V G PLC C R: A Transforming Industry

MASTER IN FINANCE
VODAFONE GROUP PLC COMPANY REPORT

TELECOMMUNICATION 4 JANUARY 2019
beatriz.rodrigues@novasbe.pt
MARIA BEATRIZ RODRIGUES & MARTA DE LA FUENTE
30135@novasbe.pt
Recommendation: BUY
A transforming Industry
Vodafone a leading player in innovation Price Target FY20: £2.65
 Vodafone is considered a BUY given the target price for

Price (as of 4-Jan-19) £1.57
the fiscal year-end 2020 of £2.65 (FX Futures EUR/GBP currency
Reuters: VOD.L, Bloomberg: VOD:LN
exchange rate of 0.91, March 2020). This corresponds to an
upside of 69% compared to the current market price of £1.57. 52-week range (£) 1.43 - 2.40
Market Cap (£m) 41 699
Having so, we strongly believe that Vodafone is currently
Outstanding Shares (m) 26 720
undervalued. Dividend Yield 8.52%
Source: Bloomberg
 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
Source: investing.com
CAGR of 1%, as demand increases. However, an intensive
(Values in € millions) 2018 2019E 2020F
competitive environment presents challenges to operators.
Revenues 46 571 46 317 46 265
EBITDA 14 737 14 234 14 525
 One of the main concerns with the company’s current
Net Income 2 788 -1 083 2 630
strategy is the ability to continuously increase dividends in the EPS 0.10 -0.04 0.10
future as earnings might not be sufficient to cover it. Dividend per share 0.1507 0.1537 0.1537
EBITDA margin (%) 32% 31% 31%
 The model gives a target price for the YE 2020 using a Source: Vodafone Annual Report 2018; Analyst estimations
DCF model along with the forecast of revenues per segment with a
WACC of 4.16% and a terminal growth rate of 0.033%.
Company description
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.
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.
Page 1/53
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 2/53
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 3/53
Company overview
Exhibit 1: Group Service
Revenues per segment Integrated in the Telecommunications’ industry, Vodafone is currently
headquartered in London, United Kingdom. From July 17, 1982 the company has
t 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
66%
CONSUMER Africa, Tanzania, Democratic Republic of Congo, Mozambique, Lesotho, Kenya
29%
ENTERPRISE
5%
(associate)) and other AMAP - Egypt, Ghana, New Zealand, Turkey. Additionally,
OTHER
the enterprise owns Joint Ventures in the Netherlands (VodafoneZiggo Group
Exhibit 2: NGN self-build households
passed (in millions) 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
Exhibit 3: NGN wholesale households that connects everyday devices through a specific network without the need to
passed (in millions) 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
Source: Vodafone Annual Report 2018
these services, Vodafone acquires spectrum licenses enabling the use of radio
Exhibit 4: Mobile Market Share (%) 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
Exhibit 5: Fixed Market Share (%) 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
Source: Statista services and growing digital - especially reflected in Vodacom’s annual growth
1
Vodafone Annual Report 2018
PAGE 4/53
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
Vodafone is the only telco
that is a Tier 1 supplier to segment’s service revenue grew 0.9% in the year, partially offset by roaming
automotive original regulations. Enterprise represents 29% of the Group’s service revenue with
equipment manufacturers
(‘OEMs’), with customers Internet of Things being one of the fundamental points of differentiation in this
including eight of the top ten sector – counting with more than one million new SIMs per month from IoT
car manufacturers globally. services adding to its 68 million network; notwithstanding, advantages have been
Source: Vodafone Half Year Results 2019
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.
Exhibit 6: Ownership location 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
PAGE 5/53
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.
Information on Dividends and shares
Exhibit 7:Information
Informationonon Dividends
Dividends and shares 2017 2018
Dividend payout ratio 2017
-61% 2018
142%
payout
Dividend per ratio
share (€) -61%0,1477 142%
0,1507
Dividendof
Number per shareattributed
shares (€) to shareholders (million) 0,1477
26 622 0,1507
26 676
Number of dividends
Amount shares attributed to shareholders (million)
paid (€m) 26 622
3 932 26 676
4 019
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 6/53
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
Exhibit 8: “CARE” Framework 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
NPS
Maintained leading position in 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
Exhibit 9: Savings from Digital
Vodafone 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
Exhibit 10: Demand for data 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).
Exhibit 11: Operational Margins (%)
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
Exhibit 12: Faster growth in Adj.
higher levels than service revenue (Exhibit 12).
EBITDA than Service Revenue
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”.
PAGE 7/53
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

