european telecoms - credit suisse

DISCLOSURE APPENDIX AT THE BACK OF THIS REPORT CONTAINS IMPORTANT DISCLOSURES, ANALYST CERTIFICATIONS, LEGAL ENTITY DISCLOSURE AND THE STATUS OF NON-US ANALYSTS. US Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision.

27 March 2018 Europe

Equity Research

Telecommunication Services

European Telecoms Research Analysts

Jakob Bluestone, CFA

44 20 7883 0834

[email protected]

Justin Funnell

44 20 7888 0268

[email protected]

SECTOR REVIEW

Line loss worsening in Europe

■ We lower fixed forecasts for a number of operators with 2020E EBITDA

trimmed at BT (-0.2% with our target price cut to 260p from 280p), Orange

(-0.5%), TDC (-2.0%), Telenor (-0.7%) and Telia Sweden EBITDA (-1.0%).

■ Fixed line loss in Europe is becoming worse with market line loss falling

0.4% y/y in 2017 and incumbent line loss falling 3% y/y. The deterioration is

despite a recovery in economic growth (historically a driver of better line

loss trends). Partly this deterioration reflects more fibre overbuild (hurting

incumbent market shares, as we previously explored) and worse B2B

trends in Europe (becoming worse in most European markets).

■ However, we are also see signs of fixed-mobile substitution picking

up, particularly as unlimited mobile offers become increasingly common.

Unlimited mobile broadband is now available in around three-quarters of

European mobile markets and typically costs €25-40, ie often a discount to

equivalent fixed line offerings. We find that some of the markets with the

biggest discount of mobile broadband versus fixed broadband are also

seeing the highest line loss, ie mobile broadband is driving some cord-

cutting in Europe.

■ Overall, the markets that look most at risk from worse line loss are

Denmark/Norway/Switzerland and we lower our forecasts in several

markets.

Figure 1: CS forecasts aggregate market line loss, incumbent (retail +

wholesale) total line loss and incumbent retail line loss (y/y)

Source: Company data, Credit Suisse estimates

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

Market line loss yoy (Incumbent+ULL+cable) Incumbent retail access lines, y/y change

Total incumbent access lines (retail+wholesale)

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European Telecoms 2

Table of contents

Line loss accelerating 3

European economies recovering 6

Fibre driving some incumbent line loss 8

Business also driving some line loss 11

Mobile substitution also driving line loss 15

Credit Suisse forecasts for line loss 37

Appendix: Line loss by market 46

BT Group (BT.L) 53

Changes to BT Group forecasts 55

Orange 59

TDC (TDC.CO) 62

Telenor (TEL.OL) 65

Telia Company (TELIA.ST) 68

Appendix: Mobile broadband pricing (15/3) 71

27 March 2018

European Telecoms 3

Line loss accelerating

Incumbent access line trends have improved

materially from 10 years ago

The recovery in incumbent retail fixed access line trends from around 2012 has been one

of the most positive stories the sector has seen in recent years. This was originally driven

by an increase in high-speed broadband deployment, particularly following the European

Commission's decision to opt for light-touch regulation of fibre (esp. FTTC). Around 10

years ago, incumbent access line loss in Europe was running at around 6-7% annual

contractions, and this has reduced to a 2-3% decline pa.

The improvement in access line trends (ie, number of billing relationships, whether voice-

only, 2p, 3p or some other combination of services) has been a big driver in fixed pricing

power in the sector, in turn driving better revenue per line (RPL) trends in Europe either

through straight price hikes or through customers moving up to more expensive tiers of

broadband (e.g. ADSL to VDSL or FTTH at a higher price point). Improving line loss and

better RPL trends drove the return to modest growth in incumbent fixed line revenues

during Q4 2017.

But recently the recovery has stalled – and is even

going backwards

However, we have been highlighting for several quarters now in our regular wireline

reviews (European wireline: Q4 17 results review) that more recently incumbent fixed line

trends have started to deteriorate again. Incumbent access line loss is no longer moving

towards stabilizing and at the margin appears to be turning negative (Figure 2).

This worsening appears to be market-driven rather than driven by the market share of

incumbents versus challengers. In calculating our market access line figures, we take

great care to make reasonable estimates for challengers access line trends (though these

are often not disclosed on a regular basis).

Roughly half the markets in Europe are still seeing shrinking lines with particularly large

declines in Europe's wealthiest markets (Norway, Switzerland, and Denmark) and some of

the relatively more affluent markets (the Netherlands, Austria, and France) also seeing line

loss. However, total access lines are still rising in several other markets including a mix of

Southern European markets (Portugal, Spain, and Italy) and some wealthier Northern

European countries (UK, Germany, Sweden, and Belgium). We show these in Figure 3.

If we look instead at which markets are seeing worsening line loss trends (irrespective of

whether access line growth is positive or negative), we can see that almost all markets are

seeing worse access line developments (Figure 4). Only two markets (Italy and Belgium)

are seeing meaningful improvements in line loss trends, while the majority countries are

seeing worse trends in line loss than previously. Some of the countries with the worst rates

of line loss (Norway and Switzerland) are also seeing the biggest deteriorations in their

rates of line loss, ie the line loss problem is becoming worse. Markets that were previously

seeing very high growth in access lines (Sweden) are also seeing this stall rapidly.

Two main drivers: fibre and FMS

We highlighted in our 2018 Telecoms Sector Outlook that the deterioration in incumbent

line loss related to two main factors: increasing fibre overbuild by challengers (leading to a

market share shift) and increasing fixed mobile substitution (leading to a deterioration in

overall market access line growth).

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European Telecoms 4

Figure 2: Access lines —Total Incumbent retail* & European market* (y/y)

Source: Company data, Credit Suisse research, total lines defined as Incumbent retail + wholesale lines, ULL and cable, * excluding naked DSL

Figure 3: Access lines trend by market (y/y)

Source: Company data, Credit Suisse research, Norway excludes naked DSL

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

EU market line loss y/y EU incumbent retail line loss, y/y EU incumbent total line loss, y/y

0.8% 0.6% 0.4% 0.3% 0.1% 0.1%

-0.4% -0.4% -0.6%

-1.3%-1.5% -1.8%

-2.3%

-6.0%

-10%

-8%

-6%

-4%

-2%

0%

2%

2Q17 3Q17 4Q17

27 March 2018

European Telecoms 5

Figure 4: Change in y/y rate of incumbent retail line loss (pp; Q4 17)

Source: Company data, Credit Suisse research

Figure 5: Incumbent access lines (retail and wholesale) trend by market (y/y)


1.5%

0.9%

0.4%

-0.2%-0.4%

-0.6%-0.7%

-1.0%-1.2% -1.3% -1.3%

-1.6%

-1.9%-2.1%

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

Q4 17 y/y

0.2%

-0.8%-1.1%

-2.1% -2.2%

-3.1%-3.4%

-3.8% -3.8% -3.9%

-5.1% -5.2%

-6.1%

-9.4%-10%

-8%

-6%

-4%

-2%

0%

2%

Q217 Q317 Q417

27 March 2018

European Telecoms 6

European economies recovering

Telecoms has some sensitivity to economic growth

The deterioration in access line trends is particularly surprising as it comes at a time of an

improving economic environment in Europe. European GDP growth recovered from 2.0%

in 2016 to 2.5% in 2017. Credit Suisse's European economist Neville Hill (Euro area PMIs:

Past the peak, 21 Feb 2018) has pointed out that European economic growth likely

reached a peak in Q1 17 (inflationary pressures building), but the overall backdrop

remains favourable in most of the region.

Telecoms tends to be a fairly low cyclical sector compared with many other sectors in the

stock market. However, some segments have a fairly high correlation with GDP growth

with the B2B segment having around a 2-for-1 correlation between revenues and growth.

In the past we have found that mobile has a roughly 1-for-1 correlation and consumer fixed

line has a 0.5-for-1 (ie 1-for-2) correlation with GDP growth. Generally, telecoms tends to

be late cyclical, given the length of contracts. B2B contracts are typically around three

years on average, mobile contracts are typically around 12-18 months where lock-ins are

in place, and consumer fixed contracts typically 12-18 months but with most customers out

of lock-in.

In the past, line loss and GDP growth have correlated

If we look at line loss and GDP growth in Europe, we find that there was indeed some

sensitivity in the past (Figure 7).

■ Market access line loss went from modestly positive to sharply negative around the

start of the Global Financial Crisis (ie starting around 2008).

■ When GDP growth started to recover around 2010, line loss started to moderate

(though remained in negative territory) and then deteriorated again when the eurozone

crisis began in 2012.

■ As the European economies started to improve, line loss moderated, as described

above.

But now macro/line loss have decoupled

However, in the past 12-18 months, line loss has started to deteriorate again even though

economic growth has accelerated further. So there are clear signs of decoupling.

If we look at GDP growth and line loss (Figure 8), we see little correlation between the rate

of line loss and GDP growth, a further sign of decoupling between GDP growth and line

loss.

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European Telecoms 7

Figure 6: GDP growth in Europe (% y/y)

Source: Eurostat, Thomson Reuters

Figure 7: European GDP growth (q/q) and aggregate

lines (y/y) Figure 8: Market line loss vs GDP growth by country

Source: Company data, Credit Suisse research, Eurostat, Thomson Reuters Source: Company data, Credit Suisse research, Eurostat, Thomson Reuters

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

2015 2016 2017

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

Acc

ess

line

loss

(y/

y)

GD

P g

row

ht (q

/q)

Line loss GDP growth

BELUK

GER

FRA

NETH

POR

SWI

AUT

DEN

SPA

ITA

SWE

NOR

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

3.5%

-7% -6% -5% -4% -3% -2% -1% 0% 1% 2%

GD

P g

row

th (2

017A

)

Market line loss (Q4 17; y/y)

27 March 2018

European Telecoms 8

Fibre driving some incumbent line loss

Fibre overbuild increasingly important

We have been highlighting for several years (Building the gigabit society) that the pressure

on incumbents to roll out fibre is rising for a number of reasons. This includes higher

demand for fibre, 5G, faster cable/mobile, changes in regulation and more third-party fibre.

Recently, the latter of these (third-party fibre overbuild) has grown in importance. Around

Europe we are seeing more third-party fibre overbuilds by various parties, including

utilities, private equity, some public companies, and municipalities. In some cases there is

a single player (e.g. OpenFibre in Italy, an Enel JV), while in other case there are multiple

players (e.g. Swedish munis).

Markets with most fibre overbuild

■ Italy: OpenFibre Italy acquired Metroweb in 2016 (1.2m homes passed) and plans to

pass 9.5m of 15.5m homes in A&B areas. It also won Infratel I and II targeting 9.3m

homes with FTTx, ie the total local area network

■ Portugal: Vodafone and NOS are expanding their footprint rapidly as a result of having

easy access to ducts and rollout costs per home in Portugal are typically ~€150 per

home passed, ie very low.

■ Spain: As in Portugal the easy duct access and lax planning laws have allowed Orange

and Vodafone to also roll out cheaply. Recently they have both moved more towards a

wholesale arrangement with TEF.

■ Switzerland: The utilities in Zurich/Geneva/Bern and the association of smaller utilities

(SFN) have been the main driver through significant FTTH investment. These operate

mostly a wholesale-only model and have signed an agreement with Salt, Sunrise and

UPC (Liberty Global) granting them access to their network with low recurring fees.

(Sunrise – Revisiting Swiss consolidation)

■ Sweden: Telia has seen extensive overbuild by smaller players and it was late in rolling

out FTTH especially to MDUs. As a result Telia will effectively become a wholesaler in

large parts of Sweden (see (Telia – Downgrade to Underperform)

Fibre overbuild driving line loss

In Figure 11 we correlate incumbent line loss with fibre overbuild and find that it is indeed

a significant factor. Some of the markets seeing the highest line loss to challengers (e.g.

Sweden, Portugal, Spain) are also the markets with the highest degree of line loss.

However, this should not impact market line loss as we capture the challengers (NOS,

Telenor, Orange Spain etc) in our market access line loss figures.

So the highest line loss does explain some of the deterioration in access line loss for the

incumbents, but does not explain the deterioration in access line loss for the market

overall.

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European Telecoms 9

Figure 9: Threat from fibre overbuild by market (% of homes passed by

challenger FTTH; 2016 and 2021E)

Source: Credit Suisse report Building the Gigabit Society - One year later...

Figure 10: Increase in threat from overbuild by market (Increase in homes

passed by challenger FTTH from 2016 to 2021E)

Source: Credit Suisse report Building the Gigabit Society - One year later...

0%

20%

40%

60%

80%

100%

120%

SWED PORT ESP SWITZ DEN NORW ITA AVG DE FRA* UK NETH BELG

2016A 2021E

0%

5%

10%

15%

20%

25%

30%

ITA PORT ESP SWITZ SWED AVG FRA DE UK DEN NETH BELG NORW

Change in overbuild (2021E vs 2016E)

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European Telecoms 10

Figure 11: Incumbent line loss (retail and wholesale) correlates with FTTH

overbuild


Figure 12: CS view of risk of line loss from FTTH overbuild (higher % = higher

risk)

Source: Credit Suisse estimates

Denmark

France

Germany

Italy

Neths

NorwayPortugal

Spain

Sweden

Switz

UK

R² = 0.4493

-10%

-8%

-6%

-4%

-2%

0%

2%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Ret

ail +

who

lesa

le in

cum

bent

line

loss

(Q

3 17

, y/y

)

Fibre overbuild by challengers (2017A)

BT

DTORA

TELIA

TNOR

PT

SCMN

TDC

TI

KPNPROX

TEF

TKA0%

5%

10%

15%

20%

25%

30%

0% 20% 40% 60% 80% 100% 120%

Incr

ease

in F

TT

H o

verb

uild

by

chal

leng

ers

2016

-21E

FTTH overbuild by challengers - 2021E

27 March 2018


Business also driving some line loss

Fixed vs consumer

Around three-quarters of access lines are for consumers with the remaining lines for

business customers. We calculate this by aggregating the business/consumer split for the

operators that provide a figure. This is equivalent to roughly half the access lines in

Europe, ie a reasonable but not perfect proxy for overall market dynamics.

Definitions of what is consumer and business varies (e.g. for SME customers the line can

be blurry) and disclosure on consumer vs business trends is generally quite low across the

industry. But even with those caveats, there has been a significant gap between trends for

business and consumer trends and recently business trends have been worsening.

While consumer access line trends have been roughly flat, business trends have been

shrinking by around 4-5% pa, ie a large underperformance. Recently, business trends

have rolled over (as have consumer trends), explaining some of the deterioration of

access line trends.

Main drivers of B2B underperformance

■ Consolidation of lines, as business customers have abandoned legacy products (e.g.

ISDN, particularly in the Nordic region).

■ Linked to this is migration to VoIP which is cheaper than leased lines and might also

count as a smaller number of customers.

■ Some substitution by mobile. Vodafone has been one of the few operators to report

good trends in B2B (Vodafone Group - Enterprise - growing 2.6%) and it has been the

challenger offering both fixed and mobile products.

■ From a revenue perspective, the rate of decline in business has been even worse as

there has been significant ARPU compression for business customers. Much of the

business market was historically less competitive than the consumer market (fewer

players, more complex products) allowing business operators to over-earn. However,

over time and with technology change (VoIP, better mobile) and, in some cases, spill-

over of consumer pricing pressure, the business market eventually started to roll over

as well. So, at a time when consumer trends were generally improving in fixed and

mobile, the business market was catching up.

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Figure 13: Aggregate consumer and business line loss (for operators

publishing a split; y/y)


Markets with deteriorating B2B

In Figure 14 to Figure 25 we show the consumer and business line loss trends for the

operators or markets where data are available, either from the operator or the regulator.

The rates of growth/decline are much more widely dispersed than for consumer but there

are a number of markets that stand out having particularly weak B2B trends.

We would particularly highlight the UK and France among the bigger markets. BT has

highlighted problems in its B2B division on the big profit warnings last year. In France

Orange is also seeing more competition and this is likely to worsen a little in 2017-18 due

to new wholesale products being introduced by ARCEP (this would not lead to worse

market trends, just worse trends at Orange). SFR has also struggled in French B2B.

Among the other markets seeing worsening trends we would note that Switzerland is

seeing more pressure from Sunrise, Denmark is seeing some cannibalization by cheap

mobile (e.g. in public sector).

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

2Q 14 3Q 14 4Q 14 1Q 15 2Q 15 3Q 15 4Q 15 1Q 16 2Q 16 3Q 16 4Q 16 1Q 17 2Q 17 3Q 17

Total consumer Total business

27 March 2018


Most markets have seen worse trends in Business

Figure 14: Austria consumer & business trends (y/y)

Figure 15: Belgium (Telenet) consumer & business

trends (y/y)

Source: NRA Source: Company data

Figure 16: Denmark (TDC) consumer & business

trends (y/y)

Figure 17: Finland consumer & business trends

(y/y)

Source: Company data Source: NRA

Figure 18: France (Orange) consumer & business

trends (y/y)

Figure 19: Italy (TI) consumer & business trends

(y/y)

Source: Company data Source: Company data

-4%

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

Austria Conusmer Austria Business

-3%

-2%

-1%

0%

1%

2%

3%

4%

5%

6%

7%

8%

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

Telenet Conusmer Telenet Business

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

TDC Conusmer TDC Business

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

Finland Conusmer Finland Business

-9%

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

Orange (France only) Conusmer Orange (France only) Business

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

TI (domestic) Conusmer TI (domestic) Business

27 March 2018


Figure 20: Netherlands (KPN) consumer & business

trends (y/y)

Figure 21: Portugal (NOS) consumer & business

trends (y/y)


Figure 22: Spain consumer & business trends (y/y)

Figure 23: Sweden (NOS) consumer & business

trends (y/y)

Source: NRA Source: NRA

Figure 24: Switzerland (Swisscom) consumer &

business trends (y/y)

Figure 25: UK (BT) consumer & business trends

(y/y)


-25%

-20%

-15%

-10%

-5%

0%

5%

10%

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

KPN Conusmer KPN Business

-5%

0%

5%

10%

15%

20%

25%

30%

35%

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

NOS Conusmer NOS Business

-4%

-2%

0%

2%

4%

6%

8%

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

Spain Conusmer Spain Business

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

Sweden Conusmer Sweden Business

-18%

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

2%

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

Swisscom Conusmer Swisscom Business

-12%

-10%

-8%

-6%

-4%

-2%

0%

1Q14

2Q14

3Q14

4Q14

1Q15

2Q15

3Q15

4Q15

1Q16

2Q16

3Q16

4Q16

1Q17

2Q17

3Q17

BT Group Conusmer BT Group Business

27 March 2018


Mobile substitution also driving line loss

Fixed-mobile substitution of voice not new

Fixed mobile substitution (FMS) is not a new phenomenon in Europe. Indeed it has been

the main driver of line loss in Europe over the past 20 years. Historically this was voice-

only lines being cut, as opposed to broadband lines.

According to the European Commission's 2016 E-Communication Household Survey of

28,000 consumers, around a third of European homes have no fixed voice connection. In

some markets the proportion of customers without a voice connection is extremely high

with nearly 90% of consumers in Finland not having fixed voice connections and around

60% of homes in Austria/Denmark. Common in these markets is the ability for customers

to be able to drop their fixed voice connection and take "naked" DSL (ie broadband only).

