone a leading player in innovation

Recommendation: BUY

Price Target FY20: £2.65

Price (as of 4-Jan-19) £1.57

Reuters: VOD.L, Bloomberg: VOD:LN

52-week range (£) 1.43 - 2.40

Market Cap (£m) 41 699

Outstanding Shares (m) 26 720

Dividend Yield 8.52%

Source: Bloomberg

Source: investing.com

(Values in € millions) 2018 2019E 2020F

Revenues 46 571 46 317 46 265

EBITDA 14 737 14 234 14 525

Net Income 2 788 -1 083 2 630

EPS 0.10 -0.04 0.10

Dividend per share 0.1507 0.1537 0.1537

EBITDA margin (%) 32% 31% 31%

Source: Vodafone Annual Report 2018; Analyst estimations

[email protected]

The model gives a target price for the YE 2020 using a

DCF model along with the forecast of revenues per segment with a

WACC of 4.16% and a terminal growth rate of 0.033%.

Vodafone is considered a BUY given the target price for

the fiscal year-end 2020 of £2.65 (FX Futures EUR/GBP currency

exchange rate of 0.91, March 2020). This corresponds to an

upside of 69% compared to the current market price of £1.57.

Having so, we strongly believe that Vodafone is currently

undervalued.

Vodafone is one of the market’s leading companies operating in the Telecommunications’ industry; it provides many services from mobile, fixed broadband, TV and voice with operations spread along two main business segments: Europe and Africa, Middle East and Asia Pacific (AMAP). Headquartered in London, United Kingdom, it is part of the FTSE 100 market index.


PAGE 2/53

Table of Contents

Company Overview ....................................... Erro! Marcador não definido.

Shareholders’ structure ..................................................................................... 5

Core Programs ........................................................................................ 6

Strategy ................................................................................................... 8

Economic Overview ................................................................................ 9

Industry Overview ..................................................................................10

Segment Analysis ..................................................................................13

Northern Europe ........................................................................ 13

Southern Europe ........................................................................ 15

Rest of Europe ........................................................................... 16

Vodacom ..................................................................................... 16

Other AMAP ............................................................................... 17

Joint Ventures ............................................................................ 18

Valuation Assumptions .........................................................................19

Revenue forecast ............................................................................................. 19

Cost discrimination ........................................................................................... 20

EBITDA Margin ................................................................................................. 20

Capital Expenditures ........................................................................................ 21

Goodwill ............................................................................................................. 21

Taxation ............................................................................................................. 22

Discountinued Operations ............................................................................... 22

Wacc & Growth rate ......................................................................................... 23

Valuation Outcome ................................................................................24

Multiples Valuation ........................................................................................... 24

Risk factors ........................................................................................................ 25

Scenario Analysis ............................................................................................. 26

Sensitivity Analysis........................................................................................... 26


PAGE 3/53

Appendix ................................................................................................28

Appendix I: Revenue Forecast ....................................................................... 28

Financial Statements: Balance Sheet ........................................................... 30

Financial Statements: Income Statement ..................................................... 31

Financial Statements: Statement of changes in Equity .............................. 31

Financial Statements: Cash Flow Statement ............................................... 32

Disclosures and Disclaimer ..................................................................33

Individual reports ...................................................................................36

Credit Risk Analysis ......................................................................................... 36

Evolution of Internet of Things ........................................................................ 46


PAGE 4/53

Company overview

Integrated in the Telecommunications’ industry, Vodafone is currently

headquartered in London, United Kingdom. From July 17, 1982 the company has

managed to build a strong brand recognition in its two main business segments:

Europe and Africa, Middle East and Asia Pacific (AMAP).1

As of 2018, the firm has its operations spread along 25 countries: UK,

Germany, Spain, Italy and Rest of Europe - Albania, Czech Republic, Germany,

Greece, Hungary, Ireland, Malta, Portugal, Romania; Vodacom Group (South

Africa, Tanzania, Democratic Republic of Congo, Mozambique, Lesotho, Kenya

(associate)) and other AMAP - Egypt, Ghana, New Zealand, Turkey. Additionally,

the enterprise owns Joint Ventures in the Netherlands (VodafoneZiggo Group

Holding B.V.), Australia (Vodafone Hutchison Australia Pty Limited) and in India

(Indus Towers Limited) – Exhibit 1.

Vodafone offers a variety of products and services to individual customers and

enterprises ranging from mobile and fixed broadband to TV and voice. A

major part of its business also includes the Internet of Things (IoT) – a system

that connects everyday devices through a specific network without the need to

have human interaction throughout the process - together with its Internet

Protocol – Virtual Private Network (IP-VPN); the latter includes cloud and carrier

services to multinationals. Additionally, the company offers an M-Pesa service -

providing mobile money transactions within its own platform - and maintains

agreements with Mobile Virtual Network Operators (MVNOs) for whom the

company rents out wireless capacity. Nonetheless, in order to deliver some of

these services, Vodafone acquires spectrum licenses enabling the use of radio

frequencies.

In past years, fixed service lost its impact which problem the company overcame

by providing bundle offers of mobile, fixed and content services. Also, it should

be highlighted the company’s leading role as a mobile operator with a 62.4 million

mobile contract customer base in Europe. Moreover, the Group owns the largest

fixed Next-generation Network (NGN) footprint which services are able to

market 65% of total European’s footprint, covering in 2018 around 107 million

households (Exhibit 2 and 3) - including VodafoneZiggo.

In the last fiscal year, Vodafone’s growth was mainly driven by opportunities in

emerging markets - motivated by data penetration, development of financial

services and growing digital - especially reflected in Vodacom’s annual growth

1 Vodafone Annual Report 2018

Exhibit 1: Group Service Revenues per segment

t

66% CONSUMER

29% ENTERPRISE

5% OTHER

Exhibit 2: NGN self-build households

passed (in millions)

Exhibit 3: NGN wholesale households

passed (in millions)

Exhibit 4: Mobile Market Share (%)

Exhibit 5: Fixed Market Share (%)

Source: Vodafone Annual Report 2018

Source: Statista


PAGE 5/53

revenue of 8%. Reinforcing, it must not be dismissed the momentum in fixed

broadband and convergence (Exhibit 5) – adding 1,339 and 754 thousand new

customers, respectively - collectively with the success of IoT. Vodafone Business

segment’s service revenue grew 0.9% in the year, partially offset by roaming

regulations. Enterprise represents 29% of the Group’s service revenue with

Internet of Things being one of the fundamental points of differentiation in this

sector – counting with more than one million new SIMs per month from IoT

services adding to its 68 million network; notwithstanding, advantages have been

arising from vertical integration of financial and automotive services.

Overall, Vodafone has on average 103,564 employees distributed along its

geographic business areas. The team has been devoted to the progress of the

company achieving Group revenues of €46.571 billion just in 2018. Combined

with the current cost efficiency programme – which will be further analysed - and

a strong financial performance, the company was able to maintain an increasing

organic growth in adjusted EBITDA of 11.8%, compared with 5.8% in 2017.

Shareholders’ structure

To begin with, Vodafone’s board has been going through a main succession plan

followed by the resignation of the previous Group CEO Vittorio Colao on October

1st, 2018 - after a 10-year mandate of integrity inside Vodafone. He was

succeeded by Nick Read (former CFO) with Margheritta Della Valle – Deputy

CFO - taking the role of the latter. A major review has been made to the

remaining board to ensure its effectiveness and alignment of skills and

experience with the firm’s goal. Notwithstanding, Gerard Kleisterlee maintained

his position as the Chairman of the company.

Company’s ordinary shares are traded both in the London Stock Exchange and

on NASDAQ – traded in the form of American Depositary Shares (ADSs) issued

by Deutsche Bank, each representing ten ordinary shares. The majority of the

Group’s shareholders come from Europe and UK, even though a significant 43%

is held by North American investors (Exhibit 6).

In what concerns to the company’s shareholder structure, no significant changes

are disclosed by the company even after the succession plan and internal

reorganisation of the Board. Having so, the company is essentially divided into 4

different groups: Institutional investors, Treasury shares hold by the company,

Private company ownership and General Public holdings.

Institutional ownership accounts for approximately 85% of Vodafone’s shares,

representing the major portion of the company. This creates a comfortable

environment for shareholders to invest as bull/bear traps are not expected since

Vodafone is the only telco that is a Tier 1 supplier to automotive original equipment manufacturers (‘OEMs’), with customers including eight of the top ten car manufacturers globally.

Exhibit 6: Ownership location


Source: Vodafone Half Year Results 2019


PAGE 6/53

Information on Dividends and shares

2017 2018

Dividend payout ratio -61% 142%

Dividend per share (€) 0,1477 0,1507

Number of shares attributed to shareholders (million) 26 622 26 676

Amount of dividends paid (€m) 3 932 4 019

these trends usually arise from estimated changes by these valuable investors.

Secondly, there is 14% ownership from General Public which is held by

essentially retail investors – its size allows for a noteworthy power inside the

company if collectively considered. Thirdly, with approximately 0.1%, there is

Private Company Ownership which does not have a significant impact on the

firm’s business owing to its small stake. Finally, it also has to be considered the

inside ownership which accounts for approximately 9% stake.

BlackRock Investment Manager comprises one of the biggest institutional

shareholders with approximately 6.9% ownership. However, apart from

BlackRock, Deutsche Bank owning 17.79% of ordinary shares as a custodian of

the American Depositary Receipt (ADR) programme and Bank of New York

Mellon which held the same programme prior to February 2017, no shareholder

has ever held more that 3% of the company in the past four years.

As a representation of the company’s confidence in its potential to drive up free

cash flow, over the past three years, it has been distributing increasing dividends

per share. Just in 2018, €3.9 billion were paid – 15.07 eurocents per share for the

year - embracing a steady annual growth of 2%.

This signals a positive financial health and confidence in future performance to

investors. Notwithstanding, Vodafone has disclosure its intention to keep the

growth in dividends even though the analyst questions the sustainability of the

company’s dividend policy in the forecoming years. It is believed that it will be

necessary to stop dividend growth as it is not covered by the company’s earnings

but by its free cash flow, which might turn out to be too tight going forward. As

such, it was considered a target range to estimate dividend growth: 2.5x-3x Debt

to EBITDA was used stopping dividend growth when the limits are surpassed.

Exhibit 7: Information on Dividends Information on Dividends and shares

2017 2018

Dividend payout ratio -61% 142%

Dividend per share (€) 0,1477 0,1507

Number of shares attributed to shareholders (million) 26 622 26 676

Amount of dividends paid (€m) 3 932 4 019


Core Programmes

Vodafone has in course three main programmes: Network Leadership, Customer

eXperience eXcellence (“CXX”) and Fit for Growth.

Firstly, Network leadership is built on the goal of creating a strong and

differentiated network. To do so, the firm has been investing in its IT

infrastructures and relying on its own cable, fibre and strategic partnerships.


PAGE 7/53

Getting 5G network ready is a major concern. As such, a massive MIMO

(multiple input, multiple output) network of antennas is being deployed enabling

the evolution of a much more efficient radio signal transmission. Closely, one

antenna is now assigned to a specific user or group instead of being transmitted

everywhere, creating a more reliable service with less interference and larger

spectrum capacity. Additionally, the deployment of fibre deeply into households

has allowed the expansion of data speed and network capacity which is expected

to reach 12.7 million households with 1 Gbps by 2020, compared with the current

100 Mbps.

Secondly, it has the Customer eXperience eXcellence (CXX). This initiative

represents Vodafone’s core marketing strategy. In fact, the firm’s motivation

towards customer satisfaction is key and why the company links several of its

employees’ annual bonuses on Net Promoter Scores (NPS). Built on a “CARE”

framework (Exhibit 8), its focus is drove towards the client: promising extra

security protection, guarantees, a personalised service (conquered through Big

data analysis), reward programmes within the My Vodafone app and a flexible

manner of managing their service, equally supported by the latter. Vodafone has

managed to build a relationship based on trustworthiness together with a 5%

year-on-year rise on penetration over digital channels – 60% of its customers

already use the company’s application.

Thirdly, there is the Fit for Growth line-up designed to drive up operating margins

via reduced net operating costs along the process. This is being captured

through the centralisation of procurement, share of service centres in low cost

regions, improvement of sales channel efficiency, creation of a standardised

network design and zero based budgeting (“ZBB”) initiatives. The last two total

cost savings of €580 million over the past three years (Exhibit 9).

Notwithstanding, there is a realised success reflected on the cost efficiency

programme that together with the commercial momentum is enabling Vodafone

to take advantage from the approximate 60% year-on-year increase on data

traffic demand (Exhibit 10) reflected in the past two fiscal years. Overall, this was

accomplished due to a “cost teardown” – programme enabled the improvement

of operational margins (Exhibit 11) combined with reported EBITDA growing at

higher levels than service revenue (Exhibit 12).

Finally, Digital Vodafone is a core part of the company’s strategy helping to boost

others like CXX and Fit for Growth. The goal goes through building the best

digital experience at the customer – relying on digital channels to create an easy,

instant and personalised interaction, supported on data analytics and

automatization of processes in IT – moving from “mostly human to mostly digital”.

NPS Maintained leading position in

Exhibit 8: “CARE” Framework

Exhibit 11: Operational Margins (%)

Exhibit 10: Demand for data

Exhibit 9: Savings from Digital Vodafone

Exhibit 12: Faster growth in Adj.

EBITDA than Service Revenue



PAGE 8/53

Strategy

Recent updates on the company’s strategy are driving emphasis towards

increasing the on-net penetration with existing customers (Exhibit 13) in order to

drive down churn rates. The major opportunities are now concerning digital

transformation and asset utilisation.

Deepening customer engagement is sustained by three drivers involving different

approaches: Europe consumers, Vodafone Business and Emerging consumers.

Concerning European consumers, they are inserted in mature markets meaning

that it is already saturated and there is not a lot of potential to grow the customer

base. Thus, strategy will focus on existing consumers: upselling to them while

lowering churn rates and strengthening relationships. On the other hand,

Vodafone Business is expected to grow with the idea of industrialising IoT

supported by the expansion from automotive to digital buildings, healthcare and

logistics. Revenue streams in emerging markets are projected to come from

digital and financial services (e.g. M-Pesa) and the opportunity from the already

mentioned increasing growth in data. Figures illustrate an opportunity giving the

low percentages: 22% of mobile costumer base from 4G services and 43%

smartphone penetration.

Digital transformation is built on the idea of creating a much simpler business

model from price plans, products and services to optimisation of internal

processes. As emphasised by the firm’s CEO Nick Read, the main advantage

that the company will take from investing in 5G is the underlying cost reduction,

with 80% coming from savings on radio cost delivery (Exhibit 14). Additionally,

savings are expected to exceed €1.2 billion just in net operating expenditures by

the fiscal year of 2021.

Finally, looking at projections from asset utilisation, advantages are expected

from M&A synergies and the best use of the company’s 58,000 European towers;

focusing on the latter, the company wants to build a new venture by the name of

Virtual TowerCo which sole purpose is effectively managing and increasing the

usage of its infrastructure by creating a shared network. This would enable a

much smoother deployment of 5G networks, which will require many more sites,

and established lower costs by monetising its towers. The company came down

to an estimation of €8 billion reduction in costs from this strategy. Recapping, the

company wants to implement a strong capital allocation discipline so that the

higher return opportunities are undertaken including strategic partnerships and

delivering synergies on new and existing investments – VodafoneZiggo, Merger

in India and approval of Liberty Global’s acquisition - deprioritising other areas.

The cost cutting

opportunity alone for

European telecoms has

been estimated to be as

much as €60 billion.

We have a strong track

record of delivering or

exceeding targeted cost

and capex synergies on

prior deals.

