Focus on defensive, income paying stocks (page 4 of 4)

Proportionate EBITA (incl. pro rata figures from non-controlling stakes) came in at GBP 6.203bln versus expectations of GBP 5.59bln. EPS was at p3.3 versus expectations of around p 2.7-2.8. Vodafone generated GBP 2.9bln in free cash flow in the first six months of its fiscal year, which is more than in the previous fiscal year. Net debt could be reduced to GBP 10.7bln from GBP 12.2bln. The excellent result was achieved due to a good performance in markets such as Japan and Italy where EBITA margins came in much stronger than expected at 32% and 49% respectively. Vodafone now generates about 14% of its revenue from data services with Japan leading this development. We believe that the data services business is a key growth area for telecom operators in the coming future and Vodafone seems to be best positioned to benefit from this trend. Vodafone expects 10% customer growth and 15% EBITA growth next year, which is more than twice CSFB's forecast. With free cash flow of GBP 4-4.5bln now possible for the whole fiscal year Vodafone's FCF yield would arrive at 6%-7%, which is almost twice the sector's average of 3.5%. On that basis Vodafone appears to be cheap and we would expect that the results helped the stock to break the resistance level at GBP 1.10 and lifted the stock's trading range one level higher to the GBP 1-1.20 range from the GBP 0.80-1 range that the stock established in the past few months.