Figure 26: Households having a mobile telephone

access but no fixed telephone access

Figure 27: Households with mobile internet access

and no (fixed) internet connection at home

Source: European Commission E-Communications and the Digital Single Market (May 2016)http://www.eena.org/download.asp?item_id=177

Source: European Commission E-Communications and the Digital Single Market (May 2016)http://www.eena.org/download.asp?item_id=177

87%

60% 59%

47%43%

34%

28% 28% 27%

22%19%

16% 15% 15%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

FI DK AT SE IT IE PT ES BE UK FR EL NL DE

31%

18%

13% 13%12%

11% 11%10%

7% 7%6%

2%1% 1%

0%

5%

10%

15%

20%

25%

30%

35%

IT ES EL AT PT IE UK BE FR SE FI DK DE NL

27 March 2018


Mobile-only broadband less common

Customers going mobile-only for broadband (ie having a 3G or 4G router) or some other

wireless access solution is less common, albeit not non-existent. According to the same

household survey, around 13% (one-eighth) of consumers in Europe have a mobile

broadband connection but no fixed broadband connection. Much of this is in Eastern

Europe; in Western Europe, it is closer to 10% with the notable exception of Italy where

the proportion of customers using only mobile broadband is much higher.

Signs of change?

However, with 4G offering improved speed/reliability, the ability of mobile to substitute

fixed broadband is increasing. We would note a number of comments from various CEOs

in the sector highlighting the improving potential of mobile broadband to substitute fixed.

Selected quotes

"We're really excited about the potential that we see [from 5G]. And for us, it starts with

mobile. […] the traditional distinctions between what you can get on a mobile device and

what you can get on a wireline broadband connection are falling away with each passing

generation. In fact, even with LTE, we believe we are the only Internet connection for a

significant minority of our customers who have no other Internet connection. And the

potential to deliver more and more of their time, their needs, their requirements through

wireless and 5G is a massive opportunity. And in fact, there's some speculation that a little

bit of the postpaid volume we're seeing recently is from a phenomenon of people dropping

expensive broadband delivered through wires out of their portfolio."

John Legere, T-Mobile US – CEO (italics added, Q4 17 results call)

"So on mobile broadband what is fascinating, […] this is a real opportunity for us in the

Swiss market. [It] is a little bit behind some of the other markets in terms of mobile

broadband opportunities like connected iPads, connected watches, connected hotspots.

And we have now a full portfolio in place and we are motoring on that quite nicely. It's

captured under our secondary SIM base, which has a higher growth than our primary SIM

base. Having said that, we focus in this space really on value. So it's not about just

additional secondary SIMs, we really want to get a good solid ARPU per SIM card"

Olaf Swantee, Sunrise – CEO (Q4 17 results call)

"We don't have enough spectrum to substitute fixed currently. But once we get 5G

spectrum in 2021 then we could start targeting denser areas more [with 4G router]"

Olivier Roussat – Bouygues Telecom CEO (Q4 17 analyst presentation)

27 March 2018


Markets with vulnerability to FMS

Mobile networks increasingly good substitute for fixed

Mobile networks on 4G are increasingly able to offer a service comparable to low-end

fixed line. As a result, markets that have good mobile networks are arguably more

vulnerable to FMS and higher degrees of line loss than markets which are still more reliant

on 3G.

In Figure 28 - Figure 29, we use OpenSignal data to compare 4G coverage and average

4G speeds to line loss in the various markets.

From a statistical point of view, line loss does not appear to be particularly correlated to

4G coverage or speeds and we would note Italy has some of the highest FMS to date

despite the fact it has some of the lowest 4G coverage and 4G speeds in Europe.

However, we would make a few observations:

■ Average 4G speeds are around c25-35Mbps in most markets. These sorts of speeds

are well above regular fixed ADSL (8Mbps) and ADSL2+ (24Mbps). Indeed these

speeds are on average comparable to typical consumer speeds on VDSL (typically

around 30-40Mbps). Mobile speeds might be slightly more variable and VDSL over

short loop lengths can still deliver meaningfully higher speeds than 4G mobile

(c100Mbps). But the gap for many customers is not very high

■ Switzerland and Norway are two of the markets in Europe that have the highest line

loss and also have some of the widest 4G coverage. So in those two markets it does

appear to be a driver to some extent. The Netherlands also appears to be potentially

vulnerable given good 4G coverage, even though line loss is not particularly high.

Figure 28: 4G coverage vs market line loss (Q4 17) Figure 29: 4G speeds vs market line loss (Q4 17)

Source: Company data, Credit Suisse research, OpenSignal Source: Company data, Credit Suisse research, OpenSignal

Austria

BelgiumDenmark

France

GermanyItaly

Netherlands

Norway

Portugal

Spain

Sweden

Switzerland

UK

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

60% 65% 70% 75% 80% 85% 90% 95%

Line

loss

(y/

y)

4G coverage

Austria

BelgiumDenmark

France

GermanyItaly

Netherlands

Norway

Portugal

Spain

Sweden

Switzerland

UK

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

20.0 25.0 30.0 35.0 40.0 45.0

Line

loss

(y/

y)

4G speeds (Mbps)

27 March 2018


Methodology from outlook piece

4G speeds and coverage are a useful starting point but ultimately too simplistic to screen

for markets where FMS is driving line loss - and for gauging where it could be a risk.

In our 2018 Telecoms Sector Outlook we reviewed markets at risk of fixed mobile

substitution.

We scored operators based on an equal-weighted ranking on three different measures:

■ ADSL as a percentage of fixed broadband lines

■ Fixed broadband penetration - percentage points above the level of Italy which is

currently the market with the highest mobile broadband penetration

■ Percentage of fixed broadband lines which are not converged, to capture the degree to

which convergent customers are less likely to become mobile-only.

Based on this methodology, we found that the markets that were the most vulnerable to

FMS were;

■ Sweden - Fixed broadband penetration is fairly low and there is almost no convergence

■ UK - DSL, the most common broadband penetration, is fairly average and the market

(like Sweden) has seen little convergence

■ Italy - the market has already seen a high degree of FMS. However, the vast majority

of broadband is via DSL and there are relatively few customers taking fixed mobile

convergent offerings

■ France - DSL again remains by far the dominant means of fixed broadband

infrastructure.

■ Austria - DSL is dominant and despite TKA’s early convergent Kombipacket offerings

there is relatively little convergence in Austria

■ Norway - the market has no convergence

Figure 30: Risk of line loss from mobile broadband substitution

ADSL as % of FBB

lines

FBB penetration

(above level of

Italy)

% of FBB lines not

F-M

Total Index to 100

TELIA 50% 21% 100% 171% 57

BT 47% 27% 95% 169% 56

TI 82% 0% 85% 167% 56

ORA 84% 33% 41% 158% 53

TKA 90% 3% 65% 158% 53

TNOR 30% 28% 100% 158% 53

TDC 50% 28% 79% 157% 52

DT 54% 15% 82% 151% 50

SCMN 24% 39% 71% 134% 45

PT 56% 23% 50% 129% 43

KPN 20% 32% 60% 112% 37

PROX 20% 27% 44% 91% 30

TEF 45% 14% 15% 74% 25

Source: Credit Suisse research

https://plus.credit-suisse.com/r/V7akS62AF-Wucx

27 March 2018


Mi-Fi available in most markets

In order for mobile broadband to be able to substitute fixed line, there obviously needs to

be a meaningful 4G mobile broadband offering available.

Most markets in Europe now have some sort of 4G mobile broadband routers available,

though prices vary widely and the size of the bundles vary significantly too.

The EC does a regular study of mobile broadband pricing in which it categorises markets

as follows:

■ The inexpensive countries are: Poland, Austria, Italy, Lithuania, Latvia, Estonia,

Slovenia, and Luxembourg, Sweden and France.

■ The relatively inexpensive countries are: the UK, Denmark, Romania, Croatia, Spain,

Bulgaria, and Germany

■ The relatively expensive countries are: Belgium, Malta, Finland, the Netherlands,

Portugal, Slovakia, and Ireland.

■ The most expensive countries are: Hungary, Cyprus, the Czech Republic and Greece.

However, in our view, the EC's analysis is not massively useful as no country is

consistently in the least or most expensive bracket.

Figure 31: EC major clusters of countries by price level over all usage baskets

Source: European Commission https://ec.europa.eu/digital-single-market/en/news/mobile-broadband-prices-europe-2017

27 March 2018


We look at 3 different bundles

In Figure 32 - Figure 34, we look at three different bundles

■ 15GB bundles. We see these as fairly niche as the bundle is quite small and therefore

would only be likely to able to substitute very light broadband users, e.g. older

generations, very low income households or those who do not watch on-demand TV.

These low-end offerings are available in most markets and typically cost eur10-35.

Bundles <eur20 are available in Italy, Portugal, Belgium and Denmark. Italy and

Portugal are relatively low income so even a small bundle might be appealing to a

segment of the population although Portugal has a lot of fibre so would be less

vulnerable. But Italy has a lot of low-speed ADSL with single-digit Mbps speeds and we

believe these offerings are a big part of the substitution of fixed broadband that Italy

has seen.

■ 50GB bundles. We see this bundle size as potentially able to substitute ADSL where

average usage is 50GB. These bundles are available for eur15-35 typically and could

be genuine substitutes in many markets where broadband speeds are generally low.

We would also note that broadband ARPU in Europe is typically around eur35 so these

offers are at price points that are comparable to fixed (we discuss this is more detail

later). We would note that mobile broadband is very expensive in the Netherlands

which is probably the reason that we have seen little FMS despite the Netherlands

having some of Europe’s best 4G networks.

■ Unlimited mobile broadband bundles. We see unlimited mobile broadband as a

potential catalyst as it has quite high substitution potential. ADSL users typically

consume 50GB/m and fibre/cable customers typically 100-150GB/m of data, so these

tariffs could be a genuine substitute. These are not yet available in most markets and

are generally at quite high retail price points. However we would note that they are now

available in around two-thirds of markets and in half of these the price points are

<eur40. For example, in Portugal and France, mobile broadband is available for

eur25-35 (though markets suffer from low speeds/low coverage for 4G). Switzerland is

interesting as it has some of the cheapest mobile broadband in Europe and some of

the best mobile networks. Sweden and Denmark also have good mobile networks and

attractively priced unlimited offers.

Figure 32: ~15GB tariffs in European markets (€/m)

Source: Company data, Credit Suisse research. Pricing data as of 15 March 2018

50

35 3533

31 30

2522

2016 15 15

10

0

10

20

30

40

50

60 €/m - 15GB tariffs

€/m

27 March 2018


Figure 33: ~50GB tariffs in European markets (€/m)


Unlimited mobile broadband for CHF25-50

Figure 34: Unlimited tariffs in European markets (€/m)


5250

40

35 35 34 34 3330

2521

15

0

10

20

30

40

50

60

ice(Norway)

Tmo NL Vod Spa 3 Austria Vodafone(Ger)

3 Sweden 3UK ByTel(France)

Salt(Switz)

Nos (Por) Oister(DK)

3 Italy

€/m - 50GB tariffs

€/m

149

62

50 5040

34 33 3025

0

20

40

60

80

100

120

140

160

TI (Italy;100GB)

ice (Norway;100GB)

3 Austria Tmo NL Oister (DK;350GB)

3 Sweden(100GB)

ByTel(France;200GB)

Salt (Switz) Nos (Por)

€/m - unlimited (or nearest equivalent)

€/m

27 March 2018


Markets with worsening line loss have cheap Mi-Fi

In Figure 35 - Figure 36, we look at the correlation between the three benchmark Mi-Fi

bundles and line loss in Europe. Figure 35 has a low R-square ie, little statistical

explanatory power. Figure 36 has a better correlation and suggests that, in markets with

cheap unlimited mobile broadband, line loss is indeed higher.

Figure 35: Price of ~50GB Mi-Fi bundle vs y/y change in market access line loss

(Q4 17)


Figure 36: Price of unlimited* Mi-Fi bundle vs y/y change in market access line

loss (Q2 17)

Source: Company data, Credit Suisse research. *unlimited or nearest equivalent (>100GB bundle). Pricing data as of 15 March 2018

UK

GER

FRA

NETH

POR

SWI

AUT

DEN

SPA

ITA

SWE

NOR

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

0 10 20 30 40 50 60

y/y

chan

ge n

line

loss

Price of 50GB wireless broadband bundle (€)

FRA

NETH

POR

SWI

AUT

DEN

ITA

SWE

NOR

y = 0.0002x - 0.0198R² = 0.487

-2.5%

-2.0%

-1.5%

-1.0%

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

0 20 40 60 80 100 120 140 160

y/y

chan

ge in

line

loss

Price of unlimited wireless broadband bundle (€)

27 March 2018


Looking at fixed vs mobile broadband pricing

Looking at mobile broadband pricing in isolation is interesting but ultimately what matters

is not the stand-alone price of mobile broadband but how that compares to fixed

broadband pricing. We consider that in the following section.

■ Low-end: in Figure 38 we show the price of the benchmark 15GB bundle and how that

compares with a benchmark entry level 15Mbps broadband (double-play where

available) tariff from the various operators. We consider these to be roughly equivalent

products. We would note that this is not a very relevant bundle in some markets – for

example, in Belgium/Sweden the majority of fixed broadband connections are on fibre,

ie very few customers would see small mobile broadband bundles as a viable

alternative.

■ Mid-range: In Figure 39 we compare a 50GB mobile broadband tariff with the price of a

50Mbps fixed broadband tariff (typically VDSL-based or nearest equivalent).

■ High-end: In Figure 40 we compare the benchmark unlimited mobile broadband tariff

with the price of a 100Mbps broadband connection. Again this might not be a relevant

option in markets (e.g. Austria) with little high-speed fixed line broadband.

Inevitably there is some subjectivity in what is the nearest equivalent fixed broadband

tariff. But we consider this a reasonable methodology as it is similar to the choice a

consumer would face.

Looking at each of the individual fixed broadband tariffs for each operator arguably makes

the analysis overly complex so in Figure 41 - Figure 43 we have compared mobile

broadband tariffs to a straight average of the relevant fixed tariffs (note we have not

market share weighted the tariffs). This allows us to easily compare whether fixed or

mobile broadband is cheaper.

Figure 37: % of broadband subscribers on >=30Mbps downstream bundles, by market

Source: Regulator data, Credit Suisse research, Note: includes the whole market, ie also cable and non-incumbent fibre

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

Austria Belgium Denmark Finland France

Germany Norway Portugal Spain Sweden

UK Netherlands Italy

2

7 M

arc

h 2

01

8

Eu

rop

ean

Te

leco

ms

24

Figure 38: Comparison of low-end Mi-Fi vs fixed broadband: 15GB mobile broadband (in red) vs ~15Mbps fixed broadband tariffs (in blue)

Source: Company data, Credit Suisse research. Numbers in parenthesis are fixed broadband speeds in Mbps. Pricing data as of 15 March 2018

0

10

20

30

40

50

60

70

2

7 M

arc

h 2

01

8

Eu

rop

ean

Te

leco

ms

25

Figure 39: Comparison of mid-end Mi-Fi vs fixed broadband: 50GB mobile broadband (in red) vs ~50Mbps fixed broadband tariffs (in blue)


0

10

20

30

40

50

60

70

2

7 M

arc

h 2

01

8

Eu

rop

ean

Te

leco

ms

26

Figure 40: Comparison of high-end Mi-Fi vs fixed broadband: unlimited mobile broadband (in red) vs ~100Mbps fixed broadband tariffs (in

blue)


0

20

40

60

80

100

120

140

160

27 March 2018


Figure 41: Comparison of low-end Mi-Fi vs fixed broadband: 15GB mobile broadband (in red) vs ~15Mbps

fixed broadband tariffs (in blue)


Figure 42: Comparison of mid-end Mi-Fi vs fixed broadband: 50GB mobile broadband (in red) vs ~50Mbps

fixed broadband tariffs (in blue)


0

10

20

30

40

50

60

0

10

20

30

40

50

60

27 March 2018


Figure 43: Comparison of high-end Mi-Fi vs fixed broadband: unlimited mobile broadband (in red) vs

~100Mbps fixed broadband tariffs (in blue)


0

20

40

60

80

100

120

140

160

27 March 2018


Difference in price between MBB and fixed BB

Lastly in Figure 44 - Figure 46, we show the difference between the benchmark mobile

broadband and fixed broadband tariffs for the 15GB mobile/15Mbps fixed, 50GB

mobile/50Mbps fixed and unlimited GB mobile/100Mbps fixed tariffs.

One striking conclusion is that mobile broadband is generally cheaper than the equivalent

average fixed broadband tariff. This is true for the low-end, the mid-range and the high

end. Mobile broadband is only priced as premium product in a few markets.

■ Low end: mobile broadband is only more expensive in the Netherlands, Germany,

Spain, France and Austria. In the rest of Europe, it is cheaper and several of those

markets (notably the UK and Italy) are predominantly ADSL markets, ie with a high

number of customers on relatively low speeds.

■ Mid range: mobile broadband is only more expensive in Spain/Germany/France, while

it is cheaper in most of the rest of Europe

■ High end: mobile broadband is on a relative discount to fixed in most markets. The

discount is largest in Switzerland where entry-level broadband is typically CHF50-60

and Salt is offering unlimited mobile broadband for CHF30. This suggests a large

potential to substitute mobile broadband for fixed and helps explain why the fixed line

loss in Switzerland is so particularly acute.

Figure 44: Difference in price between low-end mobile broadband tariffs and

average fixed line tariffs (€)

Source: Company data, Credit Suisse research. Negative numbers show how much cheaper mobile broadband is compared to fixed broadband . Pricing data as of 15 March 2018

-25

-20

-15

-10

-5

0

5

10

15

Low-end

27 March 2018


Figure 45: Difference in price between mid-end mobile broadband tariffs and


Source: Company data, Credit Suisse research. Negative numbers show how much cheaper mobile broadband is compared to fixed broadband Pricing data as of 15 March 2018

Figure 46: Difference in price between unlimited mobile broadband tariffs and


Source: Company data, Credit Suisse research. Negative numbers show how much cheaper mobile broadband is compared to fixed broadband. Pricing data as of 15 March 2018

-20

-15

-10

-5

0

5

10

Mid-end

-50

-45

-40

-35

-30

-25

-20

-15

-10

-5

0

5

Unlimited

27 March 2018


Line loss vs discount on mobile broadband

Lastly in Figure 47 we show the correlation between line loss and the mobile broadband

discount vs fixed broadband for the mid-range bundle (which we see as the most

relevant).

The R-squared is not very high but nonetheless there does appear to be some correlation

between which markets are seeing highest line loss and where mobile broadband is

relatively cheap.

Figure 47: Line loss reasonably correlated with € discount on a mobile

broadband bundle (~50GB) vs a fixed broadband bundle


AustriaDenmark France

Germany

Italy

Netherlands

Norway

Portugal Spain

Sweden

Switzerland

UK

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

-25 -20 -15 -10 -5 0 5 10 15

27 March 2018


Fixed wireless access vs fibre

Fixed-wireless broadband increasingly visible

Longer term, fixed markets are shifting more towards fibre. When we consider the longer-

term likelihood of mobile broadband substituting fixed broadband, we believe (unlimited)

mobile broadband will be able to offer a service on par with fibre, from a technical point of

view. We looked at this recently at the Mobile World Congress in Barcelona where we

looked at fixed wireless access (FWA) services in greater depth.

FWA occurs through an antennae near the home but instead of the last connection (e.g.

from telegraph pole to home) being via fibre/copper/co-axial cable it is via wireless. The

network operator places a base station near the home and a receiving antenna is mounted

on the wall/roof of the home with an Ethernet cable that connects to a router inside the

home.

