Investment Summary
 

1. Vodafone is among the market leaders in delivering robust and reliable fixed and mobile technology globally.

2. It works together with around 2,000 of the world's biggest multinational organisations and 70% of the Fortune 500.

3. The Group has invested €23bn in its network over the past 2 years, evolving it to become a digital business platform.

4. The company’s shares are trading near 52-week low, which makes it an attractive buy.

5. Shares are currently trading at EV/EBITDA multiple of 4.8x, which is lower than the industry’s multiple, which shows that the company is undervalued.
 

Business Overview

Vodafone is a telecommunication company, providing a range of services including mobile communication, fixed communication, unified communication, internet of things (IoT), cloud hosting and security & carrier services. The company is primarily operating in two geographies, Europe and AMAP (Africa, Middle East and Asia Pacific) which include 25 countries. The Group has a partnership agreement with local operators in 47 countries which benefits in extending its business reach. They are among the top internet providers globally. The company is based in Newbury, the United Kingdom and was founded in 1984. It is listed on the London Stock Exchange and is a constituent of FTSE 100 index.

Key Statistics



Top Shareholders



Varied Products & Solutions Range


(Source: Company Website)

The Group has various range of products and solutions, which includes Mobile communications, Fixed communications, Internet of Things, Cloud and hosting, etc.

Vodafone in Various Industries


(Source: Company Website)

The company operates in many industries. Some of the industries are Automotive, Banking & Finance, Healthcare, Manufacturing, Retail, etc.

Group’s Strategic Objectives Outlines its Progress


(Source: Company Website)
 

1. Growing revenue streams.

2. Transformation opportunity.

3. Driving free cash flow generation.

4. Sustained reinvestment.

5. Differentiated assets and leading scale.
 

Modest Guidance for FY2021

Good commercial momentum in most markets, despite a challenging European competitive environment
 

1. Fifth consecutive quarter of improved churn.
 

Executing at pace on its strategic priorities
 

1. Further progress on mobile network sharing in Germany and Portugal.

2. On track to operationalise and monetise its European TowerCo.

3. Leading the industry efforts to improve supply chain diversity.

4. Group now focused on two scaled regional platforms, post the sale of Egypt.
 

Systematically strengthening the quality of its assets to support growth.

Recent News to ponder on

On 1st April 2020, Vodafone Group Plc announced that it had completed the sale of 100% of Vodafone Malta to Monaco Telecom SAM for a consideration of €250 million in cash, which is equivalent to 7.8x EBITDA and 13.1x Operating Free Cash Flow multiples of the fiscal year 2019.

On 25^th March 2020, Vodafone, Telecom Italia Group and INWIT have completed the merger of Vodafone Italy's towers into INWIT, which made INWIT, Italy's largest tower operator.

Let’s throw some light on the Trading Updates for the period Q3 FY2020
In the third quarter of the fiscal year 2020, the Group’s revenue increased by 6.8 per cent to €11,750 million as compared to €10,998 million (same period of the last year) on a reported basis. The company’s revenue on organic growth basis grew by 0.8 per cent to €9,733 million as compared to €9,153 million (same period of the last year). It was due to the benefits from the acquired Liberty Global assets. The Group has witnessed good growth in Rest of the World (Q3: 9.1%, Q2: 8.9%) organically as the company continued its recovery in South Africa. The company has expected full year adjusted EBITDA guidance in the range of €14.8-15.0 billion. The company expected free cash flow of approximately €5.4 billion in the fiscal year 2020.

Robust Revenue growth despite the challenging conditions in H1 FY2020


(Source: Interim Report, Company Website)

For the first half of the financial year 2020, the company’s reported revenue increased by 0.4 per cent to €21.9 billion as compared with the corresponding period of the last year, due to the benefits derived from the acquisition of Liberty Global'sassetsin Central & Eastern Europe and Germany. During the period, Group’s service revenue increased by 1.5 per cent to €18.5 billion, while organic adjusted EBITDA grew by 1.4 per cent. Loss after-tax in the first half of the FY2020 was €1.9 billion. Adjusted earnings per share was 0.85 Eurocents during the first half of the fiscal year 2020. The board of the group has announced an interim dividend of 4.50 Eurocents per share. On 30the September 2019, the net debt stood at €48.1 billion. 

Key Performing Indicators


(Source: Interim Report, Company Website)

The company’s Service revenue increased to Euro 18.5 billion in the H1 FY2020 as compared to Euro 18.3 billion in the H1 FY2019, an upside of 0.3 per cent.

The company’s adjusted EBITDAincreased to Euro 7.1 billion in the H1 FY2020 as compared to Euro 6.9 billion in the H1 FY2019, an upside of 1.4 per cent.

The company’s adjusted EBITincreased to Euro 2.2 billion in the H1 FY2020 as compared to Euro 2.1 billion in the H1 FY2019.


Financial Ratios

 

The reported EBITDA margin in H1 FY20 was 46.10 per cent. The reported operating margin was 2.60 per cent for the H1 FY20 as compared to -9.30 per cent in H1 FY2019. Net margin reported was -8.6 per cent for the first half of the fiscal year 2020, improved from the last year’s data of negative 19.5%. Return on equity for the same period stood at -3.5 per cent. On the liquidity front, Vodafone Group Plc’s current ratio stood at 0.97x. On leverage front, the debt-equity ratio of the Vodafone Group Plc’s was 1.24.


