Bear Stearns
Vodafone ( ADR: VOD $37 )
Buy Subscriber Numbers Expected This Week
MarketCap: $227.7 Billion
Index: NYSE Composite
Fanos Hira - Telecom Services/Wireless (Europe)
VOD will announce calendar Q3 subscriber growth towards the end of this week. We predictably expect a slow-down from the previous quarter with a total of 5,316 million proportionate net additions to reach 65 million proportionate subscribers, compared to 6,573 million net additions in the previous quarter. UK will account for 0.775 million, or 14.6% of net additions, EMEA 3.738 million, or 70.3% of net additions, with US & Asia Pacific accounting for 0.804 million or 15.1% of net additions, on our estimates. As average penetration in Europe surpasses 55%, incremental growth in our view becomes increasingly less relevant, especially as the ARPU differential between contract net additions in Europe begins to widen- to illustrate the point in the Netherlands 4.2 pre-pay customers generate the same revenues as one traditional customer. Retention, and also the migration towards more advanced services will be a key determinant of value going forward in our view. We expect investors to be comforted by improvements in net additions in the UK, and continued momentum within Germany and Italy. VOD is not only the largest cellular operator in the World but also benefits from a clear early mover advantage in the corporate and SME segment. As market penetration begins to mature, and as the sophistication of data applications develop, this will become an increasingly visible determinant of success, in our view. Despite all the recent concern in the UK market, following Orange's strong headline growth, VOD's positioning within the corporate market remains intact, which will be solidified when it offers one-rate plans in Q400 or Q101. We also believe that over the coming quarters as asset disposals continue, the strength of VOD's balance sheet will exceed market expectations. Although we accept that in the near-term the trigger for outperformance will not be a new revenue stream, but a realization that issues with respect to UMTS licensing, the migration from 2G to 3G and the impact on ROCE, are over discounted, VOD trades at an unwarranted discount to the sector, in our view. On our forecasts, which are below consensus, the company trades on a prospective EBITDA to three year growth multiple of 0.84, compared to the sector average of 1.23. We reiterate our Buy. Our price target is US$53.8/ ADR. One ADR represents 10 Ordinary Shares |
