* Valuation supports a more neutral stance
We raise PO to reflect AMAP peer group multiples as a more accurate measure of
value, with VOD reported to be assessing a potential IPO of Indian operations. This
derives a PO of 252p, alongside which a relative valuation in-line with peers justifies
a more Neutral stance, thus we upgrade. Downside risks include a slower than
expected recovery following a disappointing FY print (a driver of our previous
Underweight thesis that has seen consensus expectations fall), and our mid-term
thesis on increased capex needs that could mean consensus expectations of
dividend growth are disappointed. However, balancing this is upside risk potential
from a possible asset swap with Liberty Global - now confirmed in negotiations - that
could realise synergies from a shift to convergent infrastructure.
* Fundamentals still a work-in-progress
FY results confirmed a fragile recovery; with market underperformance in Germany,
and expectations of a slower recovery across the group until H2. Not all was
disappointing; Italy and Africa improved and KPIs were encouraging from the
perspective of data growth and project spring-funded network performance. Midterm,
without M&A, we think capex guidance is unsustainable and that consensus
expectations of dividend growth could be disappointed
* M&A could derive upside
VOD has confirmed it has entered into discussions with Liberty Global about a
possible exchange of assets but not a combination of the two groups. This follows
comments from Liberty Global Chairman John Malone in an interview with
Bloomberg where he described the Western European assets of VOD as a ‘great fit’
with Liberty’s footprint. In a separate note today we explore the possibilities of an
asset swap and wider acquisition/merger scenarios and confirm that we believe
synergies could be material.