Stay Overweight — Telecom stocks have low exposure to economic slowdown and
stable cashflows relative to many other sectors; they trade at a 12% PE discount
to utilities. Free cash flow growth should exceed GDP growth and the sector
should offer 6% 2008E operating profit expansion (8% CAGR to 2010E) on falling
capital employed.
 ROIC (13.2%) Increases Driven By Growth And Reinvestment Discipline — We
have been concerned about many past investments and traditionally favoured
cashflow generation over investment; few M&A deals have been self-evidently
cheap. This year, however, we would expect to see earnings growth of over 13%
and cash flow growth faster than reinvestment. 2008 ROIC should add 70bps.
 Emerging Market Investments to Accelerate — The risk is that companies
misinterpret the relative rerating of their own stocks as a mandate from the market
for heady investment. We think DT, FT, Telefonica, and Vodafone will invest again
in emerging market telecom assets during 2008. Credit availability may help to
lower the number of players competing for these investments.
 Domestic themes — We analyse data growth, particularly in business applications,
big bundles, regulatory pressure returning, fibre announcements, no big mergers
or exits, government stakes placed in France, Germany, Sweden.
 Current Commercial Policies Stable — We analyse sensitivity to the current
economic environment, current commercial factors, and bundle and minute
pricing and use these to drive our triangle analysis of sales, margins and capex.
We argue economic sensitivity is low and that sales growth of 3% compound
2007-2010E will be leveraged by slightly higher margins and lower
depreciation/capex.
 Preferred Names — Big-cap ideas: BT, Telecom Italia, Telefonica, Vodafone. Midcap:
OTE, Swisscom, Telenor. Small-cap: Thus, United Internet. Details on pages
13-19. 2008 risk relative to other sectors comes from a hard landing and within
the sector from irrational competition.
 Save the Date — Citi’s European and Emerging Market Telecom Conference in
London, 17-19 March.