Vodafone Equity Valuation

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VODAFONE. (VOD.L, VOD LN) SECTOR: Telecommunications Services INDUSTRY: Wireless Telecommunications Services ANALYST: Myles Carey CID: 00619732

 Includes Investment highlights, analyst opinion and investment recommendation supported by strategic analysis of VOD.L and the Telecommunications sector and a comprehensive valuation based on DCF, multiple and DDM analysis.

September 6, 2010


Equity Research Report NAME: Myles Carey CID: 00619732

Page 3: Investment Summary Pages 3-4: Investment Highlights Page 5: Business Summary Page 6: SWOT Analysis Page 7: Telecoms Industry - Overview Page 8: Telecoms Industry – Trend and Regulation Page 9: Competitive position Page 10: Performance Page 11: Valuation – Sum-of-parts Page 12: Valuation – DDM and Risks

September 6, 2010


Investment Summary:  We believe Vodafone to be slightly undervalued due to the intrinsic value within its portfolio that is not recognised in the share price. It is a well known phenomenon/anomaly that the equity-market is valuing Vodafone at a discount to fundamental value. Certain assets controlled by the group are failing to adequately contribute to Vodafone’s share price. Analysts disagree to the extent with which the market is discounting the price from its sum-ofparts. We take the view that the disposal value of the group is 188.2p – giving a potential 38% upside on our recommendation. This valuation is based on the premise that management adhere to the outlined strategy to realise this value through divestures and disposals of select underperforming assets such as Verizon Wireless (VZW) and SFR. Patience may be required for the group to realise value in this manner, however the stock is still supported by a 6.81% Dividend yield (8.31p) with an annual targeted growth of 7%. Our view is further supported by recovering cyclical demand in Europe as Macro conditions improve (Spain excepted) and continued improvements in margin and Cash flow management. Rating: BUY Analyst: Myles Carey Vodafone Group Plc Vodafone House The Connection, Newbury Berkshire ENG RG14 2FN United Kingdom Contact: Kate Hinksman (Sr. Investor Relations Manager) http://www.vodafone.com/

Company Data Price Date of Price Price Target Capital upside 52-week range (price) Div Yield Float (mil) EPS Mkt Cap Options Vol. (1M avg) Sector View 157 28/08/2010 188.2 38% 112.90 – 161.94 8.31 (6.81%) 5257.47 16.4p 74.79B 255,873,913 Hold

12 month Price performance

Investment Highlights:  6.8% dividend yield with annual growth of 7% targeted going forward. With the BOE keeping rates at record lows (0.5% as of 6/09/10), well below inflation rates (2009 CPI 2.9%), Investors are looking elsewhere to generate yield-based returns. We believe that strong defensive stocks like Vodafone will benefit from this dynamic on both sides of the Atlantic. Strong cash generative core businesses with exceptional recent free cash flow growth yoy (see table on the right)

Free Cash Flow Performance

FCF 2009 7241 5722 5580

FCF Growth Yoy 27% 3% N/A

2008 2007

September 6, 2010


Value Focus: CEO Vittorio Coloa has repeatedly stated that the focus on value is concentrated on controlled assets in Europe, India, stake in VZW and the sub-Sahara. We thus envisage a realisation of value through a series of divestitures and transactions in the coming year o China Mobile - 3 % stake o Bharti - Residual 4% stake o VZW: Vodafone owns 45% o Softbank Japan – preferred shares o SFR – 44% stake with Vivendi the controlling shareholder. Vivendi has long signalled 100% ownership as its objective o Vodafone Egypt: 55% stake Realisation of improved organic revenue trends derived from strong and continued investment throughout the downturn (see valuation)...
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