Exhibit 13: Vodafone’s on-net

penetration in European market

Exhibit 14: Relative radio cost delivery


Source: Vodafone Strategic Report 2018



PAGE 9/53

Economic Overview

Vodafone has a very wide market presence, thus it is paramount to understand

the overall state of the economy in the main markets, together with

understanding the impact of macro factors in demand for Telecommunication

services in order to build the basis of this analysis.

Many studies have been conducted to estimate the impact of a change in price or

income on costumers’ choices regarding telecom services. Cadman and Dineen2

(Exhibit 15) analysed 28 observations of cross-sectional data to evaluate the

sensitivity of fixed broadband services. The model concludes that the long-run

price elasticity of demand is relatively inelastic, retrieving a coefficient of -0.43%,

i.e. the demand does not seem to be significantly affected by the price. However,

income elasticity of demand is stronger - meaning that a 1% increase in wealth

would lead to 0.78% increase in demand. Additionally, “years since launch”,

together with its square, was inputted in the model. These allowed for an

important conclusion: non-linear growth in broadband, i.e. diminishing growth rate

is expected with increasing service penetration.

A lack of data regarding mobile services, drove the need to base this analysis on

a combination of factors that characterize the market: penetration rate and mobile

phone dependence. Mobile devices are a feature of the modern world such that

penetration is expected to reach 4.78 billion users in 2020 (Exhibit 16), with a

rate close to 70%. However, in developed economies, penetration rate already

accounts for 90% of population. Moreover, mobile dependency is increasing

significance: according to Deloitte3, more than 30% of consumers check their

phone in the first five minutes after waking up in the morning (Exhibit 17) and

20% check their phones at least 50 times a day (Exhibit 18).

Nowadays consumers already perceive mobile phones as an essential good. In

2014, The Telegraph4, United Kingdom, reported that:

“The high take-up of essential communication services shows that, in

most cases, cost is not a barrier to use. Some 95 per cent of

households have at least one mobile phone, 84 per cent have a

landline and 82 per cent an internet connection.”

Combining all the factors abovementioned, one can conclude that the increasing

dependence on mobile services is reducing sensitivity to income changes

however it still has an impact on customers’ choice, especially regarding fixed

2 Price and Income Elasticity of Demand for Broadband Subscriptions: A Cross-Sectional Model of OECD Countries, Richard Cadman, Chris Dineen, 2008 3 Global mobile consumer trends, 2nd edition, Deloitte 2017 4 “Mobile phones and internet now ‘essential’”, by Matthew Sparkes, The Telegraph, July 2014

Exhibit 16: Mobile phone users worldwide 2015- 2020

Exhibit 17: First access with in 5 minutes

Exhibit 18: Percentage of people who access 50+ times in a day

Exhibit 15: Cadman and

Dineen results

Source: Richard Cadman, Chris Dineen, 2008

Source: Statista

Source: Deloitte


PAGE 10/53

broadband services. Thus, predicting the future state of the economy was

considered of great importance.

The International Monetary Fund (IMF)5 reports that developed economies grew

0.6pp more in 2017 compared to 2016 which was essentially explained by an

increase in investment spending. Emerging markets increased their growth by

0.4pp in 2017 primarily due to an acceleration in private consumption (Exhibit

19).

Moving forward into developed economies, it is expected a global slight increase

in GDP to 3.9% in the medium term (compared to 3.8% reported in 2017). This is

based on a strong momentum, positive market confidence and the repercussions

of the United States expansionary fiscal policy. On the other hand, the euro area

is expected to grow at 1.4 % - damaged by low productivity together with

ineffective reform efforts and poor demographics - while emerging markets are

expected to stabilise at about 5%, mainly reflecting the strong economic

performance in Asia.

In close detail, developing Europe, reported a GDP growth of 6% in 2017 but it is

projected to slow down to 4.3% and 3.7% in 2018 and 2019, respectively. It is

expected that over the medium-term, growth will stabilise around 2.2%, pushed

down by demographics and low productivity. Sub-Saharan Africa is also

projected to rise in 2018 and 2019 reaching 3.4% and 3.7% growth, respectively.

Lastly, South Africa is estimated to strengthen from 1.3% in 2017 to 1.5% in 2018

and 1.7% in 2019. In the medium-term both regions are expected to grow at

1.8% (Exhibit 20).

Industry Overview

Together with the conclusions from the previous section, understanding how the

industry is characterised is crucial to support the forecast of Vodafone’s future

performance.

The telecommunications’ industry has been seeing momentous growth over the

past decade mostly driven by technology which boosted demand for

communications. The industry is essentially fragmented and highly competitive

counting with at least four providers in each country, between international and

national suppliers, giving the customer different options.

Product innovation is a fundamental investment in order to secure a strong

market share. However, close substitutes and imitations will eventually arise so

5 World Economic Outlook, April 2018: Cyclical Upswing, Structural Change, April 2018

Exhibit 19: GDP growth (Annualised

semi-annual percentage change)

Exhibit 20: Contributions to the

change in Real GDP Growth, 2016–17

Source: International Monetary Fund


PAGE 11/53

telecom companies must continuously look for innovations that will make their

products relatively more desirable to consumers than those of competitors.

Worldwide the industry has been growing since 2016 with the development of

smartphones and social media, creating new demands and pushing the industry

upwards. Telecom spending is expected to grow 1% in 2019 and has been

growing at a CAGR of 1%. As a whole, the industry generated more than €1

trillion ($1.6 trillion) in 2018 and it is expected to reach $1.7 trillion by 2020

(Exhibit 21).

Fixed broadband services are now the focus of telecom companies arround the

world. The global spending in fixed/wireless services has been growing 2% per

year going from 823 billion dollars in 2015 to the expected 918 billion dollars in

2020, promoted by both companies and families that require more internet

coverage as well as television plans. The number of fixed broadband

subscriptions showed a positive trend in the last 10 years essentially motivated

by Europe and Asia Pacific which constitute the biggest markets for this service.

In 2017, there were about 960 new fixed subscriptions with Asia Pacific

accounting for 509 of them.

The increase in smartphone penetration, consumers moving to 4G networks and

the dissemination of social media boosted demand for data. Figures show

improvements on data traffic growing from 43 gigabytes in 2015 to 144 gigabytes

in 2017. Additionally, it is expected to reach 701 gigabytes in 2021 (Exhibit 22).

Technology enabled the development of new disruptive Over-the-top (OTT)

content service providers. New communication applications like WhatsApp or

Rich Communications Services (RCS), are stimulating demand for data while

hurting other sources of mobile revenue, SMS and voice for instance. In 2021 it is

expected that SMS revenue will drop to $16 billion whereas RCS grows to $40

billion (Exhibit 23). Additionally, WhatsApp members are increasing at a very

fast rate and in 5 years moved from 200 million users to 1.5 billion.

Further analysis was undertaken in order to understand how the industry is

developing under each region where the company operates.

In Europe, the mobile segment has been following a downward trend for the last

6 years, with revenue decreasing from €135 billion to €115 billion in 2017

(Exhibit 24). In terms of fixed broadband, it is estimated that there are more than

189 million broadband subscribers, which is an increase of 65 million users over

the last decade. The European households coverage stood at 83% in 2016, with

Luxembourg conquering the first place (92%). Mobile broadband includes

essentially 4G networks, however the adoption throughout Eastern Europe has

been rather slow, but it is predicted to reverse in 2019.

Data consumption has

been higher than ever,

and it is expected to

increase even more.

Exhibit 21: Information Technology spending on Telecommunication services worldwide

Exhibit 23: Global SMS/RCS

messaging revenue

Exhibit 22: Global mobile data traffic

Exhibit 24: Mobile service revenue in Europe 2008 - 2017

Source: Statista


Source: Analysis Mason

Source: Statista

https://fesrvsd.fe.unl.pt:2058/statistics/221345/number-of-internet-subscribers-in-europe-since-2005/

https://fesrvsd.fe.unl.pt:2058/statistics/377806/broadband-internet-connection-penetration-in-european-countries/

https://fesrvsd.fe.unl.pt:2058/statistics/612745/4g-adoption-in-western-europe-2014-and-2019/


PAGE 12/53

Since Europe is Vodafone’s main market, taking a closer look to each location

will help designing better forecasts to understand the future of the company6.

Germany is Vodafone’s primary market. It has been showing an overall flat

growth essentially motivated by a weaker mobile service revenue, offset by

strong performance in fixed broadband services. By 2026, the latter began a

stabilising trend. Over the medium term it is expected that mobile service will

reclaim its strength culminating in a stable to modest growth (Exhibit 25).

In Italy, revenues have been declining 1% to 2%, largely motivated by the

increasing competition in the mobile segment with the entrance of Iliad. In 2016,

after several years of reported low revenues, the Italian market reached a

positive growth mostly due to a strong performance of fixed broadband of about

6% in the first-half of 2017. Nevertheless, market researchers expect that future

increasing competition in the fixed wholesale market, motivated by the new

provider Enel, is expected to weaken revenues (Exhibit 26).

The United Kingdom has been showing flat growth. This was motivated by a

decline in mobile revenue and lower revenue growth, yet positive, from fixed

service – drags were caused by lower public-sector and wholesale revenue.

Since 2014, this market has been one of the most stables in Europe, steadily

growing 3% to 4% in broadband, helping offset negative mobile revenue.

Nonetheless, with a penetration rate of 90%, the market is already saturated

(Exhibit 27).

The Spanish segment presented a positive growth of 2%-3% due to a strong

performance in fixed broadband services motivated by a high degree of

convergence and positive returns from previous investments in capacity. In 2016

household convergence reached 63% and it is expected to develop even more in

the following years. In terms of competitiveness, Spain is characterised by its

intensive competitive environment where low cost providers disrupting the market

are forcing incumbents to revise their mobile offers downwards (Exhibit 28).

Vodafone’s main competitors in Europe are Deutsch Telekom, Orange and

Telefónica. Deutsche Telekom is the market leader generating total revenues of

€74.9 billion in 2017 while Telefónica reported €52 billion in revenues, also from

the year of 2017. The company number of mobile customers in Spain was close

to 17.5 million, together with a 43 million base in Germany established by a

second brand called O2. Vodafone takes the third place among telecom leaders

with the aforementioned total revenue of €46.6 billion and more than 19.7 million

mobile customers just in the UK (Exhibit 29). In terms of brand value, Vodafone

6 European Telecoms: How Growth and Investment Compare Across the Top Five Markets, Mark Habib, S&P Global, 2017

Exhibit 25: German Telecoms

Market Revenue Growth

Exhibit 26: Italian Telecoms Market

Revenue Growth

Exhibit 27: UK Telecoms Market Revenue Growth

Exhibit 29: Revenue of the leading Telecom operators in Europe in 2016

Exhibit 28: Spanish Telecoms Market

Revenue Growth

Source: S&P Global Ratings, company reporting,

Credit Suisse

Source: Statista

https://fesrvsd.fe.unl.pt:2351/statistics/269535/




PAGE 13/53

is the second most valuable telecom brand in Europe, valued in $28.86 billion,

following Deutsche Telekom with $41.5 billion.

Finally, Africa has been showing a lot of opportunities for the

telecommunications’ industry. The region grew at about 6% a year in mobile

services and 1% annually in fixed for the last 5 years7. The liberalisation of the

sector triggered a telecom revolution which enabled the deployment of new

improved services and the arrival of global leaders boosting active competition.

Africa has been one of the fastest-growing mobile markets in the world for the

past five years reaching a penetration rate of approximately 45% (Exhibit 30)

and 440 million users. These numbers are not a surprise since only 6% of

Africans owned a mobile phone by 20048.

Africa’s main operator is MTN, a South Africa based company that has been

showing high numbers of subscribers and year-on-year net additions, 221 million

in 2018. Vodacom, considered jointly with the remaining Vodafone Africa

operations, came in second in terms of market share, with 160 million

subscriptions (Exhibit 31), followed by Maroc Telecom (Morocco) with 60 million.

Orascom Telecom (Egypt) and Telkom (South Africa) are the least representative

in Africa with just, 46.52 million and 5.2 million users, respectively. In particular,

the South African market has been completely dominated by Vodafone for the

last years. Vodacom has extended its leading position over its competitors, with a

43% market share in South Africa – increasing the gap with the main rival MTN9.

Segment Analysis

In order to better understand Vodafone’s business and its performance

throughout recent years, this section will be exclusively focused on the

geographical segments where the company operates.

The company itself divides its operations into the following geographic regions –

Europe (first three segments) and Africa, Middle East and Asia Pacific

(concerning the last two):

Northern Europe

Starting by Northern, this segment is composed by Germany and the United

Kingdom – accounting for approximately 23% and 15% of the Group’s total

revenue, respectively. This is a big pie of the company’s operations and one of

the most stable market.

7 “Africa’s Telecoms Market to Hit $65bn by 2018”, Niyi Aderibigbe, Ventures in Africa 8 “The Telecom Sector in Africa”, Africa Business Pages, Dec 2018 9 “SA mobile subscribers in 2017: Vodacom vs MTN vs Cell C vs Telkom”, Business Tech, Jun 2017

Exhibit 31: Number of subscribers

(in millions)

Exhibit 30: Global unique mobile

subscribers’ penetration by region

Source: Statista


PAGE 14/53

Shifting analysis to Germany, with its mobile service stabilised and strong mobile

customer base, fixed broadband service has become the main focus of the

company in this market together with opportunities from converged propositions –

“GigaKombi”. Germany’s commercial performance was quite strong in the last

years reporting a growth in both mobile and fixed revenues - reflected in an

increase in service revenues of 2.6% in 2018. EBITDA margin grew by 2.85 pp in

the last year, supported by a reduction on operating costs of 2.3%.

Nonetheless, the latest deal regarding Liberty Global’s assets is expected to

generate capital expenditure synergies that will deliver a €6 billion NPV10. Liberty

Global, the main cable provider in Europe, will allow Vodafone to reach 11 million

marketable homes in 2019 and eventually more than 50 million if the deal with

Unitymedia is completed. Unitymedia, the second largest operator in Germany,

will give Vodafone the opportunity to cover regions not yet covered by Liberty

Global.

However, a problem arouses. German regulators11 are concerned that customers

might be left at disadvantage and are debating if such deal should be approved

considering anti-trust issues. Nevertheless, the analyst consensus and Vodafone

itself are positive that in the middle of calendar 2019 the convergence program

will be accepted.

The United Kingdom business has been a long-suffering segment of Vodafone’s

European operations, reporting severe losses in 2016 of €97 million and €542

million in 2017, and the slowest one to move to a converged service.

The 2016 acquisition by BT of a leading wireless provider in the UK12 disturbed

the market. Vodafone’s position was undermined once it needs to resort to

wholesale fixed-line capacity on the retail side being left at a disadvantage

compared to competitors. Besides, following 2012’s acquisition of Cable &

Wireless Worldwide, Vodafone’s branch financial performance was dragged

down once the acquisition did not go as expected, causing serious reputational

damage and culminating in a £5 million fine from the UK regulator.

Notwithstanding, Vodafone expects the UK business to report stronger profits in

the following years as a result of a restructuring plan in its home market. The

company has struggled for more than a decade in the UK as it attempted to

revive growth in its local mobile business and failed.

In what concerns to the mobile segment, highly intensive competition

environment and pricing pressure will continue to impose difficulties in

10 Vodafone To Acquire Liberty Global's Operations in Germany, the Czech Republic, Hungary and Romania 11 Mergers: Commission opens in-depth investigation into proposed acquisition by Vodafone of Liberty Global's business in Czechia, Germany, Hungary and Romania. Dec 2018, European Commission 12 “BT's £12.5bn EE takeover gets green light”, Sean Farrell, Jan 2016, The Guardian


PAGE 15/53

Vodafone’s operations both in term of revenue and mobile subscribers.

Notwithstanding, it is also expected that the deployment of 5G (4G network

coverage is now 99%), together with the restructure of the home market will help

Vodafone change the scenario and improve its numbers for this segment. Yet,

the analysts look at these figures in a conservative way especially considering

past performance.