Figure 48: Example of FWA deployment

Source: Ericsson. UE = 3GPP user entity, STA = Wi-Fi station

NGCO

MBB UE

Cabinet (fixed network)

CPE

IoT UE/STA

5G/LTE RBS

5g for MBB And IoT

5G for FWA

Legacy fixed bb access in case of hybrid access (FWA combined with existing copper or fibre access

This link could be fixed or even wireless 5G based, or based on Wi-Fi

Wi-Fi/ 3GPP

MBB UE

FWA UE

CPE

Wi-Fi STA

https://plus.credit-suisse.com/r/V7bgxm2AF-Wucx

https://www.ericsson.com/en/ericsson-technology-review/archive/2016/fixed-wireless-access-on-a-massive-scale-with-5g

27 March 2018


Several demonstrations of high-capacity FWA at MWC

At the Mobile World Congress (MWC) vendors presented FWA solutions which were able

to give FWA speeds similar to what customers could receive using fibre-to-the-home, ie

1Gbps.

■ Qualcomm launched two modems in February

− Snapdragon X24 using 1.8-2.6GHz 4G bands

− Snapdragon X50 using 8x100MHz in 28GHz 5G bands. This delivered speeds of

~3Gbps using 4x Massive MIMO

Figure 49: Snapdragon X50 modem Figure 50: Snapdragon X40 modem

Source: Credit Suisse research Source: Credit Suisse research

■ Nokia showed three FWA offerings

− LTE

− WiGig

− 5G. This was run on a 60GHz spectrum band and Nokia and was offering speeds

of >1Gbps on short distances.

The solution involves putting an antenna (connected to high-speed backhaul) within a

few hundred meters from the home and then putting a receiving antenna the size of an

A4 sheet of paper back on the building. The latter is again connected to an Ethernet

cable for a regular indoor connection. For 5G Nokia uses beamforming but not Massive

MIMO.

https://www.qualcomm.com/products/snapdragon-x24-lte-modem

https://www.qualcomm.com/products/snapdragon/modems/5g/x50

27 March 2018


Figure 51: Nokia antennae Figure 52: One of Nokia's receiving antennas

Source: Credit Suisse research Source: Credit Suisse research

■ Ericsson showed its FWA solutions. These were working in the 1.8-3.5GHz bands but

could also work in mmWave bands (e.g 28GHz). These are intended to be used as a

mix of 4G and 5G and, according to Ericsson, deliver 1Gbps speeds at up to <300m

but still deliver usable (but not ultra fast) broadband speeds (down to 10Mbps) for up to

2-3km.

■ SKT demonstrated its 5G offering at its stand. Strictly this is not a FWA product (it had

a demo for a bus at the Olympics and a Samsung tablet), but was still an interesting

demonstration of achieving fibre speeds via mobile. This offering was delivering

speeds of 2-3Gbps but also using very high bands (28GHz) and a lot of spectrum

(8x100MHz, ie 800MHz altogether).

Figure 53: SKT test offering >2Gbps speeds with low latency


27 March 2018


FWA already in operation around the world as niche product

There are already a number of FWA services in place using old technologies (mostly

4G/WIMAX), e.g. Orange Poland has nearly 20% of its retail broadband on FWA. In Figure

54 we show a number of FWA services around the world as highlighted by Ericsson at the

MWC.

Figure 54: Selected current FWA services around the world

Operator Country Type Sold data rate Bucket

Entel Chile Indoor CPE 10Mbps 30GB

AT&T USA Outdoor CPE 10Mbps 160GB

Optus Australia Outdoor CPE 47Mbps Unlimited

T-Mobile Austria Indoor CPE 150Mbps Unlimited

Source: Ericsson

In addition there are a many other examples of FWA;

■ In Italy, there is a FWA provider called Linkem (recently received €60 from European

Investment Bank (Telecompaper 24 January 2018). It is moving from Wimax to LTE

TDD technology and plans to expand its coverage of Italian households from 45%

(2015) to at >70% by 2018. Linkem uses LTE and has a national 3.5GHz license

■ In Sweden, Teracom is building a FWA solution offering 100/100Mbps. Our impression

is that this service intends to deliver close to the promised speed (14ms latency).

■ In the US, Verizon is due to launch FWA in 11 US markets and plans to deliver

residential broadband in 3-5 years.

■ In the UK, CBNL has been offering FWA for 12 years at high bandwidth using point-

multpoint for several years. It has several cities working live, e.g. in Poland and in

Texas/Utah in the US.

https://www.rcrwireless.com/20171130/5g/verizon-5g-fixed-wireless-access-2018-tag17

27 March 2018


Drawbacks to FWA

The major issues with FWA are;

■ It only works over fairly short distances. The consensus among the vendors we

spoke to was that on current technologies (including Massive MIMO and beam

forming) FWA would only deliver gigabit speeds (>1Gbps) over 100-300m at best (as

illustrated by some of the smaller circles in the city-scape mock-up by Ericsson)

Figure 55: Model distances for 4G and 5G cells


■ The fact it only works on short distances and requires high-grade backhaul means that

FWA cannot replace fibre entirely (fibre still needs to be rolled out close to the

customer, e.g. to nearby telegraph pole) but it can reduce the cost on the last

connection.

■ It consumes huge amounts of spectrum. The various demos (using mmWave

spectrum ie 30-300GHz) were generally using ~800MHz spectrum. Even though

spectrum is cheap in these bands, it also means it is using 3-5x the total amount of

spectrum available to most mobile operators in Europe.

■ There are technical challenges at these high bandwidth levels. On the plus side

there is little noise in these bands, but the flip side is that it only works on line of sight,

ie, simple environmental factors like leaves and weather can interfere with the signal. It

can also make self-install potentially more challenging. These can be highly

challenging and are the major reasons why past attempts at FWA have not been

successful.

Conclusion on FWA

We believe some of the newer FWA technologies are interesting but would note that there

are still some real drawbacks before it can start to substitute fibre in a meaningful way.

However, at the margin, it might reduce demand for fibre.

27 March 2018


Credit Suisse forecasts for line loss We forecast market line loss to worsen slightly and we expect incumbent line loss (retail

and wholesale) to go from -2% to -3%.

Figure 56: Aggregate market line loss, incumbent total (retail + wholesale) line

loss and incumbent retail line loss (y/y)


-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

Market line loss yoy (Incumbent+ULL+cable) Incumbent retail access lines, y/y change

Total incumbent access lines (retail+wholesale)

27 March 2018


Summary

Ranking operators' outlook

In Figure 57, we rank the various markets risk of incumbent line loss worsening.

We look at four equal weighted factors;

■ How much challenger fibre overbuild is there currently in each market? We use

the data from our 2017 report Building the Gigabit Society - One year later... to show

the percentage of homes passed by challenger fibre in 2017.

■ How weak is the B2B market? We look at the y/y decline in the B2B market, as

discussed in Figure 13.

■ How big is the discount for mobile broadband vs nearest equivalent fixed

broadband? We look at how many euros cheaper our mid-tier mobile bundle is vs a

comparable fixed line offer, ie we compared the cheapest ~50GB mobile broadband

tariff with the average ~50Mbps fixed broadband tariff as in Figure 45.

■ How many people have already moved to mobile-only broadband? This is to

capture that a market like Italy, which is ripe for fixed-mobile substitution, already has

seen a large segment of the population make the move leaving little incremental room

for further substitution. We use the survey data from the EC (Figure 27) – while we are

skeptical about survey data generally we assume that it gives a reasonable sequencing

of which markets have already seen high inroads from mobile broadband and which

markets have not.

Figure 57: Fixed line loss vulnerability ranking

Challenger

fibre

overbuild

2017E

(1=lowest

overbuild)

B2B lines y/y Ranking

(1=lowest

loss)

Mob-only

homes

(1=highest %) MBB vs FBB

price

difference (€)

(1=lowest

discount)

Overall risk

(1=fixed

outlook

vulnerable)

Austria 5.0% 5 N/A 6 13% 3 0 6 12

Belgium 0.5% 1 -5.7% 4 10% 6 -20 12 9

Denmark 35.5% 8 -11.6% 8 2% 11 -19 10 1

France 4.5% 3 -7.8% 5 7% 8 2 5 10

Germany 6.6% 6 N/A 6 1% 12 6 2 7

Italy 13.4% 7 0.1% 3 31% 1 -22 13 8

Netherlands 4.8% 4 -19.4% 10 1% 12 9 1 5

Norway 36.8% 9 N/A 6 5% 10 -19 11 2

Portugal 78.4% 13 9.2% 1 12% 4 -17 9 5

Spain 66.6% 12 6.0% 2 18% 2 2 3 13

Sweden 65.0% 11 -9.5% 7 7% 8 2 3 4

Switzerland 40.4% 10 -15.2% 9 10% 7 -17 8 3

UK 3.3% 2 -8.5% 6 11% 5 -15 7 11

Source: Company data, Credit Suisse research and estimates, NRAs, EC

https://plus.credit-suisse.com/r/V7Zon92AF-Wucx

27 March 2018


Most vulnerable markets

■ In Figure 58, we take the weighting for each of these four factors and sort by their

overall rankings. We compare this to our forecasts for line loss (market/incumbent

total/incumbent retail) both before this analysis (ie our previously published forecasts)

and after (we have changed forecasts for Denmark/Norway/Sweden/France and the

UK). We also show the detailed tables with our forecasts (old and new) for market line

loss, incumbent line loss (retail + wholesale) and incumbent retail line loss in Figure

Figure 59 to Figure 69.

Figure 58: Comparing line loss vulnerability and line loss (summary)

Old Old Old Old Old New New New New New New vs old

Risk rank Country Market line

loss

Inc. line

loss (retail

+ WS)

Inc. retail

line loss

Chge in Inc.

line loss

Market line

loss

Inc. line

loss (retail

+ WS)

Inc. retail

line loss

Inc. retail

line loss

Chge in Inc.

line loss

Chge in Inc.

line loss

2017 2017 2017 2020 2017-20 2017 2017 2017 2020 2017-20

(pp)

(delta; pp)

1 Denmark -0.4% -3.9% -4.7% -4.7% 0.0% -0.4% -3.9% -4.7% -7.7% -3.0% -3.0%

2 Norway -0.6% -6.1% -5.1% -5.1% 0.0% -0.6% -6.1% -5.1% -8.1% -3.0% -3.0%

3 Switzerland -6.0% -9.4% -13.5% -2.0% 11.5% -6.0% -9.4% -13.5% -2.0% 11.5% 0.0%

4 Sweden -1.5% -4.9% -7.6% -7.9% -0.3% -1.5% -4.9% -5.0% -5.9% -0.9% -0.5%

5 Netherlands -1.3% -3.4% -2.5% -4.0% -1.5% -1.3% -3.4% -2.5% -4.0% -1.5% 0.0%

6 Portugal 0.6% -3.8% -2.8% -2.8% 0.0% 0.6% -3.8% -2.8% -2.8% 0.0% 0.0%

7 Germany 0.4% -1.1% -2.8% -3.2% -0.5% 0.4% -1.1% -2.8% -3.2% -0.5% 0.0%

8 Italy 0.8% 0.2% -2.1% -2.2% 0.0% 0.8% 0.2% -2.1% -2.2% 0.0% 0.0%

9 Belgium 0.3% -1.9% -1.9% -3.7% -1.7% 0.3% -1.9% -1.9% -3.7% -1.7% 0.0%

10 France -1.8% -2.2% -2.5% -1.8% 0.7% -1.8% -2.2% -2.5% -1.8% 0.7% 0.0%

11 UK 0.1% -0.8% -2.9% -3.6% -0.6% 0.1% -0.8% -2.9% -6.1% -3.1% -2.5%

12 Austria -2.3% -3.8% -3.9% -2.2% 1.7% -2.3% -3.8% -3.9% -2.2% 1.7% 0.0%

13 Spain 0.1% -5.1% -4.3% -5.0% -0.7% 0.1% -5.1% -4.3% -5.0% -0.7% 0.0%


The markets that are most vulnerable to incumbent line loss are;

■ Denmark - There is high FTTH overbuild (utilities), B2B is challenging, mobile

broadband is cheap vs fixed line and few homes are mobile-only. We have lowered our

forecast for incumbent retail line loss over the next three years by 3pp (from 0% to

-3%) to reflect the structural challenges of the market.

■ Norway – the main issue here is also very cheap mobile broadband relative to fixed

broadband (and very good mobile networks). There is also high FTTH overbuild by

utilities (Altibox) though this is not new and relatively few homes have gone mobile-

only. Again, we have lowered our forecast for incumbent retail line loss over the next

three years by 3pp (from 0% to -3%) to reflect the structural challenges of the market

■ Switzerland – There is high FTTH overbuild (utilities), B2B is challenging and mobile

broadband is cheap. Line loss is already double digit which is exceptionally high as

there is currently very high loss of voice-only subs. Swisscom has 2.7m access lines of

which a quarter (~700k) are voice-only, but these are shrinking rapidly (by ~450k in

2017 ie -40%). Obviously this pace of decline cannot continue long and we therefore

assume that incumbent retail line loss improves to only -2% by 2020. We have not

made any material changes to our Swisscom forecasts.

■ Sweden – the main issue is the highest overbuild of independent fibre companies and

a weak B2B market, coupled with the fact there is little mobile-only. We assume that

Telia's incumbent retail line loss worsens from -5% in 2017 to -7% in 2020 .

27 March 2018


■ UK - We have also lowered our BT line loss forecasts though this is more related to the

fact that we expect worsening market share trends at BT (TalkTalk, VMED), rather than

linked to concerns about mobile substitution or fibre overbuild.

Market line loss summary

Figure 59: Market line loss (old estimates)

Market line loss yoy

(Incumbent+ULL+cable)

2015 2016 2017 2018E 2019E 2020E 17-20 chge (pp)

Austria 1.4% -0.3% -2.3% -0.6% -0.7% -0.7% 1.5%

Belgium -0.3% 0.9% 0.3% -0.9% 0.0% -0.2% -0.5%

Denmark -2.3% -1.3% -0.4% -0.4% -0.4% -0.4% 0.0%

France -0.6% -0.5% -1.8% -1.4% -1.4% -1.4% 0.4%

Germany 1.0% 1.1% 0.4% 0.5% 0.5% 0.5% 0.1%

Italy -1.3% -0.7% 0.8% 1.5% 1.5% 1.5% 0.7%

Netherlands -0.9% -1.1% -1.3% -0.8% -1.0% -1.2% 0.1%

Norway 0.1% 0.4% -0.6% -0.6% -0.6% -0.6% 0.0%

Portugal 1.8% 2.2% 0.6% 0.6% 0.6% 0.6% 0.0%

Spain -0.3% 1.4% 0.1% 0.9% 0.9% 0.9% 0.8%

Sweden 0.9% 0.6% -1.5% -2.9% -2.6% -1.3% 0.2%

Switzerland -1.9% -4.7% -6.0% -7.3% -2.4% -1.0% 5.1%

UK 1.0% 0.5% 0.1% -0.6% -0.6% -0.6% -0.6%

Europe average 0.1% 0.2% -0.4% -0.3% -0.2% -0.1% 0.3%


Figure 60: Market line loss (new estimates)

Market line loss yoy

(Incumbent+ULL+cable)

2015 2016 2017 2018E 2019E 2020E

Austria 1.4% -0.3% -2.3% -0.6% -0.7% -0.7%

Belgium -0.3% 0.9% 0.3% -0.9% 0.0% -0.2%

Denmark -2.3% -1.3% -0.4% -1.4% -2.4% -3.4%

France -0.6% -0.5% -1.8% -1.4% -1.4% -1.4%

Germany 1.0% 1.1% 0.4% 0.5% 0.5% 0.5%

Italy -1.3% -0.7% 0.8% 1.5% 1.5% 1.5%

Netherlands -0.9% -1.1% -1.3% -0.8% -1.0% -1.2%

Norway 0.1% 0.4% -0.6% -1.6% -2.6% -3.6%

Portugal 1.8% 2.2% 0.6% 0.6% 0.6% 0.6%

Spain -0.3% 1.4% 0.1% 0.9% 0.9% 0.9%

Sweden 0.9% 0.6% -1.5% -1.6% -1.7% -1.8%

Switzerland -1.9% -4.7% -6.0% -7.3% -2.4% -1.0%

UK 1.0% 0.5% 0.1% -0.8% -2.8% -3.1%

Europe average 0.1% 0.2% -0.4% -0.3% -0.6% -0.6%


27 March 2018


Incumbent line (retail + wholesale) loss summary

Figure 61: Total incumbent line loss (inc wholesale; old estimates)

Total incumbent access lines

(retail+wholesale)

2015 2016 2017 2018E 2019E 2020E 17-20 chge (pp)

Austria 0.1% -1.6% -3.8% -2.1% -2.2% -2.2% 1.5%

Belgium -3.8% -2.9% -1.9% -3.1% -3.4% -3.7% -1.7%

Denmark -4.5% -3.4% -3.9% -3.9% -3.9% -3.9% 0.0%

France -1.0% -1.1% -2.2% -1.6% -1.5% -1.4% 0.9%

Germany -1.3% -0.5% -1.1% -0.9% -1.0% -1.0% 0.1%

Italy -2.5% -1.6% 0.2% 0.0% -1.5% -2.3% -2.5%

Netherlands -2.1% -3.4% -3.4% -3.0% -3.3% -3.6% -0.3%

Norway -5.6% -5.6% -6.1% -6.1% -6.1% -6.1% 0.0%

Portugal -6.4% -6.7% -3.8% -3.8% -3.8% -3.8% 0.0%

Spain -4.9% -5.3% -5.1% -4.8% -5.9% -5.8% -0.7%

Sweden -5.0% -5.8% -4.9% -6.0% -7.0% -8.1% -3.2%

Switzerland -4.6% -6.9% -9.4% -11.3% -4.3% -2.1% 7.3%

UK 0.5% -0.3% -0.8% -1.4% -1.4% -1.4% -0.6%

Europe average -1.8% -1.8% -2.1% -2.0% -2.1% -2.2% -0.1%


Figure 62: Total incumbent line loss (inc wholesale; new estimates)

Total incumbent access lines

(retail+wholesale)

2015 2016 2017 2018E 2019E 2020E

Austria 0.1% -1.6% -3.8% -2.1% -2.2% -2.2%

Belgium -3.8% -2.9% -1.9% -3.1% -3.4% -3.7%

Denmark -4.5% -3.4% -3.9% -4.9% -5.9% -6.9%

France -1.0% -1.1% -2.2% -1.7% -1.8% -1.9%

Germany -1.3% -0.5% -1.1% -0.9% -1.0% -1.0%

Italy -2.5% -1.6% 0.2% 0.0% -1.5% -2.3%

Netherlands -2.1% -3.4% -3.4% -3.0% -3.3% -3.6%

Norway -5.6% -5.6% -6.1% -7.1% -8.1% -9.1%

Portugal -6.4% -6.7% -3.8% -3.8% -3.8% -3.8%

Spain -4.9% -5.3% -5.1% -4.8% -5.9% -5.8%

Sweden -5.0% -5.8% -4.9% -5.3% -5.5% -6.0%

Switzerland -4.6% -6.9% -9.4% -11.3% -4.3% -2.1%

UK 0.5% -0.3% -0.8% -1.7% -3.7% -3.9%

Europe average -1.8% -1.8% -2.1% -2.0% -2.6% -2.8%


27 March 2018


Incumbent retail line loss

Figure 63: Incumbent retail line loss (old estimates)

Incumbent retail access lines,

y/y change

2015 2016 2017 2018E 2019E 2020E 17-20 chge (pp)

