German bank Berenberg has trimmed its price target for Vodafone Group PLC (LON:VOD) to 250p from 253p citing a slightly lower value of its Indian venture.
In an announcement on 25 April, Vodafone said it would merge its Indian mobile tower joint venture Indus Towers with local rival Bharti Infratel to become the world’s second largest tower mobile company.
Indian merger less valuable
In a note to clients, analysts at the bank said the merger had now devalued slightly: “The high indebtedness of the Indian joint venture (JV) (now above 7x net debt/EBITDA pro-forma), despite recent asset sales and an equity injection, means risks of a further cash injection from the group cannot be ruled out.
They added: “Previously, a sale of the group’s stake in Indus Towers could have at least facilitated this without adversely affecting group leverage. However, Vodafone’s decision to fold this stake into publicly quoted Bharti Infratel, while positive in giving investors a see-through valuation for the tower asset, means the stake is no longer as liquid and therefore debt will have to be raised at the group level to provide additional financial support if needed.”
‘Buy’ rating maintained despite India worries
The bank, however, maintained its ‘Buy’ rating on the stock, citing elements of potential upsides in its investment case that were obscured by the concerns around the company’s Indian assets.
“Support from European broadband and AMAP should help group service revenue trends stay in positive territory (c1% in hard currencies). Meanwhile, digitisation and recent regulatory concessions in AMAP should lead to EBITDA CAGR of 3%” Berenberg said, adding that while they agreed with solvency concerns around India, it was “an industry-wide problem that will inevitably have to result in government-led relief or competitors being acquired by [Indian mobile network operator] Jio, both outcomes of which are positive.”
Analysts also commented that the proposal from the European Parliament regarding symmetric regulation is far less negative than it may seem for Vodafone’s recent €18.4bn deal to purchase operations from US cable giant Liberty Global.
READ: Vodafone to be Europe's leading next generation network owner after €18.4bn Liberty Global deal
More generally, the bank said results for the second half of the year due on 15 May should reassure on organic prospects.
Analysts commented: “We think there is scope for a slightly stronger H2 EBITDA performance than consensus expects with organic growth for underlying EBITDA at about 7% (H1: 9%).
“This, together with a 2018/19 outlook for low single-digit organic growth for underlying EBITDA (we are at 3% while consensus is at 2%), should serve as a reminder that service revenue, EBITDA and free cash flow growth are not at risk of declines from an Italian price war as the valuation seems to suggest” they added.
In mid-morning trading Friday, Vodafone shares were up 0.6% at 211.4p.