Vodafone – Pan-European Telco Security (NASDAQ:VOD)


Day 1 - Mobile World Congress 2022

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Creator’s Be aware: That is the free model of a premium article posted on iREIT on Alpha in June of 2022.

Expensive readers,

On this piece, we’re going to check out European telco big Vodafone (NASDAQ:VOD). The corporate is a world-leading telco operator with one of many largest bases of consumers on earth (near 600 million mixed in Europe, the Center East, Africa, and Asia, with round 375 million in India).

We will discuss in regards to the historical past and foundations of the corporate and have a look at the place the corporate goes. Additionally, and most significantly, we will see what we will make by investing within the firm at this valuation – or at what valuation we ought to be beginning to put money into Vodafone.

Vodafone – Trying on the firm

When Vodafone, we need to start by understanding the corporate’s historical past – as a result of it is a related one. The corporate, together with its joint ventures, provides phone, cell, and broadband providers to over 550 million prospects worldwide.

Vodafone operations

Vodafone operations (VOD IR)

A few of Vodafone’s important markets embrace Germany, Italy, and the UK, which collectively account for roughly 50% of its group income. The corporate’s plans for this publicity are fairly clear – they purpose to diversify into additional markets in India, Africa, and different nations/continents to be able to lower their dependency on Europe as a market, which is now in the course of its execution. Vodafone as an entrant into the Indian market has seen some success, they usually at the moment have over 375 million subscribers in India alone. These subscribers will double on account of Vodafone’s merger with Thought Mobile, which was closed in mid-2018.

Vodafone Presentation

Vodafone Presentation (VOD IR)

Earlier than 2014, Vodafone owned a big (45%) stake within the US telecommunications big Verizon (VZ). This was offered as part of the corporate’s restructuring plan. The stake was offered for $130B, and the asset sale that Vodafone has undergone as a part of its plans to “lower the wire” in pay-TV and related ventures is a part of what’s depreciated the inventory’s nominal worth over the previous few years.

Vodafone’s technique over the previous few years has included the M&A of smaller wi-fi and telecommunications corporations and the event of its providers right into a full-range suite of communication plans for patrons worldwide (with a core concentrate on Europe). The acquisition of Liberty International is the newest feather within the firm’s now-extensive cap of transactions.

Vodafone’s historic and present stance on India as a market is that it represents an essential driver for future development (therefore the battle for nearly a billion prospects), they usually proceed to plan to develop within the nation.

Vodafone additionally manages a number of 5G initiatives throughout Europe, amongst different issues, within the full firm rollout of the brand new communication requirements throughout the continent. That is a lot alike the plans of AT&T (T) and different world/American telecommunications giants, that are all at the moment going through the CapEx-intensive prospects of increasing already present 4G networks into 5G.

Vodafone Presentation

Vodafone Presentation (VOD IR)

Nonetheless, all is, in fact, not effectively within the Indian market. Robust competitors, which has heated up much more insistently for the reason that launch of Jio again in -16. It is also truthful at this level to say that the promised windfall and “development” story has become a ball-and-chain round Vodafone’s company ankle. In summer time 2020, the Supreme Courtroom dominated that Indian operators undoubtedly need to pay the untold (zillions, not but estimated) quantity of rupees of the historic spectrum and license charges to the federal government that this similar Courtroom had determined to impose within the earlier autumn. Who was essentially the most affected by the ruling?

Vodafone. The winner of the ruling is Jio, which not solely owes little or no cash however already is an Indian market chief. Vodafone’s diploma of loss and points right here is tough to overstate, on condition that Vodafone selected to present out a 35.8% stake in its firm to the federal government of India fairly than paying out the curiosity owed to the federal government.

Fortunately, VOD is a primarily European participant, regardless of its a whole lot of tens of millions of Indian prospects. It’s possible you’ll get the image that Vodafone is just not an particularly well-managed firm, however this isn’t totally true. Administration made extraordinarily sensible performs which have been neglected by the broader market. What I’m talking about is the corporate’s Publish-VZ cash-long state, the place Vodafone took benefit of telco Europe to purchase a number of EU cable operators.

The Kabel-Deutschland bid in 2013 allowed Vodafone to enter the German quad-play communications market, whereas the strategic M&A of Ono allowed it to strengthen its place in Spain. Vodafone acquired Liberty International’s operations in Germany, the Czech Republic, Hungary, and Romania for €18.4bn again in -18. From a elementary viewpoint, this operation was wonderful for Vodafone. In Germany, by shopping for the cable operator Unitymedia, Vodafone constructed a converged nationwide challenger to Deutsche Telekom, bringing the fixed-side Gigabit connections to 25m German houses (62% of complete German households) by 2022, and the corporate has been leveraging its capabilities since. The present share value and think about on Vodafone usually don’t replicate this, and viewing lots of the articles printed on Searching for Alpha, it is my view that that is an usually little-known reality in regards to the firm.

