Vodafone shares due a 'material re-rating'

Vodafone shares have been a star performer since full-year results on 16 May, up around 9% including the dividend. Few blue chips have done better. But there's plenty more upside here, according to this fan.

Weak handset sales meant annual revenue of €47.6 billion (£42.1 billion) was marginally worse than forecast, but cash profit of €14.2 billion was well ahead of consensus estimates, and free cash flow (FCF) of over €4 billion was a 10% beat.

And forward guidance for 2018 is more than aggressive than analysts at Deutsche Bank had pencilled in. Look for profit growth of 4-8%, says Vodafone, implying €14-€14.5 billion.

FCF of an estimated €5 billion for the year to March 2018 is increasingly above the €4 billion dividend, too. This "should be received well, and alongside higher growth over-time, should assist in a material stock re-rating".

Growth in headline Europe and group organic service revenue (OSR) is expected to be volatile, although be roughly stable year-on-year.

"Though OSR will dip in Q2 due to roaming, we view continuation of improving underlying trends, with perhaps mobile serv. rev growth turning positive in FY19 (pending UK recovery and Italy competition) as supportive for margins/operating leverage and FCFs."

Deutsche has upgraded estimates for both cash profit and FCF by 2% for 2018 to €14.36 billion and €4.93 billion respectively.

Repeating 'buy' advice, the broker has also upgraded its price target by 15p to 300p, implying 34% potential upside.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.