- If regulators allow telecoms companies to consolidate, Vodafone could benefit
- It could both buy and sell businesses
- Vodafone is looking to reduce leverage as it sells off parts of its business
Clive Beagles, co-manager of JOHCM UK Equity Income Fund (GB00B95FCK64), explains why he has recently added to telecoms company Vodafone (VOD).
“Vodafone was weak as the new group chief executive – Margherita Della Valle – rebased expectations, which now look credible. We had cut our position by more than 50 per cent over the past few years but started to add post the fall after its recently published annual results.
“Following the change of chief executive we think that there is a good chance she will complete some of the proposed disposals, given she has been involved in the process for some time. There is lots of potential value to monetise as the company tries to drive operator consolidation in Spain and Italy via possible disposals, and in the UK, where it is trying to merge.
“Most mobile operators are not making a high return on capital employed because there are too many operators. The industry has shown structural growth, but needs to make a lot of capital expenditure and, as yet, companies are not making sufficient returns. This has resulted in a capital expenditure ‘black hole’ – a valid concern.
“If regulators don’t allow consolidation, it will not be possible to generate enough cash flow and profitability. But if consolidation is allowed to move forward the situation will improve and it should benefit Vodafone, which may sell businesses to operators in countries such as Spain and Italy, and buy businesses elsewhere.
“We think that there is a lot of intrinsic value in the company, although it has got more leverage than [many] other stocks in JOHCM UK Equity Income Fund. But Vodafone is looking to reduce this as it sells off parts of its business. Only one stock in our fund is overlevered – National Express (NEX). This is a small position and we have publicly called for the board to sell one of its three divisions to remove its 'debt jacket'.
“Vodafone is also not one of our larger positions – at the end of May it only accounted for 1.5 per cent of JOHCM UK Equity Income Fund’s assets. And we expect it to cut its dividend, although this is what it should do as companies should only pay dividends that are affordable.
“However, with Vodafone trading below 80p a share we think that its risk/reward profile is more favourable than it has been for a while.”