Share Price Performance


Daily Chart as on 6^thApril 2020, before the market closed (Source: Thomson Reuters)

On April 6, 2020, at the time of writing (before the market close, at 11:22 AM GMT), Vodafone Group Plc shares were trading at GBX 113.58, up by 2.25 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 169.46/GBX 92.76. The group’s stock is reflecting slightly higher volatility as against the benchmark index, based on the company’s beta of 1.0313. The outstanding market capitalisation was around £29.91 billion.

From the technical standpoint, 14 days-Relative Strength Index of the stock has started recovering from the oversold zone, which is strengthening the upside move.

Valuation Methodology

Method 1: Price to Earnings Approach (NTM)



To compare Vodafone Group Plc with its peers, Price/Earnings multiple has been used. The peers are Elisa Oyj (NTM Price/Earnings was 25.73), Geberit AG (NTM Price/Earnings was 22.86), Tele2 AB (NTM Price/Earnings was 21.93), Gamma Communications Plc (NTM Price/Earnings was 21.51), Swisscom AG (NTM Price/Earnings was 18.72) and Talktalk Telecom Group Plc (NTM Price/Earnings was 14.31). The average of Price/Earnings (NTM) of the company’s peers was 20.84x (approx.)

Method 2: Price to Cash Flow Approach (NTM)



To compare Vodafone Group Plc with its peers, Price/Cash Flow multiple has been used. The peers are Telenor ASA (NTM Price/Cash Flow was 5.2), CRH Plc (NTM Price/Cash Flow was 5.73), Orange SA  (NTM Price/Cash Flow was 2.90), Airtel Africa Plc (NTM Price/Cash Flow was 1.94), BT Group Plc (NTM Price/Cash Flow was 0.47)and Liberty Global Plc (NTM Price/Cash Flow was 2.50). The Average of Price/Cash Flow (NTM) of the company’s peers was 3.12x (approx.)

Valuation Metrics


(Source: LSE)

As on 28^th February 2020, the company’s EV/EBITDA multiple is 4.8x, which was lower as compared with the industry, which shows that the company is underpriced than the industry and the company’s P/B multiple is 0.7x, which was fairly valued as compared with the industry.


(Source: LSE)

This analysis is a useful technique to decompose the different drivers of ROE. It can be further examined through three financial metrics which are: net profit margin, asset turnover and financial leverage. This analysis helps to deduce whether the company’s profitability, use of debt or assets that’s driving ROE.

Vodafone Group V/S FTSE-100 Price – 1 Year


(Source: Thomson Reuters)

In the last one year, Vodafone Group Plc share price has declined 19.62 per cent as compared to 32.64 per cent decline of FTSE-100 index, which shows that the stock has outperformed the index during the last one year.

Dividend Yield


(Source: Thomson Reuters)

Vodafone Group Plc has a dividend yield of 6.77 per cent, which is lower than the industry dividend yield of 8.17 per cent and the sector dividend yield of 8.17 per cent.

Vodafone Group V/S Industry V/S Sector – 1 year


(Source: Thomson Reuters)

In the last one year, Vodafone Group Plc share price declined by 22.73 per cent, which is lower than the industry decline rate of 41.26 per cent and sector decline of32.07 per cent.

Vodafone Group Total return- 1 year


(Source: Thomson Reuters)

In the last one year, Vodafone Group Plc has delivered a total return of negative 18.52 per cent while the FTSE All share index has delivered a total return of negative 24.02 per cent.

Growth and Risk Assessments

Trading is expected to remain challenging, and the growth of EBITDA may be in low single digit with free cash flow generation of around 5.4 billion euro. The company has acquired Liberty Global business in Germany. The group is expecting between €14.8- €15 billion of adjusted EBITDA, reflecting lower single-digit organic growth and free cash flow of approximately €5.4 billion. Pro-forma financial leverage, excluding the INWIT transaction, is anticipated to be around 3.0x at the year-end and the intention to decrease the leverage towards the lower end of the 2.5x-3.0x range within the next few years.

Business Outlook Scenario

During the third quarter of the fiscal year 2020, the company grew organically as well as on a reported basis. On 4th December 2019, the company announced that they are collaborating with Amazon Web Services (AWS), which would benefit its business. Now, the developers can simply develop innovative applications on the Amazon Web Services API and operate them from the 5G network node closest to their end-users.  In most of the major European markets, the company has now secured network sharing agreements. It has made a collaboration with Virgin Media in the United Kingdom, in order to enhance the use of the network assets. In May 2020, the company anticipate the European Tower Co to be operational and continue to unlock the substantial value implanted in the tower infrastructure. The upgrade to the 5G network will cost billions in spectrum and deployment across all of Vodafone’s markets. The digital transformation is already generating a healthier experience for the clients, enhancing the differentiation, supporting growth and at the same time decreasing the structural costs.

Based on the decent fundamental prospects and support from valuation done using the above two methods, we have given a “BUY” recommendation at the closing price of GBX 111.02 (as on 3rd April 2020) with lower double-digit upside potential based on 20.84x NTM Price/Earnings (approx.) on FY20E earnings per share (approx.) and 3.12x NTM Price/Cash flow (approx.) on FY20E cash flow per share (approx.).
 
*All forecasted figures and Peers information has been taken from Thomson Reuters.
* The “Buy” recommendation is also valid for the current price as covered in the report as on 6th April 2020.             

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