Vodafone Plc;  Updating Price Target and Trading Guidance – 11 September 2014


Group Financial Performance Continues to Decline, Shares under Pressure

Overall, Vodafone’s performance deterioration continued its 2013 decline into the 1st quarter of the current financial year, with group service revenue falling by 2.9%. This was as strong growth in the emerging markets proved insufficient to offset the declining performance of core markets such as the UK and Europe.

Consequently, the shares have suffered from deteriorating sentiment toward the group’s growth prospects as well as declining interest since the payment of special dividends resulting from the Verizon disposal.

As a result, VOD.L has remained under pressure throughout much of Q2 and Q3, with our price target of 190.00 pence to the downside being reached in July.

Today we revise our guidance as to what we expect from the group during the months ahead, while assigning a new price target to the shares.

To view our earlier report, click here

Vodafone Share Price at Hourly Intervals



A Fork in the Road

Uncertainty surrounding the road ahead for Vodafone has increased during recent weeks as further developments regarding M&A activity in the telecoms sector have now emerged. Where previously Vodafone shareholders benefited from the backstop that if management’s acquisition strategy failed then a takeover by international rivals would be more likely, this is now not the case.

The determinant of this has been announcements from both AT&T as well as Japan’s Softbank that each intend to pursue alternative opportunities in North America.

With this comes a fork in the road for Vodafone shareholders as each is facing a choice of whether to stay the course and continue to have faith in management’s ability to buy and build a brighter future for the group, or walk away while the shares remain above their longer-term average.


The Road Ahead

Over the longer-term, Vodafone has a number of opportunities available to it, most notably in unified communications, emerging markets and wireless data services.

In relation to unified communications, Vodafone seeks to combine both mobile and fixed line telecoms in Europe as evidenced by its acquisitions in both Germany and Spain which have each advanced the group’s progress in this area.

The rationale behind this move is that unified comms will provide the group with an attractive entry into a new service area, with an ideal opportunity to increase the average expenditure of existing clients while also tapping into a large pool of pre-existing fixed revenue (fixed line).

In addition to the above, emerging markets also offer substantial growth opportunities for the group, although further progress here comes with risks attached and will be slow and steady at best.

Further from here, Vodafone also has access to increased revenue opportunities through the roll out of 4G data services. According to current management figures and statements, the group expects to achieve a substantial penetration of the UK and European market for wireless data. While some way off from here at present, management optimism on this subject bodes well for earnings expectations over the medium to long term.  

All in all, the case for remaining invested in Vodafone is a relatively strong one given its existing dominant position in the UK & Europe, strong brand, healthy balance sheet and numerous expansion opportunities. However, investors have already demonstrated a degree of scepticism over the group’s ability to avoid the pitfalls of the past when on the acquisition trail.


Summary, Conclusion and Takeaway

Given the dependency of the group’s strategy upon M&A, and management’s poor track record at the negotiating table, we believe that the group will need to demonstrate that its strategy is working, with tangible progress, before investors will be willing to increase their bets on its longer-term success.

For this reason, and given the diminishing likelihood that the group will become an M&A target, we have downgraded our forward outlook for the shares.

After hitting our previous target, VOD.L has recovered some of the ground previously lost and now sits comfortably above the 200.00 pence. However, we see further upside from here as likely to remain capped at 210.00 pence and expect that the predominant directional bias of trading will be to the downside.

Consequently, and according to our earnings and valuation forecasts, we assign a medium term price target today of 175.00 pence for shares currently trading at 205.00 pence.


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