Jefferies upgrades Vodafone to 'buy', says core business undervalued
Vodafone could release up to €16.0bn (£14.0bn) in cash by selling a stake in its tower assets while improving organic performance, Jefferies analysts said as they upgraded the phone company to 'buy'.
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The company has a route to increase returns and earn its cost of capital by organic means within three years while reducing leverage, the analysts said. Furthermore, monetising European tower assets would then show Vodafone's core business valued at an unreasonable discount, Jefferies said as it increased its price target for Vodafone to 176.0p from 144.0p.
Organic growth could increase the FTSE 100 company's return on invested capital to 7% in March 2023 from 5.1% in March 2020 based on managed recoveries in Spain and Italy, better quality UK metrics and margins strengthened by cost savings, Jefferies said.
Vodafone's European towers are valued at between €16.0bn and €22.0bn, the analysts, led by Jerry Dellis, said. They said the company could release cash of between €13.0bn and €16.0bn by selling down its stake in the towers holding company to 50.1%, selling a 25.0% stake in the UK and merging its Italian towers into INWIT, the tower unit of Telecom Italia.
"We outline an Organic track for Vodafone to grow returns and earn its cost of capital within three years, whilst reducing leverage by a quarter," Dellis wrote in a note to clients.
"Then we describe a tower track, credible and practical scenarios for monetising European tower assets that would reveal a Vodafone RumpCo offering attractive returns and low leverage. At today’s share price, we believe that Vodafone RumpCo is implicitly valued at an unwarranted discount."