Exhibit 13: Vodafone’s on-net that it is already saturated and there is not a lot of potential to grow the customer
penetration in European market
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%
Exhibit 14: Relative radio cost delivery
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 cost cutting
the fiscal year of 2021.
opportunity alone for
European telecoms has Finally, looking at projections from asset utilisation, advantages are expected
been estimated to be as from M&A synergies and the best use of the company’s 58,000 European towers;
much as €60 billion.
focusing on the latter, the company wants to build a new venture by the name of
Source: Vodafone Strategic Report 2018
Virtual TowerCo which sole purpose is effectively managing and increasing the
usage of its infrastructure by creating a shared network. This would enable a
We have a strong track
record of delivering or much smoother deployment of 5G networks, which will require many more sites,
exceeding targeted cost and established lower costs by monetising its towers. The company came down
and capex synergies on to an estimation of €8 billion reduction in costs from this strategy. Recapping, the
prior deals. 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.
PAGE 8/53
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.
Exhibit 15: Cadman and
Dineen results Many studies have been conducted to estimate the impact of a change in price or
income on costumers’ choices regarding telecom services. Cadman and Dineen 2
(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
Source: Richard Cadman, Chris Dineen, 2008

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
Exhibit 16: Mobile phone users
important conclusion: non-linear growth in broadband, i.e. diminishing growth rate
worldwide 2015- 2020
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
Source: Statista rate close to 70%. However, in developed economies, penetration rate already
Exhibit 17: First access with in 5 accounts for 90% of population. Moreover, mobile dependency is increasing
minutes
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:
Exhibit 18: Percentage of people who
access 50+ times in a day “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.”
Source: Deloitte 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
PAGE 9/53
broadband services. Thus, predicting the future state of the economy was
Exhibit 19: GDP growth (Annualised
semi-annual percentage change) 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
Exhibit 20: Contributions to the
change in Real GDP Growth, 2016–17 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
Source: International Monetary Fund
5
World Economic Outlook, April 2018: Cyclical Upswing, Structural Change, April 2018
PAGE 10/53
telecom companies must continuously look for innovations that will make their
Exhibit 21: Information Technology
spending on Telecommunication products relatively more desirable to consumers than those of competitors.
services worldwide
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).
Source: Statista
Fixed broadband services are now the focus of telecom companies arround the
Exhibit 22: Global mobile data world. The global spending in fixed/wireless services has been growing 2% per
traffic
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.
Source: Analysis Mason
The increase in smartphone penetration, consumers moving to 4G networks and
Data consumption has the dissemination of social media boosted demand for data. Figures show
been higher than ever, improvements on data traffic growing from 43 gigabytes in 2015 to 144 gigabytes
and it is expected to in 2017. Additionally, it is expected to reach 701 gigabytes in 2021 (Exhibit 22).
increase even more. 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
Exhibit 23: Global SMS/RCS
messaging revenue 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
Exhibit 24: Mobile service revenue 6 years, with revenue decreasing from €135 billion to €115 billion in 2017
in Europe 2008 - 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
Source: Statista been rather slow, but it is predicted to reverse in 2019.
PAGE 11/53
Since Europe is Vodafone’s main market, taking a closer look to each location
Exhibit 25: German Telecoms
Market Revenue Growth will help designing better forecasts to understand the future of the company 6.
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

Exhibit 26: Italian Telecoms Market
Revenue Growth 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
Exhibit 27: UK Telecoms Market
Revenue Growth 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
Exhibit 28: Spanish Telecoms Market
Revenue Growth 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
Source: S&P Global Ratings, company reporting,
Credit Suisse €74.9 billion in 2017 while Telefónica reported €52 billion in revenues, also from
Exhibit 29: Revenue of the leading the year of 2017. The company number of mobile customers in Spain was close
Telecom operators in Europe in 2016
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
Source: Statista
6
European Telecoms: How Growth and Investment Compare Across the Top Five Markets, Mark Habib, S&P Global, 2017
PAGE 12/53
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
Exhibit 30: Global unique mobile sector triggered a telecom revolution which enabled the deployment of new
subscribers’ penetration by region
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
Exhibit 31: Number of subscribers
showing high numbers of subscribers and year-on-year net additions, 221 million
(in millions)
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
Source: Statista 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
PAGE 13/53
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 regulators 11 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 14/53
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 15/53
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 –
Vodafone will become
allowing for further progresses on fixed line, convergence plans and high cost
Europe’s leading next
savings owing to market consolidation.
generation network owner,
Together with the services in Germany, Vodafone has agreed to acquire Liberty
serving the largest number
Global’s services in Czech Republic, Hungary and Romania ambitioning a
of mobile customers and
convergence plan that will aggregate its biggest market, Germany, and Central
households across the EU.
and East markets (CEE). This plan will award Vodafone the position of European
Vittorio Colao 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
PAGE 16/53
macro pressures are driving slowdowns in this segment’s performance. However,

