“Vodafone today announces that discussions with Liberty Global have terminated,” Vodafone (LSE: VOD) said today. That’s exactly the outcome I expected back in May — so what happens now?
Bearish or bullish?
On 5 June 2015, Vodafone said that it was “in the early stages of discussions with Liberty Global regarding a possible exchange of selected assets between the two companies.“
Today’s statement gives Vodafone a different dimension — investors will now have to focus on fundamentals and nothing else. Frankly, I would not be prepared to buy its stock just yet, but I am ready to give management the benefit of the doubt, adding VOD to my wish list.
That’s not been the case for a very long time.
Evidence
I need more evidence, though, that growth in organic service revenue will get closer to 1.5% quarterly, and that projected trends derived from its latest quarterly results (+0.8% growth rate) will get better into 2017. In fact, at 2.3 times its forward net leverage is still problematic, in my view.
Furthermore, management must confirm that free cash flow will be about £1bn on an annual basis, and possibly as high as £1.5bn on the back of additional cost reductions. Based on these assumptions, Vodafone will likely be able to maintain its rich dividend policy, according to my calculations — its current stock price implies a forward yield of 5.3%.
That’s important because Vodafone has a significant debt pile and if it does not grow, both principal and interest repayments will become heavier and could certainly jeopardise its credit rating, which is just a notch above junk. Finally, it’d be great to hear more good news than bad news for its German business, which underperformed in recent times.
210p
After months of speculations, its stock finally starts to trade without any M&A premium, which tends to inflate asset prices under extraordinary circumstances, including the possibility of a takeover, disposals or asset swaps. And that’s another reason why if I were to invest in the telecommunication sector today I would be tempted to buy VOD.
Its shares are down almost 4% at the time of writing as the market did not digest the Liberty news, yet we are getting closer to a valuation that makes some sense now — the low end of my personal price target range remains 200p. By comparison, the average price target from brokers is about 250p, according to Thomson Reuters, but I’d expect a few downgrades as early as this week, particularly from the bulls who have pencilled a price target of 300p a share.
So, you can wait a day or two before deciding what to do.