Austria 0.2% -1.5% -3.9% -2.1% -2.2% -2.2% 1.7%

Belgium -2.6% -2.9% -1.9% -3.1% -3.4% -3.7% -1.7%

Denmark -6.3% -4.5% -4.7% -4.7% -4.7% -4.7% 0.0%

France -2.8% -2.1% -2.5% -2.3% -2.1% -1.8% 0.7%

Germany -2.2% -2.2% -2.8% -2.7% -3.0% -3.2% -0.5%

Italy -5.9% -3.9% -2.1% -1.5% -2.3% -2.2% 0.0%

Netherlands -1.9% -3.5% -2.5% -3.4% -3.7% -4.0% -1.5%

Norway -5.3% -4.2% -5.1% -5.1% -5.1% -5.1% 0.0%

Portugal -5.0% -4.8% -2.8% -2.8% -2.8% -2.8% 0.0%

Spain -4.2% -2.9% -4.3% -4.0% -5.1% -5.0% -0.7%

Sweden -4.6% -5.0% -7.6% -6.2% -7.3% -7.9% -0.3%

Switzerland -5.4% -10.0% -13.5% -11.5% -4.2% -2.0% 11.5%

UK -2.1% -2.4% -2.9% -3.6% -3.6% -3.6% -0.6%

Europe average -3.3% -3.0% -3.2% -3.1% -3.2% -3.1% 0.1%


Figure 64: Incumbent retail line loss (new estimates)

Incumbent retail access lines,

y/y change

2015 2016 2017 2018E 2019E 2020E

Austria 0.2% -1.5% -3.9% -2.1% -2.2% -2.2%

Belgium -2.6% -2.9% -1.9% -3.1% -3.4% -3.7%

Denmark -6.3% -4.5% -4.7% -5.7% -6.7% -7.7%

France -2.8% -2.1% -2.5% -2.3% -2.1% -1.8%

Germany -2.2% -2.2% -2.8% -2.7% -3.0% -3.2%

Italy -5.9% -3.9% -2.1% -1.5% -2.3% -2.2%

Netherlands -1.9% -3.5% -2.5% -3.4% -3.7% -4.0%

Norway -5.3% -4.2% -5.1% -6.1% -7.1% -8.1%

Portugal -5.0% -4.8% -2.8% -2.8% -2.8% -2.8%

Spain -4.2% -2.9% -4.3% -4.0% -5.1% -5.0%

Sweden -4.6% -5.0% -5.0% -5.8% -5.9% -5.9%

Switzerland -5.4% -10.0% -13.5% -11.5% -4.2% -2.0%

UK -2.1% -2.4% -2.9% -3.8% -5.8% -6.1%

Europe average -3.3% -3.0% -3.2% -3.2% -3.5% -3.5%


27 March 2018


Line loss forecasts by market

Figure 65: Austria market line loss, incumbent total

(retail + wholesale) line loss and incumbent retail

line loss (y/y)

Figure 66: Belgium market line loss, incumbent total


line loss (y/y)

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 67: Denmark market line loss, incumbent

total (retail + wholesale) line loss and incumbent

retail line loss (y/y)

Figure 68: France market line loss, incumbent total


line loss (y/y)


-5%

-4%

-3%

-2%

-1%

0%

1%

2%

AUT mkt TA retail access TA total access

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

Belgium mkt PROX retail access PROX total access

-9%

-8%

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

Denmark mkt TDC retail access TDC total access

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

France mkt ORA retail access ORA total access

27 March 2018


Figure 69: Germany market line loss, incumbent



Figure 70: Italy market line loss, incumbent total


line loss (y/y)


Figure 71: Netherlands market line loss, incumbent



Figure 72: Norway market line loss, incumbent total


line loss (y/y)


-5%

-4%

-3%

-2%

-1%

0%

1%

2%

GER mkt DT retail access DT total access

-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

ITA mkt TI retail access TI total access

-6%

-5%

-4%

-3%

-2%

-1%

0%

Netherlands mkt KPN retail access KPN total access

-10%

-8%

-6%

-4%

-2%

0%

2%

Norway mkt TNOR retail access TNOR total access

27 March 2018


Figure 73: Spain market line loss, incumbent total


line loss (y/y)

Figure 74: Sweden market line loss, incumbent total


line loss (y/y)


Figure 75: Switzerland market line loss, incumbent



Figure 76: UK market line loss, incumbent total


line loss (y/y)


-7%

-6%

-5%

-4%

-3%

-2%

-1%

0%

1%

2%

SPA mkt TEF retail access TEF total access

-10%

-8%

-6%

-4%

-2%

0%

2%

4%

Sweden mkt TELIA retail access TELIA total access

-16%

-14%

-12%

-10%

-8%

-6%

-4%

-2%

0%

Switzerland mkt SCOM retail access SCOM total access

-10%

-8%

-6%

-4%

-2%

0%

2%

UK mkt BT retail access BT total access

27 March 2018


Appendix: Line loss by market

Figure 77: Austria - Incumbent vs Market Line Loss

(yoy) Figure 78: Incumbent wireline revenues (yoy)

Source: Company data, Credit Suisse research Source: Company data, Credit Suisse research

Figure 79: Belgium – Incumbent vs Market Line

Loss (yoy) Figure 80: Incumbent wireline revenues (yoy)


-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

TKA retail TKA total AUT

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

TA

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

PROX retail PROX total BEL

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

PROX

27 March 2018


Figure 81: Denmark- Incumbent vs Market Line Loss



Figure 83: France- Incumbent vs Market Line Loss



-10.0%

-9.0%

-8.0%

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

TDC retail TDC total DEN

-9.0%

-8.0%

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

TDC

-8.0%

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

ORA retail ORA total FRA

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

ORA

27 March 2018


Figure 85: Germany- Incumbent vs Market Line Loss



Figure 87: Neths- Incumbent vs Market Line Loss



-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

DT retail DT total GER

-9.0%

-8.0%

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

DT

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

KPN retail KPN total NETH

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

KPN

27 March 2018


Figure 89: Italy-Incumbent vs Market Line Loss



Figure 91: Norway- Incumbent vs Market Line Loss



-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

TI retail TI total ITA

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

TI

-8.0%

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

TNOR retail TNOR total NOR

-8.0%

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

TNOR

27 March 2018


Figure 93: Portugal- Incumbent vs Market Line Loss



Figure 95: Spain- Incumbent vs Market Line Loss



-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

PT retail PT total POR

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

PT

-8.0%

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

2.0%

3.0%

TEF retail TEF total SPA

-14.0%

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

8.0%

TEF

27 March 2018


Figure 97: Sweden- Incumbent vs Market Line Loss



Figure 99: Swiss- Incumbent vs Market Line Loss



-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

Telia retail Telia total SWE

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

TELIA

-16.0%

-14.0%

-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

SCOM retail SCOM total SWI

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

1.0%

SCOM

27 March 2018


Figure 101: UK- Incumbent vs Market Line Loss



-12.0%

-10.0%

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

BT retail BT total UK

-8.0%

-6.0%

-4.0%

-2.0%

0.0%

2.0%

4.0%

6.0%

BT

27 March 2018


Europe/United Kingdom Integrated Telecommunication Services

BT Group (BT.L) Rating NEUTRAL Price (23 Mar 18, p) 219.25 Target price (p) (from 280.00) 260.00 Market Cap (£ m) 21,753.8 Target price is for 12 months.

Research Analysts

Paul Sidney

44 20 7888 6015

[email protected]

Justin Funnell

44 20 7888 0268

[email protected]

Reduce target price to 260p

■ Event: We reiterate our Neutral rating on BT Group but reduce our price

target to 260p (from 280p) after updating forecasts post Q3FYMar18 results

and incorporating higher long-term line loss assumptions. We remain broadly

in line with consensus EBITDA for FYMar18-20E.

■ Retail line loss forecasts increased from FYMar20E. We increase our line

loss forecasts to more accurately reflect (1) our Fixed-Mobile substitution

analysis, particularly the threat to DSL from larger mobile bundles; (2) the

potential impact from a worsening UK economy; offset by the positive impact

of (3) Fixed-Mobile converged offers that we expect BT Retail (following the

merger of EE and Consumer) to launch in May. We now expect BT Retail line

loss of 1.74m (defined as lines sold through BT lines of business) compared

to 1.55m previously over FYMar18-20E.

■ Earnings update: We keep our BT Group Revenue, EBITDA and EPS

forecasts for FYMar18-20E broadly unchanged. Our FYMar18-20E BT Group

FCF forecast fall 2-6%, however, driven by slightly higher CAPEX forecasts

following Openreach's recent FTTP (fibre-to-the-premise) announcement. We

now forecast CAPEX of c. £3.5bn per annum over the next few years having

previously forecast CAPEX of around £3.4bn previously. We continue to

include a negative cash tax impact from IFRS15 of £200m and £100m in

FYMar19 and FYMar20, respectively. We have reduced our DPS forecasts

very slightly, now assuming 2% annual DPS over the next few years vs. 3%

previously.

■ Catalysts & Risks: BT Group will report FYMar18 results on 10 May.

Actuarial pension valuation due calendar H118. Main risk to BT is a

deteriorating UK economy.

■ Valuation: BT trades on an Adjusted FYMar19E FCF yield of 8.6% vs. the

sector on 7.1% (calendar 2018E FCF yield). Share price performance

The price relative chart measures performance against the

FTSE ALL SHARE INDEX which closed at 3830.2 on

23/03/18

On 23/03/18 the spot exchange rate was £.87/Eu 1.-

Eu.81/US$1

Performance 1M 3M 12M Absolute (%) -10.2 -20.0 -32.7 Relative (%) -6.4 -12.1 -28.8

Financial and valuation metrics

Year 3/17A 3/18E 3/19E 3/20E Revenue (£ m) 24,081.9 23,836.5 23,699.7 23,433.4 EBITDA (£ m) 7,645.4 7,502.1 7,581.6 7,564.5 Pre-tax profit adjusted (£ m) 2,354.43 2,547.04 2,971.23 3,240.03 CS EPS (adj.) (p) 28.87 27.64 29.11 28.85 Prev. EPS (p) - 27.47 29.01 28.68 ROIC (%) 15.6 15.0 15.3 15.0 P/E (adj.) (x) 7.6 7.9 7.5 7.6 P/E rel. (%) 145.7 164.7 166.6 177.2 EV/EBITDA (x) 4.2 4.4 4.4 4.4

Dividend (03/18E, £) 15.75 Net debt/equity (03/18E,%) 133.1 Dividend yield (03/18E,%) 7.2 Net debt (03/18E, £ m) 11,132.9 BV/share (03/18E, £) 0.8 IC (03/18E, £ m) 19,498.6 Free float (%) 99.9 EV/IC (03/18E, (x) 1.7 Source: Company data, Thomson Reuters, Credit Suisse estimates

27 March 2018


BT Group (BT.L)

Price (23 Mar 2018): 219.25p; Rating: NEUTRAL; Target Price: (from 280.00p) 260.00; Analyst: Paul Sidney

Income statement (£ m) 3/17A 3/18E 3/19E 3/20E

Revenue 24,082 23,836 23,700 23,433 EBITDA 7,645 7,502 7,582 7,565 Depr. & amort. (3,510) (3,510) (3,510) (3,510) EBIT 4,135 3,992 4,072 4,055 Net interest exp. (594) (557) (499) (514) Associates (9) (1) (1) (1) PBT 2,354 2,547 2,971 3,240 Income taxes (446) (509) (559) (613) Profit after tax 1,908 2,038 2,413 2,627 Minorities -0 -0 -0 -0 Preferred dividends - - - - Associates & other 961 710 480 240 Net profit 2,869 2,747 2,893 2,867 Other NPAT adjustments (961) (710) (480) (240) Reported net income 1,908 2,038 2,413 2,627

Cash flow (£ m) 3/17A 3/18E 3/19E 3/20E

EBIT 4,135 3,992 4,072 4,055 Net interest (594) (557) (499) (514) Cash taxes paid (661) (509) (759) (1,052) Change in working capital (461) (300) (100) (100) Other cash and non-cash items 3,899 3,562 3,704 3,819 Cash flow from operations 6,318 6,188 6,418 6,208 CAPEX (3,119) (3,470) (3,496) (3,503) Free cashflow to the firm 3,199 2,718 2,922 2,704 Acquisitions - - - - Divestments 0 0 0 0 Other investment/(outflows) (527) 150 (384) (499) Cash flow from investments (3,646) (3,320) (3,880) (4,002) Net share issue/(repurchase) (206) (200) 0 0 Dividends paid (1,435) (1,528) (1,553) (1,606) Issuance (retirement) of debt - - - - Cashflow from financing (2,263) (2,285) (2,053) (2,120) Changes in net cash/debt 189 (468) (269) (488) Net debt at start 10,854 10,665 11,133 11,402 Change in net debt (189) 468 269 488 Net debt at end 10,665 11,133 11,402 11,890

Balance sheet (£ m) 3/17A 3/18E 3/19E 3/20E

Assets Total current assets 6,875 6,914 6,954 6,993 Total assets 42,372 42,212 42,237 42,269 Liabilities Total current liabilities 10,925 10,925 10,925 10,925 Total liabilities 34,037 33,847 33,156 32,684 Total equity and liabilities 42,372 42,213 42,237 42,269

Per share 3/17A 3/18E 3/19E 3/20E

No. of shares (wtd avg.) (mn) 9,938 9,938 9,938 9,938 CS EPS (adj.) (p) 28.87 27.64 29.11 28.85 Prev. EPS (p) - 27.47 29.01 28.68 Dividend (p) 15.45 15.75 16.07 16.39 Free cash flow per share (p) 32.19 27.35 29.40 27.21

Key ratios and valuation 3/17A 3/18E 3/19E 3/20E

Growth/Margin (%) Sales growth (%) 27.4 (1.0) (0.6) (1.1) EBIT growth (%) 4.7 (3.5) 2.0 (0.4) Net income growth (%) 0.2 (4.3) 5.3 (0.9) EPS growth (%) (13.1) (4.3) 5.3 (0.9) EBITDA margin (%) 31.7 31.5 32.0 32.3 EBIT margin (%) 17.2 16.7 17.2 17.3 Pretax profit margin (%) 9.8 10.7 12.5 13.8 Net income margin (%) 11.9 11.5 12.2 12.2

Valuation 3/17A 3/18E 3/19E 3/20E

EV/Sales (x) 1.3 1.4 1.4 1.4 EV/EBITDA (x) 4.2 4.4 4.4 4.4 EV/EBIT (x) 7.8 8.2 8.1 8.3 Dividend yield (%) 7.04 7.19 7.33 7.48 P/E (x) 7.6 7.9 7.5 7.6

Credit ratios (%) 3/17A 3/18E 3/19E 3/20E

Net debt/equity (%) 128.0 133.1 125.6 124.0 Net debt to EBITDA (x) 1.4 1.5 1.5 1.6 Interest coverage ratio (x) 7.0 7.2 8.2 7.9

Company Background

BT Group plc (BT Group) is a communications services company. The Company operates in more than 170 countries worldwide. The Company’s principal activities include the provision of fixed lines, broadband, mobile and television products and services

Blue/Grey Sky Scenario

Our Blue Sky Scenario (p) 330.00

Our Blue Sky scenario assumes BT is not adversely impacted by a weakening UK economy over the next 3 years, does not pay any content inflation & can grow its EBITDA would grow over Mar18-22E boosted by further modest retail price increases. At our blue sky valuation BT Group would trade on an adjusted sector 7x calendar 2018E EV/EBITDA consistent with EBITDA growth.

Our Grey Sky Scenario (p) (from 230.00) 210.00

Our Grey Sky scenario assumes BT is substantially impacted negatively by a deep UK economic recession. Under this scenario we believe underlying BT Group EBITDA would likely decline over Mar17-20E with a substantial slowdown in UK wireline market growth and no further retail price increases. At our grey sky valuation BT would trade on a Sector calendar 2019E adjusted EV/EBITDA 6.0x but with around 10% lower EBITDA.

Share price performance

The price relative chart measures performance against the FTSE ALL SHARE

INDEX which closed at 3830.2 on 23/03/18

On 23/03/18 the spot exchange rate was £.87/Eu 1.- Eu.81/US$1

Source: FTI, Company data, Thomson Reuters, Credit Suisse Securities (EUROPE) LTD. Estimates

27 March 2018


Changes to BT Group forecasts In Figure 103 we set out a summary of changes to our BT Group financial forecasts post

the recent Q3Mar18 results (see link to BT Group Q3Mar18 results comment) and we set

out more detailed changes to both our divisional forecasts and cash flow items in the

following table.

Figure 103: BT Group: Changes to group forecasts

GBP in millions, unless otherwise stated

YE March 2018E 2018E 2019E 2019E 2020E 2020E

Summary New Old Change New Old Change New Old Change

Revenue 23,836 23,928 -0.4% 23,700 23,795 -0.4% 23,433 23,583 -0.6%

EBITDA 7,502 7,523 -0.3% 7,582 7,614 -0.4% 7,565 7,583 -0.2%

EBIT 3,992 3,973 0.5% 4,072 4,064 0.2% 4,055 4,033 0.5%

Adjusted net income 2,747 2,730 0.6% 2,893 2,883 0.3% 2,867 2,850 0.6%

Adjusted EPS (GBp) 27.6 27.5 0.6% 29.1 29.0 0.3% 28.9 28.7 0.6%

DPS (GBp) 15.8 15.9 -1.0% 16.1 16.4 -1.9% 16.4 16.9 -2.9%

CAPEX (3,470) (3,405) 1.9% (3,496) (3,395) 3.0% (3,503) (3,353) 4.5%

Normalised FCF 2,666 2,752 -3.2% 2,728 2,858 -4.5% 2,396 2,569 -6.7%

Normalised FCF (ex-IFRS 15

adjustment) 2,666 2,752 -3.2% 2,928 3,058 -4.3% 2,496 2,669 -6.5%


We keep our BT Group Revenue, EBITDA and EPS forecasts for FYMar18-20E broadly

unchanged. Our FYMar18-20E BT Group FCF forecast fall 2-6%, however, driven by

slightly higher CAPEX forecasts following Openreach's recent FTTP announcement. We

now forecast CAPEX of c. £3.5bn per annum over the next few years having previously

forecast CAPEX of around £3.4bn previously. We continue to include a negative cash tax

impact from IFRS15 of £200m and £100m in FYMar19 and FYMar20, respectively. We

have reduced our DPS forecasts very slightly, now assuming 2% annual dividend growth

over the next few years vs. 3% growth previously.

We discuss our divisional changes in more detail below.

