* Optimistic on a turnaround by Q3
While Q1 trends will remain challenging, VOD sounded confident that improving
operational trends would be evident by Q3 (February 2015). This would be driven by a
turnaround in Germany (c25% of EBITDA) and Italy (c10% of EBITDA), rising 4G
penetration driving ARPU growth and continued growth in AMAP (c35% of EBITDA).
* Foundations laid for German improvement / Italy remains competitive
In Germany, VOD believe their mobile network quality is now back on a par with DT.
Although consumer perception will likely lag, VOD has restored pricing parity with DT
in the higher end of the mobile market and post-paid net adds momentum is already
improving. VOD noted that 80% of the German management team has been changed
in the past 12 months. Italy remains competitive with 3 offering tariffs as low as €8pm
for 400 mins/400 SMS/ 2GB data but recent headline price rises are encouraging.
* Scope for portfolio optimisation / Europe to consolidate?
We believe VOD will consider divesting a handful of smaller assets outside the ‘big six’.
Specifically, VOD is focused markets where it can be a clear #1/#2, where it can offer
unified services and where the market structure is attractive. VOD believe there could
be significant change over the coming years with Europe consolidating down to a
handful of larger players with converged (quad-play) offerings. VOD was evaluating
different fixed line options in the UK depending on the success of BT in mobile. VOD
expects German mobile consolidation will go ahead but are wary of generous terms
being awarded to MVNOs that could disrupt the market and lead to a lack of incentives
to invest in infrastructure.
* Valuation: PT based on SOTP/DCF
While recent downgrades to consensus estimates are unhelpful for sentiment, we
believe VOD will emerge stronger and see improving operating momentum over the
coming quarters. We continue to believe VOD could be a direct and indirect beneficiary
of M&A/European consolidation. For calendar 2015, VOD trades on 5.7x EV/EBITDA
and 8% EFCF yield (0% post spectrum/Spring) and offers a 5.5% dividend yield.