ADR Flash: VOD: Confirm our 2H rating - Report Summary
Salomon Smith Barney
Friday, September 22, 2000
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--SUMMARY:----ADRs --OPINION:------------------------------------------------------------------ ADR Flash: VOD: Confirm our 2H rating - Report Summary 9/22 ADR FLASH NOTE----------------------------------Salomon Smith Barney ========================================================================== ADR Contact: Nobel Gulati 212-816-8836 Kathleen Boyle 212-816-3702 ========================================================================== Vodafone | Price ADR: $34.31 | Rank*: 2H Ticker: VOD | Price Local: GBP2.40 | EV/EBITDA: 27.64x Sector: Telecom Svcs | Target Price ADR: $50 | BV/ADR: NA Country:United Kingdom | 52-Wk Range: $64-34 | 5yr. EPS Grth: NA Revenues: $23,892M | Sh. Out (ADRs) 6,153M | LTD/Cap: NA Market Cap: $211,125M | ADR:ORD Ratio 1:10 | Div. Yld: 0.64% Analyst: Terence Sinclair (44 20) 7986-4204 NET FOREX FYE EPS ADR$ EPS ORD P/E DIV ADR$ DIV ORD GBP/$ -------------------------------------------------------------------------- 3 /00A CURR 0.75 GBP0.05 45.8 0.22 GBP0.014 1.60 3 /01E PREV 0.53 GBP0.04 65.2 0.22 GBP0.0154 1.42 3 /01E CURR 0.53 GBP0.04 65.2 0.22 GBP0.0154 1.42 3 /02E PREV 0.82 GBP0.06 41.6 0.24 GBP0.0169 1.42 3 /02E CURR 0.82 GBP0.06 41.6 0.24 GBP0.0169 1.42 Sources: Company reports and Salomon Smith Barney estimates -------------------------------------------------------------------------- SUMMARY: * Compelling strategic position in global telecoms. * Execution risks lower than for most mobile companies. * Singular option on data growth through Vizzavi. * Market capitalization and technical issues restrict upside. * We confirm our Outperform, High Risk (2H) rating. * The following is an excerpt from out report "Vodafone and its Daughters - Citius, Altius, Fortius", dated September 22. To request a copy, please contact your Salomon Smith Barney representative. -------------------------------------------------------------------------- OPINION: Vodafone looks like the stock that trades but doesn't move - volatile, but too big a part of the industry (and the index) to be rerated. However, its value-creation options are enormous, with a portfolio of assets that could allow it to change the global mobile game to its advantage and to bring in worldwide data applications with common interfaces and technical backup., Given its record of turnaround and integrating subsidiaries it is not appropriate to apply a discount to the sum-of-the-parts. To deserve a premium, however, requires a gear shift: news on disposals / monetizations, successful GPRS introduction and product innovation through Vizzavi. Our recommendation is 2H (Outperform, High Risk) and our price target is $50 UNITED STATES OF MOBILE Vodafone's corporate activity over the past year has left it with a diversified portfolio, with less than half the value residing in its core UK, Italian and German assets. Current quoted subsidiaries contribute 12%. The company has started to tidy and monetize its assets as a federated portfolio; the market would be wrong to expect centralized decision-making for its principal assets. COMPELLING STRATEGIC POSITION IN GLOBAL TELECOMS Global scale is much discussed in telecoms but Vodafone is one of the few companies halfway to achieving it. With a meaningful presence in each major territory, a market capitalization of $235 billion and much access knowledge capital, it is likely to strike first and hardest, achieving a higher return on capital than its peers. We do not expect the market to pay up for this option before it is realized, but at current valuations the market looks (rightfully) to be giving the company some benefit of the doubt. EXECTUION RISKS LOWER THAN FOR MOST MOBILE ASSETS Aside from TIM, Vodafone subsidiaries achieve higher returns and better margins than many rivals. The battle for subscribers in Germany is a case in point. Margins are declining sharply but evidence suggests that D2 is reaching margins some 10% higher than its larger rival without sacrificing share. Ironically, the UK business is the one where the crunch between subscriber growth and acquisition cost is being played to the advantage of others. SINGULAR OPTION ON DATA GROWTH THROUGH VIZZAVI Vizzavi will have launched in five countries by end-2000; the time to get dogmatic about its value is six months away. However, while not unique, it is the most credible attempt by a mobile operator to create a pan-European portal. If it can legitimately claim a 20% share of GPRS access within two years, as we expect, it could secure a level of customer loyalty that would extend Vodafone's relative premium. this should also transfer to subsidiaries such as Libertel INVESTMENT THESIS Vodafone has been an excellent investment over the past three years, outpacing telecoms, mobile stocks and the UK market. In terms of market capitalization, the picture is even stronger. Vodafone has used its stock aggressively to pursue acquisitions, including Airtouch and Mannesmann, in round numbers doubling its end-1998 shares outstanding to pay for assets. The market has been happy to support these acquisitions, and investors with index benchmarks have struggled to keep up. Vodafone is now the largest telecom stock available to global investors. It is 2x larger than Deutsche Telecom, the next largest European telecom company, 2x larger than MCI Worldcom, 2x larger than AT&T, and almost 4x larger than the next European mobile stock, TIM. This exceptional performance appears exhausted - since March, the stock has retreated from its high of about $64 to its current level in just six months. None of the obvious reasons - concerns about sector valuations and UMTS license fees - have disappeared. Imminent newsflow will focus on Vivazzi, subscriber number and 1H00/01 results. None of these may be compelling news over the next few months. However, medium term the stock is likely to be driven by four issues: 1. Can Vodafone create superior returns for its size and scale? 2. Has Vodafone reached a strategic position in which its options are still extensive given its scale and financial power? Or are its intentions increasingly irrelevant to the investment case since new assets are likely to offer only small changes to its market value? 3. Given Vodafone's scale and the number of independent/quoted assets, how does it make most sense to think of it: as a closely manager investment trust of an integrated whole? 4. Will Vodafone offer returns that differ markedly from the industry norm? Or is it a play on the wireless sector first, and its own performance model? Our response to the above mentioned questions are colored by our positive view: * VOD has an exceptional federation of assets with leading positions in local markets; * Vizzavi is the first serious attempt to build a comprehensive, credible mobile portal; * VOD's sheer scale makes it the partner of choice for content providers; * Alone of all European mobile operators, VOD has the potential to create a seamless environment for its customers across Europe; * VOD companies have a very strong record in product innovation; and * VoD has a capital base that it can use to pursue opportunities and buy assets. Against this, we balance certain risks: * VOD may not be able to successfully integrate so many diverse acquisitions; * VOD may need to seek control of Vizzavi to maximize value; * VOD may not be able to create a return on its investment in UMTS in France, Germany and Italy, let alone the UK; * VOD is at risk from aggressive marketing and pricing by later entrants; and * VOD may be less able to subscribe for more capital; given its peculiar index position in Europe. |