■ We maintain our FYMar18-20E Consumer revenues stable with the positive impact of

a price increase (implemented from 7 January 2018) and a higher mix of fibre

customers in the broadband mix (Figure 104) offset by increased line loss forecasts

(Figure 106);

Figure 104: BT Group: UK & BT broadband changes to forecasts

000s, unless otherwise stated


YE March 2018E 2018E 2019E 2019E 2020E 2020E

KPIs New Old Change New Old Change New Old Change

UK Broadband & BT broadband

UK Broadband penetration of households 87.7% 87.6% 0.1% 88.0% 87.7% 0.3% 88.1% 87.4% 0.8%

UK Broadband base 25,886 25,854 0.1% 26,332 26,256 0.3% 26,745 26,533 0.8%

UK Broadband net adds 499 467 6.9% 447 402 11.1% 413 277 48.8%

UK Broadband churn 1.27% 1.26% 0.5% 1.25% 1.26% -0.8% 1.25% 1.26% -1.4%

BT Retail broadband base 9,376 9,370 0.1% 9,510 9,491 0.2% 9,634 9,574 0.6%

BT Broadband net adds 100 94 6.5% 134 121 11.1% 124 83 48.8%

BT Retail broadband market share 36.2% 36.2%

BT Churn & Fibre

BT DSL churn 1.50% 1.50% 0.0% 1.50% 1.50% 0.0% 1.50% 1.50% 0.0%

BT Fibre base 5,639 5,555 1.5% 6,176 5,865 5.3% 6,720 6,289 6.8%

BT Fibre net adds 704 620 13.7% 536 311 72.6% 545 424 28.4%

BT Fibre churn 1.10% 1.1% 0.0% 1.10% 1.1% 0.0% 1.10% 1.10% 0.0%

https://plus.credit-suisse.com/r/V7bJcP2AF-VBby

27 March 2018


We raise our FYMar18-20E Consumer EBITDA by 1-3% to reflect the January 2018

Consumer price increase and lower English Premier League (EPL) content costs

following the recent EPL auction, which is offset by higher retail line loss forecasts for

FYMar19-20E as noted above. We maintain our UK market and BT Retail broadband

subscriber assumptions broadly stable;

■ In July 2017, BT announced it was to merge its Consumer and EE divisions which we

continue to view as a positive strategic move, preparing BT for the launch of more

focused Fixed-Mobile converged consumer offers, likely announced in May 2018. In

our new forecasts we do not assume any further BT Consumer price increases beyond

the January 2018 increase;

■ For Business & Public Sector we cut our FYMar18-20E revenue forecasts slightly by

1% but maintain our EBITDA forecasts unchanged reflecting the recent Q3 results and

an expected sequential improvement in BPS year-on-year growth in Q4Mar18 (we

forecast a Q4Mar18 y/y BPS EBITDA decline of 4% vs. an 8% decline in Q3Mar18);

■ Our Openreach revenue for FYMar18 rises ~1%, boosted by lower Openreach line

loss for FYMar18. From FYMar19, however, our Openreach line loss forecasts rise

although this is more than offset by a lower 40Mbps fibre wholesale rate as recently

announced in Ofcom's latest WLA review. We raise Openreach EBITDA c.1% over

FYMar18-20E reflecting the changes to our revenue forecasts;

■ We cut our Global Services revenue forecasts by 3-5% over FYMar18-20E reflecting

the Q3Mar18 results and the continuing restructuring of Global Services aimed at

shifting focus away from regional customers and reducing the overall cost base. Our

FYMar18 Global Services EBITDA rises 8% but falls 6-7% in FYMar19-20E;

■ For Wholesale our revenue and EBITDA forecasts remain largely unchanged;

■ We continue to forecast a pension deficit of £10bn with top-up payments from the year

to March 2019 rising to c. £1bn per year from c.£700m in FYMar18.

CAPEX forecasts rise to £3.5bn over FYMar19-22E

Openreach recently announced it was extending its fibre-to-the-premise (FTTP) build to

3m premises. (BT Group—UK FTTP build extended to 3m—A step in the right direction,

dated 1 February 2018). Openreach continues to target 10m premises passed with fibre

by the mid-2020s if the conditions exist for it to make a suitable return on the investment.

Openreach set out last year that a 10m FTTP build could cost it between £3-6bn to the

customer premise, plus a further £175-200/premise to actively connect each premise.

Any plans to go ahead with the FTTP build would, everything else being equal, raise BT

Group's CAPEX levels (compared to the £3.46bn reported the year to March 2017) but

there are several other important drivers for BT Group CAPEX over the next few years

including:

■ Openreach is currently planning to also build out several million Gfast premises by

2020 as part of its committed commercial plan;

■ Openreach is close to completing its commercial FTTC build across 95% of the UK

(currently ~90% coverage) so BT Openreach FTTC CAPEX spend would, everything

else being equal, fall materially once the commercial FTTC rollout is complete;

■ In December, the UK government turned down BT's offer to connect the "last 5%" of

the UK not covered by BT's 95% FTTC build. BT estimated this would have cost £450-

600m over the next four years but, with the UK government still to decide on an

alternative plan, we exclude any additional CAPEX to connect the "last 5%"; and

https://plus.credit-suisse.com/r/V7bISl2AF-VBby

27 March 2018


■ EE one-off integration costs are estimated by us to be c.£200m in FYMar17 and

c.£100m in FYMar19. We don't expect any further spend on EE integration from

FYMar20E.

Figure 105: BT Group CAPEX y/y reconciliation by technology


CAPEX driver reconciliation Mar-16 Pf Mar-17 Mar-18E Mar-19E Mar-20E Mar-21E Mar-22E

BT Group CAPEX 3,141 3,454 3,470 3,496 3,503 3,509 3,520

Less...EE CAPEX (inc. ESN contract) (506) (616) (700) (700) (700) (700) (700)

Less…EE integration CAPEX (200) (100)

Less...Global Services CAPEX reported (383) (361) (337) (245) (189) (182) (176)

BT UK wireline CAPEX 2,252 2,277 2,334 2,551 2,615 2,627 2,644

Change y/y absolute 25 56 216 63 5 3

CAPEX drivers (absolute) Mar-17 Mar-18E Mar-19E Mar-20E Mar-21E Mar-22E

FttC CAPEX (300) (60) (152) (68) 0 0

Gfast CAPEX 50 25 163 53 0 0

FTTH CAPEX (homes passed) 23 28 161 74 102 0

FTTH CAPEX (homes connected) 7 3 25 11 16 0

Wholesale & Ventures 17 (23) (7) (5) (6) (5)

Other 229 85 27 0 (99) 22

Change in BT Wireline CAPEX y/y 25 57 217 64 13 17


In summary we increase our UK wireline CAPEX from an estimated £2.28bn in FYMar17

to around £2.6bn pa over FYMar19-22. However, for BT Group, a reduction in FTTC

CAPEX, falling Global Services CAPEX and no further EE integration CAPEX from

FYMar19 means our BT Group CAPEX only rises modestly from £3.46bn in FYMar17 to

around £3.5bn pa over FYMar19-22. In Figure 105, we set out a reconciliation of year-on-

year CAPEX movements for BT's UK wireline business (by stripping out EE, EE

integration costs and Global Services CAPEX).

Retail Line loss forecasts raised over FYMar18-20E

In Figure 106 we set out our updated line loss assumptions for the UK market, Openreach

and BT Retail (Consumer + Corporate line loss). We increase our line loss forecasts to

more accurately reflect (1) our Fixed-Mobile substitution analysis in this research,

particularly the threat to DSL from larger mobile bundles; (2) the potential impact from a

worsening UK economy; offset by the positive impact of (3) Fixed-Mobile converged offers

that we expect BT Retail (following the merger of EE and Consumer) to launch in May. We

now expect BT Retail line loss of 1.74m (defined as lines sold through BT lines of

business) compared to 1.55m previously over FYMar18-20E.

Figure 106: BT Group: Credit Suisse UK market & BT line loss assumptions

000s


YE March 2018E 2018E 2019E 2019E 2020E 2020E

KPIs New Old Change New Old Change New Old Change

UK Market & BT lines

UK premises (CS estimate) 29,616 29,616 0.0% 30,016 30,016 0.0% 30,416 30,416 0.0%

UK market lines (Openreach + VMED) 29,769 29,933 -0.5% 29,323 29,384 -0.2% 28,590 28,818 -0.8%

YoY change in market lines -0.3% -0.7% -1.5% -2.5%

Openreach reported line loss (216) (480) -54.9% (652) (638) 2.2% (990) (622) 59.1%

Openreach line loss as % lines -0.9% -1.8% -2.6% -2.3% -4.1% -2.3%

BT Retail reported line loss* (451) (496) -9.0% (554) (550) 0.7% (801) (500) 60.3%

BT Retail line loss as % lines -3.7% -4.1% -4.8% -4.7% -7.3% -4.5%

27 March 2018


Credit Suisse vs. consensus

In Figure 107, we set out our published forecasts vs. BT Group compiled pre-Q4Mar18

consensus. For BT Group EBITDA we are in line with consensus for FYMar18E (£7.50bn),

1% ahead for FYMar19E (£7.58bn) and 1% below for FYMar20E (£7.57bn). Comparing

BT Group FCF with consensus we are 4% ahead for FYMar19E but 4% below for

FYMar20E.

Figure 107: BT Group: CS vs. consensus (sourced from BT Group pre-Q3Mar18 results)


March March March March March March

2018E 2018E Diff 2019E 2019E Diff 2020E 2020E Diff

CS Consensus (%) CS Consensus (%) CS Consensus (%)

Revenue 23,836 23,825 0.0% 23,700 23,730 -0.1% 23,433 23,854 -1.8%

EBITDA - pre specifics 7,502 7,496 0.1% 7,582 7,515 0.9% 7,565 7,601 -0.5%

EBIT - pre specifics 3,992 3,976 0.4% 4,072 3,979 2.3% 4,055 4,085 -0.7%

Adjusted EPS (GBp) 27.6 27.6 0.2% 29.1 28.0 4.0% 28.9 28.9 -0.2%

DPS (GBp) 15.8 15.5 1.6% 16.1 15.7 2.5% 16.4 15.9 3.0%

CAPEX 3,470 3,433 1.1% 3,496 3,541 -1.3% 3,503 3,568 -1.8%

Normalised FCF 2,666 2,772 -3.8% 2,728 2,648 3.0% 2,396 2,488 -3.7%

Source: BT pre-Q4Mar18 compiled consensus, Credit Suisse estimates

27 March 2018


Europe/France Integrated Telecommunication Services

Orange (ORAN.PA) Rating OUTPERFORM Price (23 Mar 18, €) 13.56 Target price (€) 16.50 Market Cap (€ m) 36,057.1 Target price is for 12 months.

Research Analysts


44 20 7883 0834

[email protected]

Higher ULL loss

■ Event: We make minor cuts to our forecasts on the back of lower

wholesale revenues (more pressure on competitor ULL). We cut 2020E

EBITDA 0.5%.

■ Investment overview: We expect Orange's retail trends to continue to be

driven by its investments in fibre which we see improving its market position.

However, line loss in France has been worsening and we see competitor ULL

line losses accelerating. France is not particularly at risk from fixed mobile

substitution but with some unlimited offers (Iliad and, at a high price points, at

times from SFR) in mobile plus Bouygues offering a 4G FMS product for rural

areas, it is not immune either. As a result, we have lowered the rate of ULL

subs loss (but not Orange retail subs trends) and lowered our wholesale

revenue forecast for Orange slightly.

■ Catalysts and Risks: We expect continued solid results in coming years

(CSe 2% ahead of 2019E consensus EBITDA) with Q1 18 results due 26

April. The main near-term downside risk is the recent pick-up in promotions

leading to weaker domestic trends.

■ Valuation: 2019E free cash flow yield 5.9% (vs the sector on 6.9%).



CAC 40 INDEX which closed at 5095.2 on 23/03/18

On 23/03/18 the spot exchange rate was €1/Eu 1.-

Eu.81/US$1

Performance 1M 3M 12M Absolute (%) -3.3 -7.4 -7.5 Relative (%) 0.6 -2.7 -9.3


Year 12/17A 12/18E 12/19E 12/20E Revenue (€ m) 41,096.0 41,492.2 41,822.1 42,161.3 EBITDA (€ m) 12,879.0 13,253.2 13,588.6 13,876.3 Adjusted net income (€ m) 3,409.00 3,560.33 3,781.99 3,955.85 CS EPS (adj.) (€) 1.28 1.33 1.41 1.47 Prev. EPS (€) - - 1.42 1.50 ROIC (%) 7.4 7.5 7.7 8.0 P/E (adj.) (x) 10.6 10.2 9.6 9.2 P/E rel. (%) 70.8 73.6 75.9 79.2 EV/EBITDA (x) 5.1 4.9 4.8 4.6

Dividend (12/18E, €) 0.70 Net debt/equity (12/18E,%) 87.4 Dividend yield (12/18E,%) 5.2 Net debt (12/18E, € m) 29,490.9 BV/share (12/18E, €) 11.7 IC (12/18E, € m) 63,249.2 Free float (%) 73.0 EV/IC (12/18E, (x) 1.0 Source: Company data, Thomson Reuters, Credit Suisse estimates

27 March 2018


Orange (ORAN.PA)

Price (23 Mar 2018): €13.555; Rating: OUTPERFORM; Target Price: 16.50; Analyst: Jakob Bluestone

Income statement (€ m) 12/17A 12/18E 12/19E 12/20E

Revenue 41,096 41,492 41,822 42,161 EBITDA 12,879 13,253 13,589 13,876 Depr. & amort. (6,846) (6,946) (7,046) (7,146) EBIT 6,039 6,314 6,551 6,739 Net interest exp. (1,305) (1,218) (1,168) (1,118) Associates 6 7 8 9 PBT 4,734 5,096 5,383 5,621 Income taxes (1,088) (1,286) (1,346) (1,405) Profit after tax 3,646 3,810 4,037 4,216 Minorities (237) (250) (255) (260) Preferred dividends - - - - Associates & other 0 0 0 0 Net profit 3,409 3,560 3,782 3,956 Other NPAT adjustments (1,523) (875) (850) (825) Reported net income 1,886 2,685 2,932 3,131

Cash flow (€ m) 12/17A 12/18E 12/19E 12/20E

EBIT 6,039 6,314 6,551 6,739 Net interest (1,541) (1,450) (1,300) (1,150) Cash taxes paid (583) (1,050) (1,100) (1,100) Change in working capital 265 0 0 0 Other cash and non-cash items 5,994 5,970 6,159 6,406 Cash flow from operations 10,174 9,784 10,310 10,895 CAPEX (7,527) (7,400) (7,200) (7,000) Free cashflow to the firm 3,024 2,384 3,110 3,895 Acquisitions - - - - Divestments - - - - Other investment/(outflows) (7,941) (7,900) (7,700) (7,500) Cash flow from investments (15,468) (15,300) (14,900) (14,500) Net share issue/(repurchase) 34 0 0 0 Dividends paid (1,729) (1,729) (1,869) (1,970) Issuance (retirement) of debt - - - - Cashflow from financing (2,738) (1,729) (1,869) (1,970) Changes in net cash/debt 601 155 741 1,425 Net debt at start 30,247 29,646 29,491 28,750 Change in net debt (601) (155) (741) (1,425) Net debt at end 29,646 29,491 28,750 27,325

Balance sheet (€ m) 12/17A 12/18E 12/19E 12/20E


Per share 12/17A 12/18E 12/19E 12/20E

No. of shares (wtd avg.) (mn) 2,660 2,670 2,680 2,690 CS EPS (adj.) (€) 1.28 1.33 1.41 1.47 Prev. EPS (€) - - 1.42 1.50 Dividend (€) 0.65 0.70 0.74 0.77 Free cash flow per share (€) 1.14 0.89 1.16 1.45


Growth/Margin (%) Sales growth (%) 0.4 1.0 0.8 0.8 EBIT growth (%) 1.9 4.6 3.7 2.9 Net income growth (%) 34.6 4.4 6.2 4.6 EPS growth (%) 34.6 4.0 5.8 4.2 EBITDA margin (%) 31.3 31.9 32.5 32.9 EBIT margin (%) 14.7 15.2 15.7 16.0 Pretax profit margin (%) 11.5 12.3 12.9 13.3 Net income margin (%) 8.3 8.6 9.0 9.4

Valuation 12/17A 12/18E 12/19E 12/20E




Company Background

Orange is a France-based telecom operator. It offers services covering fixed and mobile communications, data transmission, the Internet and multimedia, and other added-value services for individuals, businesses and other telecom operators.


Our Blue Sky Scenario (€) 18.00

We assume a i) 5% uplift to fixed revenues from taking more share in fixed; ii) a 5% uplift to French mobile revenues due to network superiority driving better market share. We apply an 80% gross margin and 35% tax rate to the incremental FCF. We also assume a 6% blue-sky FCFY

Our Grey Sky Scenario (€) 11.00

We assume a i) 5% hit to fixed wholesale revenues from faster roll-out of co-investment and co-financing by peers; ii) a 5% hit to French mobile revenues due to Iliad becoming stronger in mobile with an improved 4G position. We apply an 80% gross margin and 35% tax rate to the incremental FCF. We also assume a 8% grey-sky FCFY


The price relative chart measures performance against the CAC 40 INDEX

which closed at 5095.2 on 23/03/18

On 23/03/18 the spot exchange rate was €1/Eu 1.- Eu.81/US$1


27 March 2018


Figure 108: Changes to estimates

New New New Old Old Old Change Change Change

2018E 2019E 2020E 2018E 2019E 2020E 2018E 2019E 2020E

Revenues:

- Mobile 7,188 7,164 7,140 7,087 7,053 7,012 1.4% 1.6% 1.8%

% chge in MSR 1.9% 1.3% 1.3% 1.3% 1.1% 1.0%

Nat. Roaming revenues 350 250 150 350 250 150 0.0% 0.0% 0.0%

% chge in service revenues 0.1% -0.4% -0.4% -0.4% -0.5% -0.6%

- Fixed 10,985 11,076 11,105 11,035 11,149 11,234 -0.4% -0.7% -1.1%

France 18,172 18,240 18,246 18,122 18,202 18,246 0.3% 0.2% 0.0%

- Spain 5,620 5,880 6,152 5,729 6,015 6,293 -1.9% -2.2% -2.2%

- Poland 2,626 2,623 2,647 2,614 2,610 2,634 0.5% 0.5% 0.5%

Europe 11,229 11,486 11,785 11,308 11,593 11,897 -0.7% -0.9% -0.9%

Africa & ME 5,130 5,232 5,337 5,133 5,338 5,552 -0.1% -2.0% -3.9%

Enterprise 7,179 7,036 6,895 7,217 7,072 6,931 -0.5% -0.5% -0.5%

IC&S 1,634 1,618 1,602 1,628 1,612 1,596 0.4% 0.4% 0.4%

Eliminations -1,878 -1,840 -1,803 -1,950 -1,911 -1,873 -3.7% -3.7% -3.7%

Group revenues 41,492 41,822 42,161 41,483 41,956 42,449 0.0% -0.3% -0.7%

% chge 1.0% 0.8% 0.8% 1.1% 1.1% 1.2%

EBITDA:

France opex -11,002 -10,852 -10,702 -10,902 -10,752 -10,602 0.9% 0.9% 0.9%

France 7,170 7,388 7,544 7,220 7,450 7,644 -0.7% -0.8% -1.3%

- Spain 1,739 1,826 1,917 1,748 1,835 1,927 -0.5% -0.5% -0.5%

- Poland 686 684 691 682 681 687 0.5% 0.5% 0.5%

Europe 3,274 3,361 3,459 3,314 3,401 3,499 -1.2% -1.2% -1.1%

Africa & ME 1,660 1,694 1,727 1,571 1,634 1,699 5.7% 3.7% 1.7%

Enterprise 1,328 1,302 1,276 1,281 1,255 1,230 3.7% 3.7% 3.7%

IC&S -80 -80 -80 -80 -80 -80 0.0% 0.0% 0.0%

Bank -100 -75 -50 -125 -75 -50 -20.0% 0.0% 0.0%

Group EBITDA (clean) 13,253 13,589 13,876 13,181 13,585 13,943 0.5% 0.0% -0.5%

% margin 31.9% 32.5% 32.9% 31.8% 32.4% 32.8% 0.2% 0.1% 0.1%

% chge 2.9% 2.5% 2.1% 3.3% 3.1% 2.6%

Clean net income 3,560 3,782 3,956 3,066 3,364 3,631 16.1% 12.4% 8.9%

DPS (€) 0.70 0.74 0.77 0.68 0.72 0.75 2.6% 2.6% 2.6%

Group capex -7,400 -7,200 -7,000 -7,350 -7,200 -7,000 0.7% 0.0% 0.0%

Capex/sales 17.8% 17.2% 16.6% 17.7% 17.2% 16.5%

OCF 5,853 6,389 6,876 5,831 6,385 6,943 0.4% 0.1% -1.0%

FCF (CS) 2,384 3,110 3,895 2,315 3,069 3,827 3.0% 1.3% 1.8%


27 March 2018


Europe/Denmark Integrated Telecommunication Services

TDC (TDC.CO) Rating NEUTRAL Price (23 Mar 18, Dkr) 49.95 Target price (Dkr) 50.25 Market Cap (Dkr m) 40,559.4 Target price is for 12 months.