In one in all its important markets, Germany, Vodafone is now one in all two giants, with the opposite one being Deutsche Telekom (OTCQX:DTEGY). By that, I imply operators that supply each fastened and cell communications, which most friends don’t. The group might be a key utility there, a money machine that gives good visibility for a minimum of 30 years.

Within the Czech Republic, Hungary and Romania, Vodafone was primarily lively within the cell phase of those markets (with 15.8m cell prospects) and has no significant presence in every nation’s fixed-line or TV segments. In these markets, it is a tertiary operator with 1 / 4 of market share or thereabouts, except Romania, the place it has practically a 3rd.

Liberty International is primarily a fixed-line and TV operator (with 1.8m broadband and a couple of.1m TV prospects) with little or no cell actions in these international locations. So the important thing level that I am attempting to make on this article as to those operations is that this transaction permits and accelerates the supply of converged fastened, cell, and TV providers within the Czech Republic, Hungary, and Romania.

Vodafone Presentation

Vodafone Presentation (VOD IR)

The corporate’s non-EU operations in Egypt, South Africa, and different issues are of great curiosity as effectively, having become an African powerhouse. I am of the camp that believes Africa to be a really vital future participant in world economics, so I am at all times on the lookout for new methods to realize publicity to the continent.

COVID-19 wasn’t good for Vodafone. The corporate suffered from decrease roaming revenues, particularly as journey trended down, however has been returning to development since then. Specifically, Vodafone can concentrate on its fastened actions as a part of its resurgence of profitability. Within the firm’s important income generator Germany, the expansion is definitely strong when it comes to developments, though VOD continues to be principally struggling in geographies like Italy.

The corporate reported FY22 not that way back, which included annual income development of 4%, which was kind of in accordance with total expectations. EBITDAaL was up 5% as lengthy, consistent with expectations as effectively.

The excellent news was that FCF really beat expectations, and Vodafone showcased simply what a high quality telco can do when it comes to free money move technology when issues are working – the destructive information was a dividend caught at 9 cents (although it wasn’t actually anticipated to develop right here) per share, in addition to a comparatively modest FY23 steering, which is more likely to overhang the corporate’s compressed/pressured share value right here.

Nonetheless, the corporate has very conservative leverage, at round 2.7X web debt/adj. EBITDAaL, and intends to proceed to push CapEx to be able to enhance its total property – excellent news, all issues thought-about. We have a look at Vodafone like we have a look at most telcos – EBITDA much less CapEx money move technology.

The issue is that the market doesn’t see Vodafone rising sufficient contemplating its spectacular property, which is why the market is punishing the corporate. This does not replicate the conservative security Vodafone really appears to be providing and the combination that appears to be ongoing. Vodafone is certainly persevering with to make good progress on integrating Unitymedia, with the rebranding and TV portfolio harmonization now full, and the organizational integration accomplished. The broadband buyer base has reached practically 11M, with 23.8M households now in a position to entry Gigabit speeds.

Elsewhere in Europe, the UK sees good momentum (EBITDA up by 3.3% YOY), aggressive Spain experiences a return to very slight income development and Italy, the hardest market of the group with continued value competitors, is declining much less, and EBITDA is stabilizing. Briefly, every thing Vodafone is seeing is development, with the one exception of Vodafone India.

Dangers to Vodafone

As you would possibly anticipate, India is among the largest dangers that bear mentioning right here – although I’ll say that with Vodafone leaving a big stake to the Indian authorities, the problem right here ought to be all however over. Other than its Indian points, there are some things that may weigh on Vodafone within the close to future, as I see the dangers.

First is the CEO. Nick Learn in all probability has achieved some good issues – however the checklist of utter catastrophes beneath his watch is lengthy. From lacking alternatives in Italy with Iliad, Spain with the Orange-Masmovil Merger, and with the Vantage story the place Brookfield and International Infrastructure Companions made a €14.5B unsolicited supply for a majority stake within the unit, however Vodafone would favor to make a take care of a telco (probably Orange) fairly than monetary traders. A mistake, as I see it – and he continues to make them. Administration, particularly Mr. Learn, and the best way he governs VOD is among the dangers I see right here – and this is perhaps a dealbreaker for a few of you.

The corporate, being a telco, is within the unenviable place of pushing huge quantities of CapEx to market to be able to maintain observe of its 5G investments, and this can probably proceed till on the very least 2025E.

The corporate’s failure to make use of its place actually involves the forefront additionally, after we think about that it missed the chance to M&A with Virgin, which is able to now merge with O2. Why would this have been such a terrific deal? As a result of with Virgin, VOD would have had within the UK what it has in Germany – a market co-leader with property second to nearly none.