Vodacom South Africa has managed to achieve a steady growth (Exhibit 32) by
Exhibit 32: Vodacom Revenue 2016- finding alternative revenue streams in the strong growing demand for mobile data
2018
- 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
PAGE 17/53
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
We are never going to stop
in fixed line services both in terms of ARPU as numbers of consumers, showing
breaking down barriers and
the effects of partnering with the lead cable provider in Europe.
we will continue to
Notwithstanding, in 2018 Deutsche Telekom announced the acquisition of Tele2
challenge these industries
NL to become the strong number three in the Netherlands behind KPN and
in years to come.
VodafoneZiggo. This move from Deutsche Telekom promises to challenge
Deutsche Telekom 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
PAGE 18/53
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 19/53
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
Exhibit 33: Annual reduction in costs 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
Source: Analyst estimations 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
Exhibit 34: Previous FY
Industry’s 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
Source: Companies’ annual reports
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
PAGE 20/53
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
Exhibit 35: Liberty Global’s Deal 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.
Source: Liberty Global annual report 2017
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
Exhibit 36: 4G Industry Capital be approved by EU’s regulatory commission, it was included in this analysis.
Expenditure
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 report 23,
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 37: 4G Investment vs.

(Exhibit 35). Further amortizations of integration costs and synergies are also
Vodafone’s PP&E Forecast 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.
Source: Statista; Analyst Estimations
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
PAGE 21/53
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 22/53
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 Bonds 26, 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 23/53
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 24/53
Vodafone’s Net Income is low and has a higher probability of reaching negative
Exhibit 38: Multiples Valuation results 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
Source: Analyst estimations
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
PAGE 25/53
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
Exhibit 39: 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.
Source: Analyst estimations
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
PAGE 26/53
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
Exhibit 40: Scenario Analysis 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%
Source: Analyst estimations 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.
PAGE 27/53
Appendix
Appendix I: Revenue Forecast
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
Industry flat to modest growth in the medium-term Industry spending is increasing
Strong customer base and market share Strong growth, set to stabilise in the medium-term
ARPU stable according to past trends Acquisition of Liberty Global reaching 50M marketable homes in
the near future
Germany ANALYSTS’ FORECAST
ANALYSTS’ FORECAST
 Following recent trends, ARPU declines until 2020 stabilising
afterwards according to the Industry  Projected ARPU growth of 1% in the medium-term
 Customer base follows same trend, stabilising at 0.5%  Consumer base will reflect the higher penetration captured
through acquisitions
Northern
Europe Flat growth across the industry (location with most stable since 2014) Industry steadily growing between 3 to 4%; low growth potential
given the high penetration rate, i.e. high saturation of the market
Long suffering segment with weak market position
Weak strategy, dependent on wholesale, together with high
Highly competitive market intensive competition
Company’s restructuring plan on operations/costs in course ANALYSTS’ FORECAST
United
Kingdom ANALYSTS’ FORECAST  Growth potential is offset by competition however both ARPU
and the number of customers will grow modestly
 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 revenues declining 1 to 2% driven by high pricing pressure Reported large Industry growth of 6% in H1 2017
from new entrants
Strong NGN strategy in fixed is expected to capture more
Second brand “ho” will push down ARPU; cannibalisation of the main customers
brand
Intense competition is damaging the revenue potential
Italy ANALYSTS’ FORECAST
 ARPU will decline 5% in 2019 due to new discount prices offered
by “ho” steadily converging to a rate of – 0.5%  Strong market presence reflected in the increase in the
Southern consumer base of 60% over the whole forecasted period
Europe  Consumer base follows the same trend with tougher competition
Industry is experiencing positive returns from previous investments in capacity; positive growth ranging from 2 to 3%
High degree of convergence
Spain 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
Declining trend in mobile revenues is expected to continue going Gains from FFTH roll-out in Portugal is driving customer growth
forward, offsetting momentum in fixed
Acquisition of Liberty Global, including CEE, is expected to drive
Rest of Europe ANALYSTS’ FORECAST further NGN coverage
 Declining ARPU and customer base, being the latter more ANALYSTS’ FORECAST
significant at a 2% rate
 76% growth in consumer base together with a stable ARPU
PAGE 28/53
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
Industry is experiencing strong growth Presumable expansion from a new entrant, increasing market
share
Strong growing demand for mobile data together with large year on
year penetration rate ANALYSTS’ FORECAST
High market share  Large growth in the consumer base captured by the company’s
Vodacom recent inception in the market
 ARPU is partially mirrored by the latter, i.e. decreasing while
 Declining ARPU gradually converging to a steady rate of – 0.5% customer base goes up
 Mobile customers show an upward trend reflecting the
opportunities abovementioned
Successful effort form segmentation together with an increasing Good performance able to offset inflationary pressure
penetration in the market captured by a strong strategy
Escalating data
 Fixed broadband customers will follow recent upward trends
Other Africa, Middle East Highly competitive market partially progressively converging to a rate around 1%
& Asia Pacific ANALYSTS’ FORECAST
 Decreasing ARPU in the first 4 years of the forecasted period,