Research Analysts


44 20 7883 0834

[email protected]

Line loss cut driving 2% 19E EBITDA downgrade

■ Event: We lower 2019E EBITDA 2% to reflect worse line loss in

Denmark. We maintain our Neutral rating as the share price is not currently

driven by fundamentals but instead by the current bid-process for the

company (where the financial regulator has approved the bid for the company

but antitrust clearance is still pending).

■ Investment overview: The outlook for market and incumbent line loss in

Denmark remains one of the most challenging in Europe. Denmark has high

utility fibre overbuild from utility fibre (mostly Waoo and Stofa and utility fibre

is seeing growing traction (Stofa going national post Boxer acquisition, Waoo

reporting 40k broadband adds in 2017). Denmark also has weak B2B trends,

partly from legacy ISDN. The fixed broadband market is also vulnerable to

fixed-mobile substitution as mobile broadband is very cheap relative to fixed

broadband (e.g. Oister offers 80GB mobile broadband bundle for €20 vs TDC

charging €33 for entry level ADSL). The market has also seen relatively few

homes go mobile-only for broadband access, leaving significant market

potential.

■ Our previous forecasts assume roughly flat market access lines and TDC

lines shrinking 5% CAGR in 2017-20. We now assume that market line loss

worsens to -3% by 2020 and TDC line loss worsens to -8% in 2020.

■ Catalysts and Risks: The main downside risk for TDC is the bid failing in

which case we expect shares would return to mid-30s. The main upside risk

is the bid clearing at DKK50.25 (our target and the consortium bid).

■ Valuation: 2019E free cash flow yield 6.0% vs the sector at 6.9%.

.



OMXC 20 which closed at 971.8 on 23/03/18

On 23/03/18 the spot exchange rate was Dkr7.45/Eu 1.-

Eu.81/US$1

Performance 1M 3M 12M Absolute (%) 0.7 30.2 35.8 Relative (%) 5.5 35.5 28.3


Year 12/17A 12/18E 12/19E 12/20E Revenue (Dkr m) 20,270.0 19,842.4 19,684.0 19,391.6 EBITDA (Dkr m) 8,281.9 8,211.2 8,328.4 8,244.9 Adjusted net income (Dkr m) 2,262.89 2,034.56 2,126.00 2,060.87 CS EPS (adj.) (Dkr) 2.81 2.52 2.64 2.56 Prev. EPS (Dkr) - - 2.66 2.75 ROIC (%) 5.7 5.3 5.6 5.6 P/E (adj.) (x) 17.8 19.8 18.9 19.5 P/E rel. (%) 53.4 63.8 69.1 79.5 EV/EBITDA (x) 8.0 7.8 7.5 7.4

Dividend (12/18E, Dkr) 1.40 Net debt/equity (12/18E,%) 87.4 Dividend yield (12/18E,%) 2.8 Net debt (12/18E, Dkr m) 23,237.7 BV/share (12/18E, Dkr) 33.0 IC (12/18E, Dkr m) 49,816.2 Free float (%) 97.3 EV/IC (12/18E, (x) 1.3 Source: Company data, Thomson Reuters, Credit Suisse estimates

27 March 2018


TDC (TDC.CO)

Price (23 Mar 2018): Dkr49.95; Rating: NEUTRAL; Target Price: 50.25; Analyst: Jakob Bluestone

Income statement (Dkr m) 12/17A 12/18E 12/19E 12/20E

Revenue 20,270 19,842 19,684 19,392 EBITDA 8,282 8,211 8,328 8,245 Depr. & amort. (5,160) (5,100) (5,082) (5,065) EBIT 3,546 3,452 3,569 3,486 Net interest exp. (641) (642) (642) (642) Associates (8) 0 0 0 PBT 2,975 2,889 3,006 2,923 Income taxes (548) (691) (716) (698) Profit after tax 2,427 2,199 2,290 2,225 Minorities -0 -0 -0 -0 Preferred dividends - - - - Associates & other (164) (164) (164) (164) Net profit 2,263 2,035 2,126 2,061 Other NPAT adjustments (836) (341) (323) (306) Reported net income 1,427 1,694 1,803 1,755

Cash flow (Dkr m) 12/17A 12/18E 12/19E 12/20E

EBIT 3,546 3,452 3,569 3,486 Net interest (659) (768) (768) (768) Cash taxes paid (556) (548) (691) (716) Change in working capital 455 0 0 0 Other cash and non-cash items 4,427 4,584 4,634 4,684 Cash flow from operations 7,213 6,720 6,745 6,685 CAPEX (4,363) (3,912) (3,831) (3,726) Free cashflow to the firm 2,462 2,412 2,475 2,489 Acquisitions - - - - Divestments - - - - Other investment/(outflows) 213 (126) (169) (200) Cash flow from investments (4,150) (4,038) (4,000) (3,926) Net share issue/(repurchase) 0 0 0 0 Dividends paid (802) (927) (1,129) (1,157) Issuance (retirement) of debt (1,865) 0 0 0 Cashflow from financing (2,944) (1,197) (1,399) (1,427) Changes in net cash/debt 2,035 2,412 1,346 1,333 Net debt at start 27,685 25,650 23,238 21,891 Change in net debt (2,035) (2,412) (1,346) (1,333) Net debt at end 25,650 23,238 21,891 20,559

Balance sheet (Dkr m) 12/17A 12/18E 12/19E 12/20E


Per share 12/17A 12/18E 12/19E 12/20E

No. of shares (wtd avg.) (mn) 806 806 806 806 CS EPS (adj.) (Dkr) 2.81 2.52 2.64 2.56 Prev. EPS (Dkr) - - 2.66 2.75 Dividend (Dkr) 1.15 1.40 1.44 1.47 Free cash flow per share (Dkr) 3.05 2.99 3.07 3.09


Growth/Margin (%) Sales growth (%) (3.6) (2.1) (0.8) (1.5) EBIT growth (%) (12.4) (2.6) 3.4 (2.3) Net income growth (%) (10.2) (10.1) 4.5 (3.1) EPS growth (%) (10.4) (10.1) 4.5 (3.1) EBITDA margin (%) 40.9 41.4 42.3 42.5 EBIT margin (%) 17.5 17.4 18.1 18.0 Pretax profit margin (%) 14.7 14.6 15.3 15.1 Net income margin (%) 11.2 10.3 10.8 10.6

Valuation 12/17A 12/18E 12/19E 12/20E




Company Background

TDC A/S is a Denmark-based provider of telecommunications solutions. Its activities comprise six business segments: Nordic; Private; Business; YouSee; Operations & Wholesale ; and Headquarters (HQ).


Our Blue Sky Scenario (Dkr) 50.25

We assume that the consortium's proposed bid is succesful.

Our Grey Sky Scenario (Dkr) 35.00

We assume the consortium's bid fails and the share price goes back to the pre bid levels.


The price relative chart measures performance against the OMXC 20 which

closed at 971.8 on 23/03/18

On 23/03/18 the spot exchange rate was Dkr7.45/Eu 1.- Eu.81/US$1


27 March 2018



2018E 2019E 2019E 2018E 2019E 2020E 2018E 2019E 2020E

New New New New New New % chge % chge % chge

Consumer 10,324 10,189 10,084 10,324 10,170 10,033 0.0% -0.2% -0.5%

Business 4,294 4,239 4,201 4,294 4,239 4,034 0.0% 0.0% -4.0%

Wholesale 1,823 1,841 1,860 1,823 1,841 1,860 0.0% 0.0% 0.0%

Cost Centre 500 500 500 500 500 500 0.0% 0.0% 0.0%

Total Denmark 16,818 16,648 16,523 16,818 16,629 16,305 0.0% -0.1% -1.3%

Total Norway 3,141 3,172 3,204 3,141 3,172 3,204 0.0% 0.0% 0.0%

Group revenues 19,842 19,703 19,610 19,842 19,684 19,392 0.0% -0.1% -1.1%

y/y growth -2.1% -0.7% -0.5% -2.1% -0.8% -1.5%

Consumer 6,119 6,166 6,164 6,119 6,147 6,113 0.0% -0.3% -0.8%

Business 2,393 2,348 2,320 2,393 2,348 2,167 0.0% 0.0% -6.6%

Wholesale 1,101 1,112 1,123 1,101 1,112 1,123 0.0% 0.0% 0.0%

Cost Centre -2,743 -2,661 -2,581 -2,743 -2,661 -2,581 0.0% 0.0% 0.0%

Total Denmark 6,860 6,956 7,016 6,860 6,937 6,812 0.0% -0.3% -2.9%

Total Norway 1,351 1,391 1,433 1,351 1,391 1,433 0.0% 0.0% 0.0%

Group EBITDA (clean) 8,211 8,347 8,449 8,211 8,328 8,245 0.0% -0.2% -2.4%

y/y growth -0.9% 1.7% 1.2% -0.9% 1.4% -1.0%

Net Income 1,694 1,818 1,914 1,694 1,803 1,755 0.0% -0.8% -8.3%

DPS 1.40 1.44 1.47 1.40 1.44 1.47 0.0% 0.0% 0.0%

FCF 2,412 2,494 2,647 2,412 2,475 2,489 0.0% -0.8% -6.0%


27 March 2018


Europe/Norway Wireless Telecommunication Services

Telenor (TEL.OL) Rating UNDERPERFORM Price (23 Mar 18, Nkr) 174.70 Target price (Nkr) 150.00 Market Cap (Nkr m) 262,304.7 Target price is for 12 months.

Research Analysts


44 20 7883 0834

[email protected]

Lowering forecasts on lower line loss

■ Event: We lower 2019E EBITDA 1% to reflect worse line loss in Norway (and

updating for FX). We maintain our Underperform rating on Telenor.

■ Investment overview: The outlook for fixed access lines in Norway is among

the more challenging in Europe. Over a third of Norway is overbuilt by utility

fibre which has had good commercial success with the Altibox platform and

which is still expanding its footprint. There are relatively few homes that are

mobile-only (ie high fixed broadband household penetration) and mobile

broadband is cheap relative to fixed broadband. Ice offers 50GB mobile

broadband for around €50 (and Norwegian networks are among Europe's

best; ice has national roaming with Telia outside footprint). By comparison

fixed broadband typically costs around €55-60.

■ We have lowered our line loss forecasts for the Norwegian market and

Telenor. We previously saw line loss in Norway remaining around -1% pa in

2017-20 and Telenor retail line loss of -5% pa over the same period. We now

expect that to worsen to -3% in 2020 for market line loss and -8% for

incumbent retail line loss. Norway fixed is ~10% of group revenues (pre CEE

sale) so the group downgrade is small (<1% to EBITDA) despite operational

leverage.

■ Catalysts and Risks: We are 2.5% below 2020E consensus EBITDA as we

expect the current cost-cutting drive to ultimately have some negative

revenue effects. We also assume higher spectrum costs than consensus.

■ Valuation: 2019E adjusted free cash flow yield 4.4% vs the sector at 6.9%.



OBX INDEX which closed at 732.0 on 23/03/18

On 23/03/18 the spot exchange rate was Nkr9.58/Eu 1.-

Eu.81/US$1

Performance 1M 3M 12M Absolute (%) -3.0 -2.1 20.5 Relative (%) -0.1 -1.5 2.7


Year 12/17A 12/18E 12/19E 12/20E Revenue (Nkr m) 124,677.3 126,615.2 127,034.2 127,215.9 EBITDA (Nkr m) 48,640.5 49,394.1 50,837.9 51,462.7 Adjusted net income (Nkr m) 15,712.56 15,554.03 16,234.73 16,677.07 CS EPS (adj.) (Nkr) 10.62 10.61 11.08 11.38 Prev. EPS (Nkr) - 10.74 11.23 11.57 ROIC (%) 17.3 14.4 15.1 15.5 P/E (adj.) (x) 16.5 16.5 15.8 15.4 P/E rel. (%) 36.9 38.2 39.9 43.1 EV/EBITDA (x) 6.4 6.8 6.6 6.4

Dividend (12/18E, Nkr) 8.51 Net debt/equity (12/18E,%) 115.3 Dividend yield (12/18E,%) 4.9 Net debt (12/18E, Nkr m) 75,320.8 BV/share (12/18E, Nkr) 41.4 IC (12/18E, Nkr m) 140,661.0 Free float (%) 55.0 EV/IC (12/18E, (x) 2.4 Source: Company data, Thomson Reuters, Credit Suisse estimates

27 March 2018


Telenor (TEL.OL)

Price (23 Mar 2018): Nkr174.7; Rating: UNDERPERFORM; Target Price: 150.00; Analyst: Jakob Bluestone

Income statement (Nkr m) 12/17A 12/18E 12/19E 12/20E

Revenue 124,677 126,615 127,034 127,216 EBITDA 48,641 49,394 50,838 51,463 Depr. & amort. (21,257) (20,585) (20,585) (20,585) EBIT 27,383 28,810 30,253 30,878 Net interest exp. (2,389) (2,400) (2,900) (2,900) Associates 1,087 (20) 0 5 PBT 26,081 26,390 27,353 27,983 Income taxes (7,454) (7,833) (8,116) (8,303) Profit after tax 18,628 18,557 19,237 19,680 Minorities (2,915) (3,003) (3,003) (3,003) Preferred dividends - - - - Associates & other 0 0 0 (0) Net profit 15,713 15,554 16,235 16,677 Other NPAT adjustments (2,856) (300) (300) (300) Reported net income 12,857 15,254 15,935 16,377

Cash flow (Nkr m) 12/17A 12/18E 12/19E 12/20E

EBIT 27,383 28,810 30,253 30,878 Net interest (2,389) (2,400) (2,900) (2,900) Cash taxes paid (6,100) (7,833) (8,116) (8,303) Change in working capital 1,873 0 0 0 Other cash and non-cash items 21,279 20,385 20,385 20,385 Cash flow from operations 42,046 38,961 39,622 40,059 CAPEX (18,361) (48,385) (20,920) (20,184) Free cashflow to the firm 21,122 (12,524) 15,602 16,775 Acquisitions (2,000) 0 0 0 Divestments 7,511 - - - Other investment/(outflows) 3,140 0 0 0 Cash flow from investments (9,710) (48,385) (20,920) (20,184) Net share issue/(repurchase) (1,435) 0 0 0 Dividends paid (11,944) (11,873) (12,467) (13,090) Issuance (retirement) of debt (17,456) 5,000 0 0 Cashflow from financing (33,421) (10,073) (15,667) (16,290) Changes in net cash/debt 8,815 (24,676) 3,035 3,585 Net debt at start 59,460 50,645 75,321 72,286 Change in net debt (8,815) 24,676 (3,035) (3,585) Net debt at end 50,645 75,321 72,286 68,701

Balance sheet (Nkr m) 12/17A 12/18E 12/19E 12/20E


Per share 12/17A 12/18E 12/19E 12/20E

No. of shares (wtd avg.) (mn) 1,495 1,466 1,466 1,466 CS EPS (adj.) (Nkr) 10.62 10.61 11.08 11.38 Prev. EPS (Nkr) - 10.74 11.23 11.57 Dividend (Nkr) 8.10 8.51 8.93 9.38 Free cash flow per share (Nkr) 14.13 (8.54) 10.64 11.44


Growth/Margin (%) Sales growth (%) (0.6) 1.6 0.3 0.1 EBIT growth (%) 2.6 5.2 5.0 2.1 Net income growth (%) (5.0) (1.0) 4.4 2.7 EPS growth (%) (3.6) (0.1) 4.4 2.7 EBITDA margin (%) 39.0 39.0 40.0 40.5 EBIT margin (%) 22.0 22.8 23.8 24.3 Pretax profit margin (%) 20.9 20.8 21.5 22.0 Net income margin (%) 12.6 12.3 12.8 13.1

Valuation 12/17A 12/18E 12/19E 12/20E




Company Background

Telenor ASA is a telecommunication company. The Company’s mobile communication business includes voice, data, Internet, content services, customer equipment and electronic commerce.


