Since 11 September 2023, the Vodafone (LSE:VOD) share price has risen by just 0.9%.
Given that it’s collapsed by more than 50% since September 2019, long-suffering shareholders (like me) should probably be grateful. But will it ever recapture former glories?
Back to basics
When Margherita Della Valle was appointed chief executive in April 2023, she quickly diagnosed a fundamental problem. Vodafone’s return on capital employed (ROCE) wasn’t high enough. During the year ended 31 March 2024 (FY24), its post-tax ROCE was 4.5%.
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Think about that.
The company would have made more if it had sold all its assets, paid off its liabilities, and left the remaining cash in an interest-earning bank account.
To help improve its financial performance, the company recently sold its Spanish division and a binding agreement will see it offloading its Italian business.
Selling these is expected to improve the group’s ROCE by one percentage point.
And it will provide some much-needed cash to help pay down Vodafone’s enormous borrowings.
Looking further ahead — subject to regulatory approval — the company hopes to merge its UK operations with Three. Although no numbers have been provided, there should be significant overhead savings.
If all goes to plan, a slimmed down business will emerge, using its assets more efficiently and growing again.
Not all plain sailing
But the company faces a major challenge in Germany, its biggest market.
A change in the law means landlords are no longer allowed to bundle television services with rental agreements. As a result, Vodafone expects to lose 50% of its 8.5m multi-dwelling customers. It’s not expecting revenue growth in the country to resume until FY26.
It’s a better picture elsewhere. The first quarter of FY25 saw an increase in turnover — compared to the same period in FY24 — in all other territories.
But in March, to reflect a smaller group, the directors decided to cut the dividend by 50%, to 4.5 euro cents (3.8p). Of concern, it’s the second cut in six years.
As a general rule, investors don’t like change and uncertainty. I therefore think it’s a little early to predict (with any confidence) a recovery in the company’s share price any time soon.
But if it becomes clearer that the turnaround plan is starting work, I think more people will want a piece of the action and the share price could start to take off.
Simple maths
And in my opinion, now could be a good entry point to consider.
That’s because the company sold its Spanish business for 5.6 times adjusted EBITDAaL (earnings before interest, tax, depreciation and amortisation, after leases).
Applying this to Vodafone’s forecast earnings for FY25, of €13.3bn, and deducting its net debt at 31 March 2024 of €33.2bn, gives a possible valuation for the group of €41.3bn (£34.8bn).
If realised, this would be a 76% premium to its current (11 September) market cap. The last time the company achieved a similar valuation was in April 2022.
Although there are no guarantees, I remain hopeful that the financial performance of the restructured group will start to improve. The share price should then start to move in the right direction. I doubt it will become the FTSE 100’s most valuable company again. But I think it will be worth a lot more than it is today.