stabilising afterwards around 1%
 Strong consumer base, showing an upward trend
PAGE 29/53
2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036
Core Business
Operating Cash 996 996 996 953 931 926 925 931 945 959 976 989 1 000 1 010 1 020 1 027 1 033 1 038 1 042 1 045 1 048 1 051 1 054
Accounts & Notes Receivable 4 475 5 641 5 785 5 298 5 491 5 331 5 325 5 358 5 438 5 521 5 614 5 690 5 755 5 812 5 867 5 910 5 946 5 975 5 999 6 016 6 032 6 049 6 065
Inventories 534 667 716 576 581 596 587 583 583 588 594 602 609 615 621 625 629 633 635 637 639 641 643
Investment in Affiliates 138 (4) 479 3 138 2 538 2 792 3 071 3 378 3 446 3 515 3 585 3 657 3 730 3 804 3 880 3 842 3 803 3 765 3 727 3 653 3 580 3 508 3 438
Other Receivables ST 1 493 1 287 1 207 918 895 968 967 973 988 1 003 1 020 1 034 1 046 1 056 1 066 1 074 1 080 1 085 1 090 1 093 1 096 1 099 1 102
Other Receivables LT 243 380 745 157 545 462 462 465 472 479 487 494 499 504 509 513 516 518 520 522 523 525 526
Derivative & Hedging - Assets ST 240 372 1 029 610 180 576 576 579 588 597 607 615 622 628 634 639 643 646 649 650 652 654 656
Derivative & Hedging - Assets LT 2 719 5 169 4 414 3 672 2 449 3 370 3 367 3 387 3 438 3 490 3 550 3 598 3 639 3 675 3 709 3 736 3 759 3 778 3 793 3 803 3 814 3 824 3 835
Prepaid Expenses ST 4 554 3 842 3 540 3 035 3 409 3 455 3 404 3 379 3 382 3 407 3 441 3 488 3 529 3 564 3 598 3 625 3 648 3 666 3 682 3 693 3 703 3 714 3 724
Prepaid Expenses 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 Investments 4 303 5 198 4 631 3 459 3 204 3 781 3 873 3 955 4 029 4 102 4 159 900 900 900 – – – – – – – – –
LT Receivables 281 398 471 362 435 408 407 410 416 422 429 435 440 444 449 452 455 457 459 460 461 462 464
Accounts Payable (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)
Accrued Liabilities (552) (223) (183) (154) (159) (161) (159) (158) (158) (159) (160) (163) (165) (166) (168) (169) (170) (171) (172) (172) (173) (173) (174)
Balance sheet
Provisions ST (1 166) (1 061) (958) (1 049) (891) (851) (1 098) (1 201) (1 253) (1 284) (1 313) (1 321) (1 290) (1 260) (1 257) (1 238) (1 219) (1 214) (1 215) (1 222) (1 223) (1 225) (1 226)
VODAFONE GROUP PLC
Provisions LT (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)
Deferred revenue 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)
Deferred revenue LT – (170) (165) (204) (237) (236) (235) (237) (240) (244) (248) (252) (254) (257) (259) (261) (263) (264) (265) (266) (267) (267) (268)
Other Payables & Accruals ST (11 663) (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)
Other Payables & Accruals LT (87) (119) (123) (30) (314) (318) (314) (311) (311) (314) (317) (321) (325) (328) (331) (334) (336) (338) (339) (340) (341) (342) (343)
Derivatives & Hedging - Liabilities ST (85) (125) (550) (728) (250) (241) (233) (225) (217) (210) (203) (196) (189) (183) (176) (170) (165) (159) (153) (148) (143) (138) (133)
Derivatives & Hedging - Liabilities LT (982) (1 237) (1 428) (1 349) (2 133) (2 060) (1 989) (1 921) (1 855) (1 792) (1 730) (1 671) (1 614) (1 559) (1 505) (1 454) (1 404) (1 356) (1 309) (1 264) (1 221) (1 179) (1 139)
Goodwill 28 240 31 182 28 238 26 808 26 734 26 734 34 029 33 051 31 814 30 750 29 728 28 697 27 727 26 790 25 885 25 011 24 165 23 349 22 560 21 798 21 061 20 350 19 662
Working Capital 27 611 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 27 678 36 807 35 515 30 204 28 325 25 927 33 435 36 589 38 173 39 129 40 012 40 249 39 308 38 380 38 284 37 708 37 136 36 984 37 016 37 233 37 267 37 302 37 337
Other Intangible 28 310 28 990 30 326 19 412 16 523 15 124 19 504 21 344 22 268 22 825 23 341 23 479 22 930 22 389 22 332 21 996 21 663 21 574 21 593 21 719 21 739 21 760 21 780
Total Investment in tangible and intangible assets 55 988 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 Business Invested Capital 83 598 98 198 95 198 79 491 72 973 70 765 89 980 94 363 95 880 96 561 97 154 93 374 91 131 88 939 87 134 85 416 83 729 82 703 81 979 81 523 80 816 80 134 79 477
Financial Statements
Non Core Business
Deferred Tax Assets 24 960 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
% Growth
Tax receivables 979 796 1 402 150 106 106 106 106 106 106 106 106 106 106 106 106 106 106 106 106 106 106 106
Pension Costs (665) (551) (341) (594) (410) (422) (412) (402) (400) (398) (396) (394) (392) (390) (388) (386) (384) (384) (384) (384) (384) (384) (384)
Deferred Tax Liabilities (905) (823) (564) (535) (644) (631) (618) (606) (594) (582) (570) (559) (548) (537) (526) (516) (505) (495) (485) (476) (466) (457) (448)
Assets Held for sale 41 – 3 657 17 195 13 820 – – – – – – – – – – – – – – – – – –
Liabilities held for sale – – (438) (11 794) (10 999) – – – – – – – – – – – – – – – – – –
Accrued Taxes (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)
Non Core Business Invested Capital 23 142 30 162 30 024 26 800 26 355 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
Financing
Excess Cash 16 631 13 859 17 263 14 002 12 538 – – – – – – – – – – – – – – – – – –

