Value in Vodafone?

Value in Vodafone?

Vodafone are seeking to deliver on its ambitious growth plans, partly through their acquisition strategy, including the €19bn acquisition of Liberty Global’s European assets.

Vodafone’s performance in the past was held back by economic weaknesses in some of its key European operations, but this situation has been alleviated. Coupled with fast growing emerging markets and global growth in demand for data we see continued support for their longer term prospects.

The new CEO, Nick Read, is implementing a number of strategies to improve its commercial execution, simplify the business and gear it up for the digital future. They intend to extend their network sharing agreement with Telephonica O2 in the UK to include 5G, enabling the service to reach a wider geographic area and customer base at a lower cost. This can also be seen in the EU, with the acquisition of broadband and fixed line assets in Germany and Eastern Europe giving them a better foothold to expand into quad play services. Also, their investment programme known as Project Spring is now complete, which has transformed the quality of their technology.

The Q3 update in January provided some reassurance for investors as group service revenues were virtually flat, meanwhile service revenues from the rest of the world were better, rising by 4.9%. Data users grew by 8% to 79m, and 4G customers grew by 48% to 38m. This supported strong data growth of over 50% in the quarter. However, there is still a lot of opportunity ahead – only 69% of customers use data services, and only 33% of customers use 4G, although this is increasing rapidly, up 10% YOY. Another significant growth driver is the African payments platform, M-Pesa. Active customers grew 14% to 37m. IoT revenues continue to grow strongly, up 10% year to date, with 17% growth in connectivity offsetting the impact of a slowdown in the automotive market on hardware-related revenues. Fixed, which represents 32% of segment revenues, grew 3.8% year to date, supported by a strong performance in the cloud business.

Since the stock appears to offer good value for money due to its dividend yield being more than twice that of the FTSE 100, it could offer recovery potential over the long run, especially for income seekers willing to accept a low to medium level of risk. While it has disappointed in the past, its risk/reward ratio looks like it is becoming increasingly favourable. The company is entering into a greater number of partnerships which could strengthen its position in a number of growth markets. And while M&A activity may prove to be costly, it could catalyse the company’s long-term growth rate across a number of key markets. We see this as a strong long-term buy as both an income stock but also for the potential to offer some modest growth.

Our price target is 190 pence.

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