Vodafone Group PLC

Vodafone Group PLC (LON: VOD) is a FTSE 100 listed 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 ex-dividend date for the final dividend (payable on 6 August 2021) is 24 June 2021.

Rationale for Valuation – BUY at GBX 116.04

• Vodafone is on track to report Adjusted EBITDA for FY22 to be in the range of €15.0 - €15.4 billion, while adjusted free cash flow is projected to be at least €5.2 billion.
• Vodafone demonstrated resilient performance in FY21 with recovery in H2 FY21 and solid strategic deliveries. The Covid-19 impact on roaming and visitor revenue offset the benefit arising from the acquisition of Liberty Global's assets.
• The accelerating service revenue growth, share gain in broadband subscriptions, digital transformation initiatives and increased investment shall grow revenues and cash flow over the medium-term.
• As per valuation metrics, EV/Sales, EV/EBITDA, Price/Cash Flow, Price/Book, and Price/Earnings multiples are currently lower than the Telecommunications Services industry.
• From a technical standpoint, 14-day RSI (44.12) is hovering close to an oversold position and supporting an upside potential.

Key Risks

• The commercial activity is yet to return to a normal level, and thus, Europe mobile contract churn was 1.6% lower in Q1 FY22 than Q1 FY21.
• The Company faces intense pressure regarding pricing and market share.
• A slowdown in the growth of telecommunications and mobile money services could adversely affect the demand for communication sites and tower space.

Recent News

Acquisition: On 22 July 2021, Vodafone Spain acquired 2x10 MHz of spectrum in the 700 MHz band for €350 million from the MINECO (Spanish Ministry of Economic Affairs and Digital Transformation).

Q1 FY22 Trading Update for the quarter ended 30 June 2021 (as on 23 July 2021)

 (Source: Company Website)

• Vodafone demonstrated growth in Europe and Africa. During Q1 FY22, service revenue grew 3.3% year-on-year, supported by both Consumer and Business segments.
• As M-Pesa transaction volumes surged 45% year-on-year in Q1 FY22, there was strong growth in Africa.
• The easing of lockdown restrictions also supported the revenue growth in South Africa, and other international markets.

One Year Share Price Chart

 (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price/Earnings Approach (FY22) (Illustrative) 

Conclusion

Vodafone reported strong service growth in Europe and Africa during Q1 FY22, driven by a strategic transformation in building commercial and operating momentum built over the past 3 years. As given in the image below, Vodafone has issued its adjusted EBITDA and free cash flow guidance following a resilient performance in FY21. It remained focused for its next phase of strategy (including simplification of the Group, successful IPO of Vantage Towers, rollout of next generation mobile and fixed networks, and continued reduction in customer churn). Moreover, the increased demand during the pandemic shall support the revenue and cash flow growth over the medium term. The stock made a 52-week high and low of GBX 142.74 and GBX 87.11, respectively.

(Source: Company Website)

Based on the resilient financial performance, reduced net debt, digital transformation and support from the valuation as done using the above method, we have given a “BUY” recommendation on Vodafone Group PLC at the closing market price of GBX 116.04 (as on 22 July 2021), with lower double-digit upside potential based 16.60x Price/Earnings (approx.) on FY22E Earnings Per Share (approx.).

Next PLC

Next PLC (LON: NXT) is a FTSE 100 listed online clothing retailer, which also has around 500 stores in the UK and Eire.

Key Dates

• The ex-dividend date for the special dividend is 12 August 2021, while it is scheduled for payment on 3 September 2021.
• On 29 September 2021, Next is likely to announce half-year results for FY22.

Rationale for Valuation – EXPENSIVE at GBX 8,020.00

• The new wave of coronavirus cases can derail the economic recovery and consumer sentiments, and the Company might fail to achieve the expected sales growth.
• The subdued consumer demand, widespread staff shortages, and disrupted supply chains can keep the outlook gloomy.
• From a technical standpoint, 14-day RSI (68.02) is in the overbought position, while the stock price is hovering close to the upper Bollinger Band.
• Since FY17, gross margin has remained below the industry median of 41.3%.

Key Risks

• With rising cases of Delta variant, there is a likelihood of reintroduced restriction which can affect the operating environment for retailers.
• The macroeconomic uncertainties and inflationary pressure can further impact the consumer spending power.

Trading Statement for the eleven weeks to 17 July 2021 (as on 21 July 2021)

(Source: Company Website)

• For the above-mentioned period, full price sales surged 18.6% versus two years ago; therefore, full year price sales guidance increase from 3% to 6%.
• Regarding business rates relief to the Government, the Company has decided to repay £29 million.
• The cash surplus for FY22 is expected to be £240 million, while the Company also plans to pay special dividends to shareholders.

One Year Share Price Chart

 (Data Source: Refinitiv, Analysis done by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY22) (Illustrative)

Conclusion

Next has already given a stellar return of over 58% in the past year, and now trading close to its 52-week high. Therefore, breaching its 52-week high amid rising uncertainties regarding new wave of coronavirus and inflationary pressure might be difficult. Moreover, price consolidation can be anticipated in the short-term. The UK Purchasing Managers' Index has dropped sharply in July 2021, which can further impact consumer sentiments. The stock made a 52-week High and Low of GBX 8,404.00 and GBX 4,959.00, respectively.

Considering the macroeconomic uncertainties, overstretched technical stance, rising cases of the Delta variant, and support from the valuation as done using the above method, we have given a “EXPENSIVE” recommendation on Next PLC at the closing market price of GBX 8,020.00 (as on 22 July 2021).  

*All forecasted figures and Industry Information have been taken from REFINITIV.

*Dividend Yield may vary as per the stock price movement.

*The reference data in this report has been partly sourced from REFINITIV.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached or if the price closes below the support level (indicative stop-loss price).

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