Financial Debt (35 369) (48 505) (51 578) (41 637) (39 978) (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)
Net Financial Debt (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)
Other Financial Liabilities (1 057) – (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)
Preferred Equity & Hybrid Capital – – – – – – – – – – – – – – – – – – – – – – –
Minority Interests (1 186) (2 197) (1 811) (1 519) (967) (967) (1 068) (1 014) (959) (905) (853) (807) (770) (741) (717) (699) (687) (680) (676) (674) (676) (681) (691)
Net Financial Assets - 41 897 - 34 091 - 31 688 - 34 158 - 55 255 - 62 077 - 66 033 - 69 092 - 71 979 - 70 200 - 69 464 - 68 359 - 67 413 - 66 229 - 64 752 - 63 721 - 62 824 - 62 075 - 60 890 - 59 527 - 57 969
Equity 85 757 91 517 83 325 72 200 67 640 59 628 57 257 54 326 51 383 48 509 45 724 43 248 41 279 39 741 38 439 37 476 36 848 36 442 36 215 36 117 36 213 36 518 37 051
Dividends Payable – – –
Common Equity 83 325 72 200 67 640 59 628 57 257 54 326 51 383 48 509 45 724 43 248 41 279 39 741 38 439 37 476 36 848 36 442 36 215 36 117 36 213 36 518 37 051
Check TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE
TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE
Net transactions with shareholders - 542 - 3 689 - 4 959 - 4 916 - 2 990 - 2 926 - 2 849 - 2 763 - 2 669 - 2 600 - 2 526 - 2 448 - 2 364 - 2 275 - 2 179 - 2 076 - 1 967 - 1 850 - 1 726 - 1 592 - 1 450
Dividends (4 233) (3 709) (3 961) (4 197) (4 090) (4 099) (4 108) (4 117) (4 127) (4 136) (4 145) (4 154) (4 163) (4 173) (4 182) (4 191) (4 200) (4 210) (4 219) (4 228) (4 237)
Share repurchases – – (1 735) (1 735) – – – – – – – – – – – – – – – – –
Other transactions with shareholders 3 691 20 737 1 015 1 100 1 173 1 259 1 354 1 458 1 536 1 619 1 706 1 799 1 898 2 003 2 115 2 233 2 359 2 493 2 636 2 787
COMPANY REPORT
PAGE 30/53
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
Revenues 49 810 47 631 46 571 46 317 46 265 46 552 47 247 47 968 48 780 49 440 50 006 50 500 50 976 51 348 51 659 51 914 52 120 52 267 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 Other Op. Expenses 25 242 23 053.00 22 179.00 22 481.10 22 148 21 987 22 001 22 165 22 385 22 692 22 957 23 189 23 410 23 585 23 732 23 854 23 953 24 024 24 092 24 161 24 231
Depreciation and Amortization 11 697 10 179 9 910 8 917 11 520 12 595 13 147 13 473 13 779 13 859 13 536 13 216 13 183 12 985 12 788 12 735 12 746 12 821 12 833 12 845 12 857
SG&A 10 982 10 429 9 655 9 602 9 592 9 651 9 795 9 945 10 113 10 250 10 367 10 469 10 568 10 645 10 710 10 763 10 805 10 836 10 865 10 895 10 926
% Revenue 22% 22% 21% 21% 21% 21% 21% 21% 21% 21% 21% 21% 21% 21% 21% 21% 21% 21% 21% 21% 21%
Impairment losses 569 - - 2 900 - - - - - - - - - - - - - - - - -
Share of result in associates and joint ventures 60 164 389 424 465 500 542 588 638 676 716 758 803 851 902 955 1 013 1 074 1 138 1 207 1 280
173% 137% 9% 10% 8% 8% 8% 8% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6%
Adjustments 2 509 409 917
Operating Income - 1 129 3 725 4 299 2 841 3 471 2 819 2 846 2 974 3 142 3 315 3 862 4 383 4 618 4 984 5 331 5 517 5 628 5 660 5 757 5 859 5 967
Net Interest 1 510 933 421 544 756 880 971 1 066 1 181 997 941 967 965 979 989 994 994 990 981 966 944
Earnings Before Taxes - 2 639 2 792 3 878 2 297 2 714 1 939 1 876 1 907 1 961 2 318 2 921 3 416 3 652 4 005 4 342 4 523 4 634 4 670 4 777 4 894 5 022
VODAFONE GROUP PLC
Taxes 4 937 789 828 516 610 436 422 429 441 521 657 768 821 901 976 1 017 1 042 1 050 1 074 1 100 1 129
Deferred taxes recognized 4 295 - 1 629 - 537 - 526 - 516 - 505 - 495 - 485 - 476 - 466 - 457 - 448 - 439 - 430 - 421 - 413 - 405 - 397 - 389 - 381
Income Statement
Other adjustments - 320 - 78

