Picture supply: Vodafone Group plc
I’ve lengthy been arguing that the Vodafone (LSE:VOD) share value underestimates the true worth of the telecoms group. Nevertheless, no one seems to have been listening!
Nicely, possibly issues are beginning to change. That’s as a result of since 4 February, when the share value closed at 65.1p, it’s risen 16.1% to 75.6p (at lunchtime on 21 March).
Though I’m a shareholder, I attempt to take a dispassionate view. There’s no level making an attempt to child myself if I do know – deep down – that I made a mistake after I purchased the inventory. As Warren Buffett famously as soon as stated: “Ought to you end up in a chronically leaking boat, vitality dedicated to altering vessels is prone to be extra productive than vitality dedicated to patching leaks.”
However no matter metric I take advantage of, I at all times come again to the identical conclusion. Particularly, that Vodafone’s market cap (presently £19.2bn) doesn’t precisely replicate its underlying worth.
Crunching the numbers
Take earnings for example.
The common historic (trailing 12 months) price-to-earnings ratio of 206 listed telecoms firms is 12.6. For the 12 months to 30 September 2024, Vodafone’s primary earnings per share from persevering with operations was 8.87 euro cents (7.43p at present trade charges). If the group was valued in step with the sector common, its shares would presently be altering palms for 93.6p. That’s a premium of 23.8% to in the present day’s value.
It’s an analogous story when the group’s steadiness sheet is taken into account. Utilizing its newest revealed accounts at 30 September 2024, Vodafone’s price-to-book (PTB) ratio is simply 0.38. For comparability, its closest rival on the FTSE 100, BT, has a PTB ratio of 1.3.
Lastly, I consider the latest transaction by the corporate helps my argument.
In January, Vodafone offered its Italian division for 7.6 instances adjusted earnings earlier than curiosity, tax, depreciation and amortisation, after leases (EBITDAaL). Analysts are predicting EBITDAaL of €11.02bn (£9.24bn) for the yr ending 31 March 2025. Valuing the group on the identical foundation would suggest a inventory market valuation of over £70bn. Lowering this by the group’s debt would nonetheless counsel its present market cap is method beneath its intrinsic worth.
Issues to beat
Nevertheless, regardless of my perception that it’s undervalued, the group continues to face some challenges.
Because of a legislation change in regards to the bundling of contracts, it’s dropping home prospects in Germany, its largest market. And its debt stays on the excessive facet — telecoms infrastructure doesn’t come low cost. Competitors within the sector can be intense.
Sceptics may also level out that the corporate’s share buyback programme is behind the share value enhance, reasonably than a change in investor sentiment. The corporate’s purchased simply over 406m of its personal shares for the reason that begin of February, decreasing the quantity in circulation by 1.6%. I’m positive this can have had some affect on the worth however I don’t suppose it explains the entire current enhance.
Settle down!
But regardless of the current share value rally, I’m not getting too excited. A have a look at the group’s five-year chart exhibits that we’ve been right here earlier than. Many instances, the truth is.
No less than it’s been trending in the correct route for the previous six weeks or so. I’m subsequently going to carry on to my Vodafone shares, hoping that extra traders will quickly worth the inventory as I do.