The debate over whether the Vodafone (LSE:VOD) share price offers good value rages on. And based on comments I’ve seen, investors appear to have widely differing views about how to interpret the group’s most recent trading update, released on 4 February.
For the year ending 31 March (FY25), the group remains on course to report revenue of around €37bn. Adjusted EBITDAaL (earnings before interest, tax, depreciation and amortisation, after leases) of €11bn is anticipated.
The directors hope that the recent restructuring exercise will result in a slimmer group, albeit one that uses its assets more efficiently. Here’s my attempt at providing a balanced view.
A bullish view
Vodafone’s business in Germany has been struggling. And its performance has a material impact on the group. However, during the third quarter of FY25, there were some signs of a recovery, with the directors reporting “improving customer trends”. An additional 23,000 individuals entered into mobile contracts during the period.
In my opinion, it’s good news that the company has agreed to sell its division in Italy for €8bn, following on from the disposal of its Spanish business. This’ll generate some much-needed cash to help reduce the group’s borrowings. And it should improve the return on capital employed.
Encouragingly, net debt continues to fall. At 30 September 2024, it was €31.8bn, compared to €33.2bn a year earlier. And it’s much lower than it was at the end of FY20 (€42bn).
Also, the group’s coming to the end of a €2bn share buyback programme, which should help improve earnings per share.
The proposed merger of the group’s UK operations with Three was given regulatory approval in December. The company says this’ll promote greater competition and ensure better value for consumers.
And a bearish view
Vodafone Germany has been impacted by a change in law which prevents the bulk-selling of TV contracts. The division remains loss-making and lost 5,000 business customers during the third quarter of FY25. This contributed to a 7.6% drop in service revenue, compared to the same period in FY24.
Selling its division in Italy will generate some cash. However, it’ll continue the trend of making the group smaller. During FY24, the country contributed €4.67bn to revenue.
Although the group’s indebtedness is improving, it still remains high relative to earnings.
The group’s €2bn share buyback programme’s nearing completion. However, in my opinion, it doesn’t adequately compensate shareholders for the 50% dividend cut announced last May.
Although the company’s merger with Three is likely to complete in the first half of 2025, I don’t know what this means for shareholders. Annual cost and capital expenditure synergies of £700m are expected by the fifth full year post-completion. But this feels like a long time away.
On balance
Overall, although Germany remains a concern, I think the stock continues to offer good value. The 204 listed telecoms companies in Europe have a trailing 12-months price-to-earnings ratio of 13.7. During four quarters to 30 September 2024, Vodafone reported earnings per share of 8.59 euro cents (7.12p at current exchange rates). Applying the European-wide multiple to this figure gives a possible valuation of 97.5p.
This is a 39% uplift to its current (28 February) share price. On this basis, I think Vodafone could be a stock for bargain-hunters to consider.