Southern Europe

Represented by the firm’s operations in Italy and Spain - comprising 11 to 13%

each of total Group Revenues - Southern Europe is one of the segments where

the company faces the most challenging situation. This is essentially due to the

intensive competitive market, especially at the price level with “below-the-line”

offers.

Going deep into Italy, the presence of Iliad in the wireless market is expected to

create an adverse impact through price and margin pressures. Vodafone has

recently launched a new brand under the name of “ho” whose success and good

traction allowed the company to increase price by 2€ compared to its main

competitor – Iliad Italia. However, this originated a cannibalisation issue to

Vodafone Italy’s main brand. Even while facing difficulties, the company

managed to achieve a year-on-year decrease of around 8% on operational

expenditures.

Notwithstanding, the firm has recently closed an agreement with the electric utility

company, Enel, which provided additional fibre that could be used in many areas,

apart from Vodafone’s already own fibre in place and NGN footprint. Having so,

this create the path towards a larger network which is expected to reach around

19 million properties by 2027.13 All the aforementioned combined, permitted a

continued strong customer base growth and higher ARPU in fixed line, taking the

best of the fixed line momentum in this market.

Moreover, Vodafone has already launched its first 5G-network in Milan,

accounting with 80% coverage, and is expecting to expand it to other cities

throughout the country already in 2019. Developments in the new network have

totalled an investment of around € 90 million14 so far. Just in 2018, 2.4 billion

were used to buy spectrums.

Looking into the Spanish market, the company strategy has been changing by

focusing in “more-for-more” deals. Recent trends suggested that football services

were no longer profitable and driving P&L down. Consequently, the service was

13 “We're Calling Vodafone Undervalued”, Allan C. Nichols, Nov 2018, Morning Star 14 “Vodafone and TIM claim 5G firsts in Italy”, Dec 2018, The Geography


PAGE 16/53

dropped shifting now efforts towards movies and TV series, however this

supports the projected decrease in TV consumers going forward.

In 2015, Vodafone acquired one of the largest cable TV operators, Ono, in Spain,

opening doors to offer bundled services in this market. It should be highlighted

that high-value subscribers were captured by these services. Moreover, it is

important to stand out Spain’s position as the country in which the growth

towards converged services has had the furthest impact: consumer converged

revenues from “Vodafone One” grew by 13.7%.

Throughout the year, growth was obtained in the customer base on mobile

contract customers, fixed broadband households and TV households, adding 164

000, 109 000 and 51 000 respectively. However, owing to the highly competitive

intensity the company reported an increase in churn rate and a decline in

broadband and TV base in the last quarter; due to same factors, the company is

considering dragging costs via cutting jobs.15

Rest of Europe

Performance in Rest of Europe has been supported by a continued cost control

with an increase on adjusted-EBITDA margin of 0.3 pp to 30.7%, compared to

2017. Nonetheless, revenues have been declining since 2016, from €6.6 billion to

€4.9 billion in 2018, especially motivated by losses from mobile segment which

decrease by 20% just in 2018.

From all the regions combined in this segment, operations stand out in markets

such as Ireland, with growth supported on fixed customers; Portugal, where

service revenue grew by 4.6%, supported by a strong growth in both fixed and

mobile; and Greece. In what concerns to the latter, the firm has announced the

acquisition of CYTA Hellas – a fixed and mobile telecommunications provider –

allowing for further progresses on fixed line, convergence plans and high cost

savings owing to market consolidation.

Together with the services in Germany, Vodafone has agreed to acquire Liberty

Global’s services in Czech Republic, Hungary and Romania ambitioning a

convergence plan that will aggregate its biggest market, Germany, and Central

and East markets (CEE). This plan will award Vodafone the position of European

leader in NGN.16

Vodacom

Vodacom – majority owned by Vodafone, holding 60.5% of the latter - concerns

operations in South Africa, accompanied by its international operations; recent

15 Vodafone Half Year Results 2019 16 “Vodafone strikes €18bn deal for Liberty Global's cable and broadband assets”, Mark Sweney, May 2018, The Guardian

Vodafone will become

Europe’s leading next

generation network owner,

serving the largest number

of mobile customers and

households across the EU.

Vittorio Colao


PAGE 17/53

macro pressures are driving slowdowns in this segment’s performance. However,

Vodacom South Africa has managed to achieve a steady growth (Exhibit 32) by

finding alternative revenue streams in the strong growing demand for mobile data

- data revenue grew 12.8% compared to 2017. Additionally, strong penetration

numbers concerning 4G coverage have now reached 80% of users and service

revenues for the fiscal year of 2018 went up by 4.7%.

Results in this market are supported by a continued strong consumer base built

in the company’s personalised bundle strategy and segmentation, which now

exhibits 18.7 million bundle users.

An important part of the firm’s tactic approach in this segment is drove by M-Pesa

– reporting a 24% growth for the year - and again increased data demand in

Vodacom’s International operations – which account for 22.2% of Vodacom’s

service revenue – incorporating markets such as Tanzania, Mozambique,

Lesotho (where Vodacom was the first to launch 5G), the DRC and Kenya. 17

Lastly, it can be highlighted the company’s impact as No.1 customer NPS in

these markets. Hence, future performance is expected by Vodacom boosted by

investments in e-commerce platforms, augmenting Fintech, Big data and

expansion in Artificial Intelligence (driving smart capital expenditures for fibre

deployments while preventing churn).

Other AMAP

Lastly, the segment is composed by four major markets: Turkey, Egypt, Ghana

and New Zealand. This segment showed a 10.7% increase in service revenue

excluding the sale of 51% stake of Vodafone Qatar operations.

Concerning the Turkish market18, highlight is given to the growth on consumer

contract and data revenue, beating local price inflation of 11% in 2018 and

sustaining pressure from competitors. EBITDA margin increased by 1.4pp to

22.6% in 2018 pulled by revenue growth and reduce maintenance and repair

costs19. On the other hand, Egypt has been showing good performance reflected

by the 20.7% increase in service revenue. EBITDA margin grew based on

successful efforts on segmentation, escalating data penetration and higher ARPU

together with a strong customer base growth and cost discipline. All these factors

offset the 13% local price inflation.20

17 Interim Results for the Six Months Ended, Sep 2018, Vodacom 18 Case Study Vodafone Turkey: Transforming to become Customer Centric, CELFOCUS 19 Vodafone Turkey Reduces Maintenance and Repair Costs with CA Technologies Solutions for Service-Oriented Architecture, Sep 2015, CA technologies 20 “Vodafone Egypt marks record revenues in 2017, reaching over EGP 18bn”, Feb 2018, Daily News Egypt

Exhibit 32: Vodacom Revenue 2016-2018



PAGE 18/53

Finally, Vodafone New Zealand is approaching a potential Initial Public Offering

(IPO). This market has been facing difficulties in fixed line which offset the growth

reported in mobile in 2018 – service revenue declined by 0.5%. Fierce price

competition has been dragging revenue down which the company sought to

overcome by partnering with networking giant Nokia. It is expected that Vodafone

will modestly grow in the future with Nokia21 helping stimulate the business.

Joint Ventures

VodafoneZiggo was born from a partnership with Liberty Global in the

Netherlands, a highly competitive market where Vodafone has been battling to

maintain revenue growth and market share. Total revenue declined by 3.8% in

2018, reflecting price competition in mobile. However, it was offset by the growth

in fixed line services both in terms of ARPU as numbers of consumers, showing

the effects of partnering with the lead cable provider in Europe.

Notwithstanding, in 2018 Deutsche Telekom announced the acquisition of Tele2

NL to become the strong number three in the Netherlands behind KPN and

VodafoneZiggo. This move from Deutsche Telekom promises to challenge

Vodafone and will certainly be a disruptive force in the market. Taking this, it is

expected that the results from this joint venture will be disappointing in the

foreseeable future.

Vodafone Hutchison results from a merger between Vodafone and a national

incumbent in Australia. Currently, this joint venture is Vodafone’s most prominent

one with a strong position in a competitive market that allowed it to grow service

revenue in 0.8% in 2018 with both higher mobile ARPU and consumer base. A

future merger involving Vodafone will give the opportunity to increase competitive

advantage.

All the factors mentioned are expected to result in an increase in share of results

from this joint venture.

Vodafone India was developed through a merger between Vodafone and a well-

known Indian telecom provider, Indus Towers and in June 2018 a new merger

with Idea Cellular. The transaction was subject to intense regulatory scrutiny but

culminated in a positive outcome for the venture.

Revenues from this location have been decreasing, 18.7% in 2018, essentially

due to highly intensive competition from incumbents and new entrants that have

been disturbing the market with fierce price competition. The regulatory pressure

had also a negative impact in the company’s operations in the previous years.

21 “Vodafone partners with Nokia for pre-standard 5G trials in NZ”, Apr 2018, Telecom Review

We are never going to stop

breaking down barriers and

we will continue to

challenge these industries

in years to come.

Deutsche Telekom


PAGE 19/53

However, the Indian mobile market is one of the fattest growing one with still a lot

of room to be explored. Industry forecasts show that it is scheduled to recover in

the following years with larger mobile penetration and coverage. Vodafone is

raising financials to invest in this market in order to satisfy demand.

It is expected that India’s operations will suffer in the next two years and steadily

recover from that moment after.

Safaricom is a Vodafone’s associate in Kenya and has been showing

tremendous growth for the last years, 14.1% growth in net profit. Vodafone’s is a

market leader in this location and the increasing 4G coverage has provided the

company with significant advantage and allowing it to secure a strong consumer

base.

Safaricom is one of the most promising association of Vodafone’s in terms of

revenue growth in a low competitive market. It is expected to keep an upward

trend along the forecasted period.

Valuation Assumptions

In order to build a company analysis on Vodafone it was best assumed that a

Discounted Cash Flow (DCF) model will serve as the basis of this valuation. This

methodology was chosen as it is believed that it can best capture the key value

drivers of its business. As such, to come up with a recommendation to investors,

a forecast period of 18 years was considered since recent long-term investments

are expected to yield benefits later in the future only reaching steady state in

2036. Nonetheless, this recommendation concerns the Enterprise value by

March 31st, 2020.

Revenue Forecast

Forecasting revenues is paramount in such models once it reflects the

company’s performance going into the future. Additionally, many core items are

dependent on its projections.

Moving to the actual revenues forecast, these were divided per business

segment resorting to Vodafone’s financial spreadsheet. Valuing such

components turned out to be a difficult task as Vodafone has several sources of

revenue: mobile incoming, mobile customer, fixed line service and others like

fees and equipment sales.

Firstly, mobile and fixed revenues were projected sustained in two key value

drivers: mobile average revenue per user (ARPU) and net additions. To get a

better understanding of each part composing the broad segment, operations in


PAGE 20/53

the major markets, like Germany, Italy, UK, Spain, Rest of Europe, Vodacom and

Other AMAP, were considered. This allowed stronger results and more coherent

forecasts.

Supported by the assumptions, the values retrieved for revenues did not match

exactly the reported ones, yet they are perfectly correlated. As such, it was

possible to determine a growth rate throughout the forecasted period for each

segment, which was further applied to reported revenues as inputs in the model.

Moreover, to support the forecast, both past performance and future projections

were summarised on the table in Appendix I.

Cost Discrimination

The cost structure of the company is divided in three main components: direct

costs, customer costs and operating expenses. Since the company does not

provide any further discrimination on these, the forecast was based on a pattern

found when comparing each cost stream to revenues. Thus, an average of the

past three years was used to compute future costs.

Together with the cost deployment structure in course through the “Fit for

Growth” programme, already explained in the previous sections, it was applied

an annual cost reduction over the period to the average of the reported years.

Additionally, the acquisition of Liberty Global’s assets in Germany and the CEE

was considered separately as gains are expected to drive costs further down, i.e.

reflecting benefits from the convergence plan (Exhibit 33).

EBITDA Margin

According to the company’s strategic plans, management has been implementing

a cost efficiency plan under the name Fit for Growth. The main goal, as already

explain in this report, is to improve the company’s profitability margins and

sustainable growth. Compared to the industry average of 25.80%, Vodafone’s

EBITDA margin is higher, standing at 31.65% in 2018. Moreover, the company is

followed by Orange with 31.12% (Exhibit 34)22. Geographically, Vodafone has

very similar EBITDA margins across its business segments. Other AMAP

represents the lowest one with only 26.93%, and the highest of the group is

found in Southern Europe with 38.70%, figures from year-ended 2018.

The margins are expected to increase in all segments which is aligned with

Vodafone’s ambitions and the cost cutting programme currently undertaken.

Nevertheless, this growth will vanish over the period around 32% as steady state

is reached.

22 "Margins by Sector", NYU, Jan 2019

Exhibit 33: Annual reduction in costs

Exhibit 34: Previous FY Industry’s EBITDA Margin

Source: Analyst estimations

Source: Companies’ annual reports


PAGE 21/53

Capital Expenditures

Vodafone’s main capital expenditure (CapEx) projects include: requirements to

roll out networks in major emerging markets like South Africa - one of the group’s

prime market in this segment; capital needed to provide data products and

services; requirement to meet the population coverage in terms of wireless band

and mobile frequency, i.e. expenses related to usual capital replacement.

Closely, it combines all the cash outflows that concern the purchase of new

property, plant and equipment (PP&E) and computer software necessary for the

Group’s development.

For valuation purposes, net PP&E and other intangibles will be collectively

forecasted, net of accumulated depreciation and amortization. These costs are

estimated as a percentage of Net PP&E and other intangibles.

The company is expected to have an extraordinary capital expenditure related to

the acquisition of Liberty Global - additional information formerly scrutinized

under the segment section. Since there is a strong likelihood that acquisition will

be approved by EU’s regulatory commission, it was included in this analysis.

Hence, the impact of this transaction was calculated resorting to the value of the

assets of Germany and CEE operations from Liberty Global’s annual report23,

together with the value of the deal and integration costs disclosed by Vodafone in

its acquisition report24. The transaction is expected to be completed in mid-

calendar 2019 so that the value of €11.105 billion is added to 2020’s PP&E

(Exhibit 35). Further amortizations of integration costs and synergies are also

considered over the years.

Moreover, combining Vodafone’s prospects with the known ambition of leading

5G network implementation, which is already starting to take place in some of its

markets, an impulse to CapEx growth is expected in line with these investment

requirements. To forecast this component, it was taken into account the

deployment of 4G LTE networks back in 2010 as proxy for growth (Exhibit 36

and 37) yet in a more stable manner, since the industry experts believe that 5G

investments will use some of the 4G already developed infrastructures.

Goodwill

Vodafone has had an history of overpaying for its acquisitions and that is why the

goodwill has such a high value. However, tests for impairments are performed at

least annually so that Goodwill is subject to strong write offs that have been

23 Liberty Global PLC Annual Report – 2017, pg. 250 24 “Acquisition of Liberty Global’s operations in Germany, the Czech Republic, Hungary and Romania”, pg. 3, 12

Exhibit 35: Liberty Global’s Deal

Exhibit 36: 4G Industry Capital

Expenditure

Exhibit 37: 4G Investment vs.

Vodafone’s PP&E Forecast

Source: Liberty Global annual report 2017

Source: Statista; Analyst Estimations


PAGE 22/53

reducing it along the years. As such, the analysts expect that the latter will persist

throughout the company’s life.

In 2020, in case the acquisition of Liberty Global is approved by regulatory

parties, Vodafone will report an increase in Goodwill of €7.295 billion. This

amount reflects the difference between the value of deal and the assets fair

value, including implementation costs.

Taxation

For a company with operations spread across different countries the tax

treatment can be challenging. Likewise, the analyst felt the need to apply in the

model a corporate tax rate that would reflect the different countries’ statutory rate.

Given that not every country has the same weight on Vodafone’s revenues, when

calculating the effective tax rate, they were accounted proportionally reaching a

value of 22.49%. This value will be later on subject of a scenario analysis.

