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Vodafone offering 'attractive entry point' says HSBC as it upgrades to 'buy'

Analysts at the bank believe the tone of telecoms company’s commentary “should get progressively brighter”, starting with the first-quarter statement in July
Vodafone has 'rebased' its dividend by 40% as it ups investment amid rising competition

The time is right to buy shares in Vodafone Group Plc (LON:VOD) as “trends are set to improve”, HSBC said as it upgraded its recommendation for the telecoms titan to ‘buy’ from ‘hold’.

Earlier this month, the FTSE 100-listed mobile networks operator took the decision to cut its dividend by 40% to give itself the financial headroom needed to buy 5G mobile spectrum, roll out the service, and complete the €19bn acquisition of Germany’s Unitymedia and other assets from Liberty Global, which is expected in July.

READ: Vodafone cuts dividend 40% as it fights for 'financial headroom'

HSBC analysts, in a note to clients on Friday, noted that the fall in Vodafone's share price since the dividend cut has brought the yield on the stock down to 6.4% and presented “an attractive entry point” for new investors.

Keeping its share price target at 160p - implying a 4.9% yield in-line with sector peers - and even though the analysts expect Vodafone to trade at a discount, they “see reasons for this gap to the sector average to narrow”.

For starters, they added, the dividend reset and the recent New Zealand disposal indicate a “welcome” proactive approach by management of the balance sheet, while other key catalysts should be improving revenue trends and the immediate benefits to cash flow from the Liberty deal.

READ: Vodafone institutional investors back dividend cut, see shares bouncing back

Following recent comments from Vodafone's management, HSBC believes the tone of the company’s commentary “should get progressively brighter”, starting with the first-quarter statement in July and “likely” approval of the Unitymedia acquisition.

Making it clear that “material risks remain” as Vodafone’s markets stay highly competitive and performance “must improve and missteps be eliminated” in a sector that “remains resolutely out of favour”, the analysts said the near 50% fall in the shares since the start of last year and removal of the dividend-related overhang have now created a sufficiently attractive opportunity to lift their rating.

Shares in Vodafone were up almost 2% to 125.68p on Friday morning.

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