Market is too gloomy on Voda­fone

Growth in Europe and peer-beat­ing div­i­dends on of­fer

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One of the largest com­mu­ni­ca­tions net­work providers, Voda­fone (VOD) sup­plies more than 523m mo­bile cus­tomers world­wide. The FTSE 100 mega-cap is also a sta­ple port­fo­lio stock for thou­sands of in­vestors thanks to its sub­stan­tial div­i­dend.

This year’s ex­pected in­come of around €0.15 per share (the group re­ports in eu­ros) im­plies a 6.3% yield, the fifth high­est on the FTSE 100.

The div­i­dend looks se­cure, in our opin­ion. The market wak­ing up to this fact could re­sult in a share price re-rat­ing to­wards 280p lev­els, going by the tar­get price of in­vest­ment bank UBS.

SHARE PRICE DRAG

The stock has nudged lower be­cause of com­pe­ti­tion wor­ries and thanks to the strength­en­ing pound ver­sus the euro.

Ag­gres­sive pro­mo­tions are an­tic­i­pated from Iliad, a new en­trant in Italy where Voda­fone earns about 12% of its ser­vice rev­enue. We be­lieve the group has the fi­nan­cial mus­cle and brand strength to bat this threat off over the medium-term. Voda­fone faced a sim­i­lar prob­lem in India in the re­cent past, but that cut-throat bat­tle is eas­ing off.

RE­TURN­ING TO GROWTH

While the market has homed in on these neg­a­tives, it seems to be un­der­play­ing suc­cess else­where in Europe, and emerg­ing economies in Africa, the Mid­dle East and Asia Pa­cific (AMAP). This is thanks to Voda­fone’s uni­fied com­mu­ni­ca­tion strat­egy which com­bines high-qual­ity voice, data, cloud for busi­ness, and en­ter­tain­ment ser­vices across a wide range of tech­nolo­gies and screens to both con­sumers and en­ter­prises.

Var­i­ous coun­tries are also pro­vid­ing hefty sub­si­dies to en­cour­age broad­band de­ploy­ment. Ger­many, for ex­am­ple, has ear­marked €24bn over the next few years, and Voda­fone is one of the best funded and big­gest in­vestors.

Most an­a­lysts an­tic­i­pate the first real growth from Voda­fone in years. Es­ti­mates im­ply mid-sin­gle digit pre-tax profit ex­pan­sion this year to 31 March 2018, and un­der­ly­ing rev­enue progress. There is also scope for an­other hefty chunk of costs to be stripped away, with the com­pany eye­ing €7bn in sav­ings.

DIS­COUNT VAL­U­A­TION

Net debt of €32bn this year would be bal­anced by an­tic­i­pated €72bn net as­sets. More than €5bn of free cash flow is ex­pected, com­fort­ably cov­er­ing the €4.1bn div­i­dend bill.

The stock trades on a 7% equity free cash flow yield, ac­cord­ing to UBS, and prom­ises a sig­nif­i­cantly more at­trac­tive in­come yield than ei­ther the av­er­age for its sec­tor (4.5%) or the FTSE 100, which av­er­ages at about 4%. A 280p share price would bring the yield down to 4.8%, roughly in line with peers. (SF)

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