The Vodafone (LSE:VOD) share price continues to disappoint. It appears to be stuck in a range of 65-75p. Shareholders (like me) could be forgiven for thinking that the days when the shares were worth more than £1 are long gone.
Looking back to July 2023, its shares have fallen 7% in value. Since July 2019, they’ve crashed 48%. It’s sometimes hard to believe that Vodafone was once the UK’s most valuable listed company.
It’s a different story with Deutsche Telekom, Europe’s largest telecoms operator. Over the past five years, its share price has risen by over 50%.
Both companies like to use EBITDAaL (earnings before interest, tax, depreciation and amortisation, after leases) to measure profitability.
Vodafone recently sold its business in Spain and is currently in advanced talks to dispose of its Italian division. Excluding these, analysts are expecting EBITDAaL, for the year ending 31 March 2025 (FY25), to be €10.9bn (£9.3bn at current exchange rates).
Deutsche Telekom is forecast to generate earnings of €42.8bn (£36.3bn) in 2024.
If these figures prove to be correct, it means the two companies are currently valued at 2 and 2.73 times their expected current year earnings respectively.
If Vodafone could achieve a valuation similar to that of its larger rival, its share price would be just below 100p — 95p, in fact.
Delving into the detail
A closer look at the recent financial performance of the two companies highlights why, in my opinion, they’re valued differently.
The biggest single market for both is Germany. The first three months of 2024 saw Deutsche Telekom record its 30th successive quarterly earnings growth in the country. It’s also managed to grow its profits for 25 consecutive quarters in Europe as a whole.
By contrast, Vodafone’s revenue, margin and adjusted EBITDAaL in Germany were all lower in FY24, compared to FY23.
It’s a similar story with net debt. At 31 March it was 3.02 times profits for the UK company. At 31 December 2023, Deutsche Telekom’s ratio was 2.58.
Ringing the changes
Despite this apparently gloomy assessment, I’m pleased to report that Vodafone is seeking to address its problems. That’s why it wants to get rid of its Mediterranean businesses. These are dragging down its return on capital (this measure should improve by one percentage point post-disposal) and will give it up to €13bn in sales proceeds.
In an attempt to soften the blow of a 50% dividend cut, €4bn of this is expected to be used to buy the company’s own shares. The balance will help to reduce its borrowings.
The company has also raised its prices in Germany. And it intends to focus more on the business sector in Europe.
In addition, plans are being made to simplify the group’s operating structure to improve its customer experience. And if regulatory approval’s obtained, its UK operation will be merged with Three.
Deutsche Telekom shows that it’s possible to be successful in the telecoms industry despite the triple threat of intense competition, huge capital expenditure requirements, and regulatory oversight.
I therefore remain hopeful that Vodafone will be able to turn its business round and start growing again. However, in my opinion, only when evidence of this becomes clearer will it be possible to justify a three-figure share price again.
