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Media/Telecommunications Coverage Group Company Overview • Top mobile provider in telecom industry • Split across two geographic regions: Europe and AMAP (Africa, Middle East, and Asia Pacific) – 438 million mobile customers in 26 countries • Services include broadband internet, mobile, business enterprise solutions – Mobile is the majority of the business, 81% – 45% smartphone penetration in Europe, increased by 7% in 2013 Company Stock Ticker VOD:LN, VOD:AR Price $36.47 Market Cap $96.42b Dividend Yield 5.5% P/E 61.0733 Management • Vittorio Colao - CEO (2008-present) – 19 years of experience with the company in various markets – Managerial role in other media companies • Nick Read – CFO (2014-present) – 14 years at Vodafone with chief officer roles in the Europe and AMAP regions • Stephen Pusey CTO (2009-present) – 9 years at Vodafone after 20+ years in other telecomm companies including Nextel • Overall: young team with relevant industry experience and company experience from all its major markets Telecom Industry Overview Global Revenue Projections European Telecom Market • Competitors are local and typically restricted to a single country – e.g Telefonica in Italy, Orange in France, and DTE in Germany – Vodafone is the only major player straddling multiple • EU regulations, language barriers present significant barriers to entry in new markets EU Red Tape Alumni Homecoming Reunion 2009 10/24/09 Stagnating European Market Stagnating European Market VOD vs VGK Europe Index VOD vs Competitors Thesis • Market has overestimated impact of European downturn and unfavorable tax rulings on its business • Uniquely hedged international position positions it to capture opportunities in rapidly growing Indian market and weather European stagnation vis-à-vis competitors. • Cash-flows from Asia will compensate for lags in European investment and infrastructure construction. Revenue Breakdown Breakdown of Revenue by Product Stream Other 6% TV 12% Unbundled Mobile 36% Broadband 10% Bundled Mobile 36% Growth Factors - India • Vodafone is the largest European mobile provider in India, and is the 2nd largest provider overall (~23.89%) • Modi government is championing reforms to provide government-sponsored wireless access to 500 million people in rural India. – Company product focus favors expansion into low infrastructure • High profile unfavorable tax ruling makes Vodafone an attractive partner for the Indian government. – In the latest quarter, service revenue grew 15.0% YoY excluding currency impacts Growth Factors - India • Expanding position in India hedges against further stagnation in Europe – At current growth rates, by 2018, a 3% growth in the Indian Market would offset a 10% decrease in European revenue. • Enables cash flows that European competitors don’t have access to. Vodafone Revenue Growth Revenue Growth Breakdown by Region (2013-2014) 50 45 40 35 30 25 20 15 10 5 0 India UK Germany Italy Africa Growth Factors - Tech • M-Pesa – Launches “M-Pesa” mobile payment system - used by millions of individuals in emerging markets, large player in the increasingly vital mobile payment space – Business partnership between M-Pesa and MTN Money • Exclusive partnership between VOD and Dropbox to provide information management services in AMAP – High growth industry, 44% CAGR through 2019 Growth Factors – Europe LTE • Project Spring – 2 year investment of 19 billion pounds to grow in four areas: • Consumer Europe – Smartphone penetration has increased by 7% and Vodafone is still in the top 2 mobile operators in most European markets – Unified communications in all key European markets VOD as a Hedge - FX Volatility • Outlook on Euro is extremely uncertain – Volatility on German bonds is the highest it has ever been in the past 5 years – Dollar just hit 4 month-low after rapid strengthening (GS predicted a further 12% increase). • However, the surges of the Dollar (Jan – March 2015) are over – ECB QE is not indefinite – Weak economic indicators for the American Economy Risk – Lags in European Investment Investment in 4G LTE Infrastructure in Europe (through Q12015) 8 7 6 5 4 3 2 1 0 Deutche Telekom Orange Vodafone Telefonica T-Mobile Risks • FX risk with strengthening dollar – Aggressive EU QE policy has led to a strengthened dollar – GS estimates dollar will strengthen a further 12% against the currency basket – A 3% decline in the sterling would reduce EBITDA by £0.5 billion. • Political factors – Numerous tax disputes in India (wrt several billion dollars) – Increasing regulation in EU - Governments are mandating that wireless firms lower interconnection and roaming fees, hurting sales and margins. Valuation • Modeled using fairly conservative assumptions – In all cases, assumed tax decisions were unfavorable – In Bear/Base case, increased EU regulation of data charges – Base growth rate taken from slump in 2009 • DCF Valuation – Bear – $36.23 – Base – $39.45 – Bull - $43.76 Target • Time horizon – 24 – 30 months • Target – $41.50 • Exit Conditions – Political (Modi Budget) – Regulatory (EU)