Welcome to Morningstar.co.uk’s first crowdsourced article. Our Twitter poll asked readers to vote for a “Stock of the Week” and you have chosen Vodafone (VOD) as the inaugural company in this new series, beating HSBC (HSBA), British American Tobacco (BATS) and WPP (WPP).
The FTSE 100 telecoms firm is rated as four-star stock by Morningstar analysts, which means that at 117p, Vodafone is trading well below its fair value of 194p – and analyst Michael Hodel believes the shares are attractive at current levels.
The company endeared itself to income investors this year by holding its dividend amid a barrage of cuts and suspension by big names. It’s currently yielding more than 6% at a time when the average FTSE 100 yield is around 4%.
Another interesting development for shareholders is the plan to float its mobile phone masts business in a whopping £14 billion IPO next year. Vantage Towers, as the company will be known, is expected to generate over €500 million in extra profit every year. The announcement helped drive the recovery in Vodafone’s share price since the March lows when stock markets were gripped by coronavirus panic.
“Shares Are Attractive”
Against that backdrop, what do the experts think? Here’s what Morningstar analyst Michael Hodel has to say about the company, following its recent set of results, which covered the period when most of Europe was in lockdown:
“Vodafone’s first-quarter revenue performance was very respectable given the hit to revenue caused by the pandemic. Consolidated service revenue declined 1.3% year on year, snapping a three-quarter stretch in which revenue had shown accelerating growth. Lower wireless roaming revenue (down 70% versus the prior year) was the primary culprit.”
Looking at results in each country in which it operates, Hodel says Vodafone posted solid results across its major European markets, adding broadband customers in each. Spain and Italy, both troubled markets for Vodafone in recent quarters, showed improvement despite being hard-hit by the pandemic.
He adds: “Management also reiterated expectations for €5 billion in free cash flow and pre-tax profits to be flat or down slightly for fiscal 2021. We don’t expect to materially change our 194p fair value estimate or narrow moat rating in response to the trading update (Vodafone only discloses profitability and balance sheet information semi-annually). We believe the shares are attractive.”
Hodel has taken a keen interest in Vodafone’s unveiling of more details about its tower business, and plans to take the firm, dubbed Vantage Towers, public in early 2021. Vodafone has largely finalised commercial terms with Vantage, resulting in a business that will generate about €525 million of annual pre-tax profits, excluding the results of INWIT (33%-owned; Italy) and CTIL (50%-owned, UK).
He says: “At this point, the details of the agreement between Vodafone and Vantage don’t mean much, as the entities are determining how to split a pie that Vodafone shareholders currently own in its entirety. Management also wasn’t ready to provide details on Vantage’s capital structure, including its planned debt load, but Vodafone will hold a majority interest in the business for the foreseeable future.”