Vodafone’s rating has been upgraded to ‘buy’ by Gimme Credit

On Friday, the investment rating for Vodafone (LON:VODPF) (VOD) was upgraded to ‘buy’ by corporate bond analysis firm Gimme Credit. This change was made in response to Vodafone’s 2037 maturity bond, which is currently trading at an additional yield of 133 basis points. Gimme Credit analysts noted significant operational changes by the telecommunications company, including the recent sale of its segment in Italy to Swisscom for €8 billion. This sale is expected to be completed in the first quarter of 2025. The value of its Italian operations is 5.5 times the EBITDA of €1.45 billion for the fiscal year 2023.

In line with similar strategic objectives, Vodafone signed an agreement last year to divest its operations in Spain to Zegona Communications for a total of €4 billion in cash. According to Gimme Credit analysts, this transaction is expected to be completed in the first or second quarter of this year. The Spanish company is being sold at a multiple of 4.2 times its EBITDA. When combined, the sales of both the Italian and Spanish operations provide Vodafone with a total of 5 times the proceeds from these divestments. Vodafone is executing these sales as part of its plan to withdraw from markets with limited growth and focus on areas with greater growth potential.

Vodafone management indicated that it has completed the restructuring of its portfolio and now plans to focus on markets with more promising growth expectations. According to Gimme Credit analysts, the anticipated merger with Three UK, which is currently under review by regulators in the UK, and the divestments are expected to lead to higher profit margins. Vodafone will have a majority stake of 51% in the merged entity and expects to achieve approximately €700 million in cost savings without the need for additional cash investment.

Additionally, Vodafone announced a 50% reduction in regular dividend payments, aiming to strengthen its free cash flow. The dividend is expected to decrease from approximately €2.2 billion annually to €1.1 billion. It is estimated that this reduction in dividends will increase free cash flow by €1.1 billion, and the company management predicts that free cash flow will exceed €4 billion in the fiscal year 2025 if the divestments are successful. Vodafone also lowered its debt/EBITDA target range from the previous 2.5 to 3 times to 2.25 to 2.75 times.

Strategists at Gimme Credit believe that Vodafone’s new strategic direction is designed to halt the continuous decline in revenue by targeting markets with higher growth rates in Europe and Africa. Focusing on the more profitable corporate customer sector and potential acquisitions in Africa are key elements of the expansion plan. While the proceeds from asset sales are not significant, they indicate the challenges faced by these operations. Analysts expect the company’s financial position to remain strong and anticipate an opportunity for Vodafone to acquire the remaining stake in the UK merger with Three within three years.

source: prepared by Melisa Beğiç

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