Vodafone increase fast broadband investments in Germany

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Vodafone to invest EUR 2 bn until 2021 in its cable network infrastructure to become a more serious competitor in the fixed broadband enterprise business

Vodafone (VOD LN, BUY, CS fundamental credit view: Negative) announced today it will spend an extra EUR 2 bn in capex in Germany (Project “Gigabit”) to build ultrafast fiber broadband primarily for the enterprise segment. In detail VOD is planning to connect 2000 business parks and 100k companies with fiber. In the consumer segment which is expected to be only 25% of the spend (EUR 200 – EUR 400 m) it targets to reach one million new homes.

Germany is an important market for VOD (22% and 26% of group revenues and EBITDA, respectively) and we see this investment as positive as it a) should add 1–2% higher services revenue growth at a higher margin vs. German sector average and b) is planned to work with partners (so EUR 2 bn is a gross number not the direct impact). VOD expects that free cash flow (FCF) will be negatively impacted by EUR 100–200 m p.a. in the first two years (FY2019 and FY2020 ending in March 2019 and 2020).

From FY 2020 on the FCF generation should become positive in a range of 2.5%-5% additional YoY growth rate. VOD remains on our Telecom most favored and UK top pick list. The cross read for Deutsche Telekom (DTE GY, BUY, CS fundamental credit view: Stable) is slightly negative as it has a huge market share in the enterprise business in Germany which is now facing a more serious competitor.

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