Result - 5 127 - 1 972 4 757 2 317 2 630 2 019 1 959 1 973 2 005 2 272 2 731 3 105 3 279 3 543 3 796 3 928 4 005 4 025 4 099 4 182 4 274
Discountinued operations 5 - 4 107 - 1 969 - 3 400 - - - - - -

Net income - 5 122 - 6 079 2 788 - 1 083 2 630 2 019 1 959 1 973 2 005 2 272 2 731 3 105 3 279 3 543 3 796 3 928 4 005 4 025 4 099 4 182 4 274
Other Comprehensive Income - 2 521 - 1 357 - 2 389 - 2 013 - 2 011 - 2 023 - 2 054 - 2 085 - 2 120 - 2 149 - 2 174 - 2 195 - 2 216 - 2 232 - 2 245 - 2 257 - 2 265 - 2 272 - 2 278 - 2 284 - 2 291
Dividend Preferred Stock - - - - - - - - - - - - - - - - - - - -
Total Comprehensive Income - 7 643 - 7 436 399 - 3 096 619 - 5 - 94 - 111 - 115 123 557 910 1 063 1 311 1 550 1 671 1 739 1 753 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
Changes in Equity £m £m €m €m €m €m €m €m €m €m €m €m €m €m €m €m €m €m €m €m €m €m €m
Equity at the beginning of the period attributable to shareholders 91 510 83 325 72 200 67 640 59 628 57 257 54 326 51 383 48 509 45 724 43 248 41 279 39 741 38 439 37 476 36 848 36 442 36 215 36 117 36 213 36 518
Total Comprehensive Income (Result of the period) - 7 643 - 7 436 399 - 3 096 619 - 5 - 94 - 111 - 115 123 557 910 1 063 1 311 1 550 1 671 1 739 1 753 1 821 1 898 1 983
Comprehensive Income attributable to non-controlling interests -64 99 212
Dividends (4 233) (3 709) (3 961) (4 197) (4 090) (4 099) (4 108) (4 117) (4 127) (4 136) (4 145) (4 154) (4 163) (4 173) (4 182) (4 191) (4 200) (4 210) (4 219) (4 228) (4 237)
Share Buybacks (1 735) (1 735) – – – – – – – – – – – – – – – – –
Other transactions with shareholders 3 627 119 949 1 015 1 100 1 173 1 259 1 354 1 458 1 536 1 619 1 706 1 799 1 898 2 003 2 115 2 233 2 359 2 493 2 636 2 787
Issue or reissue of shares 23 18 18 19 14 17 17 17 17 17 17 17 17 17 17 17 17 17 17 17 17 17 17
Share-based payments 161 112 130 121 121 121 121 121 121 121 121 121 121 121 121 121 121 121 121 121 121
Transactions with non-controlling interests in subsidiaries (1 451) (756) (44) (12) 805 878 962 1 036 1 122 1 217 1 320 1 399 1 481 1 569 1 662 1 761 1 866 1 977 2 096 2 222 2 356 2 498 2 649
9% 10% 8% 8% 8% 8% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6% 6%
Issue of mandatory convertible bonds 3 480 – – – – – – – – – – – – – – – – – –
Other 12
Equity at the end of the period attributable to shareholders 83 325 72 200 67 640 59 628 57 257 54 326 51 383 48 509 45 724 43 248 41 279 39 741 38 439 37 476 36 848 36 442 36 215 36 117 36 213 36 518 37 051
-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%
Shareholders' equity (consolidated) 83 325 72 200 67 640 59 628 57 257 54 326 51 383 48 509 45 724 43 248 41 279 39 741 38 439 37 476 36 848 36 442 36 215 36 117 36 213 36 518 37 051
TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE
COMPANY REPORT
Diluted number of shares atributed to shareholders 26 682 26 629 26 692 27 857 27 857 27 146 27 207 27 268 27 330 27 391 27 452 27 513 27 574 27 636 27 697 27 758 27 819 27 880 27 942 28 003 28 064 28 125 28 186
Dividend per share 0.1477 0.1507 0.1507 0.1507 0.1507 0.1507 0.1507 0.1507 0.1507 0.1507 0.1507 0.1507 0.1507 0.1507 0.1507 0.1507 0.1507 0.1507 0.1507 0.1507
Statement of Changes in Equity
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
Core Business
NOPLAT - 1 881 3 085 4 241 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
