Merrill Lynch downgrades Vodafone as headwinds 'unlikely to abate'

Bank of America Merrill Lynch downgraded Vodafone to a 'neutral' rating from 'buy' as the telecoms giant's multiple headwinds in recent months are "unlikely to abate in the near-term", with the 2 February trading update predicted to be cautious.

Merrill felt a recovery in revenues, for so long the bull case at Vodafone, "may fade away" as soon as the year end and "looks unlikely to recover" until late in the March 2018 fiscal year.

"Our view is structural change is needed, based on analysis of VOD’s return on asset profile that looks unsustainably low, Merrill said, re-examining the media speculation of a possible asset swap with Liberty Global and M&A in India as potential solutions that could offer "some respite" but remain difficult to execute.

Analysts, while cutting the price target to 236p from a prior 280p, said structural change looked "increasingly necessary".

A hypothetical asset swap with Liberty, whereby Vodafone divests the UK and boosts Germany, suggested potential synergies of 20p per share and low cost of debt, allowing the FTSE 100 group to accept a discounted mobile valuation and still achieve double digit cash flow accretion.

A mooted Indian merger with Idea "could provide scale" to offset price pressure from Jio, but no moves are envisage in the short term.

Growth is seen as "in decline", with third-quarter guidance for lower Indian price disruption alongside currency devaluation in Turkey and Egypt, so Merrill has reduced its forecasts for like-for-like EBITDA by 3.9% and reported EBITDA by 7.7%, EPS by 34%, and free cash flow 14%, which puts it at the very low end of company guidance.