As investors, we are always on the lookout for opportunities that promise growth and potential returns. The Vodafone (LSE:VOD) share price has seen its fair share of ups and downs since September 11, 2023. With only a modest 0.9% increase, long-term shareholders may feel a sense of relief after enduring a more than 50% collapse since September 2019. But what lies ahead for this telecommunications giant? Will it ever return to its former glory days?
Diagnosing the problem
Margherita Della Valle stepped into the role of chief executive in April 2023 and wasted no time identifying a critical issue within Vodafone. The return on capital employed (ROCE) was alarmingly low. In the fiscal year ending March 31, 2024 (FY24), the post-tax ROCE stood at a mere 4.5%. That’s right, the company could have potentially earned more by liquidating all its assets, paying off debts, and simply placing the remaining cash in an interest-bearing savings account.
Making changes for the better
To address its financial performance challenges, Vodafone made strategic moves to sell its Spanish division and entered a binding agreement to divest its Italian business. These decisions are expected to bolster the group’s ROCE by a percentage point while also providing the much-needed liquidity to reduce the company’s substantial debts. The prospect of merging its UK operations with Three could lead to significant cost savings and operational efficiencies, positioning the company for growth in the future.
Navigating rough waters
Vodafone faces a significant obstacle in its largest market, Germany. Changes in regulations prohibiting landlords from bundling television services with rental agreements are projected to cause a 50% reduction in the company’s multi-dwelling customers. Revenue growth in Germany might not rebound until FY26. However, other markets have shown promising signs of improvement, with increased turnover in various territories in the first quarter of FY25.
Looking ahead
Despite promising developments, uncertainty lingers around the company’s future. The decision to slash the dividend by 50% in March raises concerns, marking the second cut in six years. Reservations among investors may hinder a swift recovery in the share price. Yet, as Vodafone’s restructuring efforts unfold, more investors might be drawn to the potential upside, igniting a positive trajectory for the share price.
A calculated move
For prospective investors, the current climate might present an opportune moment to consider entering the market. The recent sale of Vodafone’s Spanish business at 5.6 times adjusted EBITDAaL offers a glimpse into the company’s potential valuation. Forecasted earnings for FY25 and net debt figures suggest a plausible valuation of €41.3bn (£34.8bn), representing a 76% premium to the current market cap. If realized, this valuation could signify a significant upside for the company, pointing towards a path of recovery and growth.
In conclusion, while uncertainties loom over Vodafone’s future, there are reasons to be cautiously optimistic. The restructuring and strategic decisions undertaken by the company could pave the way for a more resilient and financially robust entity. As the company charts its course towards improved performance, investors might find themselves in a position to reap potential rewards from a revitalized Vodafone. While a return to its former pinnacle might be a stretch, the prospect of witnessing tangible growth in the company’s value paints a promising outlook for the days ahead.
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