Goldman upgrades Vodafone to 'buy' on self-help

Goldman Sachs upgraded Vodafone to ‘buy’ from ‘neutral’ and lifted the price target to 260p from 275p saying self-help raises confidence in the company’s growth outlook.

The bank said that following 10% underperformance versus the sector in the last three months, the stock’s valuation is compelling at around 9% calendar year 2018 free cash flow yield.

GS said the stock also looks attractively valued if it compares its view of the structural growth outlook of each stock versus its valuation.

“We believe the valuation case for Vodafone is even more compelling given the ‘free’ upside it has from the potential for European cable M&A (worth 10-40p per share) and Indian in-market consolidation.”

It pointed out that Vodafone offers above-average growth relative to the sector, with revenue/earnings before interest, taxes, depreciation and amortisation compound annual growth rates of around 2%/5% in FY17-20, benefiting from recent fixed-line investments improving its structural growth outlook.

In addition, GS argued that Vodafone has also started to show clear evidence of its ability to self-help, lowering underlying opex over the last year, which it expects to drive margin expansion and operational gearing going forward.

At 0927 GMT, Vodafone shares were up 1.3% to 210.57p.