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Vodafone: Improving Situation But Share Price Upside Provides No Margin Of Safety

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Neutral Investing


  • Vodafone's share price has declined 40% since 2015 to 2020 pre-covid level due to stretched balance sheet and performance issue.
  • Vodafone operates in highly competitive and mature market, thus limiting future high performance growth.
  • While recent earnings have shown that performance is improving, issues in key markets such as Italy and Spain still persist.
  • We estimate Vodafone's fair value to be USD 19-20 (10-14% upside from current level; US ADR). The potential upside is not attractive and provides no margin of safety.

Current Situation

Vodafone's share price has cratered from 221 pence (UK exchange) in December 2015 to 139 pence in 2020 (pre-covid impact). The decline can mainly be attributed to:

  • Over-leveraged balance sheet (D/E has increased from 52% in 15FY to 130% FY; Net Debt/EBITDA has increased from 2.5x to 3.8x)
  • Unsustainable dividend payout (Dividend/share increased from EUR 0.10 in 2005 to EUR 0.21 in 2013 then steadily declined to EUR 0.15 in 2018 before it was cut to EUR 0.09 in 2019; this is despite net income being on a declining trend)
  • History of overpaying for acquisitions (EUR 26Bn impairment loss in 2006, EUR 13Bn in 2007, EUR 28Bn from 2009 to 2014 and the recent EUR 5bn from 2019-2020)
  • Competitive market environment (as evident in their stagnant revenue)
  • Cash drain issues in their India Unit

What has changed?

The market has recently appraised Vodafone's recent FY20 result due to:

  • Service revenue finally growing again
  • Focus on efficiency and cash generation
  • Balance sheet deleveraging

While these are all positive developments, we believe that upside at current price (USD 17.56 for US market/138.96 pence for UK market; as of this writing 7 June 2020) is limited.

Limited Upside at current price

We forecast Vodafone's fair value to be GBP 1.56-1.62 / USD 19.27-19.95 representing a 10-16% upside from current level. This is based on DCF 1.5% terminal growth rate and 7.5x EV/EBITDA. We are forecating Revenue of EUR 48.7 Bn in 2025 FY (1.6% CAGR from 2020 FY) and Adjusted EBITDA (inc. JV) of EUR 15.9 Bn (1.7% CAGR from 2020 FY).

Our forecast is based on a couple of assumptions:

  • Germany: 2% CAGR revenue growth '20-'25 FY and -2% CAGR decline in EBITDA due to stagnant mobile revenue and fierce competition in fixed service with OPEX savings not being enough to fully

This article was written by

Neutral Investing profile picture
My investment approach is in finding sector neutral stock picks (by going long on a good company and short the bad one). I am more focused on minimizing risk than maximising returns.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in VOD over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

We might initiate a long position if share price drops to USD 13-14 (US Exchange)

Seeking Alpha's Disclosure: Past performance is no guarantee of future results. No recommendation or advice is being given as to whether any investment is suitable for a particular investor. Any views or opinions expressed above may not reflect those of Seeking Alpha as a whole. Seeking Alpha is not a licensed securities dealer, broker or US investment adviser or investment bank. Our analysts are third party authors that include both professional investors and individual investors who may not be licensed or certified by any institute or regulatory body.

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