Picture supply: Vodafone Group plc
I’ve lengthy been arguing that the Vodafone (LSE:VOD) share worth underestimates the true worth of the telecoms group. Nevertheless, no person seems to have been listening!
Effectively, possibly issues are beginning to change. That’s as a result of since 4 February, when the share worth 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 attempting to child myself if I do know – deep down – that I made a mistake once I purchased the inventory. As Warren Buffett famously as soon as mentioned: “Ought to you end up in a chronically leaking boat, vitality dedicated to altering vessels is more likely to be extra productive than vitality dedicated to patching leaks.”
However no matter metric I exploit, I all the time come again to the identical conclusion. Specifically, that Vodafone’s market cap (at the moment £19.2bn) doesn’t precisely replicate its underlying worth.
Crunching the numbers
Take earnings for instance.
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 fundamental 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 at the moment be altering fingers for 93.6p. That’s a premium of 23.8% to right now’s worth.
It’s the same 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 occasions 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 indicate a inventory market valuation of over £70bn. Lowering this by the group’s debt would nonetheless recommend its present market cap is means under 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 regulation change in regards to the bundling of contracts, it’s dropping home clients in Germany, its largest market. And its debt stays on the excessive aspect — telecoms infrastructure doesn’t come low-cost. Competitors within the sector can also be intense.
Sceptics may additionally level out that the corporate’s share buyback programme is behind the share worth improve, fairly than a change in investor sentiment. The corporate’s purchased simply over 406m of its personal shares because the begin of February, lowering the quantity in circulation by 1.6%. I’m certain this may have had some impression on the worth however I don’t assume it explains the entire current improve.
Relax!
But regardless of the current share worth rally, I’m not getting too excited. A take a look at the group’s five-year chart exhibits that we’ve been right here earlier than. Many occasions, in truth.
A minimum of it’s been trending in the appropriate path 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.
