My target for the Vodafone share price is 100p!

According to my calculations, the Vodafone share price should be over 40% higher. But with a different set of assumptions it could be a lot more.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Young mixed-race woman jumping for joy in a park with confetti falling around her

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

Despite recent clarification about the future structure of the group, the Vodafone (LSE:VOD) share price appears unable to break through the 70p-barrier. But with the company having entered into binding agreements to sell its operations in Spain and Italy, I think that could soon change. And as a shareholder, I hope I’m right.

Financial performance

Last month, the company said it expects adjusted EBITDAaL (earnings before interest, tax, depreciation, and amortisation, after leases) to be €13.3bn, for the year ended 31 March 2024 (FY24).

But this includes the results of the two divisions that it plans to sell. Fortunately, there’s enough financial information available to estimate how a slimmed down Vodafone might perform.

In FY23, Spain had an EBITDAaL of €947m. Once the FY24 accounts are finalised, Italy is expected to have contributed €1.05bn to earnings. To keep things simple, I’m going to assume that a restructured group will be €2bn less profitable (€11.3bn).

Real deals

When assessing company valuations, it’s useful to look at actual deals, in the same sector, that have recently been agreed. So I’m going to consider the two that Vodafone has announced, to see what it might be worth if it was sold.

The company is selling Spain for 5.3 times its FY23 adjusted EBTIDAaL. For Italy, it’s agreed a price of 7.6 times FY24 earnings.

Applying the lower of these figures to my post-restructuring earnings of €11.3bn would give a valuation of €59.9bn (£51.4bn).

Does this mean the telecoms giant is currently worth nearly three times more than its current market cap?

I don’t think so. That’s because borrowings need to be taken into consideration.

Don’t forget the debt

Typical of most transactions of this type, the two divisions are being sold on a debt-free basis. This means the seller is left with the problem of how to deal with the associated borrowings.

At 30 September 2023, Vodafone’s total debt was €65.1bn. But there was also a lot of cash on its balance sheet (€28.9bn). Offsetting these two amounts gives a net debt position of €36.2bn.

But the company plans to use €8.1bn of its disposal proceeds to reduce its gearing. Net debt would then fall to €28.1bn.

So, if Vodafone was sold for €59.9bn, and €28.1bn of the proceeds (and its cash at bank) was used to pay off its borrowings, there would be €31.8bn (£27.2bn) left over to return to shareholders. Based on the current number of shares in issue, that would be 100p per share.

On this basis, the company appears to be undervalued by nearly 50%.

On the other hand

But a different set of assumptions suggests the telecoms giant is even more of a bargain.

If Vodafone was valued the same as its business in Italy, there would be €57.8bn (£49.6bn) available to be returned to its owners — £1.83 per share!

Of course, this is a very simple way of looking at something that is hugely complicated. And a company is only worth what someone is prepared to pay for it. The huge variation in these two valuations also highlights some of the problems associated with such an exercise.

But it does give me some hope that the share price will soon climb above 70p and — hopefully — much higher.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

James Beard has positions in Vodafone Group Public. The Motley Fool UK has recommended Vodafone Group Public. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

More on Investing Articles

Investing Articles

Surely, the Rolls-Royce share price can’t go any higher in 2025?

The Rolls-Royce share price was the best performer on the FTSE 100 in 2023 and so far in 2024. Dr…

Read more »

A young woman sitting on a couch looking at a book in a quiet library space.
Investing Articles

Here’s how an investor could start buying shares with £100 in January

Our writer explains some of the things he thinks investors on a limited budget should consider before they start buying…

Read more »

Investing Articles

Forget FTSE 100 airlines! I think shares in this company offer better value to consider

Stephen Wright thinks value investors looking for shares to buy should include aircraft leasing company Aercap. But is now the…

Read more »

Investing Articles

Are Rolls-Royce shares undervalued heading into 2025?

As the new year approaches, Rolls-Royce shares are the top holding of a US fund recommended by Warren Buffett. But…

Read more »

Investing Articles

£20k in a high-interest savings account? It could be earning more passive income in stocks

Millions of us want a passive income, but a high-interest savings account might not be the best way to do…

Read more »

Investing Articles

3 tried and tested ways to earn passive income in 2025

Our writer examines the latest market trends and economic forecasts to uncover three great ways to earn passive income in…

Read more »

Investing Articles

Here’s what £10k invested in the FTSE 100 at the start of 2024 would be worth today

Last week's dip gives the wrong impression of the FTSE 100, which has had a pretty solid year once dividends…

Read more »

Investing Articles

UK REITs: a once-in-a-decade passive income opportunity?

As dividend yields hit 10-year highs, Stephen Wright thinks real estate investment trusts could be a great place to consider…

Read more »