Depreciation 11 697 10 179 9 910 8 917 11 520 12 595 13 147 13 473 13 779 13 859 13 536 13 216 13 183 12 985 12 788 12 735 12 746 12 821 12 833 12 845 12 857
Operating Cash Flow 9 816 13 264 14 151 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
growth rate
Invested Capital - Fixed Assets 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
Gross Capex reduction / (addition) 16 225 4 768 3 797 - 11 887 - 4 994 - 2 509 - 1 513 - 1 399 - 375 1 491 1 469 153 911 906 241 - 51 - 344 - 55 - 55 - 56
Net Capex reduction / (addition) 6 046 - 5 142 - 5 120 - 23 407 - 17 589 - 15 656 - 14 986 - 15 177 - 14 235 - 12 045 - 11 747 - 13 030 - 12 073 - 11 882 - 12 494 - 12 797 - 13 165 - 12 887 - 12 900 - 12 913
Invested Capital - NWC and Others 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
Investment in NWC and Others - 517 1 749 - 1 589 - 7 328 612 991 833 806 4 155 752 723 1 652 806 781 786 774 800 762 737 713
Investing Cash Flow 5 529 - 3 393 - 6 709 - 30 735 - 16 978 - 14 664 - 14 153 - 14 372 - 10 079 - 11 292 - 11 024 - 11 378 - 11 267 - 11 101 - 11 709 - 12 023 - 12 365 - 12 126 - 12 163 - 12 200
VODAFONE GROUP PLC
Core Business Free Cash Flow 18 793 10 758 6 709 - 16 450 - 2 125 768 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 Core Business
Result - 4 300 - 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
Invested Capital 30 024 26 800 26 355 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
Investment Cash Flow 3 224 445 3 335 488 491 505 496 490 475 463 451 442 429 419 410 401 391 383 375 368
Non Core Business Free Cash Flow - 5 886 - 2 457 - 3 383 - 615 - 629 - 656 - 699 - 745 - 792 - 833 - 869 - 904 - 937 - 966 - 992 - 1 017 - 1 041 - 1 062 - 1 082 - 1 103
Operational Free Cash Flow 12 906 8 301 3 326 - 17 064 - 2 754 112 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
Financing
Financial Result -€ 1 463 -€ 1 411 -€ 940 -€ 879 -€ 1 043 -€ 1 142 -€ 1 219 -€ 1 300 -€ 1 397 -€ 1 261 -€ 1 223 -€ 1 248 -€ 1 252 -€ 1 266 -€ 1 276 -€ 1 283 -€ 1 286 -€ 1 284 -€ 1 278 -€ 1 267 -€ 1 252
Net Financial Assets -€ 41 897 -€ 34 091 -€ 31 688 -€ 34 158 -€ 55 255 -€ 62 077 -€ 66 033 -€ 69 092 -€ 71 979 -€ 70 200 -€ 69 464 -€ 68 359 -€ 67 413 -€ 66 229 -€ 64 752 -€ 63 721 -€ 62 824 -€ 62 075 -€ 60 890 -€ 59 527 -€ 57 969
Discounted Cash-Flow Model
Change in NFA -€ 7 807 -€ 2 402 € 2 469 € 21 098 € 6 822 € 3 956 € 3 059 € 2 887 -€ 1 779 -€ 736 -€ 1 105 -€ 946 -€ 1 184 -€ 1 477 -€ 1 032 -€ 896 -€ 749 -€ 1 185 -€ 1 362 -€ 1 558
Net Cash Transactions with Shareholders -€ 3 689 -€ 4 959 -€ 4 916 -€ 2 990 -€ 2 926 -€ 2 849 -€ 2 763 -€ 2 669 -€ 2 600 -€ 2 526 -€ 2 448 -€ 2 364 -€ 2 275 -€ 2 179 -€ 2 076 -€ 1 967 -€ 1 850 -€ 1 726 -€ 1 592 -€ 1 450
Financing Cash Flow - 12 906 - 8 301 - 3 326 17 064 2 754 - 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
TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE TRUE
DCF Analysis
2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2032 2033 2034 2035 2036
FCF -€ 2 167 € 783 € 1 737 € 1 963 € 6 560 € 5 425 € 5 783 € 5 574 € 5 775 € 6 016 € 5 491 € 5 269 € 5 023 € 5 355 € 5 411 € 5 471
Terminal Value € 132 443
PV 2020 -€ 2 081 € 722 € 1 537 € 1 667 € 5 349 € 4 247 € 4 347 € 4 022 € 4 000 € 4 001 € 3 505 € 3 229 € 2 955 € 3 025 € 2 934 € 71 794
WACC 4.16% Inflation 2%