Our Blue Sky Scenario (Nkr) 188.00

We assume that Telenor's Asian assets are valued at 10x EBITDA and CEE 8x. We assume that Telenor's Asian businesses are valued at 8x EBITDA except for Digi which continues to trade on a mid-teens multiple

Our Grey Sky Scenario (Nkr) 90.00

We assume the Nordic assets are valued at 6x EBITDA, VIP and India at zero and Asia at 6x


The price relative chart measures performance against the OBX INDEX which

closed at 732.0 on 23/03/18

On 23/03/18 the spot exchange rate was Nkr9.58/Eu 1.- Eu.81/US$1


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2017A 2018E 2019E 2017A 2018E 2019E 2017A 2018E 2019E 2017A 2018E 2019E

New New New Old Old Old % chge % chge % chge % chge % chge % chge

post fx post fx post fx pre fx pre fx pre fx

Norway mobile 15,102 14,907 14,966 15,102 14,907 14,966 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Norway fixed 10,893 10,830 10,682 10,893 10,889 10,809 0.0% -0.5% -1.2% 0.0% -0.5% -1.2%

Sweden mobile 9,262 9,435 9,650 9,262 9,538 9,756 0.0% -1.1% -1.1% 0.0% 0.0% 0.0%

Sweden fixed 3,620 3,804 3,994 3,620 3,858 4,051 0.0% -1.4% -1.4% 0.0% 0.0% 0.0%

Hungary 4,634 4,953 4,951 4,634 4,986 4,984 0.0% -0.7% -0.7% 0.0% 0.0% 0.0%

Serbia 3,903 4,040 3,959 3,903 4,039 3,958 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Bulgaria 3,220 3,258 3,323 3,220 3,264 3,329 0.0% -0.2% -0.2% 0.0% 0.0% 0.0%

Thailand 19,089 19,609 19,563 19,089 19,597 19,551 0.0% 0.1% 0.1% 0.0% 0.0% 0.0%

Malaysia 12,188 12,680 12,390 12,188 12,706 12,415 0.0% -0.2% -0.2% 0.0% 0.0% 0.0%

Bangladesh 13,156 13,645 14,470 13,156 13,788 14,622 0.0% -1.0% -1.0% 0.0% 0.0% 0.0%

Pakistan 8,102 7,537 7,339 8,102 7,613 7,414 0.0% -1.0% -1.0% 0.0% 0.0% 0.0%

Myanmar 6,643 6,270 5,875 6,643 6,287 5,891 0.0% -0.3% -0.3% 0.0% 0.0% 0.0%

Broadcast 6,071 6,171 6,126 6,071 6,171 6,126 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Revenues 124,677 126,615 127,034 124,677 127,129 127,627 0.0% -0.4% -0.5% 0.0% 0.0% -0.1%

Norway 11,260 11,443 11,783 11,260 11,503 11,910 0.0% -0.5% -1.1% 0.0% -0.5% -1.1%

Sweden 4,038 4,191 4,354 4,038 4,241 4,406 0.0% -1.2% -1.2% 0.0% 0.0% 0.0%

Hungary 1,503 1,657 1,656 1,503 1,668 1,667 0.0% -0.7% -0.7% 0.0% 0.0% 0.0%

Serbia 1,456 1,588 1,557 1,456 1,588 1,556 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Bulgaria 1,179 1,161 1,185 1,179 1,164 1,187 0.0% -0.2% -0.2% 0.0% 0.0% 0.0%

Thailand 7,413 7,810 8,769 7,413 7,805 8,764 0.0% 0.1% 0.1% 0.0% 0.0% 0.0%

Malaysia 5,481 5,705 5,575 5,481 5,717 5,586 0.0% -0.2% -0.2% 0.0% 0.0% 0.0%

Bangladesh 7,698 8,121 8,685 7,698 8,206 8,776 0.0% -1.0% -1.0% 0.0% 0.0% 0.0%

Pakistan 3,972 3,848 3,747 3,972 3,887 3,785 0.0% -1.0% -1.0% 0.0% 0.0% 0.0%

Myanmar 2,869 2,642 2,505 2,869 2,649 2,511 0.0% -0.3% -0.3% 0.0% 0.0% 0.0%

Broadcast 1,997 2,000 1,824 1,997 2,000 1,824 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

EBITDA b/f other 48,641 49,394 50,838 48,641 49,655 51,172 0.0% -0.5% -0.7% 0.0% -0.1% -0.2%

D&A -21,257 -20,585 -20,585 -21,257 -20,585 -20,585 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Adj operating profit 27,383 28,810 30,253 27,383 29,071 30,587 0.0% -0.9% -1.1% 0.0% -0.2% -0.4%

Net income to eq. s/h 12,857 15,254 15,935 12,857 15,437 16,168 0.0% -1.2% -1.4% 0.0% -0.3% -0.5%

Dividend (NOK) 8.10 8.51 8.93 8.10 8.51 8.93 0.0% 0.0% 0.0% 0.0% 0.0% 0.0%

Capex -18,235 -18,385 -17,920 -18,235 -18,449 -17,994 0.0% -0.3% -0.4% 0.0% -0.1% -0.1%

FCF 21,226 17,676 18,802 21,226 17,795 18,961 0.0% -0.7% -0.8% 0.0% -0.2% -0.3%


27 March 2018


Europe/Sweden Wireline

Telia Company (TELIA.ST) Rating UNDERPERFORM Price (23 Mar 18, Skr) 38.87 Target price (Skr) 32.00 Market Cap (Skr m) 168,310.4 Target price is for 12 months.

Research Analysts

Henrik Herbst

44 20 7888 0286

[email protected]


44 20 7883 0834

[email protected]

Changes to forecasts

■ Event: We update forecasts for line loss and other factors impacting the

business. Due to increases to our forecasts for Norway and Finland, our

group forecasts fall by 0.4-0.7% for 2018-20E pre adjusting for the Swedish

Krona deprecation. On a headline basis, our revenue forecasts increase by

c.1%. Our EBITDA forecasts increase by 0.4-1.7% pre FX changes as a

result of a more upbeat view on Telia's ability to reduce OPEX. After taking

into account the Swedish Krona depreciation, our EBITDA forecasts increase

by 2.1-3.5% for 2018-20E. We now forecast a gradual worsening in Swedish

access line loss from -1.5% in 2017 to -1.8% in 2020 as a result of a

slowdown in broadband market line growth offsetting the slower drag from

voice only line loss. We forecast Telia line market share loss to accelerate,

and forecast Telia retail line loss to go from -5.0% in 2017 to -5.9% in 2020E,

as the company continues to lose voice only lines (still c.640k), Telia's own

fibre build where it overindexes in market share is slowing and the company

continues to lose xDSL customers.

■ Investment overview: Competition in Swedish fixed remains benign, but Telia

suffers from having been overbuilt by competitor fibre. Swedish mobile

competition is intensifying in the consumer segment while we are yet to see an

improvement in B2B. Strong trends in Norway (synergies) and Finland (benign

competition and synergies) and in the Baltics (mobile price increase in H2 17)

are offsets. We are 0.3-1.1% below consensus 2019-20E EBITDA forecasts,

driven by Sweden helped by the recent depreciation of the Swedish Krona.

■ Catalyst and risks: Q1 18 results. Key risks include bigger cost-cutting than

we currently assume and a rebound in Swedish fixed trends.

■ Valuation: Telia trades on 6.7x 18E proportionate EV/EBITDA post its recent

Eurasia exit (peers 5.8x).



OMX AFFARSVARLDENS GENERAL INDEX which closed

at 533.8 on 23/03/18

On 23/03/18 the spot exchange rate was Skr10.18/Eu 1.-

Eu.81/US$1

Performance 1M 3M 12M Absolute (%) 0.3 4.8 4.8 Relative (%) 3.9 9.0 6.0


Year 12/17A 12/18E 12/19E Revenue (Skr m) 79,867.3 80,675.8 80,104.0 EBITDA (Skr m) 23,440.5 26,441.9 26,387.9 Adjusted net income (Skr m) 6,587.76 11,446.97 11,340.64 CS EPS (adj.) (Skr) 4.96 3.20 3.16 Prev. EPS (Skr) - 3.10 3.06 ROIC (%) 5.0 6.2 6.1 P/E (adj.) (x) 7.8 12.2 12.3 P/E rel. (%) 13.2 20.7 22.7 EV/EBITDA (x) 10.4 7.7 7.7

Dividend (12/18E, Skr) 2.30 Net debt/equity (12/18E,%) 23.1 Dividend yield (12/18E,%) 5.9 Net debt (12/18E, Skr m) 34,442.3 BV/share (12/18E, Skr) 33.2 IC (12/18E, Skr m) 183,636.0 Free float (%) 58.8 EV/IC (12/18E, (x) 1.1 Source: Company data, Thomson Reuters, Credit Suisse estimates

27 March 2018


Telia Company (TELIA.ST)

Price (23 Mar 2018): Skr38.87; Rating: UNDERPERFORM; Target Price: 32.00; Analyst: Henrik Herbst

Income statement (Skr m) 12/17A 12/18E 12/19E

Revenue 79,867 80,676 80,104 EBITDA 23,441 26,442 26,388 Depr. & amort. (12,893) (12,101) (12,016) EBIT 10,547 14,341 14,372 Net interest exp. (4,234) (1,878) (1,878) Associates 778 1,521 1,355 PBT 7,091 13,984 13,849 Income taxes (1,041) (2,937) (2,908) Profit after tax 6,051 11,047 10,941 Minorities 537 400 400 Preferred dividends - - - Associates & other 0 0 0 Net profit 6,588 11,447 11,341 Other NPAT adjustments 0 0 0 Reported net income 6,588 11,447 11,341

Cash flow (Skr m) 12/17A 12/18E 12/19E

EBIT 10,547 14,341 14,372 Net interest (1,469) (1,766) (1,766) Cash taxes paid (1,424) (3,162) (3,125) Change in working capital (4,724) 2,000 1,500 Other cash and non-cash items 18,274 14,447 14,351 Cash flow from operations 21,204 25,860 25,332 CAPEX (16,405) (15,510) (16,042) Free cashflow to the firm 4,799 10,350 9,290 Acquisitions - - - Divestments - - - Other investment/(outflows) 6,290 700 0 Cash flow from investments (10,115) (14,810) (16,042) Net share issue/(repurchase) 0 0 0 Dividends paid (8,660) (9,959) (9,959) Issuance (retirement) of debt - - - Cashflow from financing 3,481 (11,669) (9,959) Changes in net cash/debt 4,087 41,429 (669) Net debt at start 79,958 75,871 34,442 Change in net debt (4,087) (41,429) 669 Net debt at end 75,871 34,442 35,112

Balance sheet (Skr m) 12/17A 12/18E 12/19E

Assets Total current assets 69,342 69,524 69,395 Total assets 243,846 246,309 248,782 Liabilities Total current liabilities 31,875 31,805 31,618 Total liabilities 138,614 97,115 97,597 Total equity and liabilities 243,846 246,309 248,782

Per share 12/17A 12/18E 12/19E

No. of shares (wtd avg.) (mn) 4,330 4,330 4,330 CS EPS (adj.) (Skr) 4.96 3.20 3.16 Prev. EPS (Skr) - 3.10 3.06 Dividend (Skr) 2.30 2.30 2.30 Free cash flow per share (Skr) 1.11 2.39 2.15

Key ratios and valuation 12/17A 12/18E 12/19E

Growth/Margin (%) Sales growth (%) (5.1) 1.0 (0.7) EBIT growth (%) (15.1) 36.0 0.2 Net income growth (%) (18.9) 73.8 (0.9) EPS growth (%) 12.5 (35.6) (1.1) EBITDA margin (%) 29.3 32.8 32.9 EBIT margin (%) 13.2 17.8 17.9 Pretax profit margin (%) 8.9 17.3 17.3 Net income margin (%) 8.2 14.2 14.2

Valuation 12/17A 12/18E 12/19E

EV/Sales (x) 3.1 2.5 2.5 EV/EBITDA (x) 10.4 7.7 7.7 EV/EBIT (x) 23.2 14.1 14.2 Dividend yield (%) 5.92 5.92 5.92 P/E (x) 7.8 12.2 12.3

Credit ratios (%) 12/17A 12/18E 12/19E

Net debt/equity (%) 72.1 23.1 23.2 Net debt to EBITDA (x) 3.2 1.3 1.3 Interest coverage ratio (x) 2.5 7.6 7.7

Company Background

Telia Company is a Sweden-based provider of telecommunications services, mainly in the Nordic and Baltic countries. It is also operational in Eurasia, although the company is looking to exit the region. Telia also holds a 24% indirect stake in Turkcell.


Our Blue Sky Scenario (Skr) 44.88

Swedish mobile remains flat, ii) line loss improves to -5% in 2018 instead of the 9% we currently forecast, iii) as a result of better EBITDA trends and operational momentum Telia rerates to 7x EV/EBITDA

Our Grey Sky Scenario (Skr) 25.91

A full blown Swedish mobile price war and worsening Swedish fixed line trends drives a -5% decline in Swedish revenues over the coming 2 years. Telia derates to 5x EV/EBITDA as a result.


The price relative chart measures performance against the OMX

AFFARSVARLDENS GENERAL INDEX which closed at 533.8 on 23/03/18

On 23/03/18 the spot exchange rate was Skr10.18/Eu 1.- Eu.81/US$1


27 March 2018


Figure 111: Telia: Summary of changes to forecasts

2018E 2019E 2020E

New Old Diff Old FX New Old Diff Old FX New Old Diff Old FX

Revenues 80,676 79,797 1.1% -0.4% 80,104 79,257 1.1% -0.6% 79,533 78,766 1.0% -0.7%

EBITDA 26,442 25,905 2.1% 0.6% 26,388 25,709 2.6% 0.9% 26,334 25,449 3.5% 1.7%

clean EBIT 14,341 13,935 2.9% 1.4% 14,372 13,820 4.0% 2.2% 14,404 13,634 5.6% 3.8%

Clean Net Income to parent 13,836 13,406 3.2% 1.4% 13,684 13,265 3.2% 1.0% 13,651 13,045 4.6% 2.3%

CAPEX -14,193 -14,026 1.2% -0.1% -14,752 -14,556 1.3% 0.0% -13,622 -13,473 1.1% -0.3%

FCF (TLSN def) 10,350 9,837 5.2% 2.9% 9,290 9,044 2.7% -0.3% 9,866 9,390 5.1% 2.0%

FCF (continuing operations, ex

spectrum)

10,113 9,744 3.8% 1.9% 9,878 9,535 3.6% 1.2% 9,589 9,060 5.8% 3.2%


Figure 112: Telia: Changes to revenue and EBITDA forecasts by market

2018E 2018E 2019E 2019E 2020E 2020E

New New Diff Diff New New Diff Diff New New Diff Diff

Revenues

Sweden 35,970 36,154 -0.5% -0.5% 34,923 35,260 -1.0% -1.0% 34,126 34,506 -1.1% -1.1%

- mobile service revenues 14,137 14,333 -1.4% -1.4% 14,005 14,392 -2.7% -2.7% 13,928 14,443 -3.6% -3.6%

- fixed service revenues 15,881 15,870 0.1% 0.1% 14,967 14,916 0.3% 0.3% 14,246 14,112 1.0% 1.0%

Finland 14,795 14,252 3.8% 0.2% 15,057 14,381 4.7% 1.0% 15,274 14,461 5.6% 1.9%

Norway 10,752 10,164 5.8% 2.8% 10,902 10,208 6.8% 3.3% 10,869 10,279 5.7% 2.2%

Denmark 5,896 5,942 -0.8% -2.4% 5,820 5,913 -1.6% -3.5% 5,762 5,890 -2.2% -4.1%

Lithuania 3,629 3,774 -3.8% -7.0% 3,675 3,880 -5.3% -8.8% 3,707 3,937 -5.8% -9.3%

Latvia 2,038 1,978 3.1% -0.5% 2,058 2,005 2.7% -1.2% 2,070 2,020 2.4% -1.4%

Estonia 3,016 2,953 2.1% -0.7% 3,088 3,030 1.9% -1.3% 3,144 3,093 1.7% -1.6%

EBITDA

Sweden 13,444 13,528 -0.6% -0.6% 12,897 13,084 -1.4% -1.4% 12,500 12,630 -1.0% -1.0%

Finland 4,795 4,490 6.8% 3.1% 5,077 4,600 10.4% 6.4% 5,304 4,660 13.8% 9.7%

Norway 4,141 3,824 8.3% 5.3% 4,252 3,828 11.1% 7.4% 4,239 3,855 10.0% 6.3%

Denmark 709 744 -4.8% -6.4% 728 769 -5.3% -7.2% 778 795 -2.2% -4.1%

Lithuania 1,288 1,315 -2.1% -5.3% 1,323 1,377 -4.0% -7.5% 1,353 1,417 -4.5% -8.0%

Latvia 652 632 3.1% -0.5% 668 642 4.1% 0.2% 682 646 5.5% 1.5%

Estonia 974 931 4.6% 1.7% 1,004 970 3.5% 0.2% 1,038 1,005 3.2% -0.1%


27 March 2018


Appendix: Mobile broadband pricing (15/3)

Figure 113: Austria

Bundle SIM-only price Data Speed Comment

€/m GB/m Mbps

TKA Netcube

20Mbit/s 26.9 Untld 20





3 Hui

Hui Flat 10 18.0 Untld 10




Hui 1GB 4.0 1 30

Hui 9GB 9.0 9 50

T-Mobile HomeNet

Light 35.0 Untld 30

Turbo 35.0 Untld 70

Extreme 45.0 Untld 150

Ultra 55.0 Untld 300

Flex 25.0 Untld 30


Figure 114: Belgium


€/m GB/m Mbps

Proximus

Mobile Internet S 15.0 2 3G/4G €0.10/extra MB

Mobile Internet M 25.0 5 3G/4G €0.10/extra MB

Orange Belgium

Easy Internet @ Home 15.0 15 4G

Internet Everywhere 15 15.0 2 €5 discount for Orange customers

Internet Everywhere 25 25.0 5 €5 discount for Orange customers

BASE

Internet Anywhere 10 10.0 1 4G €5 discount for BASE customers




27 March 2018


Figure 115: Denmark


DKK/m GB/m Mbps

Telia

Light 99 10 4G

Full 199 60 4G Inc HBO Nordic

Premium 299 200 4G Inc HBO Nordic & 10GB roaming

Premium Plus 399 1000 4G Inc HBO Nordic & 10GB roaming

Telenor Internet to Go

Internet to Go 8GB 109 8 4G



Oister (3)

