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Vodafone: Dialing in Growth or Hanging Up?
Stock Analysis & Ideas

Vodafone: Dialing in Growth or Hanging Up?

Vodafone Group (UK: VOD) is a telecommunications giant headquartered in the UK. The telecom major’s operations span Asia, Africa, and Europe. The company is expected to announce its FY22 results on May 17.

Vodafone is currently in a state of flux with a strategy equity investment in the company by the Emirates Telecommunications Group and its ambition to chase consolidation opportunities in Europe thwarted by the potential merger between France’s Orange (NYSE: ORAN) and Spain’s MásMóvil.

Let’s look at these two notable events in a bit more detail that could potentially impact the company going into FY23.

Strategic Investment by Emirates Telecommunications

On May 16, Vodafone announced that the Emirates Telecommunications Group Company PJSC (e&), formerly Etisalat had acquired a 9.8% stake in the company through the acquisition of 2,766 million shares.

Hatem Dowidar, Group CEO of e&, commented, “Our investment represents a unique opportunity to acquire a significant stake in one of the leading and strongest global telecom brands, and a company that we know well.”

Emirates Telecommunications Group made it clear that it is “not seeking to exert control or influence the company’s Board or management team. Similarly, e& has no intention to make an offer for Vodafone.”

Merger Between Orange and MásMóvil

In March this year, Orange and MásMóvil announced that they were in talks for a merger. According to a Reuters report, this merger would challenge the incumbent major top telecom player in the Spanish market, Telefonica.

The report quoted CCS Insight analyst Kester Mann as saying, “Should the deal receive the green light, it could open the floodgates to a host of other alliances in markets such as Italy, Portugal, and the UK.”

But how is this merger likely to impact Vodafone?

According to Berenberg analyst Carl Murdock Smith, Vodafone has cited the UK, Italy, Spain and Portugal as “hypercompetitive markets that would benefit from consolidation.” The analyst pointed out that these markets make up approximately 30% of the company’s EBITDA, “much less than some of its incumbent competitors.”

Smith added that if the Orange MásMóvil merger comes to fruition, excluding Spain, the remaining markets would comprise less than 25% of VOD’s EBITDA.

The analyst is of the view that Vodafone’s announcement at its H1 results last year to pursue consolidation opportunities in Europe “has weakened Vodafone’s negotiating position with counterparties.”

Analyst’s Projections

Smith has projected Vodafone Group’s organic service revenues to grow 2% year-over-year with organic revenues in Europe growing at 0.4%, including slower revenue growth rates in Germany and Spain.

The analyst’s main concern is the company’s projections for Earnings Before Interest, Taxes, Depreciation, Amortization and after Leases (EBITDAaL) in FY22-23. Smith said that Vodafone intends to grow its EBITDAaL “by a mid-single-digit percentage each year.”

While VOD has projected EBITDAaL of €15.3 billion in FY21-22 followed by €15.7 billion in FY22-23, Smith is sceptical of these projections.

The analyst has projected EBITDAaL of €15.5 billion in FY22-23 versus consensus estimates of €15.7 billion citing higher cost inflation, weakness in Turkish lira that “has created a headwind to euro financials this year that will continue in 2022/23.”

Wall Street’s Take

The analyst downgraded the stock from a Buy to a Hold citing EBITDAaL forecasts for FY22-23 that are “2% below company-compiled consensus” and “seeing simpler investment cases in the sector that are less reliant on M&A execution and offer more upside.”

The analyst also reduced the price target from 150p to 145p, implying an upside potential of 20.7% at current levels.

Other analysts on the Street, however, continue to be bullish on the stock with a Strong Buy consensus rating based on eight Buys and two Holds. The average VOD stock forecast is 162.44p implying an upside potential of 35.3% at current levels.

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