ROIC 2027 6%
99%
0.555%
GROWTH 0.033%
Value € 115 254

Non Core Business € 22 531
EV € 137 785
NFA -€ 55 255
Equity Value € 82 530
Equity Value + Cash Trans. w/ shareholders € 85 456
#Shares Outstanding 27 207
Share Price (€) 3.03 €
Shares Price + Dividend (€) 3.14 €
Futures EUR/GBP 0.91
Share Price (£) £ 2.76
Shares Price + Dividend (£) £ 2.86
Current Price £ 1.57

RECOMMENDATION BUY
Total Shareholder return 82%
COMPANY REPORT
PAGE 32/53
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 33/53
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 34/53
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 35/53
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 36/53
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 37/53
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 38/53
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 39/53
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 40/53
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 41/53
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 42/53
Appendix
Appendix I
Appendix II
Germany Italy UK Spain Rest of Europe Vodacom Other AMAP

25.70% 15.24% 10.95% 9.34% 12.51% 14.59% 11.67%
Appendix III
Asset Correlation Matrix Default Correlation Matrix
Rest of Other Rest of Other
Germany Italy UK Spain Europe Vodacom AMAP Germany Italy UK Spain Europe Vodacom AMAP
Germany 1.00 Germany 1.00
Italy 1.00 1.00 Italy 0.50 1.00
UK 0.39 0.55 1.00 50% UK 0.19 0.27 1.00
Spain 0.78 0.84 0.67 1.00 Spain 0.39 0.42 0.34 1.00
Rest of Europe -0.25 0.44 -0.17 0.00 1.00 Rest of Europe -0.13 0.22 -0.08 0.00 1.00
Vodacom 0.54 0.60 0.32 0.83 0.22 1.00 Vodacom 0.27 0.30 0.16 0.41 0.11 1.00
Other AMAP 0.63 0.74 0.83 0.92 0.05 0.59 1.00 Other AMAP 0.31 0.37 0.42 0.46 0.03 0.30 1.00
PAGE 43/53
Appendix IV36
36
SAS University, Free software
PAGE 44/53
Appendix V
Variable N Mean Std Dev Minimum Maximum

DEFAULT 1000 0.070 0.256 0 1.000
DIVLOSS 1000 0.092 0.134 0 0.891
PAGE 45/53
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 46/53
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 47/53
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 48/53
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 49/53
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 50/53
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 51/53
APPENDIX
Appendix I: OTT messages surpass mobile SMS
Source: Informa, April 2013
Appendix II: Global cellular M”M & NB-IoT connection forecast 2015 - 2021 (in millions)
Source: Statista
Appendix III: Internet of Things number of connected devices worldwide (in billions)
Source: Statista
PAGE 52/53
Appendix IV: IoT worldwide market size (in billion US dollars)
Source: Statista
PAGE 53/53

V G PLC C R: A Transforming Industry

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

V G PLC C R: A Transforming Industry

Uploaded by

Copyright:

Available Formats

MASTER IN FINANCE

VODAFONE GROUP PLC COMPANY REPORT

 Vodafone is considered a BUY given the target price for

 The group is one of the main players in the Telecom

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

BlackRock Investment Manager comprises one of the biggest institutional

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

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

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

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

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

Deepening customer engagement is sustained by three drivers involving different

Concerning European consumers, they are inserted in mature markets meaning

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

Source: Richard Cadman, Chris Dineen, 2008

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

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

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

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

Source: International Monetary Fund

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

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

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

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

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

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

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

However, a problem arouses. German regulators 11 are concerned that customers

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

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

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

In what concerns to the mobile segment, highly intensive competition

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

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

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

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

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

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

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

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

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

VodafoneZiggo was born from a partnership with Liberty Global in the

Vodafone Hutchison results from a merger between Vodafone and a national

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