6GB 59 6 4G

40GB 119 40 4G

80GB 159 80 4G

160GB 199 160 4G

3DK

5GB 110 5 4G

10GB 130 10 4G

125GB 200 125 4G

200GB 250 200 4G

350GB 300 350 4G


Figure 116: France


€/m GB/m Mbps

Orange

4G Home 43.0 Unltd 4G Only for customers who cannot

receive fixed ADSL

Bouygues Tel

4G box 33.0 200 4G


27 March 2018


Figure 117: Germany


€/m GB/m Mbps

DT Speedbox

S 20.0 2 Max 50

M 25.0 4 Max 50

L 35.0 10 Max 50

Vodafone Gigacube

Gigacube 35.0 50 Max 300 €10 discount for Red customers

1&1

L 10.0 2 Max 42 Ex promo price for WLAN router

XL 15.0 4 Max 42 Ex promo price for WLAN router

XXL 25.0 8 Max 42 Ex promo price for WLAN router


Figure 118: Italy


€/m GB/m Mbps

Telecom Italia 4G Plug

Internet 4GB 5.4 4 4G






Vodafone Giga In&Out

10GB 10.0 10 Max 150 4 week basis

15GB 0.0 15 Max 150 1 year; 4 week basis

30GB 30.0 30 Max 150 Price on 4 week basis

Wind

5 Giga 8.0 5.0 4G 4 week basis

10 Giga 10.0 10.0 4G

20 Giga 15.0 20.0 4G

3

3Cube 10.0 30 4G Night free

3Cube XL 15.0 50 4G Night free

Super Internet 5GB 3.0 5 4G




Figure 119: Netherlands


€/m GB/m Mbps

T-Mobile NL - 4G voor Thuis

Sim only 50.0 Unltd 4G 2-year contract; pre discounts

Sim en 4G router 59.0 Unltd 4G 2-year contract; pre discounts


27 March 2018


Figure 120: Norway


NOK/m GB/m Mbps

Telenor - Mobilt Bredbånd

S 199 5 ~100

M 299 10 ~100

L 499 40 ~100

XL 699 100 ~100

XXL 899 200 ~100

Telia - Mobilt Bredbånd

7GB 229 7 4G

15GB 349 15 4G

30GB 449 30 4G

50GB 549 50 4G

100GB 649 100 4G

200GB 849 200 4G

ice

7GB 199 7 4G First 6m half-price






Figure 121: Portugal


€/m GB/m Mbps

Meo

5GB 16.0 5 Max 150 postpaid; €5 discount for MEO customers

10GB 21.0 10 Max 150 postpaid; €7.5 discount for MEO customers

30GB 26.0 30 Max 150 postpaid; €10 discount for MEO customers

Vodafone On

5GB 10.0 5 Max 300 Postpaid



Nos

M 15.0 5 Max 150 Postpaid 24M

L 25.0 Unltd Max 150 Postpaid 24M; fair usage applies


27 March 2018


Figure 122: Spain


€/m GB/m Mbps

Vodafone

S 20.0 4 Max 300

M 35.0 15 Max 300

Orange

4G en casa de Orange 40.0 50 4G


Figure 123: Sweden


SEK/m GB/m Mbps

Telia

6GB 99 6 Max 300

20GB 199 20 Max 300

40GB 249 40 Max 300

60GB 349 60 Max 300

100GB 449 100 Max 300

Telenor

40GB 249 40 Max 300

100GB 349 100 Max 300

200GB 449 200 Max 300

Tele2

40GB 199 40 Max 300

100GB 299 100 Max 300

400GB 399 400 Max 300

3

3GB 99 3 4G

15GB 199 15 4G

40GB 249 40 4G

60GB 349 60 4G

100GB 349 100 4G

200GB 399 200 4G

500GB 449 500 4G


27 March 2018


Figure 124: Switzerland


CHF/m GB/m Mbps

Swisscom

10GB 39 10 2 Price w/o Natel benefit



20GB 89 20 "high speed" Price w/o Natel benefit

Sunrise

start 9 Unltd 2 Price w/o Natel benefit

comfort 19 Unltd 10 Price w/o Natel benefit

unlimited 49 Unltd 300 Price w/o Natel benefit

Salt

Surf 1 15.0 1 4G

Unlimited Surf 35.0 Unltd 4G

Unlimited Surf Roaming 50.0 Unltd 4G Inc 1GB EU/US roaming pcm


Figure 125: UK


£/m GB/m Mbps

EE

2GB 12.0 2 4G 24M contract; excludes device; up to 60Mbps





Vodafone

2GB 11.0 2 4G 12M contract; excludes device

5GB 15.0 5 4G

15GB 20.0 15 4G

30GB 25.0 30 4G

50GB 30.0 50 4G

O2





3







27 March 2018


Companies Mentioned (Price as of 23-Mar-2018) AT&T (T.N, $34.7) Altice (ATCA.AS, €7.16) BT Group (BT.L, 219.25p, NEUTRAL, TP 260.0p) Bouygues (BOUY.PA, €39.76) Deutsche Telekom (DTEGn.F, €12.97) Elisa (ELISA.HE, €35.93) Enel (ENEI.MI, €4.85) Entel Chile (ENT.SN, CLP$6769.6) Ericsson (ERICb.ST, Skr53.94) Ericsson (ERIC.OQ, $6.4) Iliad (ILD.PA, €170.95) KPN (KPN.AS, €2.43) Liberty Global (LBTYA.OQ, $32.18) NOS (NOS.LS, €4.77) Nokia (NOKIA.HE, €4.51) Nokia (NOK.N, $5.46) Orange (ORAN.PA, €13.56) Orange Belgium (OBEL.BR, €15.14) Proximus (PROX.BR, €24.49) QUALCOMM Inc. (QCOM.OQ, $53.66) SK Telecom (017670.KS, W228,500) Samsung Electronics (005930.KS, W2,486,000) Sunrise (SRCG.S, SFr82.0) Swisscom (SCMN.S, SFr467.0) TDC (TDC.CO, Dkr49.95, NEUTRAL, TP Dkr50.25) TalkTalk (TALK.L, 115.1p) Tele2 AB (TEL2b.ST, Skr97.26) Telecom Italia (TLITn.MI, €0.67) Telecom Italia (TLIT.MI, €0.77) Telefonica (TEF.MC, €7.79) Telekom Austria (TELA.VI, €7.57) Telenet (TNET.BR, €51.85) Telenor (TEL.OL, Nkr174.7, UNDERPERFORM, TP Nkr150.0) Telia Company (TELIA.ST, Skr38.87, UNDERPERFORM, TP Skr32.0) Verizon Communications Inc (VZ.N, $46.29) Vodafone Group (VOD.L, 193.62p)

Disclosure Appendix

Analyst Certification Jakob Bluestone, CFA, and Justin Funnell each certify, with respect to the companies or securities that the individual analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.

3-Year Price and Rating History for BT Group (BT.L)

BT.L Closing Price Target Price

Date (p) (p) Rating

26-Jun-15 464.15 510.00 O

27-Jun-16 375.85 400.00 N

07-Apr-17 312.05 340.00

17-May-17 309.05 320.00

07-Nov-17 248.50 280.00

* Asterisk signifies initiation or assumption of coverage.

O U T PERFO RM

N EU T RA L

27 March 2018


3-Year Price and Rating History for SK Telecom (017670.KS)

017670.KS Closing Price Target Price

Date (W) (W) Rating

06-May-15 271,500 345,000 O

07-May-15 262,500 325,000

03-Nov-15 230,000 R

22-Aug-16 221,000 NR

29-Sep-16 226,000 260,000 O *

06-Feb-17 222,000 280,000

30-May-17 249,000 280,000 N

27-Jul-17 279,000 288,000

28-Sep-17 257,500 R


3-Year Price and Rating History for Samsung Electronics (005930.KS)

005930.KS Closing Price Target Price

Date (W) (W) Rating

29-Apr-15 1,385,000 1,680,000 O

03-Sep-15 1,122,000 1,630,000

29-Oct-15 1,325,000 1,785,000

11-Jan-16 1,152,000 1,690,000

28-Jan-16 1,145,000 1,550,000

01-Jun-16 1,333,000 1,702,000

28-Jul-16 1,507,000 1,790,000

15-Dec-16 1,759,000 2,400,000

24-Jan-17 1,908,000 2,650,000

09-Mar-17 2,010,000 2,900,000

23-May-17 2,246,000 3,150,000

27-Jul-17 2,490,000 3,460,000

31-Oct-17 2,754,000 3,620,000

09-Mar-18 2,487,000 3,540,000


3-Year Price and Rating History for TDC (TDC.CO)

TDC.CO Closing Price Target Price

Date (Dkr) (Dkr) Rating

09-Apr-15 51.95 52.00 N

12-Oct-15 35.58 37.00

22-Mar-16 32.20 37.00 O

13-Oct-16 37.60 40.00

15-Jun-17 37.80 44.00

01-Feb-18 36.76 R

13-Feb-18 49.32 44.00 O

20-Feb-18 49.35 50.25 N


O U T PERFO RM

REST RICT ED

N O T RA T ED

N EU T RA L

O UT PERFO RM

N EU T RA L

O U T PERFO RM

REST RICT ED

27 March 2018


3-Year Price and Rating History for Telenor (TEL.OL)

TEL.OL Closing Price Target Price

Date (Nkr) (Nkr) Rating

15-Apr-15 171.20 170.00 N

19-Jun-15 172.80 175.00

19-Oct-15 166.30 165.00

22-Jan-16 141.80 153.00

02-Feb-16 134.50 130.00 U

19-Feb-16 124.10 115.00

12-Sep-16 141.80 R

20-Sep-16 137.60 115.00 U

24-Mar-17 145.00 125.00

18-Jul-17 155.80 135.00

25-Sep-17 163.90 141.00

26-Oct-17 173.30 150.00


3-Year Price and Rating History for Telia Company (TELIA.ST)

TELIA.ST Closing Price Target Price

Date (Skr) (Skr) Rating

15-Apr-15 51.55 49.00 N

22-Jan-16 39.74 39.00

13-Mar-17 36.36 35.00

28-Nov-17 36.51 32.00 U


The analyst(s) responsible for preparing this research report received Compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities

As of December 10, 2012 Analysts’ stock rating are defined as follows: Outperform (O) : The stock’s total return is expected to outperform the relevant benchmark* over the next 12 months. Neutral (N) : The stock’s total return is expected to be in line with the relevant benchmark* over the next 12 months. Underperform (U) : The stock’s total return is expected to underperform the relevant benchmark* over the next 12 months. *Relevant benchmark by region: As of 10th December 2012, Japanese ratings are based on a stock’s total return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractiv e, Neutrals the less attractive, and Underperforms the least attract ive investment opportunities. As of 2nd October 2012, U.S. and Canadian as well as European ratings are based on a stock’s to tal return relative to the analyst's coverage universe which consists of all companies covered by the analyst within the relevant sector, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. For Latin Ame rican and Asia stocks (excluding Japan and Australia), ratings are based on a stock’s tota l return relative to the average total return of the relevant country or regional benchmark (India - S&P BSE Sensex Index); prior to 2nd October 2012 U.S. and Canadian ratings were based on (1) a stock’s absolute total return potential to it s current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe. For Australian and New Zealand stoc ks, the expected total return (ETR) calculation includes 12-month rolling dividend yield. An Outperform rating is assigned where an ETR is greater than or equal to 7.5%; Underperform where an ETR less than or equal to 5%. A Neutral may be assigned where the ETR is between -5% and 15%. The overlapping rating range allows analysts to assign a rating that puts ETR in the context of associated risks. Prior to 18 May 2015, ETR ranges for Outperform and Underperform ratings did not over lap with Neutral thresholds between 15% and 7.5%, which was in operation from 7 July 2011. Restricted (R) : In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Not Rated (NR) : Credit Suisse Equity Research does not have an investment rating or view on the stock or any other securities related to the company at this time. Not Covered (NC) : Credit Suisse Equity Research does not provide ongoing coverage of the company or offer an investment rating or investment view on the equity security of the company or related products.

Volatility Indicator [V] : A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ sector weightings are distinct from analysts’ stock ratings and are based on the analyst’s expectations for the fundamentals and/or valuation of the sector* relative to the group’s historic fundamentals and/or valuation:

N EU T RA L

U N D ERPERFO RM

REST RICT ED

N EU T RA L

U N D ERPERFO RM

27 March 2018


Overweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is favorable over the next 12 months. Market Weight : The analyst’s expectation for the sector’s fundamentals and/or valuation is neutral over the next 12 months. Underweight : The analyst’s expectation for the sector’s fundamentals and/or valuation is cautious over the next 12 months. *An analyst’s coverage sector consists of all companies covered by the ana lyst within the relevant sector. An analyst may cover multiple sectors.

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Global Ratings Distribution

Rating Versus universe (%) Of which banking clients (%) Outperform/Buy* 47% (62% banking clients) Neutral/Hold* 37% (55% banking clients) Underperform/Sell* 13% (54% banking clients) Restricted 2% *For purposes of the NYSE and FINRA ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, a nd Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

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Target Price and Rating Valuation Methodology and Risks: (12 months) for BT Group (BT.L)

Method: We derive our target price of 260p for BT Group by putting it on a sector calendar 2019E EV/EBITDA multiple of 6.0x. We believe this valuation is broadly consistent with flat EBITDA growth for BT over the next 3 years. We are broadly in line with consensus EBITDA estimates for FYMar17-19E which is broadly consistent with a Neutral rating on the stock. With BT having only Flat EBITDA growth in a sector when EBITDA is growing for many of BT's peers this is consistent with a Neutral rating.

Risk: The main risks to our Target price and rating on BT are 1) a deeper recession negative economy impact on its Global Services division and UK business; (2) rising levels of competition in its domestic broadband/fixed line market; and (3) potential heavy investment in network upgrade due to regulatory pressure.

Target Price and Rating Valuation Methodology and Risks: (12 months) for TDC (TDC.CO)

Method: For our target price we assume the Consortium's bid of DKK50.25 is accepted. For 2018E this implies 7.8x EV/EBITDA ratio and a free cash flow yield of 5.4%. We rate the stock Neutral as we do not expect a higher bid but also see a high likelihood of the current bid being successful.

Risk: The main downside risk to our DKK50.25 target price and Neutral rating is the current bid for the company failing. If that were to happen we would expect the share price to return to its pre-bid level in the mid-30s. The upside risks include another potential buyer stepping into the bidding process.

Target Price and Rating Valuation Methodology and Risks: (12 months) for Telenor (TEL.OL)

Method: We value Telenor (TP Nkr150) through a SOP analysis of its individual assets and use this as the basis of our rating. We use market prices in Thailand, Malaysia and at Vimpelcom. We use target EV/EBITDA ratios for the other assets, depending on where they are located and their respective growth rates. This leads us to our Underperform rating.

Risk: Upside risks to our Underperform rating and Nkr150 target price are continued strong momentum in Norway mobile (our estimates assume some slowdown in growth) and a rapid recovery in the Asian assets that have seen slower top-line and EBITDA trends recently. We also believe an exit from India or Denmark would be positive for the share price.

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27 March 2018


Target Price and Rating Valuation Methodology and Risks: (12 months) for Telia Company (TELIA.ST)

Method: We base our SEK32 per share target price on Telia's consolidated assets trading 6.0x 2017E proportionate EV/EBITDA post an exit from Eurasia, a small premium to the sector reflecting Telia's potential to increase its dividend owing to leverage well below its target range. We see downside to consensus forecasts from a weaker outlook for the Swedish business and rate Telia Underperform.

Risk: The main risks to our target price and rating are: The main upside risk to our forecasts is a bigger than we anticipate cost cutting programme, and better Swedish fixed wireline trends leading to EBITDA and FCF upside versus our forecasts, rating and target price. Furthermore Telia consolidating fibre networks in Sweden could further strengthen the outlook of the business.

Please refer to the firm's disclosure website at https://rave.credit-suisse.com/disclosures/view/selectArchive for the definitions of abbreviations typically used in the target price method and risk sections.

See the Companies Mentioned section for full company names Credit Suisse currently has, or had within the past 12 months, the following as investment banking client(s): TELIA.ST, BT.L, TEL.OL, TDC.CO, OBEL.BR, PROX.BR, DTEGn.F, ORAN.PA, TEF.MC, ATCA.AS, BOUY.PA, ILD.PA, KPN.AS, LBTYA.OQ, NOS.LS, SCMN.S, TALK.L, TELA.VI, ENEI.MI, ERICb.ST, QCOM.OQ, NOKIA.HE, 017670.KS, 005930.KS, ENT.SN, VOD.L, TLITn.MI, TNET.BR, TLIT.MI, NOK.N, ERIC.OQ Credit Suisse provided investment banking services to the subject company (OBEL.BR, DTEGn.F, ORAN.PA, TEF.MC, ATCA.AS, KPN.AS, LBTYA.OQ, SCMN.S, TALK.L, TELA.VI, ENEI.MI, QCOM.OQ, TLITn.MI, TNET.BR, TLIT.MI) within the past 12 months. Credit Suisse currently has, or had within the past 12 months, the following issuer(s) as client(s), and the services provided were non-investment-banking, securities-related: TEL.OL, PROX.BR, DTEGn.F, ORAN.PA, TEF.MC, ATCA.AS, BOUY.PA, KPN.AS, LBTYA.OQ, SCMN.S, QCOM.OQ, NOKIA.HE, 017670.KS, 005930.KS, ENT.SN, TLITn.MI, TLIT.MI, NOK.N Credit Suisse has managed or co-managed a public offering of securities for the subject company (TEF.MC, ATCA.AS, LBTYA.OQ, SCMN.S, ENEI.MI, TNET.BR) within the past 12 months. Within the past 12 months, Credit Suisse has received compensation for investment banking services from the following issuer(s): OBEL.BR, DTEGn.F, ORAN.PA, TEF.MC, ATCA.AS, KPN.AS, LBTYA.OQ, SCMN.S, TALK.L, TELA.VI, ENEI.MI, QCOM.OQ, TLITn.MI, TNET.BR, TLIT.MI Credit Suisse expects to receive or intends to seek investment banking related compensation from the subject company (TELIA.ST, BT.L, TEL.OL, TDC.CO, OBEL.BR, PROX.BR, DTEGn.F, ORAN.PA, TEF.MC, ATCA.AS, BOUY.PA, ILD.PA, KPN.AS, LBTYA.OQ, NOS.LS, SCMN.S, TALK.L, TEL2b.ST, TELA.VI, ENEI.MI, ERICb.ST, QCOM.OQ, NOKIA.HE, 017670.KS, 005930.KS, ENT.SN, VOD.L, TLITn.MI, TNET.BR, TLIT.MI, NOK.N, ERIC.OQ) within the next 3 months. Within the last 12 months, Credit Suisse has received compensation for non-investment banking services or products from the following issuer(s): TEL.OL, PROX.BR, DTEGn.F, ORAN.PA, TEF.MC, ATCA.AS, BOUY.PA, KPN.AS, LBTYA.OQ, SCMN.S, QCOM.OQ, NOKIA.HE, 017670.KS, 005930.KS, ENT.SN, TLITn.MI, TLIT.MI, NOK.N Credit Suisse or a member of the Credit Suisse Group is a market maker or liquidity provider in the securities of the following subject issuer(s): ATCA.AS, BT.L, BOUY.PA, DTEGn.F, ELISA.HE, ENEI.MI, ENT.SN, ERICb.ST, ERIC.OQ, ILD.PA, KPN.AS, LBTYA.OQ, NOS.LS, NOKIA.HE, NOK.N, ORAN.PA, OBEL.BR, PROX.BR, QCOM.OQ, 017670.KS, 005930.KS, SRCG.S, SCMN.S, TDC.CO, TALK.L, TEL2b.ST, TLITn.MI, TLIT.MI, TEF.MC, TELA.VI, TNET.BR, TEL.OL, TELIA.ST, VOD.L A member of the Credit Suisse Group is party to an agreement with, or may have provided services set out in sections A and B of Annex I of Directive 2014/65/EU of the European Parliament and Council ("MiFID Services") to, the subject issuer (BT.L, TEL.OL, OBEL.BR, DTEGn.F, ORAN.PA, TEF.MC, ATCA.AS, BOUY.PA, ELISA.HE, ILD.PA, KPN.AS, LBTYA.OQ, NOS.LS, SCMN.S, TALK.L, TEL2b.ST, ENEI.MI, ERICb.ST, QCOM.OQ, NOKIA.HE, 017670.KS, 005930.KS, ENT.SN, VOD.L, TLITn.MI, TNET.BR, TLIT.MI, NOK.N, ERIC.OQ) within the past 12 months. As of the end of the preceding month, Credit Suisse beneficially own 1% or more of a class of common equity securities of (TDC.CO, OBEL.BR, SRCG.S, ELISA.HE, KPN.AS). As of the end of the preceding month, Credit Suisse beneficially owned between 1% and 3% of the equity and related equity derivatives of (SCMN.S). Credit Suisse beneficially holds >0.5% long position of the total issued share capital of the subject company (017670.KS, 005930.KS, ENT.SN). Credit Suisse beneficially holds >0.5% short position of the total issued share capital of the subject company (BOUY.PA). Credit Suisse has a material conflict of interest with the subject company (DTEGn.F) . Credit Suisse is acting as a financial advisor to Deutsche Telekom (DTEGn.DE) in the context of the announced acquisition of T-Mobile Netherlands and Tele2 Netherlands (TEL2b.ST). Credit Suisse has a material conflict of interest with the subject company (LBTYA.OQ) . Credit Suisse International is acting as financial advisor to Liberty Global plc (LBTYA.OQ) in relation to the announced acquisition of Multimedia Polska S.A. through its subsidiary UPC Poland. Credit Suisse has a material conflict of interest with the subject company (TEL2b.ST) . Credit Suisse is acting as a financial advisor to Deutsche Telekom (DTEGn.DE) in the context of the announced acquisition of T-Mobile Netherlands and Tele2 Netherlands (TEL2b.ST). Credit Suisse has a material conflict of interest with the subject company (QCOM.OQ) . Credit Suisse is Financial Advisor to NXP Semiconductors (NXPI.OQ) on their sale to Qualcomm Incorporated (QCOM.OQ). Credit Suisse has a material conflict of interest with the subject company (017670.KS) . Credit Suisse is acting as financial advisor to SK Hynix in relation to the announced sale of shares of Toshiba Memory Corporation (TMC) by Toshiba Corporation.

For date and time of production, dissemination and history of recommendation for the subject company(ies) featured in this report, disseminated within the past 12 months, please refer to the link: https://rave.credit-suisse.com/disclosures/view/report?i=354419&v=7coh2dqgxzqi5wgxjt172ttg0 .

Important Regional Disclosures Singapore recipients should contact Credit Suisse AG, Singapore Branch for any matters arising from this research report. The analyst(s) involved in the preparation of this report may participate in events hosted by the subject company, including site visits. Credit Suisse does not accept or permit analysts to accept payment or reimbursement for travel expenses associated with these events.

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27 March 2018


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27 March 2018


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