UBS reiterates 'buy' on Vodafone

UBS reiterated a ‘buy’ rating on Vodafone and left its target price unchanged at 310p on Friday.

Vodafone and Liberty Group have received conditional clearance from the European Commission for the merger of their Dutch assets. UBS said it believes investor focus is now switching back to the prospect of the two companies revisiting a broader deal.

“Strategically a deal would create a leading converged fixed/mobile operator across Europe,” UBS said.

“We estimate cost synergies from a broader deal could have an net present value of €15.6-23.4bn for 100% with a further €6.4bn of potential upside from tax synergies. Assuming a 50% share for Vodafone, we believe this would be worth up to 47p per share for Vodafone.”

UBS thinks an acquisition of Liberty Global by Vodafone could be more than 10% accretive to Vodafone's equity free cash flow (EFCF) longer-term.

“ Looking at incentives for Liberty Global management, according to company filings they are incentivised to either accelerate EBITDA (OCF) growth to >6% pa over the next three years (H1-16 was +2%) or undertake a deal that would result in a change of control (either from an acquisition or merger).

“Vodafone management incentives are geared towards significantly growing EFCF over the coming years.”

UBS said its estimates for Vodafone are broadly unchanged after the company switched to reporting in euros from pounds. The financial services company expects a 4% increase in underlying EBITDA for fiscal year 2017, rising to 6-7% per year thereafter as core European business benefits from growing mobile data usage and price changes.

“Vodafone offers a 7% EFCF yield and >5% dividend yield on a calendarised basis for 2017E. We think recovery and operational gearing in Europe have been underestimated and that the current share price factors in little for M&A upside potential.”

Shares rose 0.35% to 224.14p at 0933 BST.