Deutsche Bank reiterates 'buy' on Vodafone, lifts target price

Ahead of Vodafone’s first quarter interims on Friday, Deutsche Bank said the company continues on an “improving growth path” in Europe with both volume and price trends encouraging.

The bank expects organic service revenue of 1.9% in the first quarter, which would mark a slowdown on the fourth quarter’s 2.5%. The last quarter benefitted from accounting changes and the leap year.

“These benefits no longer accrue in the first quarter, which further suffers due to roaming rate reductions,” Deutsche Bank analysts said.

“Whilst individual markets may move backwards near-term (e.g. UK) we view the broad trend for further top-line recovery in fiscal year 2017 alongside a healthy yield, as likely to boost Vodafone's rating.”

Deutsche Bank noted that Europe’s mobile traffic growth accelerated in the fourth quarter by 0.3 percentage points (pp) to 49.0% year-on-year while unit revenue trends improved by 0.5pp to a drop of 33.6% year-on-year.

It marked the fourth consecutive quarter of improvement in unit revenues, which the bank said is “supportive for further growth with Vodafone’s top line highly sensitive to small, even offsetting, changes in the price-volume mix”.

Europe’s mobile service revenue growth was still negative with a 1.1% decline in the fourth quarter but a 1pp improvement on the previous period. “We expect a return to mobile growth during fiscal year 2017, though the UK’s contribution will deteriorate in the first half.”

The bank’s GBP estimates for the full year 2017 have risen by 5% for earnings before interest, tax, depreciation and amortisation, 10% for earnings per share and 6% for dividends per share. However, estimates traded in euro terms are slightly lower. Chief risks are foreign exchange movements and any increase in competition, Deutsche Bank said.

Shares climbed 0.58% to 226p at 1106 BST.