Vodafone Group Plc

Vodafone Group Plc (LON: VOD) is an 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.

Investment Highlights - Vodafone Group Plc – Buy at GBX 108.98

• As per valuation metrics, EV/Sales, EV/EBITDA, Price/Cash Flow and Price/Book Value multiples of the Vodafone Group Plc are currently lower as compared to the corresponding multiples of the Telecommunications Services. It reflects, shares are undervalued as compared to the industry.
• Over the course of 4 years (FY16 – FY20), the company’s operating profit surged from EUR 1,333 million in FY16 to EUR 6,604 million in FY20, compounded at an annual growth rate (CAGR) of ~49.19 per cent.
• From the technical standpoint, 90-day RSI is currently supporting an upside move (around 46 level), which means the stock price could increase in the short term.

Key Risks

• The Company expects economic pressure to impact customer revenue over time and is experiencing a direct impact on the roaming revenue from lower international travel.
• Furthermore, the sector is exposed to political, financial, and operational risks, each of which has the potential to significantly impact the Company performance.

Recent News

On 5 October 2020, Vodafone Group provided an update on merger of Indus Towers (Indus Towers Limited) and Bharti Infratel (Bharti Infratel Limited). After receiving consent from Vodafone's existing lenders, to make the merger scheme effective, the parties will approach the National Company Law Tribunal.

Trading Update for Q1 FY2021 (released on 24 July 2020)

(Source: Quarterly Report, Company Website) 

• The Company maintained commercial momentum, and service revenue stood in line with management expectations. The organic service revenue stood resilient with a decline of 1.3%, due to the impact of covid-19.
• VOD delivered stable organic service revenue and showed resilient performance from German business. The customer loyalty from mobile contract improved for the seventh successive quarter with 429,000 broadband customer add-ons in the European region.
• The leading tower infrastructure company based out of Europe, Vantage Towers, is on track for IPO in 2021, which will unlock value for shareholders of Vodafone.
• The Company remained on track to deliver net opex reduction of around €0.4 billion in the European region in FY2021. The Company restated guidance of free cash flow to around €5.0 billion.

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

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

*Peers: Orange SA, Talktalk Telecom Group Plc and Gamma Communications Plc.

*Currency exchange rate for 1 EUR = 0.91372 GBP.

Conclusion

In the first quarter of the financial year 2021, despite the decline in organic service revenue, the Company maintained commercial momentum and service revenue remained in line with expectations. The Company is looking to unlock value for shareholders through IPO of Vantage Towers in early 2021. The growth of organic service revenue was impacted due to lower automotive activity, project delays, lower prepaid revenue and lower visitors and roaming revenue. The outlook for Adjusted EBITDA remained flat or slightly down. In Germany, VOD delivered stable organic service revenue with resilient performance and customer loyalty from mobile contract improved in Europe on a year-on-year basis. The Combined Company formed after the merger of Indus tower and Bharti Infratel, will help in expansion to new markets and new customer base. The stock made a 52-week low and high of GBX 87.11 and GBX 169.46, respectively.

Based on the above rationale and support from the valuation as done using the above method, we have given a “BUY” recommendation for Vodafone Group Plc at the current price of GBX 108.98 (as on 7 October 2020, before the market close at 3:20 PM GMT+1), with lower double-digit upside potential based on 19.40x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

BT Group Plc

BT Group Plc (LON: BT. A) is an FTSE 100 Company, which provides communication and connectivity services. It provides services related to broadband, fixed-voice, mobile and TV to the consumers in the United Kingdom.

Investment Highlights - BT Group Plc – Buy at GBX 100.48

• As per valuation metrics, EV/Sales, EV/EBITDA, Price/Cash Flow and Price/Book Value multiples of the BT Group Plc are currently lower as compared to the corresponding multiples of the Telecommunications Services. It reflects, shares are undervalued as compared to the industry.
• Despite the Covid-19 crisis, the Company delivered a strong operational performance and a relatively strong financial performance and reached an important milestone with 3m FTTP.
• From the technical standpoint, 90-day RSI is currently supporting an upside move (around 45 level), which means the stock price could increase in the short term.

Key Risks

• The Company’s financial performance is impacted by the risks related to foreign exchange, interest rates, funding and liquidity and counterparties risk.
• The confidence of investor and future strategy can be impacted by changing political conditions. 

Recent News

On 24 September 2020, BT Group confirmed the intention to file for deregister all equity securities with SEC (US Securities and Exchange Commission) through filing Form 15F and would become effective in coming 90 days. The Company will continue to engage with US debt and equity investors and is fully committed towards its US-based customers.

Trading Update for Q1 FY2021 (released on 31 July 2020)

(Source: Quarterly Report, Company Website)

• The Company delivered a robust operating performance in Q1 FY2021, and Openreach committed to building FTTP to 3.2m by 2025-2026 in rural areas.
• BT’s Enterprise business launched new support schemes for small businesses for growth following the coronavirus outbreak and achieved NPS improvement in 16 successive quarters.
• The Company operational performance was impacted due to a decline in residential BT Sport revenue, market competition and a decline in roaming revenue.
• The Profitability margins have declined for the period, despite the decline in profits, the Company continue to make an investment in customer experience and taken actions to reduce costs.

One Year Share Price Chart

(Source: Refinitiv, chart created by Kalkine Group)

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

Conclusion

Despite a decline in the financial performance in the first quarter of the financial year 2021, the Company delivered a strong operating performance and is committed to supporting colleagues and customers. BT Group’s Openreach resumed repair and provisioning activity in customer premises, the majority of retail stores reopened, and Premier League restarted at BT Sport in the Q1. The Company continued to progress towards the target of 20m FTTP and launched a new scheme under Enterprise business to support small businesses for the post-covid-19 era. The Company deployed 5G to 100 cities and towns. Despite delisting from SEC, BT Group will continue to engage with US investors and is fully committed towards its US-based customers. The stock made a 52-week low and high of GBX 94.68 and GBX 212.25, respectively.

Based on the above rationale and support from the valuation as done using the above method, we have given a “BUY” recommendation for BT Group Plc at the current price of GBX 100.48 (as on 7 October 2020, before the market close at 9:35 AM GMT+1), with lower double-digit upside potential based on 6.20 Price/NTM Earnings (approx.) on FY21E earnings per share (approx.). 

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

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

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