Moreover, Vodafone has been reporting large amounts of deferred tax assets

(DTA) and liabilities (DTL) over the years. The majority of the company’s DTA are

related to problems in Luxembourg – location where corporate activities are run,

i.e. the Group’s internal financing, procurement and roaming. In 2014 and 2015,

DTA were recognized due to revaluations arising in Luxembourg investments in

order to meet LUX GAAP compliance. These losses do not have an expiration

date. Additionally, write offs from investments in Germany in 2000 gave rise to

DTA. These losses still remain within the company as they also do not expire.

Nevertheless, in 2016 and 2017, DTA were subject to a derecognition due to

investment revaluations in Luxembourg and Germany.

Giving the aforementioned, the analyst did not find sufficient basis to support

DTA’s forecast since these events are unpredictable once they derive from

revaluations and write offs dependent on the market value of the underlying

assets. However, the forecasts indicate that the Group will be able to generate

enough profit in all locations in the foreseeable future to which DTA can be used.

Hence, DTA and DTL was reduced annually by 2%, reducing the balance sheet

account and crediting comprehensive income by reducing tax expense.

In addition, DTA and DTL do not have an expiration date and Vodafone expects

to use them entirely in 20 to 50 years.

Discontinued Operations

In 2016, Vodafone moved its Indian activity to discontinued operations following

the intention to create a new joint venture involving Idea Cellular, previously

discussed in the segments’ analysis.


PAGE 23/53

The venture was finally concluded in August 2018 and following the merger, a

loss on disposal of €3.4 billion arose in the first half-year 2018/1925. Given that

discontinued operations solely reflect this business, this line will be removed from

the income statement and balance sheet from this year on after.

WACC & Growth rate

To discount the company cash flows, the weighted average cost of capital

(WACC) has to be determined. In order to do so, it is necessary to estimate the

cost of equity - through the Capital Asset Pricing Model (CAPM); the cost of

debt - resorting to the company’s outstanding bonds; and the target Debt to

Capital ratio.

The CAPM model has as inputs the risk-free rate, the market risk premium and

the beta of the company. The risk-free rate of 0.948% is based on the spot rate

of 30-year AAA Government Euro Bonds26, since it is denominated in the same

currency as cash flows and it is perceived as a risk-free asset. As for the equity

market risk, MCSI World Net Eur27 was considered. Retrieving historical data

since 2013, an annual average market return was calculated getting to a value

of 9.8%.

The beta estimation was based on a group of comparable firms that are exposed

to the same risk profile as Vodafone in a well-defined peer group of 6 telecom

providers. Orange (France), Swisscom (Switzerland), Proximus (Belgium),

Telefonica (Spain), BT Group (United Kingdom) and Deutsche Telekom

(Germany) were selected since they provide analogous services in similar

markets, thus exposed to the same economic and industry factors as Vodafone.

First of all, the raw betas for each comparable firm were retrieved from

Bloomberg, as well as the respective current market debt-to-capital ratio. Once

refuted the hypothesis of Beta Debt being equal to zero, a representative bond

from each peer was considered combined with the respective issue price, coupon

rate and maturity in order to compute the yield to maturity at issuance. Resorting

to the CAPM model, the beta debt of each company was calculated and then used

to determine the unlevered beta. Since unlevered betas focuses solely on

operating risk, they can be averaged across competitors. Finally, a relevered beta

of 0.67 was retrieved, leading to a cost of equity of 6.8%. This percentage is

consistent with the historical cost of equity reported by European Central Bank in

the Euro area of 8%28.

The target Debt to Capitalization ratio was assumed to be the one projected for

2036 once the current company’s financial position and the foreseen investments

25 Vodafone Group H1 2018/19 Results & Strategy Update, pg. 13 26 “Euro area yield curves”, European Central Bank 27 MSCI World Net EUR (MIWO00000NEU), Global market Indexes, investing.com 28 “Measuring and interpreting the cost of equity in the euro area”, European Central Bank


PAGE 24/53

will predictably force Vodafone to change their capital structure and increase

borrowing. Therefore, the target stands at 59% which is in line with the main

players in the telecommunication’s industry.

For the cost of debt, a representative bond of Vodafone was chosen. The Group

has currently €30 million worth of outstanding bonds in the most diverse

currencies and maturities. The chosen one is a euro-dominated bond with a

maturity of 14 years, coupon rate of 2.88% and issued at 98.229% of par. This

bond gives a yield to maturity of 2.92683%29. Applying the current tax rate, the

cost of debt stands at 2.3%, which follows Vodafone and the market’s consensus

estimations for the company.

Finally, combining all these assumptions a WACC of 4.165% was retrieved.

Both WACC and the company’s capital structure will be further challenged in the

sensitivity analysis section.

Nevertheless, the company’s perpetual growth rate was calculated taking into

consideration a ROIC of 6% and a payout ratio of 99%, reaching a value of

0.033% for the terminal growth rate - reasonable for a mature company like

Vodafone.

Valuation Outcome

The final result from the valuation model discloses a buy recommendation for

Vodafone Group PLC London at the year-end 2020 target share price of £2.65

reflecting a gain of 69% to its current share price of £1.57 (at the time of this

report).

The valuation model retrieved an Enterprise value of €137 785 million, getting

to a final Equity value of €82 530 million by subtracting Net Financial Assets.

The total shareholder return will be 78%, including the cash dividend.

Multiples Valuation

As an alternative to the DCF analysis, a multiples valuation approach was also

conducted. The selected companies for this analysis were the ones composing

the peer group previously defined for the WACC computation.

Moving into the valuation, firstly the mean of each multiple – EV/EBITDA, P/E

and EV/EBIT - was considered, focusing on the three companies whose multiples

were the closest to the calculated peer group’s mean. Secondly, the highest and

lowest multiple values were taking into account in order to build a range where

Vodafone’s share price should lie in. Nonetheless, EV/EBITDA is preferred as

29 Euro Medium Term Note Programme, Issue of €750,000,000 2.875 per cent, Vodafone Group


PAGE 25/53

Vodafone’s Net Income is low and has a higher probability of reaching negative

values.

By the analysis of the table in Exhibit 38, it can be seen that ranges are not in

line with the result from the DCF model. The problem arises from Vodafone’s

recent CapEx investments that increased Net Debt significantly in the year of

2020. Besides, future synergies expected from this investment are not captured

in this valuation hence retrieving different conclusions from the DCF.

Risk Factors

Considering the risks inherent in Vodafone’s business is extremely important as

its impact could disrupt operations and alter forecasts if actually verified.

As it is expected from a telco company, cyber threat and informational security

comprises a high concern as it is highly likely to occur and can have a large

impact on the Group’s reputation. As soon as customers start losing trust

Vodafone can suffer from increasing churn rates, thus the company should invest

in appropriate systems to guarantee that it is able to protect, detect and rapidly

respond in case of a cyberattack or similar event.

There are three factors that have increased the risk of occurrence, thus

considered material to this analysis:

• Failure of developing an effective technological and digital transformation:

concerning “Digital Vodafone” the failure to achieve the expected differentiated

service and cost efficiency could set back Vodafone from its competitors, losing

market share and striking forecasts, apart from the increased cost to run

operations.

• Missing opportunities due to ineffective management of data: inserted in a

digital economy, Vodafone should focus its attention on compliance with General

Data Protection Regulation (GDPR) requirements as data is used to drive up

efficiency and deliver services in line with customers’ needs and expectations. If

otherwise data is not appropriately processed according to applicable law, this

would have a negative impact on NPS and the company’s customer base,

increasing churn.

• Compromising shareholders’ returns giving an inefficient capital management: a

paramount part of Vodafone’s business lays on taking the best advantages from

investment opportunities such as completing strategic acquisitions, mergers or

partnerships. Thus, failing to capture these opportunities directly affects future

investments and mainly cash flow, on which the distribution of wealth to


Exhibit 38: Multiples Valuation results


PAGE 26/53

shareholders is dependent. Notwithstanding, this would compromise the

company’s profitability.

Also, as formerly mentioned, it should not be disregarded the high exposure to

Market disruption – new entrants creating price pressures and delivering

unlimited offers, ultimately driving down market share - and regulatory and

political measures concerning the industry.

Sensitivity Analysis

In the present section, one of the main inputs in the model is going to be tested to

account for different possible outcomes. The WACC estimation has great impact

in the final recommendation, therefore it should be studied carefully.

One of the key factors to determine WACC is the after-tax cost of debt. For this

valuation, the value of 2.3% was considered however, since a long horizon is

being forecasted, it is important to consider a change in the ability of the

company to raise funds – a range for this input of [1.45%; 3.27%] was

considered. On the other hand, debt to capitalization ratio was also tested on

values between [43%; 96%]. The sensitivity analysis showed that WACC is

indeed sensitive to changes in these inputs giving values that can vary between

3.31% and 4.84%. The impact of this new range was also checked reaching a

final share price of the company between £2.15 and £3.91.

Scenario Analysis

A scenario analysis was built with the purpose of measuring the impact that a

change in corporate taxes around the different locations where the firm operates

would be significant in the final recommendation, i.e. concerning the price per

share. Changes in tax rates is one of the group’s main concerns given that they

can be affected by several factors such as tax reforms, financial reporting

directives, state aid investigations; future corporate acquisitions and disposals,

businesses restructuring and resolution of open tax issues.

To do so, the same method was used as the one to determine the relevant

effective tax rate. Data was collected from KPMG’s corporate tax rates table,

retrieving statutory tax rates in place since 2003 across all meaningful

geographies.

The scenario calculated in the forecasted model, i.e. the one used in the

Discounted Cash Flow Model, was considered to be the base scenario and the

most likely to occur, accordingly the one attributed with the highest probability –

70% probability. This scenario assumes the statutory tax rates in place during the


Exhibit 39: Sensitivity Analysis


PAGE 27/53

fiscal year of 2020 coming to a share price of £2.76. This scenario gives

shareholders a total return of 82%.

Concerning the best (worst) case scenario, statutory tax rates were considered to

be the lowest (highest) of historical tax rates including deliberated future

implementation, either as reductions or augmentations. While the first represents

a world where the company would be able to have the lowest tax burden, the

second reflects a scenario with the largest amount of Group taxes. As such, the

only two countries where corporate tax rates are highly likely to be reduced, thus

considered in the best-case scenario, are United Kingdom and Turkey with 17%

and 20%, respectively. Needless to say, is that these represent highly

optimistic/pessimistic scenarios mirrored in the low probability of 15% each.

The best (worst) scenario gives a share price for the year-end 2020 of £2.81

(£1.99) representing a positive total shareholder return of 85% (33%).

This analysis ends with the combination of all scenarios previously stated and,

applying the respective probabilities, a target share price of £2.65 (€2.91) is

reached - remunerating shareholders with a total return of 78% - Exhibit 40.


Exhibit 40: Scenario Analysis


PAGE 28/53

Appendix

Assumptions

VODAFONE Even though unfavourable economic conditions might hurt revenues, large mobile phone dependence will sustain losses

EUROPE: Economy is growing steadily

MOBILE Set to decline across all geographies, in line with the decreasing trend, essentially due to growth in data demand boosted by disruptive technologies – WhatsApp and RCS

FIXED Set to grow boosted by Vodafone’s NGN presence in Europe and broadband services

Number of subscription is a non-linear variable, i.e. growth rate will decrease over the years

MOBILE FIXED

Northern Europe

Germany

Industry flat to modest growth in the medium-term

Strong customer base and market share

ARPU stable according to past trends

ANALYSTS’ FORECAST

Following recent trends, ARPU declines until 2020 stabilising afterwards according to the Industry

Customer base follows same trend, stabilising at 0.5%

Industry spending is increasing

Strong growth, set to stabilise in the medium-term

Acquisition of Liberty Global reaching 50M marketable homes in the near future


Projected ARPU growth of 1% in the medium-term

Consumer base will reflect the higher penetration captured through acquisitions

United Kingdom

Flat growth across the industry (location with most stable since 2014)

Long suffering segment with weak market position

Highly competitive market

Company’s restructuring plan on operations/costs in course


ARPU displays falling rates, mirrored from competition; however, it is expected to stabilise at a 0.5% rate as a reflection of the company’s abovementioned plan

Consumer base is set to decrease at rates around 1%

Industry steadily growing between 3 to 4%; low growth potential given the high penetration rate, i.e. high saturation of the market

Weak strategy, dependent on wholesale, together with high intensive competition


Growth potential is offset by competition however both ARPU and the number of customers will grow modestly

Southern Europe

Italy

Industry revenues declining 1 to 2% driven by high pricing pressure from new entrants

Second brand “ho” will push down ARPU; cannibalisation of the main brand


ARPU will decline 5% in 2019 due to new discount prices offered by “ho” steadily converging to a rate of – 0.5%

Consumer base follows the same trend with tougher competition

Reported large Industry growth of 6% in H1 2017

Strong NGN strategy in fixed is expected to capture more customers

Intense competition is damaging the revenue potential


Strong market presence reflected in the increase in the consumer base of 60% over the whole forecasted period

Spain

Industry is experiencing positive returns from previous investments in capacity; positive growth ranging from 2 to 3%

High degree of convergence

Low cost providers are forcing incumbents to revise mobile prices downwards


Overall good momentum in fixed is expected to offset flat performance in mobile, where ARPU is set to fall over the period

Rest of Europe

Declining trend in mobile revenues is expected to continue going forward, offsetting momentum in fixed


Declining ARPU and customer base, being the latter more significant at a 2% rate

Gains from FFTH roll-out in Portugal is driving customer growth

Acquisition of Liberty Global, including CEE, is expected to drive further NGN coverage


76% growth in consumer base together with a stable ARPU

Appendix I: Revenue Forecast


PAGE 29/53

AFRICA, MIDDLE EAST & ASIA PACIFIC: Unwinding opportunities from low penetration and data growth

MOBILE Segment registering the fastest growth in mobile due to market liberalisation and low levels of penetration

FIXED Growing market share and penetration

Vodacom

Industry is experiencing strong growth

Strong growing demand for mobile data together with large year on year penetration rate

High market share


Declining ARPU gradually converging to a steady rate of – 0.5%

Mobile customers show an upward trend reflecting the opportunities abovementioned

Presumable expansion from a new entrant, increasing market share


Large growth in the consumer base captured by the company’s recent inception in the market

ARPU is partially mirrored by the latter, i.e. decreasing while customer base goes up

Other Africa, Middle East & Asia Pacific

Successful effort form segmentation together with an increasing penetration in the market captured by a strong strategy

Escalating data

Highly competitive market partially


Decreasing ARPU in the first 4 years of the forecasted period, stabilising afterwards around 1%

Strong consumer base, showing an upward trend

Good performance able to offset inflationary pressure


Fixed broadband customers will follow recent upward trends progressively converging to a rate around 1%


PAGE 30/53

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

2036

Core

Bu

sin

ess

Ope

rati

ng C

ash

996

996

996

953

931

926

925

931

945

959

976

989

1 00

0 1

010

1 02

0 1

027

1 03

3 1

038

1 04

2 1

045

1 04

8 1

051

1 05

4

Acc

ount

s &

Not

es R

ecei

vabl

e4

475

5 64

1 5

785

5 29

8 5

491

5 33

1 5

325

5 35

8 5

438

5 52

1 5

614

5 69

0 5

755

5 81

2 5

867

5 91

0 5

946

5 97

5 5

999

6 01

6 6

032

6 04

9 6

065

Inve

ntor

ies

534

667

716

576

581

596

587

583

583

588

594

602

609

615

621

625

629

633

635

637

639

641

643

Inve

stm

ent

in A

ffili

ates

138

(4)

