Vodafone Remains Undervalued Despite Downgrade

Morningstar equity analysts are reducing their fair value estimate for Vodafone due to the recent strengthening of the pound versus the euro

Allan C. Nichols, CFA 2 February, 2018 | 7:29AM
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Vodafone is impacted by currency movements

Vodafone (VOD) reported third-quarter sales that were a bit below analyst expectations. Morningstar equity analysts are reducing their fair value estimate for the shares to £2.50 from £2.55 due to the recent strengthening of the British pound versus the euro, but we believe the stock remains undervalued.

A 10% strengthening of the euro would increase our fair value estimate to £2.80 per share, while a 10% weakening of the euro would decrease it to £2.25. We previously decreased our revenue expectations for the current fiscal year due to adverse currency movements.

We believe Vodafone retains a competitive advantage over peers, so our narrow moat rating is unchanged.

The firm reported revenue fell 3.6% in the quarter year over year versus our full-year projection of a 3% decline. Revenue growth is hurt by the removal of the Netherlands after its merger with Ziggo and by currency movements. The currency movements were particularly noticeable in Vodafone’s Africa, Middle East and Asia-Pacific, or AMAP, region, where organic service revenue grew 6.8% but fell 5.6% in reported currency.

Local revenue growth was driven by 8% year-over-year wireless subscriber growth to 161.8 million. The AMAP region now accounts for over 24% of the firmwide revenue, and we expect it will remain the largest driver of organic revenue growth. In Vodafone’s big four markets, Germany, Italy, Spain, and the United Kingdom, it continues to lose wireless subscribers, down 1.7% to 84.9 million.

However, revenue continues to grow in most markets due to growth in data and fixed-line revenue. Its broadband subscriber base in those four countries increased 8.8% to 12.6 million, and we expect the firm’s broadband business to continue to grow.

We find it interesting that many people still think of Vodafone as a wireless business, yet its fixed-line business now contributes 25% of its service revenue worldwide and 29% within Europe. Additionally, its enterprise business, which includes business wireless, accounts for another 29% of total service revenue. Thus, we think the markets’ concerns of a slowdown in retail wireless in Europe is overdone as it now accounts for less than 25% of Vodafone’s service revenue.

 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Vodafone Group PLC72.12 GBX0.75Rating

About Author

Allan C. Nichols, CFA  is a senior stock analyst and international investing specialist with Morningstar.

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