Vodafone Group PLC (LON:VOD) will deliver an underlying earnings increase of 6% per annum over coming years as it benefits from a growing top line and cost savings, UBS predicts.
UBS maintained its ‘buy’ rating the stock but raised its target price to 285p from 280p to reflect the recent strengthening of the South African Rand.
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Vodafone owns a majority stake in South Africa’s Vodacom.
“Despite the recent rally in the shares, we think there is more to go for and see upside from mobile data monetisation, cost savings and mergers & acquisitions,” the bank said.
UBS expects the third quarter trading update in February to reveal organic service revenue (OSR) rose 1.3%, in line with the level of growth reported in the second quarter.
Excluding the drag from low margin and volatile carrier services revenue, UBS estimates third quarter OSR of 1.8%, compared to 1.7% in the second quarter.
The third quarter should be helped by the fading effects of Germany's cut to mobile termination rates, UBS said. This will be offset by price rises in Italy where UBS expects OSR to decline.
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Growth in Spain should be healthy, UBS said, but will slow quarter-on-quarter due to increased promotional activity across the market.
The UK should see underlying OSR growth but this is masked by the impact of handset financing, the bank added.
“We see Vodafone as cheap, offering a 7.6% EFCF (equity free cash flow) yield on a calendarised basis for 2018 and a 5.9% dividend yield ,” the bank said.
“Despite the recent rally, the Vodafone share price is only at similar levels to September 2016 when Reliance Jio entered the Indian market.”