EFTA01385536

> TMT Vodafone - Robert Grindle, BUY, close 235p, 300p tgt, 27% upside ■ Vodafone organic EBITDA growth has reached 9.3% yoy, but it has got little credit for this because of the lack of topline growth - organic service revenue has been flat for two years. ■ However, our analysis shows that stripping out the effects of regulation and handset sales shows that underlying MSR has been improving, growing at 2%, compared the headline of -0.7%. ■ Poor handset sales should drag less in 2018 and could accelerate; roaming regulations will annualise out from calendar Q3. Therefore, both headwinds should abate in 2018 and hence we expect re-rating from improving top- line. ■ We believe investment risk is overstated. As 5G increases efficiency, lowering the cost of unit capacity, no material delta to current capital expenditure is needed. ■ On fibre, Vodafone can choose where it deploys, pressuring incumbents into better wholesale deals. ■ We see a deal with Liberty Global for Virgin Media as possible. Greater regulatory clarity after a few tumultuous years would enable Vodafone to sensibly value Virgin Media, making such a deal possible. This would bring substantial synergies. It could also potentially expand the CityFibre partnership. ■ The stock is cheap at 6.0x 19E EV/EBITDA (vs. the sector at 6.5x) and a dividend yield of 6% (vs. the sector at 4.5%). ■ Catalysts: improving organic growth and M&A Related DB Research: Telcos Outlook 2018: lime to call the sector up (Grindle) O4 16 O2 17 O4 17 O2 18 Deutsche Bank Organic EBITDA growth has accelerated to 9.3% 10% 5% 0% 0 -5% -10% H1 15 Group OSR Group org. EBITDA H2 15 1-11 16 Source: Deutsche Sank. Vodafone H216 H1 17 H2 17 H1 18 Ex regulation + mobile, Vodafone is growing MSR at 2% --MSR ex regulation O4 15 O2 16 Source: Deutsche Bank. Vodafone MSR ex regulation/handsets 0rrutsche Bank Research. European Equity Focus —January 21:18 CONFIDENTIAL - PURSUANT TO FED. R. GRIM. P. 6(e) CONFIDENTIAL 37 DB-SDNY-0086822 SDNY_GM_00233006 EFTA01385536