479

3 13

8 2

538

2 79

2 3

071

3 37

8 3

446

3 51

5 3

585

3 65

7 3

730

3 80

4 3

880

3 84

2 3

803

3 76

5 3

727

3 65

3 3

580

3 50

8 3

438

Oth

er R

ecei

vabl

es S

T1

493

1 28

7 1

207

918

895

968

967

973

988

1 00

3 1

020

1 03

4 1

046

1 05

6 1

066

1 07

4 1

080

1 08

5 1

090

1 09

3 1

096

1 09

9 1

102

Oth

er R

ecei

vabl

es L

T24

3 38

0 74

5 15

7 54

5 46

2 46

2 46

5 47

2 47

9 48

7 49

4 49

9 50

4 50

9 51

3 51

6 51

8 52

0 52

2 52

3 52

5 52

6

Der

ivat

ive

& H

edgi

ng -

Ass

ets

ST24

0 37

2 1

029

610

180

576

576

579

588

597

607

615

622

628

634

639

643

646

649

650

652

654

656

Der

ivat

ive

& H

edgi

ng -

Ass

ets

LT2

719

5 16

9 4

414

3 67

2 2

449

3 37

0 3

367

3 38

7 3

438

3 49

0 3

550

3 59

8 3

639

3 67

5 3

709

3 73

6 3

759

3 77

8 3

793

3 80

3 3

814

3 82

4 3

835

Prep

aid

Expe

nses

ST

4 55

4 3

842

3 54

0 3

035

3 40

9 3

455

3 40

4 3

379

3 38

2 3

407

3 44

1 3

488

3 52

9 3

564

3 59

8 3

625

3 64

8 3

666

3 68

2 3

693

3 70

3 3

714

3 72

4

Prep

aid

Expe

nses

LT

717

783

163

378

597

373

367

365

365

368

371

376

381

385

388

391

394

396

397

399

400

401

402

LT In

vest

men

ts4

303

5 19

8 4

631

3 45

9 3

204

3 78

1 3

873

3 95

5 4

029

4 10

2 4

159

900

900

900

– –

– –

– –

– –

–

LT R

ecei

vabl

es28

1 39

8 47

1 36

2 43

5 40

8 40

7 41

0 41

6 42

2 42

9 43

5 44

0 44

4 44

9 45

2 45

5 45

7 45

9 46

0 46

1 46

2 46

4

Acc

ount

s Pa

yabl

e(5

705

)(6

993

)(7

420

)(6

212

)(6

185

)(6

319

)(6

226

)(6

180

)(6

184

)(6

230

)(6

292

)(6

379

)(6

453

)(6

518

)(6

581

)(6

630

)(6

671

)(6

705

)(6

733

)(6

753

)(6

772

)(6

792

)(6

811

)

Acc

rued

Lia

bilit

ies

(552

)(2

23)

(183

)(1

54)

(159

)(1

61)

(159

)(1

58)

(158

)(1

59)

(160

)(1

63)

(165

)(1

66)

(168

)(1

69)

(170

)(1

71)

(172

)(1

72)

(173

)(1

73)

(174

)

Prov

isio

ns S

T(1

166

)(1

061

)(9

58)

(1 0

49)

(891

)(8

51)

(1 0

98)

(1 2

01)

(1 2

53)

(1 2

84)

(1 3

13)

(1 3

21)

(1 2

90)

(1 2

60)

(1 2

57)

(1 2

38)

(1 2

19)

(1 2

14)

(1 2

15)

(1 2

22)

(1 2

23)

(1 2

25)

(1 2

26)

Prov

isio

ns L

T(1

084

)(1

497

)(1

619

)(1

130

)(1

065

)(1

039

)(1

340

)(1

467

)(1

530

)(1

569

)(1

604

)(1

613

)(1

576

)(1

539

)(1

535

)(1

512

)(1

489

)(1

483

)(1

484

)(1

493

)(1

494

)(1

495

)(1

497

)

Def

erre

d re

venu

e ST

– (2

301

)(1

967

)(1

716

)(1

678

)(1

669

)(1

667

)(1

677

)(1

702

)(1

728

)(1

758

)(1

781

)(1

802

)(1

820

)(1

837

)(1

850

)(1

861

)(1

871

)(1

878

)(1

883

)(1

888

)(1

894

)(1

899

)

Def

erre

d re

venu

e LT

– (1

70)

(165

)(2

04)

(237

)(2

36)

(235

)(2

37)

(240

)(2

44)

(248

)(2

52)

(254

)(2

57)

(259

)(2

61)

(263

)(2

64)

(265

)(2

66)

(267

)(2

67)

(268

)

Oth

er P

ayab

les

& A

ccru

als

ST(1

1 66

3)(9

786

)(8

644

)(6

917

)(6

952

)(7

164

)(7

058

)(7

006

)(7

011

)(7

063

)(7

133

)(7

231

)(7

315

)(7

389

)(7

460

)(7

515

)(7

562

)(7

601

)(7

633

)(7

655

)(7

677

)(7

699

)(7

721

)

Oth

er P

ayab

les

& A

ccru

als

LT(8

7)(1

19)

(123

)(3

0)(3

14)

(318

)(3

14)

(311

)(3

11)

(314

)(3

17)

(321

)(3

25)

(328

)(3

31)

(334

)(3

36)

(338

)(3

39)

(340

)(3

41)

(342

)(3

43)

Der

ivat

ives

& H

edgi

ng -

Liab

iliti

es S

T(8

5)(1

25)

(550

)(7

28)

(250

)(2

41)

(233

)(2

25)

(217

)(2

10)

(203

)(1

96)

(189

)(1

83)

(176

)(1

70)

(165

)(1

59)

(153

)(1

48)

(143

)(1

38)

(133

)

Der

ivat

ives

& H

edgi

ng -

Liab

iliti

es L

T(9

82)

(1 2

37)

(1 4

28)

(1 3

49)

(2 1

33)

(2 0

60)

(1 9

89)

(1 9

21)

(1 8

55)

(1 7

92)

(1 7

30)

(1 6

71)

(1 6

14)

(1 5

59)

(1 5

05)

(1 4

54)

(1 4

04)

(1 3

56)

(1 3

09)

(1 2

64)

(1 2

21)

(1 1

79)

(1 1

39)

Goo

dwill

28 2

40

31 1

82

28 2

38

26 8

08

26 7

34

26 7

34

34 0

29

33 0

51

31 8

14

30 7

50

29 7

28

28 6

97

27 7

27

26 7

90

25 8

85

25 0

11

24 1

65

23 3

49

22 5

60

21 7

98

21 0

61

20 3

50

19 6

62

Wo

rkin

g Ca

pit

al27

611

32

401

29

357

29

875

28

125

29

714

37

042

36

430

35

439

34

607

33

801

29

645

28

893

28

170

26

518

25

711

24

931

24

145

23

371

22

571

21

809

21

072

20

360

PPE

Net

27 6

78

36 8

07

35 5

15

30 2

04

28 3

25

25 9

27

33 4

35

36 5

89

38 1

73

39 1

29

40 0

12

40 2

49

39 3

08

38 3

80

38 2

84

37 7

08

37 1

36

36 9

84

37 0

16

37 2

33

37 2

67

37 3

02

37 3

37

Oth

er In

tang

ible

28 3

10

28 9

90

30 3

26

19 4

12

16 5

23

15 1

24

19 5

04

21 3

44

22 2

68

22 8

25

23 3

41

23 4

79

22 9

30

22 3

89

22 3

32

21 9

96

21 6

63

21 5

74

21 5

93

21 7

19

21 7

39

21 7

60

21 7

80

Tota

l Inv

estm

ent

in t

angi

ble

and

inta

ngib

le a

sset

s55

988

65

797

65

841

49

616

44

848

41

051

52

938

57

932

60

441

61

954

63

353

63

728

62

237

60

769

60

616

59

705

58

799

58

558

58

608

58

952

59

007

59

062

59

118

Core

Bu

sin

ess

Inve

sted

Cap

ital

83 5

98

98

198

95

198

79

491

72

973

70 7

65

89

980

94 3

63

95

880

96 5

61

97

154

93 3

74

91

131

88 9

39

87

134

85 4

16

83 7

29

82 7

03

81 9

79

81 5

23

80 8

16

80 1

34

79

477

No

n C

ore

Bu

sin

ess

Def

erre

d Ta

x A

sset

s24

960

32

991

28

306

24

300

26

200

25

676

25

162

24

659

24

166

23

683

23

209

22

745

22

290

21

844

21

407

20

979

20

560

20

148

19

745

19

351

18

964

18

584

18

213

% G

row

th

Tax

rece

ivab

les

979

796

1 40

2 15

0 10

6 10

6 10

6 10

6 10

6 10

6 10

6 10

6 10

6 10

6 10

6 10

6 10

6 10

6 10

6 10

6 10

6 10

6 10

6

Pens

ion

Co

sts

(665

)(5

51)

(341

)(5

94)

(410

)(4

22)

(412

)(4

02)

(400

)(3

98)

(396

)(3

94)

(392

)(3

90)

(388

)(3

86)

(384

)(3

84)

(384

)(3

84)

(384

)(3

84)

(384

)

Def

erre

d Ta

x Li

abili

ties

(905

)(8

23)

(564

)(5

35)

(644

)(6

31)

(618

)(6

06)

(594

)(5

82)

(570

)(5

59)

(548

)(5

37)

(526

)(5

16)

(505

)(4

95)

(485

)(4

76)

(466

)(4

57)

(448

)

Ass

ets

Hel

d fo

r sa

le41

–

3 65

7 17

195

13

820

–

– –

– –

– –

– –

– –

– –

– –

– –

–

Liab

iliti

es h

eld

for

sale

– –

(438

)(1

1 79

4)(1

0 99

9)–

– –

– –

– –

– –

– –

– –

– –

– –

–

Acc

rued

Tax

es(1

268

)(2

251

)(1

998

)(1

922

)(1

718

)(1

709

)(1

707

)(1

717

)(1

743

)(1

770

)(1

800

)(1

824

)(1

845

)(1

863

)(1

881

)(1

894

)(1

906

)(1

915

)(1

923

)(1

928

)(1

933

)(1

939

)(1

944

)

No

n C

ore

Bu

sin

ess

Inve

sted

Cap

ital

23 1

42

30

162

30

024

26

800

26

355

23 0

20

22

531

22 0

40

21

536

21 0

40

20

550

20 0

74

19

612

19 1

61

18

719

18 2

90

17 8

71

17 4

60

17 0

60

16 6

69

16 2

86

15 9

11

15

543

Fin

anci

ng

Exce

ss C

ash

16 6

31

13 8

59

17 2

63

14 0

02

12 5

38

– –

– –

– –

– –

– –

– –

– –

– –

– –

Fina

ncia

l Deb

t(3

5 36

9)(4

8 50

5)(5

1 57

8)(4

1 63

7)(3

9 97

8)(2

8 72

6)(4

9 72

5)(5

6 58

5)(6

0 55

6)(6

3 62

7)(6

6 51

9)(6

4 74

9)(6

4 01

7)(6

2 91

2)(6

1 96

4)(6

0 77

6)(5

9 29

3)(5

8 25

4)(5

7 35

0)(5

6 59

4)(5

5 39

9)(5

4 02

3)(5

2 44

6)

Net

Fin

anci

al D

ebt

(18

738)

(34

646)

(34

315)

(27

635)

(27

440)

(28

726)

(49

725)

(56

585)

(60

556)

(63

627)

(66

519)

(64

749)

(64

017)

(62

912)

(61

964)

(60

776)

(59

293)

(58

254)

(57

350)

(56

594)

(55

399)

(54

023)

(52

446)

Oth

er F

inan

cial

Lia

bilit

ies

(1 0

57)

– (5

771

)(4

937

)(3

281

)(4

465

)(4

462

)(4

478

)(4

518

)(4

560

)(4

606

)(4

644

)(4

677

)(4

705

)(4

733

)(4

754

)(4

772

)(4

787

)(4

798

)(4

807

)(4

815

)(4

823

)(4

832

)

Pref

erre

d Eq

uity

& H

ybri

d C

apit

al–

– –

– –

– –

– –

– –

– –

– –

– –

– –

– –

– –

Min

orit

y In

tere

sts

(1 1

86)

(2 1

97)

(1 8

11)

(1 5

19)

(967

)(9

67)

(1 0

68)

(1 0

14)

(959

)(9

05)

(853

)(8

07)

(770

)(7

41)

(717

)(6

99)

(687

)(6

80)

(676

)(6

74)

(676

)(6

81)

(691

)

Net

Fin

anci

al A

sse

ts41

897

-

34

091

-

31

688

-

34 1

58

-

55

255

-

62 0

77

-

66

033

-

69 0

92

-

71

979

-

70 2

00

-

69

464

-

68 3

59

-

67

413

-

66 2

29

-

64 7

52

-

63 7

21

-

62 8

24

-

62 0

75

-

60 8

90

-

59 5

27

-

57

969

-

Equ

ity

85 7

57

91 5

17

83 3

25

72 2

00

67 6

40

59 6

28

57 2

57

54 3

26

51 3

83

48 5

09

45 7

24

43 2

48

41 2

79

39 7

41

38 4

39

37 4

76

36 8

48

36 4

42

36 2

15

36 1

17

36 2

13

36 5

18

37 0

51

Div

iden

ds P

ayab

le–

– –

Com

mo

n E

qu

ity

83 3

25

72 2

00

67 6

40

59

628

57 2

57

54

326

51 3

83

48

509

45 7

24

43

248

41 2

79

39

741

38 4

39

37

476

36

848

36

442

36

215

36

117

36

213

36

518

37 0

51

Ch

eck

TRU

ETR

UE

TRU

ETR

UE

TRU

ETR

UE

TRU

ETR

UE

TRU

ETR

UE

TRU

ETR

UE

TRU

ETR

UE

TRU

ETR

UE

TRU

ETR

UE

TRU

ETR

UE

TRU

E

TRU

ETR

UE

TRU

ETR

UE

TRU

ETR

UE

TRU

ETR

UE

TRU

ETR

UE

TRU

ETR

UE

TRU

ETR

UE

TRU

ETR

UE

TRU

ETR

UE

TRU

ETR

UE

TRU

E

Net

tra

nsa

ctio

ns

wit

h s

har

eho

lder

s54

2 -

3

689

-

4

959

-

4 91

6 -

2

990

-

2 92

6 -

2

849

-

2 76

3 -

2

669

-

2 60

0 -

2

526

-

2 44

8 -

2

364

-

2 27

5 -

2 17

9 -

2 07

6 -

1 96

7 -

1 85

0 -

1 72

6 -

1 59

2 -

1

450

-

D

ivid

ends

(4 2

33)

(3 7

09)

(3 9

61)

(4 1

97)

(4 0

90)

(4 0

99)

(4 1

08)

(4 1

17)

(4 1

27)

(4 1

36)

(4 1

45)

(4 1

54)

(4 1

63)

(4 1

73)

(4 1

82)

(4 1

91)

(4 2

00)

(4 2

10)

(4 2

19)

(4 2

28)

(4 2

37)

Sh

are

repu

rcha

ses

– –

(1 7

35)

(1 7

35)

– –

– –

– –

– –

– –

– –

– –

– –

–

O

ther

tra

nsac

tion

s w

ith

shar

ehol

ders

3 69

1

20

73

7

1 01

5

1

100

1 17

3

1

259

1 35

4

1

458

1 53

6

1

619

1 70

6

1

799

1 89

8

2 00

3

2 11

5

2 23

3

2 35

9

2 49

3

2 63

6

2

787

Financial Statements

Balance sheet


PAGE 31/53

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

2036

€m€m

€m€m

€m€m

€m€m

€m€m

€m€m

€m€m

€m€m

€m€m

€m€m

€m

Reve

nues

49 81

0

47

631

46 57

1

46

317

46

265

46

552

47

247

47 96

8

48

780

49 44

0

50 00

6

50 50

0

50 97

6

51 34

8

51 65

9

51 91

4

52 12

0

52 26

7

52

409

52

554

52

701

-4%

-2%

-1%

0%1%

1%2%

2%1%

1%1%

1%1%

1%0%

0%0%

0%0%

0%

COGS

and

Othe

r Op.

