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.

On 16 November 2021, Vodafone expects to release H1 FY22 results.

Rationale for Valuation – BUY at GBX 109.70

• 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.
• 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.
• Over the next eight months, Vodafone intends to introduce additional share buy-back programmes to reduce the issued share capital.
• 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. Adjacently, Vodafone has higher dividend yield than the industry median.
• From a technical standpoint, 14-day RSI (~32.50) is in the oversold territory, while the stock price is hovering close to the lower standard deviation of the Bollinger Bands.

Key Risks

• Tight supplies of semiconductors, global shipping problems, and rising inflation can create short-term uncertainties.
• In Europe, the retail footfall remained 40% lower than the pre-pandemic levels. 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.

Recent News

Board Change: On 30 September 2021, Deborah Kerr was appointed as a non-executive director, effective from 1 March 2022.

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, Analysis conducted by Kalkine Group)

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

 Conclusion

Vodafone demonstrated resilient performance in FY21 with recovery in H2 FY21 and solid strategic deliveries. 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.

It remained focused for its next phase of strategy (including simplification of the Group, successful IPO of Vantage Towers, the rollout of next generation mobile and fixed networks, and continued reduction in customer churn). The stock made a 52-week high and low of GBX 142.74 and GBX 100.94, respectively.

As given in the image below, Vodafone has issued its adjusted EBITDA and free cash flow guidance following a resilient performance in FY21.

(Source: Company Website)

Based on the share buyback programme, 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 current market price of GBX 109.70 (as on 13 October 2021, at 8:40 AM GMT+1) with lower double-digit upside potential based on 16.31x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

Associated British Foods PLC

Associated British Foods PLC (LON: ABF) is a FTSE 100 listed Company, which is engaged in the food processing and retailing business.

On 9 November 2021, ABF expects to announce its annual results for FY21.

Investment Rationale – BUY at GBX 1,752.50

• ABF unveiled that adjusted operating profit in Q4 FY21 is likely to surpass the expectations for both the food businesses and Primark.
• The introduction of new digital capability (e.g., customer-facing website) shall improve the functionality of Primark’s website and strengthen the Company’s digital marketing capability.
• The global sugar demand shall continue to surpass the production in FY22 as well, which shall further generate pricing opportunities.
• From a technical standpoint, 14-day RSI (~30.80) is in the oversold territory, while the stock price is hovering close to the lower standard deviation of the Bollinger Bands.
• All major metrics (Price/Earnings, EV/Sales, EV/EBITDA, Price/Book, and Price/Cash Flow) of ABF reflect an undervalued position against the median of the Consumer Non-Cyclicals sector.

Key Risks

• The footfall of the UK Shoppers was hit by inflation and fuel crisis in September 2021, resulting into lower consumer confidence as well.
• Supply crisis can exacerbate the problems of Primark stores, led by the Covid-19 pandemic.
• The strengthening of sterling against most of its trading currencies incurred £35 million as a loss on translation in FY21.

Recent News

Primark Cares: On 15 September 2021, ABF announced the Primark’s sustainable strategy to ensure commitment across People, Product, and Planet.

Pre-Close Period Trading update (for the 53 weeks to 18 September 2021, as on 13 September 2021)

• Associated British Foods has raised its FY21 outlook as revenue for the Sugar division is likely to be 7% ahead of FY20.
• On the back of solid performance in Illovo, the Sugar business is expected to deliver a much-improved profit year-on-year in FY21.
• Despite the lower than anticipated sales, the operating profit margin for Primark in FY21 was strong.
• The Group ended FY21 with approximately £1.9 billion in net cash before lease liabilities.

Share Price Chart

 (Data Source: Refinitiv, Analysis by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (FY21) (Illustrative) 

Conclusion 

In FY21, ABF demonstrated good working capital management and strong cash generating capability, underpinned by the improvement in net cash. Subsequently, it expects to report adjusted earnings per share for FY21 ahead of the last year and previous guidance.

However, reduced footfall due to the ‘pingdemic’, fuel crisis, and lower consumer confidence have reduced footfall and curbed sales. Notwithstanding, the cash generation in the last quarter was ahead of the management guidance and was stronger than in prior years. With a promising environment for sugar prices, cash generation should be boosted further. The stock made a 52-week high and low of GBX 2,528.00 and GBX 1,618.00, respectively. 

Based on the raised outlook, strong net cash position, reopening of Primark stores and favourable valuation conducted above, we have given a “BUY” recommendation on Associated British Foods PLC at the current price of GBX 1,752.50 (as on 13 October 2021, at 8:30 AM GMT+1), with lower double-digit upside potential based on 29.45x Price/NTM Earnings (approx.) on FY21E Earnings Per Share (approx.).

*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).

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

*All forecasted figures and Peers/ Industry information have been taken from Refinitiv.

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

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