Summary
- Liberty Global is a new shareholder with a 4.9% equity stake.
- Hungary deconsolidation is completed, and Vantage disposal proceeds are at €6.6 billion.
- Vodafone is currently trading at an FCF yield of more than 10%, we believe this is not justified. Our buy rating is then confirmed.
Here at the Lab, we recently initiated Vodafone coverage ( VOD ) with a buy rating target of £135 per share. Aside from the financial ratio consideration based on a higher adjusted free-cash-flow yield of 8.5% versus its closes competitors (7.8%), at that time, we reported how Iliad founder, i.e., Xavier Niel, acquired a 2.5% stake in the red telco giant. He explained how Vodafone was " an attractive investment opportunity, based on the quality of its asset portfolio and solid underlying trends in the global industry of telecommunications ".
Today, the American Liberty Global corporation, another strategic investor, decided to enter with a 4.92% investment in Vodafone stock. Looking at the press release, this is not a takeover move; however, the CEO defines this deal as an " opportunistic investment ". As a reminder, Liberty Global is a shareholder of Formula E racing, ITV, AtlasEdge, Televisa Univision, and Plume. In addition, he explained that " Vodafone's current share price does not reflect the underlying long-term value of their operating businesses ". Speaking of numbers, Liberty Global purchased 1.335 million shares for a total value consideration of approximately £1.2 billion. This fully supports Mare Evidence Lab's thesis on 'Disappointing Results But the Valuation is Too Low To Ignore'.
Liberty Global investments followed the United Arab Emirates' latest move, which increased its stake to 13%. In this case, the first equity stake was bought in May 2022 for a total consideration of $4.4 billion dollars for 9.8% of Vodafone's shares.
Q3 Fiscal Year 2023 trading update
Starting with the CEO's words , " the recent decline in revenue in Europe shows that we can do better". She also emphasized how the new Vodafone will have a simplified " structure to give local markets full autonomy and accountability to make the best commercial decisions for their customers ". Looking at the numbers, in Q3, the UK telecommunications giant recorded a sharper-than-expected slowdown in turnover growth. This was mainly due to the difficulties encountered in Germany, the group's main market, and Spain. In the former market, the decline was 1.8% (Fig 1), while in Spain, the decrease was more marked at minus 8.7%. At the aggregate level, Q3 top-line sales recorded a decrease of 0.4% to €11.6 billion compared to the same period last year. However, we should recall the positive evolution of Vodafone Business service sales with a growth of 2.4% thanks to digital services. Going to the other key geographies, the UK was the only major market where Vodafone delivered growth, this was due to inflation-above price hikes from most UK telecom providers. In detail, UK revenue increased by 5.3% to €1.75 billion. As for Italy, Q3 sales reached €1.07 billion with a minus 3.3%, continuing the Q2 trend due to comps pressure on mobile prices and a lower growth rate in MVNO revenues (Fig 2). However, these negative factors were partially offset by strong business demand for connectivity and digital services demand as well as the second brand called "ho." In particular, Vodafone continues to explain, it has continued to grow with 52k new customers, and now reached 3 million clients.
(Fig 1)
(Fig 2)
As already anticipated in our previous publication, Vodafone is taking the necessary steps to deliver its 1 billion savings which were announced last November. 50% target was already achieved, and according to Reuters , the company is trying to cut several hundred jobs, most of them in its London office.
Conclusion and Valuation
Key to note is the fact that the Group has left unchanged its full-year guidance with the expectation to generate adjusted earnings after leases between €15 and €15.2, confirming an adjusted free cash flow of nearly €5.1 billion (Fig 3). As a reminder, our buy rating was supported by Vodafone's implied FCF generation. In our forecast and based on the latest company's guidance, we are making minor adjustments to lower its revenue in Germany. The company raised prices, but it seems that it's recording a higher churn rate (we should closely monitor Vodafone market share evolution going forward). On the positive side, here at the Lab, we are reducing the company energy opex inflation from €500 million to €400 million, last time during the Q&A call we report the following:
" Our hedging has progressed as well. So, we are now 85% hedged. And if we were using the current spot prices, the year-on-year increase that was 200 million, two months ago is approaching now 300 million for us ". Adding also: " We have hedged almost 40% also into FY2024 ".
The company's operational performance remains under pressure, but we positively welcome its new clients' focus. Even if a few investors are questioning that there is no catalyst in the company's organic turnaround, we see a higher risk in replacing the current (ad interim) CEO. We are forecasting a Q4 2023 EBITDA with a similar Q3 weakness; however, Vodafone is currently trading at an FCF yield of 10% vs peers at 8%. To support the valuation that we reiterate (including the ADR target price set at $16.4 per share), we also update the Vantage disposal to €6.6 billion and a lower debt consideration thanks to Hungary's deconsolidation (total proceed was at €1.7 billion).
(Fig 3)
For further details see:
Vodafone: Value Pick Or Value Trap?