Expe

nses

25 24

2

23

053.

00

22

179.

00

22

481.

10

22

148

21

987

22

001

22 16

5

22

385

22 69

2

22 95

7

23 18

9

23 41

0

23 58

5

23 73

2

23 85

4

23 95

3

24 02

4

24

092

24

161

24

231

Depr

ecia

tion

and

Amor

tizat

ion

11 69

7

10

179

9 910

8 917

11 52

0

12 59

5

13 14

7

13

473

13 77

9

13

859

13

536

13

216

13

183

12

985

12

788

12

735

12

746

12

821

12 83

3

12 84

5

12 85

7

SG&A

10 98

2

10

429

9 655

9 602

9 592

9 6

51

9 7

95

9 9

45

10

113

10 25

0

10 36

7

10 46

9

10 56

8

10 64

5

10 71

0

10 76

3

10 80

5

10 83

6

10

865

10

895

10

926

% R

even

ue22

%22

%21

%21

%21

%21

%21

%21

%21

%21

%21

%21

%21

%21

%21

%21

%21

%21

%21

%21

%21

%

Impa

irmen

t los

ses

569

-

-

2 900

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

Shar

e of

resu

lt in

asso

ciate

s and

join

t ven

ture

s60

16

4

38

9

424

465

500

542

588

638

676

71

6

758

80

3

851

90

2

955

1 0

13

1 074

1 1

38

1 2

07

1 2

80

173%

137%

9%10

%8%

8%8%

8%6%

6%6%

6%6%

6%6%

6%6%

6%6%

6%

Adju

stm

ents

2 509

409

917

Oper

atin

g Inc

ome

1 129

-

3 725

4 299

2 841

3 471

2 8

19

2 8

46

2 9

74

3 1

42

3 3

15

3 862

4 3

83

4 618

4 9

84

5 331

5 5

17

5 628

5 6

60

5 757

5 859

5 967

Net I

nter

est

1 510

933

421

54

4

75

6

88

0

97

1

1 0

66

1 1

81

99

7

941

96

7

965

97

9

989

99

4

994

99

0

981

966

944

Earn

ings

Bef

ore

Taxe

s2 6

39

-

2 7

92

3 8

78

2 2

97

2 7

14

1 939

1 876

1 907

1 961

2 318

2 9

21

3 416

3 6

52

4 005

4 3

42

4 523

4 6

34

4 670

4 7

77

4 8

94

5 0

22

Taxe

s4 9

37

78

9

82

8

516

610

436

422

429

441

521

65

7

768

82

1

901

97

6

1 017

1 0

42

1 050

1 0

74

1 1

00

1 1

29

Defe

rred

taxe

s rec

ogni

zed

4 295

1 629

-

537

-

52

6 -

516

-

50

5 -

49

5 -

48

5 -

47

6 -

466

-

45

7 -

448

-

43

9 -

430

-

42

1 -

413

-

40

5 -

39

7 -

38

9 -

381

-

Othe

r adj

ustm

ents

320

-

78

-

Resu

lt5 1

27

-

1 9

72

-

4 7

57

2 3

17

2 6

30

2 019

1 959

1 973

2 005

2 272

2 7

31

3 105

3 2

79

3 543

3 7

96

3 928

4 0

05

4 025

4 0

99

4 1

82

4 2

74

Disc

ount

inue

d op

erat

ions

5

4 107

-

1 969

-

3 400

-

-

-

-

-

-

-

Net i

ncom

e5 1

22

-

6 0

79

-

2 7

88

1 0

83

-

2 630

2 0

19

1 9

59

1 9

73

2 0

05

2 2

72

2 731

3 1

05

3 279

3 5

43

3 796

3 9

28

4 005

4 0

25

4 099

4 182

4 274

Othe

r Com

preh

ensiv

e In

com

e2 5

21

-

1 3

57

-

2 3

89

-

2 0

13

-

2 011

-

2 0

23

-

2 054

-

2 085

-

2 120

-

2 149

-

2 1

74

-

2 195

-

2 2

16

-

2 232

-

2 2

45

-

2 257

-

2 2

65

-

2 272

-

2 278

-

2 2

84

-

2 291

-

Divi

dend

Pre

ferre

d St

ock

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

-

Tota

l Com

preh

ensiv

e In

com

e7 6

43

-

7 4

36

-

39

9

3 096

-

61

9

5

-

94

-

11

1 -

11

5 -

12

3

557

91

0

1 063

1 3

11

1 550

1 6

71

1 739

1 7

53

1 821

1 898

1 983

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

2036

Chan

ges i

n Equ

ity£m

£m€m

€m€m

€m€m

€m€m

€m€m

€m€m

€m€m

€m€m

€m€m

€m€m

€m€m

Equit

y at t

he be

ginnin

g of t

he pe

riod a

ttribu

table

to sh

areho

lders

91 51

0 83

325

72 20

0 67

640

59 62

8 57

257

54 32

6 51

383

48 50

9 45

724

43 24

8 41

279

39 74

1 38

439

37 47

6 36

848

36 44

2 36

215

36 11

7 36

213

36 51

8

Total

Comp

rehe

nsive

Inco

me (R

esult

of th

e per

iod)

7 643

-

7 436

-

399

3 0

96

-

61

9

5 -

94

-

11

1 -

115

-

12

3

557

91

0

1 063

1 311

1 550

1 671

1 7

39

1 7

53

1 821

1 8

98

1 983

Comp

rehe

nsive

Inco

me at

tribu

table

to no

n-co

ntro

lling i

nter

ests

-6499

212

Divid

ends

(4 23

3)(3

709)

(3 96

1)(4

197)

(4 09

0)(4

099)

(4 10

8)(4

117)

(4 12

7)(4

136)

(4 14

5)(4

154)

(4 16

3)(4

173)

(4 18

2)(4

191)

(4 20

0)(4

210)

(4 21

9)(4

228)

(4 23

7)

Share

Buyb

acks

(1 73

5)(1

735)

– –

– –

– –

– –

– –

– –

– –

– –

–

Othe

r tran

sacti

ons w

ith sh

areho

lders

3 627

11

9 94

9 1 0

15

1 100

1 1

73

1 259

1 3

54

1 458

1 5

36

1 619

1 7

06

1 799

1 8

98

2 003

2 1

15

2 233

2 3

59

2 493

2 6

36

2 787

Issue

or re

issue

of sh

ares

23

18

18

19

14

17

17

17

17

17

17

17

17

17

17

17

17

17

17

17

17

17

17

Share

-bas

ed pa

ymen

ts16

1 11

2 13

0 12

1 12

1 12

1 12

1 12

1 12

1 12

1 12

1 12

1 12

1 12

1 12

1 12

1 12

1 12

1 12

1 12

1 12

1

Trans

actio

ns w

ith no

n-co

ntro

lling i

nter

ests

in su

bsidi

aries

(1 45

1)(75

6)(44

)(12

)80

5 87

8 96

2 1 0

36

1 122

1 2

17

1 320

1 3

99

1 481

1 5

69

1 662

1 7

61

1 866

1 9

77

2 096

2 2

22

2 356

2 4

98

2 649

9%10

%8%

8%8%

8%6%

6%6%

6%6%

6%6%

6%6%

6%6%

6%

Issue

of m

anda

tory

conv

ertib

le bo

nds

3 480

–

– –

– –

– –

– –

– –

– –

– –

– –

–

Othe

r12

Equit

y at t

he en

d of t

he pe

riod a

ttribu

table

to sh

areho

lders

83 32

5 72

200

67 64

0 59

628

57 25

7 54

326

51 38

3 48

509

45 72

4 43

248

41 27

9 39

741

38 43

9 37

476

36 84

8 36

442

36 21

5 36

117

36 21

3 36

518

37 05

1

-13.4%

-6.3%

-11.8%

-4.0%

-5.1%

-5.4%

-5.6%

-5.7%

-5.4%

-4.6%

-3.7%

-3.3%

-2.5%

-1.7%

-1.1%

-0.6%

-0.3%

0.3%

0.8%

1.5%

Shar

ehold

ers' e

quity

(con

solid

ated

)83

325

72 20

0

67

640

59 62

8

57

257

54 32

6

51

383

48 50

9

45

724

43 24

8

41

279

39 74

1

38

439

37 47

6

36

848

36

442

36

215

36 11

7

36 21

3

36 51

8

37

051

TRUE

TRUE

TRUE

TRUE

TRUE

TRUE

TRUE

TRUE

TRUE

TRUE

TRUE

TRUE

TRUE

TRUE

TRUE

TRUE

TRUE

TRUE

TRUE

TRUE

TRUE

Dilut

ed nu

mber

of sh

ares a

tribu

ted t

o sha

reho

lders

26 68

2

26

629

26 69

2

27

857

27 85

7

27

146

27 20

7

27

268

27 33

0

27

391

27 45

2

27

513

27 57

4

27

636

27 69

7

27 75

8

27 81

9

27 88

0

27 94

2

28

003

28

064

28

125

28 18

6

Divid

end p

er sh

are0.1

477

0.150

70.1

507

0.150

70.1

507

0.150

70.1

507

0.150

70.1

507

0.150

70.1

507

0.150

70.1

507

0.150

70.1

507

0.150

70.1

507

0.150

70.1

507

0.150

7

Income Statement Statement of Changes in Equity


PAGE 32/53

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

2036

€m€m

€m€m

€m€m

€m€m

€m€m

€m€m

€m€m

€m€m

€m€m

€m€m

€m

Core

Bus

ines

s

NO

PLA

T1

881

-

3

085

4 24

1

4

501

2

766

2

258

2

286

2

384

2

517

2

651

3

075

3

478

3

660

3

944

4

212

4

356

4

442

4

468

4

543

4

623

4

706

Dep

reci

atio

n11

697

10 1

79

9

910

8 91

7

11 5

20

12 5

95

13 1

47

13 4

73

13 7

79

13 8

59

13 5

36

13 2

16

13 1

83

12 9

85

12 7

88

12 7

35

12 7

46

12 8

21

12 8

33

12 8

45

12 8

57

Ope

rati

ng C

ash

Flow

9 81

6

13

264

14 1

51

13

418

14

285

14

853

15

432

15

857

16

296

16

511

16

611

16

694

16

843

16

928

16

999

17

092

17

189

17

289

17

376

17

468

17

563

g

row

th ra

te

Inve

sted

Cap

ital

- Fi

xed

Ass

ets

65 8

41

49

616

44 8

48

41

051

52

938

57

932

60

441

61

954

63

353

63

728

62

237

60

769

60

616

59

705

58

799

58

558

58

608

58

952

59

007

59

062

59

118

Gro

ss C

apex

red

ucti

on /

(add

itio

n)16

225

4 76

8

3

797

11

887

-

4 99

4 -

2 50

9 -

1 51

3 -

1 39

9 -

375

-

1

491

1

469

15

3

91

1

90

6

24

1

51

-

344

-

55

-

55

-

56

-

Net

Cap

ex r

educ

tion

/ (a

ddit

ion)

6 04

6

5

142

-

5

120

-

23

407

-

17 5

89

-

15

656

-

14 9

86

-

15

177

-

14 2

35

-

12

045

-

11 7

47

-

13

030

-

12 0

73

-

11

882

-

12 4

94

-

12

797

-

13 1

65

-

12

887

-

12 9

00

-

12

913

-

Inve

sted

Cap

ital

- N

WC

and

Oth

ers

29 3

57

29

875

28 1

25

29

714

37

042

36

430

35

439

34

607

33

801

29

645

28

893

28

170

26

518

25

711

24

931

24

145

23

371

22

571

21

809

21

072

20

360

Inve

stm

ent i

n N

WC

and

Oth

ers

517

-

1 74

9

1

589

-

7

328

-

61

2

99

1

83

3

80

6

4

155

75

2

72

3

1

652

80

6

78

1

78

6

77

4

80

0

76

2

73

7

71

3

Inve

stin

g Ca

sh F

low

5 52

9

3

393

-

6

709

-

30

735

-

16 9

78

-

14

664

-

14 1

53

-

14

372

-

10 0

79

-

11

292

-

11 0

24

-

11

378

-

11 2

67

-

11

101

-

11 7

09

-

12

023

-

12 3

65

-

12

126

-

12 1

63

-

12

200

-

Core

Bus

ines

s Fr

ee C

ash

Flow

18 7

93

10

758

6 70

9

16 4

50

-

2

125

-

76

8

1

703

1

924

6

431

5

319

5

670

5

465

5

661

5

898

5

383

5

166

4

924

5

250

5

304

5

363

ROIC

6%4%

3%2%

2%3%

3%3%

4%4%

5%5%

5%5%

5%6%

6%6%

Non

Cor

e Bu

sine

ss

Resu

lt4

300

-

9

110

-

2

902

-

6

718

-

1

103

-

1

120

-

1

161

-

1

195

-

1

235

-

1

267

-

1

295

-

1

320

-

1

345

-

1

366

-

1

385

-

1

402

-

1

418

-

1

431

-

1

445

-

1

458

-

1

471

-

Inve

sted

Cap

ital

30 0

24

26

800

26 3

55

23

020

22

531

22

040

21

536

21

040

20

550

20

074

19

612

19

161

18

719

18

290

17

871

17

460

17

060

16

669

16

286

15

911

15

543

Inve

stm

ent C

ash

Flow

3 22

4

44

5

3 33

5

488

491

505

496

490

475

463

451

442

429

419

410

401

391

383

375

368

Non

Cor

e Bu

sine

ss F

ree

Cash

Flo

w5

886

-

2

457

-

3

383

-

61

5 -

629

-

65

6 -

699

-

74

5 -

792

-

83

3 -

869

-

90

4 -

937

-

96

6 -

992

-

1

017

-

1

041

-

1

062

-

1

082

-

1

103

-

Ope

rati

onal

Fre

e Ca

sh F

low

12 9

06

8

301

3 32

6

17 0

64

-

2

754

-

11

2

1

004

1

179

5

639

4

486

4

801

4

561

4

725

4

932

4

391

4

149

3

883

4

189

4

222

4

261

Fina

ncin

g

Fina

ncia

l Res

ult

1 46

3-€

1

411

-€

940

-€

87

9-€

1

043

-€

1 14

2-€

1

219

-€

1 30

0-€

1

397

-€

1 26

1-€

1

223

-€

1 24

8-€

1

252

-€

1 26

6-€

1

276

-€

1 28

3-€

1

286

-€

1 28

4-€

1

278

-€

1 26

7-€

1

252

-€

Net

Fin

anci

al A

sset

s41

897

-€

34

091

-€

31

688

-€

34

158

-€

55 2

55-€

62

077

-€

66 0

33-€

69

092

-€

71 9

79-€

70

200

-€

69 4

64-€

68

359

-€

67 4

13-€

66

229

-€

64 7

52-€

63

721

-€

62 8

24-€

62

075

-€

60 8

90-€

59

527

-€

57 9

69-€

Chan

ge in

NFA

7 80

7-€

2

402

-€

2 46

9€

21

098

€

6

822

€

3 95

6€

3

059

€

2 88

7€

1

779

-€

736

-€

1 10

5-€

94

6-€

1

184

-€

1 47

7-€

1

032

-€

896

-€

749

-€

1 18

5-€

1

362

-€

1 55

8-€

Net

Cas

h Tr

ansa

ctio

ns w

ith

Shar

ehol

ders

3 68

9-€

4

959

-€

4 91

6-€

2

990

-€

2 92

6-€

2

849

-€

2 76

3-€

2

669

-€

2 60

0-€

2

526

-€

2 44

8-€

2

364

-€

2 27

5-€

2

179

-€

2 07

6-€

1

967

-€

1 85

0-€

1

726

-€

1 59

2-€

1

450

-€

Fina

ncin

g Ca

sh F

low

12 9

06

-

8 30

1 -

3 32

6 -

17 0

64

2 75

4

112

-

1

004

-

1

179

-

5

639

-

4

486

-

4

801

-

4

561

-

4

725

-

4

932

-

4

391

-

4

149

-

3

883

-

4

189

-

4

222

-

4

261

-

TRU

ETR

UE

TRU

ETR

UE

TRU

ETR

UE

TRU

ETR

UE

TRU

ETR

UE

TRU

ETR

UE

TRU

ETR

UE

TRU

ETR

UE

TRU

ETR

UE

TRU

ETR

UE

DCF

Ana

lysi

s

2020

2021

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

2036

FCF

2 16

7-€

78

3€

1

737

€

1

963

€

6 56

0€

5

425

€

5 78

3€

5

574

€

5 77

5€

6

016

€

5 49

1€

5

269

€

5 02

3€

5

355

€

5 41

1€

5

471

€

Term

inal

Val

ue13

2 44

3€

PV 2

020

2 08

1-€

72

2€

1

537

€

1

667

€

5 34

9€

4

247

€

4 34

7€

4

022

€

4 00

0€

4

001

€

3 50

5€

3

229

€

2 95

5€

3

025

€

2 93

4€

71

794

€

WA

CC4.

