Analysts at broker Jefferies have slapped a buy recommendation on mobile phones network Vodafone (VOD) for the first time since late 2018, just days after the company's third quarter update.
Vodafone shares have rallied more than 2% in Friday trade to 154.12p.
Jefferies respected telecoms analyst Jerry Dellis believes that accelerating organic growth, improvements in returns on invested capital (ROIC) and plans to spin-off the company’s mobile masts operations into a separate company will bolster returns and drive the share price over the coming months, perhaps as high as 210p to 230p.
‘We outline an Organic Track for Vodafone to grow returns and earn its cost of capital within three years, whilst reducing leverage by a quarter,’ Dellis said today in a note to clients. ‘At today’s share price, we believe that Vodafone is implicitly valued at an unwarranted discount.’
SQUEEZING MORE VALUE
Dellis and the telco team at Jefferies believe that Vodafone can achieve 7% ROIC by March 2023, more than a third higher than the 5.1% forecast for this year, to 31 March 2020. There is also scope to slash net debt, potentially taking leverage from 3.3-times earnings before interest, tax, depreciation and amortisation (EBITDA) to around 2.7-times.
The ‘key building blocks are managed recoveries in Spain and Italy, improving quality metrics in the UK and cost savings achieved ahead of peers being partially retained in rising margins’, Dellis wrote. ‘Our forecasts reflect the Egypt disposal announced last week, and assets sales in New Zealand and the acquisition of Liberty assets in Germany and Central and Eastern Europe.’
TOWERS FLOTATION
Vodafone is pursuing a potential IPO of its European Tower business, likely sometime in calendar 2021, but the company has also indicated that is also exploring monetisation of individual, single country, towers portfolios too.
With a big hike to warnings now being forecast by Dellis and team in 2021 and beyond, it should make future dividends and payout increases more secure. The dividend was slashed from €0.15 per share to €0.09 last year because of demands on cash flows.
Dellis estimates that Vodafone will pay a €0.918 payout this year, rising to €0.936 (7.93p approximately) in 2021, implying a 2021 income yield of 5.1%.
‘Our sum-of-parts-based March 2021 price target is 176p,’ writes Dellis, before adding that ‘we show how tower monetisation can justify higher fair values in a range of approximately 210p to 230p.’
