Negative sector performance seems overdone. We believe the
telecoms sector is more immune to an economic softening than the average
equity sector and is therefore a defensive play, having significantly improved
its earnings visibility and predictability over the past 12 months. Earnings
momentum has weakened recently, but it is certainly better than that of the
Stoxx 600. Regulatory concerns also look overplayed.
Adjusted equity free cash flow is set to grow. We expect 3.6%
growth in 2008F and an acceleration in the coming years (2008-11F CAGR
of 5.5%), based on disciplined capex and a stronger contribution from
international assets.
Valuation still compelling. The sector trades at an attractive 9.4%
equity free cash flow yield. The 2008F dividend yield is 5.5% (versus the
Stoxx 600’s 4.3%). The dividend yield bears little risk (dividend payments
represent around 61% of adjusted equity free cash flow).
However, we revise our target prices across the board to reflect
higher equity risk premiums, currency volatility and lower earnings due to the
inevitable impact of the current macroeconomic turbulence.
Top picks: France Telecom, KPN, Belgacom. We favour defensive
players with well protected domestic markets and room for cost efficiencies.
Market overreaction offers opportunities such as BT Group
and Telecom Italia. BT looks to offer good value, with one of the highest
dividend yields, and sustained cash flow based on capex and opex reduction.
Telecom Italia also offers good upside after investors punished the stock. We
believe the company is fitter than the market realises.

Contents
Investment summary 3
Is the sector really defensive? 5
Companies 15
Belgacom SA...........................................................................................................17
BT Group.................................................................................................................21
Deutsche Telekom ..................................................................................................25
France Telecom ......................................................................................................29
KPN.........................................................................................................................33
Mobistar...................................................................................................................37
OTE.........................................................................................................................41
Portugal Telecom....................................................................................................45
Telecom Italia ..........................................................................................................49
Telefonica................................................................................................................53
Telenet Group .........................................................................................................57
Telenor ....................................................................................................................61
TeliaSonera .............................................................................................................65
Vodafone .................................................................................................................69
Disclosures Appendix 73