The Vodafone (LSE:VOD) share price appears to be stuck. The last time it was above 75p was in November 2023. Since May 2019, it’s fallen by 44%.
The decline is due to stagnant revenues and falling earnings. But against this disappointing backdrop, here’s why I still believe the company is hugely undervalued.
Ringing the changes
To try and improve its return on capital employed (ROCE), Vodafone has been exiting various markets.
It’s already sold its interests in Ghana and Hungary. And it disposed of its share of Vantage Towers, a European infrastructure business. And more recently, it’s successfully negotiated deals to offload its Spanish and Italian divisions.
To help investors understand the implications, the company has reissued its results for the year ended 31 March 2023 (FY23) and six months ended 30 September 2023 (H1 24), excluding these discontinued operations.
They show EBITDAaL (earnings before interest, tax, depreciation and amortisation, after leases) of €12.4bn in FY23, and €5.4bn, for H1 24. Vodafone isn’t a seasonal business so I’m going to double its H1 24 result to assume earnings for FY24 of €10.8bn.
To come up with a possible valuation it’s necessary to apply a multiple to this estimate of earnings. The best way to do this is to use figures from actual deals.
The telecoms giant has agreed to sell its businesses in Spain and Italy for 5.3 times and 7.6 times EBITDAaL, respectively — an average of 6.45.
Therefore, a possible valuation for Vodafone is 6.45 x €10.8bn = €69.7bn (£60bn at current exchange rates).
That would be over three times its current market cap of £18.8bn, implying a share price of 221p.
Gearing
However, these businesses are being sold without any debt. If borrowings were included then the consideration received by Vodafone would be lower.
At 30 September 2023, Vodafone had net debt of €36.2bn. The company plans to reduce this by €8bn using some of the sales proceeds from its Mediterranean businesses.
If I reduce my earlier valuation of €69.7bn by post-sale net debt of €28.2bn (€36.2bn – €8bn), then I think it’s realistic to assume Vodafone’s worth €41.5bn (£35.7bn).
Based on these assumptions, the share price ‘should’ be 131p.
A lone voice?
But a company is only worth what investors are prepared to pay for it. And because of the lack of growth and large debt pile, the majority clearly think its intrinsic value is currently around 70p a share.
However, we’ve seen how the company is seeking to reduce its borrowings. It’s also addressing its flat revenues by implementing some hefty price increases and focusing more on its business customers.
With regards to profitability, Selling Spain and Italy is likely to improve the company’s ROCE by “at least” one percentage point. This might not sound very much. But in FY23 it would have been worth another €1.1bn (7.7%) of operating profit.
But I still think there’s too much going on for investors to fully understand what a reshaped group is going to look like and how it’s likely to perform.
Also, there’s no guarantee that the turnaround plan will work. The company has previously attempted — and failed — to reverse its declining performance.
However, I remain hopeful that a slimline Vodafone will soon deliver some tangible results and give other investors cause to value the company like I do.