16%

Infl

atio

n2%

ROIC

202

76% 99

%

0.55

5%

GRO

WTH

0.03

3%

Val

ue11

5 25

4€

Non

Cor

e Bu

sine

ss22

531

€

EV13

7 78

5€

NFA

55 2

55-€

Equi

ty V

alue

82 5

30€

Equi

ty V

alue

+ C

ash

Tran

s. w

/ sh

areh

olde

rs85

456

€

#Sha

res

Out

stan

ding

27 2

07

Shar

e Pr

ice

(€)

3.03

€

Shar

es P

rice

+ D

ivid

end

(€)

3.14

€

Futu

res

EUR/

GBP

0.91

Shar

e Pr

ice

(£)

2.76

£

Shar

es P

rice

+ D

ivid

end

(£)

2.86

£

Curr

ent P

rice

1.57

£

RECO

MM

END

ATI

ON

BUY

Tota

l Sha

reho

lder

retu

rn82

%

Discounted Cash-Flow Model


PAGE 33/53

Disclosures and Disclaimers

Report Recommendations

Buy Expected total return (including expected capital gains and expected dividend yield)

of more than 10% over a 12-month period.

Hold Expected total return (including expected capital gains and expected dividend yield)

between 0% and 10% over a 12-month period.

Sell Expected negative total return (including expected capital gains and expected

dividend yield) over a 12-month period.

This report was prepared by Maria Beatriz Rodrigues and Marta De La Fuente, Master in Finance students of

Nova School of Business and Economics (“Nova SBE”), within the context of the Field Lab – Equity

Research.

This report is issued and published exclusively for academic purposes, namely for academic evaluation and

master graduation purposes, within the context of said Field Lab – Equity Research. It is not to be construed

as an offer or a solicitation of an offer to buy or sell any security or financial instrument.

This report was supervised by a Nova SBE faculty member, acting merely in an academic capacity, who

revised the valuation methodology and the financial model.

Given the exclusive academic purpose of the reports produced by Nova SBE students, it is Nova SBE

understanding that Nova SBE, the author, the present report and its publishing, are excluded from the

persons and activities requiring previous registration from local regulatory authorities. As such, Nova SBE, its

faculty and the author of this report have not sought or obtained registration with or certification as financial

analyst by any local regulator, in any jurisdiction. In Portugal, neither the author of this report nor his/her

academic supervisor is registered with or qualified under COMISSÃO DO MERCADO DE VALORES MOBILIÁRIOS

(“CMVM”, the Portuguese Securities Market Authority) as a financial analyst. No approval for publication or

distribution of this report was required and/or obtained from any local authority, given the exclusive academic

nature of the report.

The additional disclaimers also apply:

USA: Pursuant to Section 202 (a) (11) of the Investment Advisers Act of 1940, neither Nova SBE nor the

author of this report are to be qualified as an investment adviser and, thus, registration with the Securities and

Exchange Commission (“SEC”, United States of America’s securities market authority) is not necessary.

Neither the author nor Nova SBE receive any compensation of any kind for the preparation of the reports.


PAGE 34/53

Germany: Pursuant to §34c of the WpHG (Wertpapierhandelsgesetz, i.e., the German Securities Trading

Act), this entity is not required to register with or otherwise notify the Bundesanstalt für

Finanzdienstleistungsaufsicht (“BaFin”, the German Federal Financial Supervisory Authority). It should be

noted that Nova SBE is a fully-owned state university and there is no relation between the student’s equity

reports and any fund raising programme.

UK: Pursuant to section 22 of the Financial Services and Markets Act 2000 (the “FSMA”), for an activity to be

a regulated activity, it must be carried on “by way of business”. All regulated activities are subject to prior

authorization by the Financial Conduct Authority (“FCA”). However, this report serves an exclusively

academic purpose and, as such, was not prepared by way of business. The author - a Master’s student - is

the sole and exclusive responsible for the information, estimates and forecasts contained herein, and for

the opinions expressed, which exclusively reflect his/her own judgment at the date of the report. Nova SBE

and its faculty have no single and formal position in relation to the most appropriate valuation method,

estimates or projections used in the report and may not be held liable by the author’s choice of the latter.

The information contained in this report was compiled by students from public sources believed to be reliable,

but Nova SBE, its faculty, or the students make no representation that it is accurate or complete, and accept

no liability whatsoever for any direct or indirect loss resulting from the use of this report or of its content.

Students are free to choose the target companies of the reports. Therefore, Nova SBE may start covering

and/or suspend the coverage of any listed company, at any time, without prior notice. The students or Nova

SBE are not responsible for updating this report, and the opinions and recommendations expressed herein

may change without further notice.

The target company or security of this report may be simultaneously covered by more than one student.

Because each student is free to choose the valuation method, and make his/her own assumptions and

estimates, the resulting projections, price target and recommendations may differ widely, even when referring

to the same security. Moreover, changing market conditions and/or changing subjective opinions may lead to

significantly different valuation results. Other students’ opinions, estimates and recommendations, as well as

the advisor and other faculty members’ opinions may be inconsistent with the views expressed in this report.

Any recipient of this report should understand that statements regarding future prospects and performance

are, by nature, subjective, and may be fallible.

This report does not necessarily mention and/or analyze all possible risks arising from the investment in the

target company and/or security, namely the possible exchange rate risk resulting from the security being

denominated in a currency either than the investor’s currency, among many other risks.

The purpose of publishing this report is merely academic and it is not intended for distribution among private

investors. The information and opinions expressed in this report are not intended to be available to any

person other than Portuguese natural or legal persons or persons domiciled in Portugal. While preparing this

report, students did not have in consideration the specific investment objectives, financial situation or


PAGE 35/53

particular needs of any specific person. Investors should seek financial advice regarding the appropriateness

of investing in any security, namely in the security covered by this report.

The author hereby certifies that the views expressed in this report accurately reflect his/her personal opinion

about the target company and its securities. He/ She has not received or been promised any direct or indirect

compensation for expressing the opinions or recommendation included in this report.

[If applicable, it shall be added: “While preparing the report, the author may have performed an internship

(remunerated or not) in [insert the Company’s name]. This Company may have or have had an interest in the

covered company or security” and/ or “A draft of the reports have been shown to the covered company’s

officials (Investors Relations Officer or other), mainly for the purpose of correcting inaccuracies, and later

modified, prior to its publication.”]

The content of each report has been shown or made public to restricted parties prior to its publication in Nova

SBE’s website or in Bloomberg Professional, for academic purposes such as its distribution among faculty

members for students’ academic evaluation.

Nova SBE is a state-owned university, mainly financed by state subsidies, students tuition fees and

companies, through donations, or indirectly by hiring educational programs, among other possibilities. Thus,

Nova SBE may have received compensation from the target company during the last 12 months, related to its

fundraising programs, or indirectly through the sale of educational, consulting or research services.

Nevertheless, no compensation eventually received by Nova SBE is in any way related to or dependent on

the opinions expressed in this report. The Nova School of Business and Economics does not deal for or

otherwise offer any investment or intermediation services to market counterparties, private or intermediate

customers.

This report may not be reproduced, distributed or published, in whole or in part, without the explicit previous

consent of its author, unless when used by Nova SBE for academic purposes only. At any time, Nova SBE

may decide to suspend this report reproduction or distribution without further notice. Neither this document

nor any copy of it may be taken, transmitted or distributed, directly or indirectly, in any country either than

Portugal or to any resident outside this country. The dissemination of this document other than in Portugal or

to Portuguese citizens is therefore prohibited and unlawful.


PAGE 36/53

A Work Project presented as part of the requirements for the Award of a Master Degree in

Finance from the NOVA School of Business and Economics.

INDIVIDUAL REPORT

CREDIT RISK ANALYSIS

SAS based study

Maria Beatriz Baptista Rodrigues

Student No 30562

A Project carried out on the Masters in Finance program,

under the supervision of:

Rosário André

04th January 2019


PAGE 37/53

Abstract

The purpose of this study is to re-estimate Vodafone Group’s credit rating and consequently the

Weighted Average Cost of Capital. The WACC is a key metric in valuating companies hence it

should be tested to cover distinct possible scenarios.

The base of this study is a new method of credit risk estimation that looks at Vodafone as a holding

company composed by subsidiaries. To calculate the final result the model demands four key inputs:

probability of default of each subsidiary, cash-flow to the parent, default correlation matrix and

threshold for cash-flow stoppage.

Resorting to SAS and experts’ in this field the final rating for the holding company was computed

indicating a downgrade. This estimation goes in line with Moody’s estimations in 2018.

Key Words: WACC, credit risk, credit rating, default, default correlation matrix, asset correlation, Holding

company, subsidiary, SAS.

Credit Risk Analysis

The aim of the present study is to evaluate the true credit risk of Vodafone Group PLC and with it be

able to recalculate the Weighted Average Cost of Capital (WACC). As prior referred, WACC is a

key metric in valuating a company so every input should be tested to account for different possible

scenarios. This approach will take the company’s credit risk to find the ideal credit spread so that, in

the end, the right cost of debt is determined. According to Bloomberg, Vodafone’s Group credit

rating is Baa1, however these rating will be re-estimated through a different approach to see if, in the

end, they match. Recent discussions among analysts have been focusing in the appropriateness of

this rate considering the challenges Vodafone faces in certain markets and the new acquisition of

Liberty Global’s assets.

“On 11 May 2018, Moody's placed Vodafone's Baa1 ratings on review for downgrade

following the announcement of its proposed acquisition of Liberty Global's operations

in Germany, the Czech Republic, Hungary and Romania.”

This study will consider the equity report above for Vodafone Group PLC with all the values

unchanged except for the WACC.


PAGE 38/53

The Model

The analyst will apply a new method of credit estimation using SAS, a programming software

widely used across the credit risk industry, with the support of two specialized books.3031 This model

treats Vodafone Group as a holding company constituted by subsidiaries. The probability of the

Group defaulting is solely the combined probability of the cash flows from the subsidiaries falling

below the threshold necessary to service the holding company’s debt obligations, which in this case

will be more € 52 billion, in 2036. In order to reach the final estimation of Vodafone’s credit risk

rating the model requires a set of inputs: default probability of each subsidiary; cash-flow weight on

the Group’s results; default correlation matrix and a threshold.

Finally, the model resorts to a Monte Carlo Simulation once it is able to handle large numbers of

interactions and can create different scenarios with different outcomes in terms of correlated

subsidiary cash-flows.

All the elements above will be then combined and inputted in the model. The script will generate a

series of interactions between the subsidiaries given the values inputted calculating a thousand

different scenarios in which the companies might default.

Inputs

The first input in the model is an arrangement of probabilities for cash flow stoppage of every

subsidiary. Vodafone holdings combines a large number of subsidiaries, however, not all of them

with the same weight on the Group’s performance hence not with the same relevance. For this

analysis the main locations of Vodafone operations were considered the most prominent

subsidiaries. (appendix I)

Since these all are non-traded companies defining the default probability is without a doubt one of

the main challenges for this study. The common literature estimates that on average the default

probability of a non-traded company is 20%. However, the analyst considers that such value is not

applicable to Vodafone operations but will be kept as a reference.

In order to determine the default probability of the seven subsidiaries the following factors were

considered: the country specific risk, the average corporate default rate by country32, competitive

intensity and the way they can severely affect the subsidiary ability to generate enough revenues.

30 “Using SAS in Financial Research”, Ekkehart Boehmer 31 “SAS for Monte Carlo Studies”, by Xitao Fan et al 32 Country Reports, SACE Gruppo CDP, Jan 2019


PAGE 39/53

As it was discussed in the previous equity report, the European and Emerging markets are

performing differently. In Europe, a loyal consumer base gives Vodafone a stable environment. As

for the emerging economies, low historical penetration rates together with new technologies left a

vast number of consumers demanding for telecom services creating great potential.

Inside the European market, Germany is one of the most stable location for Vodafone with a strong

market share and relatively low competitive intensity. Vodafone challenge for this segment is

essentially regulation. The market is defined as having overall flat growth with weaker mobile offset

by fixed broadband penetration and data hungry consumers searching for more data volume. The

average corporate default risk for German companies is 2.8% and the sovereign risk only represents

1%. Considering all the above, the probability of default for this segment is estimated at 2.8%, the

average corporate default.

Looking at Italy, Vodafone’s position in this segment is very fragile and the subsidiary has been

struggling with highly intensive competition. New entrants are disrupting the market with low cost

prices damaging revenues for the main incumbents. Overall the market has been showing declines in

mobile revenue of a 1% to 2%. Fixed growth is partially offsetting the downfall but increasing fixed

competition is likely to weaken overall growth prospects to breakeven. The average corporate

default rate is 5.1% and the country specific risk 3.7%. Taking all these into account the default

probability of this subsidiary was revised upwards 3x of the average corporate default to 15.3%.

In the case of the United Kingdom, Vodafone has been struggling in its home market in the past

years. Intensive competition mainly in mobile dragged revenues down hurting the subsidiary’s

performance. Additionally, the lack of a strong strategy for fixed coverage in this segment left a

potential market for Vodafone unreachable. The industry is characterized by an overall flat growth

with mobile trending back to breakeven and fixed revenue declining in the next year on lower

public-sector and wholesale revenue. Moreover, the average corporate default rate stood at 3.1% and

the country specific risk 1.2%. Taking all these into account the default probability of the subsidiary

was revised upwards 3x to 9.30%, on the average corporate default rate.

Vodafone Spain is the subsidiary in which the growth towards converged services has had the

strongest performance. Also new technologies allowed the subsidiary to implement a structural

lower cost base plan. However, due to highly competitive intensity the company reported an

increase in churn rate and a decline in broadband in the last quarter. The industry grew 2% to 3% in

2018, however the overall growth could have been higher if it was not for the aggressive

competitive environment in the country. Furthermore, the average corporate default rate stood at


PAGE 40/53

4.5% and the country specific risk 3.2%. Taking all these into account the default probability of the

subsidiary was revised upwards 3x of the average corporate default rate to 13.5%.

The last European subsidiary is Rest of Europe which comprises eight locations. Vodafone’s

operations in these regions have been stable over the years highlighting a stronger performance by

Ireland and Portugal. However, revenue has been decreasing emphasizing the decline of 20% in

2018, putting pressure in this segment. The new deal with Liberty Global will give the subsidiary

the opportunity to develop a convergence plan that will not only stimulate revenues but also lower

costs. Additionally, the average corporate default rate all the countries was taken into account and

revised upwards giving an average of 11.80%.

