Vodafone’s stock could be set for a rally.
Carla Gottgens/Bloomberg
In August 2020, as Vodafone Group shares tumbled, this column said the drop was a buying opportunity. Nine months after that, the telecom giant’s stock gained almost 20%, to 1.40 pounds sterling ($1.91), thanks to value created from asset disposals—such as the initial public offering of its mobile-tower business—and the easing of Covid-related travel restrictions.
But just as the U.K.-listed shares (ticker: VOD.UK) hit their stride, CEO Nick Read unveiled higher-than-expected capital-expenditure plans. He green lighted an extra £500 million a year for more investment in the network, advances in financial-services technology in Africa, and to pursue digital opportunities presented during the pandemic, such as heavy demand for cybersecurity.
This, along with concerns over the health of its core German business, spooked investors, sending shares tumbling 17% to £1.09 in the past six months. That compares to a 1.1% fall at rival Deutsche Telekom (DTE.Germany) and a 2.4% decline at Telefonica (TEF).
The slide presents another buying opportunity ahead of Vodafone ’s half- year update later this month.
Research boutique New Street wrote in a recent note that the German business will recover. “Vodafone’s operational performance remains misunderstood by the market,” analysts wrote, adding that Vodafone is “outperforming operationally in all of their main markets.”
Analysts at Berenberg estimate the stock could rise to £1.55, boosted by its businesses in the Internet of Things (IoT) and African fintech.
The Internet of Things describes devices such as lights that connect to the web and can be activated remotely. It only accounts for 2% of Vodafone’s group revenue, or just under £1 billion, but it’s growing. In the fiscal first quarter to June 30, revenue increased by 22.3% from the same period a year ago.
The IoT enables companies to closely monitor the performance of products, cut costs, and hit environmental targets. Berenberg says the overall market for IoT is expected to expand 16% annually over the next three years.
Another growth area is fintech in Africa, where mobile phones have become vital in connecting people in remote areas and helping them secure access to medical help, finance, e-commerce, and insurance. M-Pesa, Vodafone’s mobile-based money-transfer service, was set up in 2007 with Vodacom Group (VOD.South Africa); Vodafone owns a 60.5% stake. M-Pesa services 15 million customers with nano and micro loans, for people who don’t have access to traditional financial resources.
The M-Pesa platform processed almost 4.5 billion transactions in the three months to June 30, an increase of 45% from the prior year. In terms of revenue and earnings, Vodafone receives a 60% share of everything Vodacom generates.
Vodafone has a market value of £30.7 billion and employs about 100,000 people. It fetches 11.5 times this year’s expected earnings and is valued in line with its peers. Pre-tax profit for 2021, which ended March 31, was €4.4 billion ($4.69 billion), an increase from €795 million in 2020, when the company took a large write-down for financing costs connected to its Indian business. Sales in 2021 were €43.8 billion, down from €44.9 billion in 2020, due to Covid-19 travel bans that reduced revenue from roaming charges and a decline in smartphone sales.
CEO Read tells Barron’s that “we are back to service revenue growth in Europe as well as Africa,” with more than 3% growth in the first quarter. “We have good commercial momentum in the business and we are continuing to build value around our platforms, such as IoT and M-Pesa,” he says.
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