Interactive Investor

Big upside seen for this fallen FTSE 100 giant

Vodafone shares continue to struggle, but for one City bank there’s reason for optimism after calling a big upturn for the high-yielding stock.

24th October 2023 13:29

by Graeme Evans from interactive investor

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The “prodigious” valuation gap between Vodafone Group (LSE:VOD) and its peers has been backed to close after a City bank said improving trends justified a new 165p target price.

The optimism at Deutsche Bank comes with Vodafone shares languishing in the 70p-80p range after another summer of frustration for long-suffering investors.

The bank believes that Vodafone's run of “unfortunate” events is nearing its end, with positive ones taking their place. It notes the drag from energy prices should normalise and then reverse by 2025, with emerging market currency pressures showing signs of easing.

The jettisoning of weaker assets, possibly including operations in Spain, and prospect of consolidation in the UK after this year’s Three merger deal should also benefit the top line.

Deutsche Bank said: “Vodafone is becoming easier to break out into its parts, revealing a prodigious under-valuation versus peers, which admittedly have less cable.”

The bank, which lifted its price target by 10p in today’s note, adds that disposals of weaker assets would do much to highlight this anomaly but only if proceeds are used diligently to boost dividend cover and free cash flow.

Other analysts are more cautious on prospects as JPMorgan yesterday trimmed its price target to 92p, with Barclays recently highlighting a figure of 95p.

Shares are down by around 40% since last summer as competition intensifies, leaving the London market’s one-time largest stock trading at its lowest level in 25 years.

The selling has continued even though new boss Margherita Della Valle has vowed to accelerate change, including by simplifying the organisation, cutting out complexity and taking steps to regain the company’s competitive standing.

The turnaround potential of a former FTSE 100 giant has tempted plenty of retail investors, with shares among the five most-bought on our platform in the third quarter of 2023.

New buyers have been attracted by a dividend yield now above 10%, although such a lofty level comes with a health warning over the potential for the payout to be cut.

The total dividend was an unchanged nine euro cents a share in May’s annual results, only just covered by earnings of 11.45 euro cents for the year to 31 March.

The next landmark for Vodafone investors will be half-year results on 14 November, when the City will be looking for updates on M&A activity and signs that operational trends are improving. The largest unit of Germany, which accounts for 30% of revenues, will be a particular focus after recent price rises.

Deutsche Bank is forecasting service revenues growth across the group will improve to 2.2% in the second quarter from 1.8% in the opening three months of the financial year.

This summer’s deal with the owner of Three, which is subject to regulatory approval, will combine the third and fourth-largest network operators in the UK in a move that creates the scale needed to invest in network and 5G expansion. 

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