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Last Seen: 3 Feb '20
Posted on 9 January 2016, 7:38 AM

Vodafone, A hold with an upside of 10-15%

Other Insights on Related Shares: VOD.L
Related Shares: Vodafone Share Price

Vodafone PLC is pretty fairly priced at the current levels and we do not see an upside of more than 15% from the current price levels. According to the data from Morning, the stock has a forward P/E of 40.4 compared to FTSE100 12 months forward P/E of 13.34. This also indicates that the stock is slightly overpriced at the current levels. Currently the stock has been trading above its 50 day and 100 day moving average of 217.68 p and 217.9 p respectively. We expect the stock to be range bound between 220 p -245 p in the coming quarters and fiscal year. Vodafone Group Plc (Vodafone) is a mobile communications company which provides services to mobile voice, messaging, data and fixed line. It has a market cap of £58.80 bn.The Company also has products such as international money transfer, savings and loans, salary disbursements and access to insurance products in different markets.  Vodafone is an industry leader with 446 million customers, mobile operations in 26 countries and fixed broadband operations in 17 countries. Vodafone is bringing the benefits of the mobile and digital revolution to consumers and businesses across the world, from offering 4G services in 18 countries to providing services such as machine-to-machine (‘M2M’) technology and M-Pesa, the mobile payments service that provides financial freedom to millions of people.


Though the company has faced a few challenges in its core European mobile business because of macroeconomic environment, competition and regulation, but the company has turned out to be a leader in the emerging markets such as India, Egypt and South Africa. The telecommunication giant has also adapted well the transitions in the industry, towards the new areas of growth such as data, emerging markets, unified communications and total communications services for enterprise customers. The company has witnessed an exceptional demand for data in fiscal 2015 with data growth totaling 80% for the full year, and accelerating every quarter in Europe. In Europe the company has increased 4G coverage to 72% in the year 2015 and the company aims to get this over 90% in the coming years. In the emerging markets such as Africa, Middle East and Asia pacific (AMAP) region, the company has increased 3G and 4G coverage to 82% and aim to increase this in the coming years. The company has almost become a full service integrated operator in its main markets. Through organic investment and acquisition, Vodafone covers approximately 28 million households across Europe with its own fibre and cable infrastructure. However, the mobile industry is highly competitive with many alternative providers and there is also a competition from other communication providers using internet based rather than cellular services such as WIFI calling or instant messaging.


As per the latest results of the company, Vodafone continued to lead in high speed data with 29.9 million 4G customers and 4G Coverage of up to 80% in Europe, up from 32% 2 years ago. Also mobile data traffic had grown by 75% in H1 2016 with average usage per customer in Europe up by 39% compared to a year ago. As a part of company’s strategy, Vodafone has come up with a project spring. Project Spring is a two-year accelerated investment programme designed to place Vodafone at the forefront of the growth in customer demand for mobile data and the increasing trend towards the convergence of fixed and mobile services for individuals and businesses. The main focus of this programme is the expansion of 4G coverage in Europe and 3G and 4G coverage in AMAP region, extending its own fibre networks in a number of markets, modernizing its mobile networks and developing and introducing leading enterprise products and services into more countries. As per the management, the company continued making good progress in project spring in the first half of fiscal 2016.


Management outlook for fiscal 2016:

According to the management guidance, the company’s EBITDA for the 2016 fiscal year is expected to

be in the range of £11.7 billion to £12.0 billion. The management expects the profit and revenue to improve in the second half.

Earnings Outlook :

 Based on the above discussion, the management guidance and our own estimates, we estimate Vodafone PLC 2016 revenue will be £44.338 billion (£42.227 billion for fiscal 2015) and the operating profit (Adjusted) will be £3.717 billion (2015 operating profit was £3.507 billion). Our estimates are conservative and assume 5 % year-over-year growth in sales and a margin for earnings before interest and taxes (EBIT) of 8.4%. Please find below the earnings outlook of the company:


Source: Author’s own calculations

In the above table, the fiscal 2014 reported earnings included extra ordinary items of £48.108 Bn. Adjusted profits reflect profits excluding non-recurring items.

Valuation based on enterprise value:

From 2013 through 2015, Vodafone PLC has traded at an average enterprise value by sales multiple of 2.0x. That assumes a multiple of 2.0x to calculate the target price. Based on this ratio and on estimated 2016 and 2017 sales, the stock price target is 251 pence. The calculations are shown in the table below:

Source: Author’s own calculations

Based on the valuation and the above discussions, we set 6 m-12 m target price of 251p. Vodafone Plc has a consensus rating of hold with a target price of 238 p which is almost in line with our target price of 251 p.

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