Good telcos exist – and Vodafone is not essentially the most qualitative – but it surely certain as heck is among the largest and one of many extra fascinating ones.

Let’s take a look at what kind of image the valuation presents us with.

Vodafone – The valuation

Right here is the place issues get very optimistic certainly. Like many telcos, Vodafone is definitely considerably undervalued to what I view to be a conservative estimate of its earnings potential. Whereas the post-Liberty deal leverage is up considerably in comparison with previous to the deal, the dividend is now very a lot in concord with the corporate’s steadiness sheet and is well coated – whereas nonetheless being one of many best possible on your complete market.

For the DCF, I exploit very conservative estimates and estimate a Gross sales development of 0%, and truly, a destructive EBITDA of round 0.5% to account for the rise in CapEx spend, in addition to contemplating total macro. You would possibly argue as to why I am doing this, however you will notice in only a second. Even with these destructive EBITDA assumptions, a WACC of 5.3%, and a risk-free price of about 3.5%, adjusted for the present market, you continue to get a value per share for the native UK-based VOD ticker at 212p for one share – which is greater than 50% greater than the present firm share value. This accounts for and presents simply how undervalued the corporate at the moment is – you could assume such development charges and nonetheless come out on high.

This theme continues for essentially the most half throughout the valuation spectrum. I have a look at issues like friends, the place P/E averages are at the moment between 10-12X P/E. Many nice telcos are at the moment on sale, together with corporations like DT, Orange (ORAN), Telefonica (TEF), and Telenor (OTCPK:TELNY). I am lengthy a lot of the ones talked about on this article. Vodafone’s lack of EPS is pressuring its P/E, which is at the moment above 10X, however when EV/EBITDA, e book multiples, and yield comparisons, Vodafone at all times comes out on high.

It yields considerably extra, is valued at considerably much less, and has a considerably greater upside than most of its friends. From a peer comparability, Vodafone suffers from vital undervaluation, which presents traders with a chance right here.

Shifting to check the corporate’s NAV, we use EBITDA multiples to worth the corporate at peer averages of 4-6X, which along with the listed worth of the towers and different property, involves round €55B on a web foundation, which involves an implied NAV/Share primarily based on the present share depend of 150p/share. On condition that the present value is 126p, or £1.26/share, that is nonetheless a big low cost to a comparatively conservative NAV.

Regardless of which approach you slice it, aside from the conservative P/E ranking as a result of firm’s lately pressured earnings, this firm has a big upside for us to think about. S&P International analysts give the corporate common targets of £1.88 or 188p, which involves an undervaluation of 26.4%, which is on par with a number of the telcos I purchase – but in addition decrease than some others.

Nonetheless – averaging out life like assumptions, forecasts and what the corporate ought to be valued at primarily based on NAV, friends and the like, we come to a valuation of at least £1.65/share, or 165p, which nonetheless leaves us with a really first rate upside from at present’s valuation.

Thesis

Vodafone, in fact, has a gorgeous ADR – the image is similar as for the native, which is VOD. VOD is a 10X ADR, which implies that each share you purchase on the NYSE really is price 10 strange shares. The ADR displays a really actual upside that I see for the corporate and that I think about correct. VOD is forecasted to develop its earnings on the bottom of power in Germany in addition to the opposite geographies, a lot because it has been doing in 2021. Even primarily based on a conservative 12-14X P/E a number of, the upside we will get from this BBB-rated telco is 17% yearly.

Vodafone Upside

Vodafone Upside (F.A.S.T graphs)

Now, I have been pushing telcos for a very long time. Some have gone up considerably – others have been absent with their sudden rises. However the frequent denominator for each single telco I have been shopping for is the very actual incontrovertible fact that they have been delivering dividends.

With out fail. 12 months in and 12 months out.

On this coming market atmosphere, I think about the security of dividends and the security of investing at low valuations of paramount significance to us traders – and that is why I think about these companies such nice investments, even in case you would possibly expertise some strain within the quick time period.

Since you’re locking capital into very a lot crucial/needed property and providers, lots of which have incomes that, via regular value will increase (like those we have seen from US corporations), are basically listed to inflation. I do not thoughts sacrificing within the type of short-term negatives or downturns, if I get my returns within the type of dividends, adopted by the eventual returns of capital appreciation, protected. That’s what I view getting with corporations like Vodafone and different telcos.

Not everybody’s a fan. I get that. However I view telcos as materially safer than Power corporations, missing a few of their volatility (in pricing), and on par with utilities and grocers. This makes the businesses fascinating investments to me, and I think about VOD to be an excellent “BUY” with an upside right here.

Listed here are my targets for the enterprise.



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