Interactive Investor

Why Vodafone shares should double in value

21st March 2023 15:05

by Graeme Evans from interactive investor

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There’s a view in the City that the telecoms giant can revisit prices not seen in five years, but long-suffering shareholders will need some convincing.

Vodafone shares 600

Vodafone Group (LSE:VOD) investors frustrated by the telco’s slow-motion turnaround have been urged to hang on after a City bank today backed the shares to double in value.

Deutsche Bank’s updated target price of 185p compares with the current 92p after Vodafone surrendered much of February’s 7% improvement during recent market turmoil.

The last time Vodafone traded at Deutsche Bank’s forecast level was in summer 2018, long before Covid hit global travel and the company was hit by intense competition affecting key markets including Italy and Spain.

Chief executive Nick Read left in December, a move that fuelled hopes a new management can be a catalyst to expedite Vodafone’s restructuring strategy and reallocate capital into core markets and away from those with poor returns.

Deutsche Bank analyst Robert Grindle said today: “Underlying value is compelling and the company is taking significant steps towards revealing it - though it will take a while for improving business trends to become fully apparent.”

He said Vodafone’s “slow-motion” transformation reflected the long-lead time between idea genesis and implementation, which is often the case in the politically sensitive, technically complex and regulated telecoms industry.

Grindle added: “This lag is anathema to public markets allowing the original logic to be either forgotten or undermined, sometimes by unforeseen, unfortunate events, over time.

“We expect more appreciation for plans already executed or whose implementation is underway at Vodafone with implications for value transparency and perceived risk.”

Slow-moving examples include the consolidation of Africa operations and the decision to partially monetise the group's towers portfolio via the Vantage Towers IPO in March 2021, the benefits of which should start to become more visible.

As these events compound and the group sees top line growth return in Europe alongside lower energy costs, Grindle sees a substantial re-rating opportunity.

He lowered his price target by 10p due to currency headwinds but pointed out shares now trade on an underlying 3.9 times 2024 earnings, well below European peers on 6.7 times. Other potential catalysts include deleveraging, M&A activity and further infrastructure deals.

His optimism is shared by US media investor Liberty Global after it recently took a 4.9% Vodafone stake worth £1.2 billion. Liberty’s boss Mike Fries called it an “opportunistic and financial investment” and said his company had no plans for a takeover.

Last month, analysts at Bank of America said shares looked too cheap after pointing out the upside risk to consensus forecasts from easing energy costs, price rises and cost cutting.

A 30% dividend cut is a risk but the bank suspected this was priced into a 9% yield and that a reduction would derive a more sustainable 6% yield along with a better Vodafone. It moved to a “buy” recommendation, with a sum of parts price target of 131p.

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