The group’s ability to sustain its generous dividend is a concern for the broker, taking into consideration higher free cash flow volatility related to the radio frequencies (i.e. spectrum) allocated to the mobile phone industry and Vodafone’s proposed US$21.8bn acquisition of Liberty Global’s assets in Germany and eastern Europe.
Vodafone has several spectrum auctions coming up, which will delay it on the path to free cash flow growth, leaving the dividend uncovered, Kepler believes.
In the broker’s view, income investors who want exposure to the European telecoms sector would be better off putting their money into KPN, Orange or Telia.
“With c. 75% of total service revenues coming from mobile, Vodafone remains a predominantly mobile carrier. While the case for data growth is evident, the case for data monetisation is not,” Kepler argues.
Digitalisation should make Vodafone more profitable, but the group is going to have to live with higher capital expenditure, the broker added, particularly with the group having to play catch-up in fixed-line services.
The broker’s sum-of-the-parts valuation of Vodafone is 180p. Shares in Vodafone were down 1.6% at 186p in late morning trading.