Investors have three reasons why they "broadly dislike" the European telecoms industry, according to Citi's new sector analyst, and Vodafone Group PLC (LSE:VOD) is not going to change opinions until its German business starts to show evidence of a serious turnaround.
The arguments investors have against European telcos are a lack of meaningful growth, companies generally seen as carrying too much debt; and "complexity in the investment case, given exposure to factors such as politics and regulation, as well as sometimes complicated corporate structures," said analyst Carl Murdock-Smith, who has taken over the beat for Citi.
For Vodafone, which had €31.8 billion (£26.4 billion) of net debt at its last update versus a current market cap of under £17 billion, the analyst said Germany is key to the story for investors.
The country represents just under half of Vodafone’s underlying profit on an EBITDAaL (earnings before interest, tax, depreciation, amortisation and after leases) basis.
Germany has been in a multi-year downgrade cycle, he noted, with consensus EBITDAaL expectations falling by more than 20% this decade for a number of reasons.
"Against this challenging backdrop, and with strategic questions outstanding, it is currently difficult to take a more constructive view on the investment case, despite the headline attraction of Vodafone’s valuation multiples."
Citi kept its 'neutral' rating in place, though Murdock-Smith cut the share price target to 66p from his predecessor's 73p as he took over coverage.
He also downgraded BT Group today to a 'sell' rating, and kept 'buy' recommendations in the sector for Deutsche Telekom and Telenor.