Vodafone: the logic behind 80% share price upside explained

It’s been two years since Vodafone shares last topped £2, but this City analyst bets it can get there again.

As if a 77% upside for Vodafone (LSE:VOD) shares wasn't enough, a City bank has today upped its price target after highlighting the value of the mobile phone giant's infrastructure assets.

The bullish note from Deutsche Bank reckons that shares are worth an extra 5p at 225p, which if achieved would be the highest point for the FTSE 100 index stock since the start of 2018.

Vodafone is currently trading at 124.34p, having slipped below 100p at the height of the Covid-19 market sell-off. The stock rebounded strongly to 141p by early June, only for the recovery to run out of steam ahead of what are likely to be poor Q1 results later this month.

Europe's Covid-19 lockdowns led to an inevitable spike in data traffic, but this was offset by the impact of lower international travel on roaming revenues. Sharp falls in trading in Spain and Italy are expected to leave revenues as much as 3.6% lower on July 24.

However, Deutsche expects that the virus impact should wane in the second quarter as cross-border travel within Europe starts to normalise and handset activity resumes, possibly driven by the prospect of a new 5G iPhone in the autumn.

Rising telecom infrastructure valuations should also benefit the shares ahead of the company's likely IPO of its European tower assets in early 2021.

Deutsche telecoms analyst Robert Grindle said deals elsewhere in the sector had heightened the focus on the value of assets within Vodafone, which he calculates are the highest of the European telco large-caps and equivalent to 75% of enterprise value.

He added:

“Increased appreciation of infrastructure value within Vodafone should be materially beneficial for the company's shares.”

Even when excluding these European assets, Grindle said Vodafone was too cheap on two-times forward earnings when compared with infrastructure-light telco peers in Europe.

He also notes that the company plans to reduce costs by more than one billion euros (£900 million) between 2021 and 2023, which should help mitigate the virus impact this year.

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Recent annual results pointed to an improving overall picture, with Vodafone returning to pre-tax profit after a surplus of €795 million (£716 million). The maintenance of the final dividend was made possible by prodigious cash generation, while the company is now at the forefront of the 5G roll-out, with a presence in 97 cities across eight European markets.

Jefferies recently upgraded its price target to 159p, which is based on the City firm anticipating a recovery in European service revenues from the third quarter onwards. 

In its note today, Deutsche said the biggest threats to its bullish price target were increased competition, foreign exchange volatility and execution risk on the recently acquired assets from Liberty Global, as well as longer term economic malaise due to Covid-19.

Earlier this week, we highlighted that CEO Nick Read had bought £573,630 of Vodafone stock at a price of 128p.