Shifting the scope now to outside European subsidiaries, Vodacom is without a doubt one of the

solidest companies of Vodafone. Its strong market leadership particularly in South Africa gave the

company the ability to face competition and conquer a higher market share every year. Through the

subsidiary, Vodafone Other AMAP, the group has been able to tackle five different countries in the

area, comprising essentially African countries. Like Vodacom, this subsidiary has been showing a

strong performance with the increase of its consumer base.

The African telecom market is one of the fastest growing markets in the world, creating great

opportunities for telecoms. Furthermore, the corporate default rate for South Africa stood at 5.2%

and the country specific risk at 5.1%. As for the Other AMAP countries the average corporate

default rate was 6.03%.

The second model requirement is the cash flow weight, from each subsidiary, in the total result of

the group disregarding corporate adjustments (appendix II). For this input, it was considered the

share of results of each subsidiary in the Group’s EBITDA. The analyst chose EBITDA and not Net

Income, once it provides more stable results and with lower probability of being negative which

could compromise the study.

The next required input is a correlation matrix, which describes the potential for correlated events of

cash flow stoppage in the case that more than one subsidiary stops its dividend payments in the same

year. Even though Vodafone is considered a well-diversified company, the correlation between

subsidiaries could be a problem that should be addressed carefully.

The event of default across subsidiaries is not likely to be independent since they are all connect

through the Group and under the same brand. In order to compute a default matrix, it is required a

series of default events for each company throughout the holding period. However, considering that


PAGE 41/53

none of these companies ever defaulted computing such matrix would be impossible. A solution for

this step was found by Moody’s in the research paper, Asset Correlation, Realized Default

Correlation and Portfolio Credit Risk. According to Moody’s, asset correlation is a critical driver in

modelling portfolio credit risk and as such valuable to determine default correlation between

subsidiaries.

The research paper explains that, one of the most common ways of modelling default correlation is

to combine default probabilities with asset correlation. The article is interesting because it highlights

the magnitude of asset correlations, and the relationship between ex-ante asset correlation and

subsequently realized portfolio risk. The major findings show that default implied correlations range

from 5% to around 50%, depending on the grouping of the underlying borrowers. Additionally,

Moody’s research concludes that borrowers with lower ratings, or higher expected default

frequencies, tend to have higher asset correlations and consequently higher default correlations.

Moreover, the authors believe that asset correlation information adds significant economic value to

forecasting realized portfolio risk, especially during periods of deteriorating credit quality. Ignoring

asset correlations may lead to an underestimation of default correlation and the actual default rate of

the Holding company.

Considering all the above, this study will resort to asset correlation as a proxy to estimate a default

correlation matrix. Since Vodafone Group’s subsidiaries were given a low rating, especially

affiliates like Italy or Spain, the default correlation will be 50% of the asset correlation. Having this,

an asset correlation matrix will be computed in order to estimate default correlation values and it

will be based on revenue data from each subsidiary for the past 6 years (appendix III).

The final required input is a threshold value for the proportion of the expected dividend flow to the

Group that can be cut off without leading to Vodafone Group’s default. The threshold was set at

30% once Vodafone’s growing debt will make the group more sensitive to changes in cash flow

from subsidiaries. The value is also in line with common literature.

Given the aforementioned, the next step is inserting the required inputs in the program. The code

used is based on the study developed by Xitao Fan et al. and can be found in appendix IV. As

previously stated, the code will generate a serious of interactions between the subsidiaries counting

the events where the cash-flow fell below the required threshold leading to the holding’s default.


PAGE 42/53

Results

The computation yielded a default rate of 7% that is compatible with a rating of Ba according to

Moody’s33, meaning that Vodafone default probability is higher than previously expected (appendix

V). The drop from Baa1 is extremely significant and will have a great impact in the final

recommendation and shareholder return. Although aggravated, this estimation is not far from

Moody’s warnings in the mid-calendar 2018 of a rating migration towards Baa3.

With the new credit assessment, WACC can be re-estimated resorting to the credit spread from the

computed rating and the risk-free rate. Given, a credit spread for a Ba bond of 2.98%34 together with

a risk-free rate of 0.95%35, the after cost of debt is now of 3.0% leading to a WACC value of 4.62%.

The new cost of debt is 34% higher than the previous one and the new WACC 12% higher. These

values led to a share price of £2.33 which represents a decrease in 18.6% from the previous £2.76 –

for simplification purposes the previous share price was considered before the scenario analysis.

The total shareholder return decreased 50.5% to 54.6% instead of the previous 82.2%.

Even though, the new WACC changes the implied share price the recommendation still stands on a

buy however with a lower return.

In conclusion, the study successfully retrieved an adequate estimate for Vodafone’s Group credit

rating correcting the final price target to £ 2.33 for the stock in the year-end 2020.

33 Derivative Dribble, Synthetic CDOs, Ratings and Super Senior Tranches, Politicized Economy, Systemic Counterparty Confusion 34 “Ratings, Interest Coverage Ratios and Default Spread”, NYU, January 2018 35 European AAA Government Bond, European Central Bank


PAGE 43/53

Appendix

Appendix I

Appendix II

Appendix III

Asset Correlation Matrix

Germany Italy UK Spain

Rest of

Europe Vodacom

Other

AMAP

Germany 1.00

Italy 1.00 1.00

UK 0.39 0.55 1.00

Spain 0.78 0.84 0.67 1.00

Rest of Europe -0.25 0.44 -0.17 0.00 1.00

Vodacom 0.54 0.60 0.32 0.83 0.22 1.00

Other AMAP 0.63 0.74 0.83 0.92 0.05 0.59 1.00

Default Correlation Matrix

Germany Italy UK Spain

Rest of

Europe Vodacom

Other

AMAP

Germany 1.00

Italy 0.50 1.00

UK 0.19 0.27 1.00

Spain 0.39 0.42 0.34 1.00

Rest of Europe -0.13 0.22 -0.08 0.00 1.00

Vodacom 0.27 0.30 0.16 0.41 0.11 1.00

Other AMAP 0.31 0.37 0.42 0.46 0.03 0.30 1.00

50%

Germany Italy UK Spain Rest of Europe Vodacom Other AMAP

25.70% 15.24% 10.95% 9.34% 12.51% 14.59% 11.67%


PAGE 44/53

Appendix IV36

36 SAS University, Free software


PAGE 45/53

Appendix V

Variable N Mean Std Dev Minimum Maximum

DEFAULT

DIVLOSS

1000

1000

0.070

0.092

0.256

0.134

0

0

1.000

0.891


PAGE 46/53

A Work Project, presented as part of the requirements for the Award of a Master Degree in Finance

from the NOVA School of Business and Economics.

Evolution of the Internet of Things

Marta Sofia Salgado De La Fuente

Student No 30135

A Project carried out on the Masters in Finance program,

under the supervision of:

Rosário André

4th January 2019


PAGE 47/53

ABSTRACT

This paper was conducted in order to analyse the Evolution of Internet of Things (IoT) in the

Telecommunication’s industry. This platform was developed from the need of Telcos to diversify

revenue streams as people started to replace the old text and voice by Over-the-top content services,

increasing demand for data. Telcos sought to overcome these disruptions in the market ultimately

unwinding a range of opportunities enabled through interconnected devices across various

applications. Nevertheless, the risks and challenges inherent in the network were further considered

in this report, as well as the impact that such issues would have on IoT service providers.

KEYWORDS:

Internet of Things, Over-the-top content services, Wireless Sensor Networks, Managed

Machine-to-Machine.

THE INTERNET OF THINGS

The world is evolving at a great speed. Technology has now taken our lives and people have become

dependent of it. This has turn into a hot topic within the corporate world as enterprises feel the need

to incorporate such innovations in order to face the strong competition and build competitive

advantages. Currently, operations are much more automated: “artificial intelligence”, 5G Networks

and the Internet of Things, for instance, are being progressively deployed, efficiently driving

businesses.

Returning to the inception of Technology, Telecommunication companies used to solely provide

Internet and mobile communication services. In the past, people were connected via messaging,

voice, social networks or e-mails. However, it did not take long before disruptive technologies

entered the market, namely through over-the-top (OTT) content services. With the evolution of

technology and digitalisation, people started having access to the Internet almost instantaneously

allowed by fast and cheaper services, and easy-travelled devices (smartphones or tablets that

decreased in size). This allowed OTT content providers to gain increased strength in the market,


PAGE 48/53

while Telcos felt the need to diversify revenue streams – as mobile revenues began facing a

downward spiral - and focus on data demand. According to Informa’s 2013 report, OTT number of

messages surpassed for the first time text messages in 2012 (Appendix I) with 19 billion versus

17.6 billion messages sent, respectively.

Gradually, sophisticated features and sensors began being incorporated in devices– first, through the

deployment of QR codes, followed by the implementation of Radio-frequency Identification (RFID)

- so that data could be readable and transmitted into the Internet enabling the interconnection of

physical objects, what is now known by the Internet of Things. The system is built along a complex

platform: while, RFID tags, reads, tracks and shares information into the system, Wireless Sensor

Networks (WSN) ensure the connectivity of devices, maintaining the various nodes – entitled by the

collection of data, monitoring and controlling, storing, interconnection and power supply –

communicated so that signals can be lastly redirected to the destination.

All the aforementioned mechanism permitted IoT to bring together the ability of connecting people

and devices both inside and outside a workplace. This does not restrains usage to smartphones,

computers or wearables but such a wide range of devices that could go from the board of electricity

or even the air conditioner and a coffee machine. Essentially, it includes almost “everything” that

could be switched on and off; IoT refers to the connection of any device that is able to collect and

transmit data inside a network via the Internet.

It has come the time where human-human relationships are ready to be replaced by connected

devices, i.e. without the need for human interaction to intervene in the process. The IoT lies within

increased machine-to-machine (M2M) communication, built on cloud computing and networks of

data-gathering sensors, enabling instantaneous connection of mobile and virtual reality. However,

IoT’s potential is still being limited by connectivity requirements related to high prices, battery

needs or equipments to roll-out the network. Recent deployments of Low Power Wide Area

Networks (LPWAN), like the Narrowband IoT (NB-IOT) installed in Vodafone’s network for

instance, have allowed a long power supply to the nodes, reaching far more devices efficiently

(given its narrowband feature) at a lower price. All these are enabled by small antennas that will

continue to be deployed over the years (Appendix II), further expanding the network.


PAGE 49/53

We’re also pioneers in Narrowband-IoT connectivity, which is enabling a whole

generation of IoT devices.

The potential for LPWA technology is huge. Most devices can last ten years in the

field without a battery charge, connect as far as 10km, cost only $10 each, with cell

sites able to support 10,000 devices.

Vodafone

Moreover, there still remains concerns on security and the ability of hackers to take on the network

so that the leakage of information could be compromised, as well as threats of system breakdowns.

Reported cyberattacks and security breaches are recurrent and topped by most enterprises as one of

the main concerns regarding Internet of Things. Sustaining this argument is Ponemon Institute - that

conducted an inquiry together with Shared Assesment Program37 - finding that 97% of respondents

believe that unsecured IoT devices could have a “catastrophic” impact within their organisation. An

additional 60% demonstrated concerns on the vulnerability of ransomware attacks38. In fact, these

breaches can compromise Enterprises’ brand recognition creating a damaging waterfall effect along

its relationships with customers, suppliers, partners and related costs, and potentially causing

financial breakdowns.

In order to overcome this problem, IoT providers have increased year-on-year security spending to

boost their services - Bain & Company research39 shows that 93% of surveyed executives are willing

to pay up to 22% more on average in order to have better secured devices, meaning that the IoT

cybersecurity market would go up to $11 billion compared with 2018’s $9 billion figures.

Nonetheless, increasing protection embodies a challenge as there is still preliminary lack of

knowledge and expertise in the area. Contrarily to traditional softwares, IoT devices cannot run anti-

virus protections. However, research and development is being made in order to assure a

continuously sum of extra protection layers to the network - more recently, in 2017, Verizon

introduced a new Security Credentialing service. Additionally, it is important to highlight that the

37 “Second Annual Study on The Internet of Things (IoT): A New Era of Third-Party Risk”, Ponemon Institute LLC

March 2018, 38 Ransomware is a type of malware that prevents or limits users from accessing their system, either by locking the

system's screen or by locking the users' files unless a ransom is paid. 39 “Cybersecurity Is the Key to Unlocking Demand in the Internet of Things”, Syed Ali, Ann Bosche and Frank Ford,

Bain & Company, June 2018


PAGE 50/53

ability to deploy security faster and more efficiently would guarantee a premium and higher

penetration/expansion in the market to leading IoT service providers. Nonetheless, it should be

acknowledged the fact that security breaches are already inherent in the system and hacks will

always be present; only extra efforts can be made to minimise these risks going into the future.

“… an attack or virus is now something that can be taken as a ‘fact of life’. We

can’t avoid it. The solution is to sort out more and more ways to address the

attacks.”

Global transport and logistics company, China

Even considering all major risks and challenges, Internet of Things (IoT) is set to grow and create

value throughout many industries. As specified by Mckinsey & Company on a recent study40, dating

May 2018, the IoT network is expected to reach an annual economic impact ranging from $3.9

trillion to $11.1 trillion just by 2025. Additionally, around 30 billion devices are expected to be

connected worldwide through the IoT just by 2020 (Appendix III).

The impact of IoT on Enterprises is already notable and it is progressively gaining momentum.

Applications still stand at a starter level yet the potential to grow has to be exploited as it can

improve Enterprises’ operations. This can enable increased opportunities to generate higher

revenues, experience gains in productivity, improve consumers’ experience, as well as unlock new

products/features and take on clever business decisions. Additionally, this allows for improvements

in efficiency as it provides access to larger amounts of data on products or internal systems, supply

chains, assets and operations.

Future is promising for IoT providers: if Vodafone’s 2017 annual growth rate of 20% in Enterprise

is carried out into the future, increased value can be realised. Evidence is captured through

Vodafone’s IoT Barometer41 which, together with Machina Research, have come up with the

following figures supporting Enterprises’ belief in IoT’s potential within their businesses:

40 “The Internet of Things: How to capture the value of IoT”, Mckinsey & Company, May 2018 41 Vodafone IoT Barometer 2017/18 report, Vodafone Group


PAGE 51/53

Exhibit 1: Results from Vodafone’s IoT Barometer 2017/2018

24% Of IT budgets are allocated to IoT

76% Believe on IoT’s potential to drive organisational success

48% Of adopters use IoT to enable large-scale business transformation

86% Show significant return from the deployment of IoT in the industrial sector

Vodafone is currently well-positioned to lead all the already mentioned innovations with a presence

along automotive, retail, healthcare, finance, energy & utilities, smart cities and manufacturing or

logistics’ industries. Also, the company has recently began to thrive mobile IoT.

Not only has the company been recognised by its clients and peers, but also year on year business

analysts have noted the achievements: identified by Analysys Mason and Machina Research as a

global leader in Managed Machine-to-Machine (M2M) - consecutively for three years - and IoT

services, both in 2016. Notwithstanding, Vodafone was also the first IoT provider reaching a 50

million connection mark as of February 2017.

Concluding, the Internet of Things still has a lot of potential to grow sustained in projected

worldwide market size (Appendix IV) and tremendous value added. Nevertheless, this gains can

only be captured by continuously adapting to change and succeeding on leading the market, pari

passu with investments on improving services. The vigorous role on addressing security and privacy

issues is also expected to boost the performance of IoT service providers, hence it should not be

disregarded.


PAGE 52/53

APPENDIX

Appendix I: OTT messages surpass mobile SMS

Appendix II: Global cellular M”M & NB-IoT connection forecast 2015 - 2021 (in millions)

Appendix III: Internet of Things number of connected devices worldwide (in billions)

Source: Statista

Source: Informa, April 2013

Source: Statista


PAGE 53/53

Appendix IV: IoT worldwide market size (in billion US dollars)

Source: Statista

vodafone group plc company report · 2019-05-30 · vodafone group plc company report page 5/53...

Documents