FTSE 100 mobile firm Vodafone Group PLC (LON:VOD) has had its target price cut by JP Morgan Cazenove to 240p from 255p amid concerns over the sustainability of its dividend and growth outlook.
In a note to clients, analysts at the US investment bank said in contrast to 2017 when Vodafone hit multi-year highs, this year it had suffered a “dramatic de-rating” as scrutiny around the core pillars of the business questioned its credibility.
READ: Vodafone has price target cut by UBS on Italy costs and UK earnings concerns
The bank added that they believed the company’s fortunes now rested on its ability to cut costs rather than in top-line growth.
Reducing spending was “key” to supporting deleveraging, improving dividend cover, and restoring operational confidence, analysts said, adding that a deal in May to buy continental European assets from Liberty Global and the purchase of spectrum by its Italian unit in October had helped stretch the net-debt to EBITDA ratio to 3.8x, intensifying concerns of capital structure and dividends.
READ: Vodafone ticks up as Italian arm snaps up spectrum for €2.4bn to develop 5G coverage
JP Morgan Cazenove also said that asset sales could help alleviate the risks associated with the high debt ratio, suggesting non-core European units as potential targets as well as Australian, New Zealand, and Indian assets.
Lastly, the bank suggested that, in the absence of the above options, it would argue for a dividend cut as the structural benefits would “far outweigh” the headline risk.
“A cut is not a necessity. That said, it remains a sensible alternative if other measures to support rapid deleveraging fail” analysts said, adding that a 35% reduction would support 0.4x of additional leverage reduction four years out.
The bank also retained its ‘Overweight’ rating on the stock, mainly on the back of a foreign exchange tailwind forecasting a revenues/EBITDA rise of 2% per annum.
In late-morning trading Wednesday, Vodafone shares were up 0.5% at 147p.