Q1: Investment Appraisal Report: Valuing for Vodafone Group PLC

Investment Recommendation Report for Vodafone Group PLC

1. Introduction

This report is aimed to provide an investment recommendation regarding Vodafone Group PLC for the most recent financial year ending March 2023. Vodafone Group PLC is a well-known international telecommunication company with headquarters based in the UK. It operates across Europe – United Kingdom, and the rest of Europe, Germany, Italy, and Spain, as well in Portugal, Romania, Benelux, and Turkey, Asia, India, in Africa  such as Vodacom in South Africa and Safaricom in Kenya, as well in Oceania in New Zealand (Vodafone, 2024). Thus, the value of the company will be evaluated using financial modeling skills and valuation techniques, such as the Gordon Performance Model, Multi-stage Growth Model, as well as Market Multiple Approach, among others. The aim of the assessment is to compare the worth of the equity per share calculated in the report with the last month closing market price in March 2023 and to decide whether to buy or sell Vodafone shares.

2. Data Description and Methodology

Data Description

Financial data for analysis for Vodafone Group PLC is based on its annual report on the financial year ending March 2023. Such information may include the fortune of the company such as revenues, net income, value of the free cash flow, as well as the value of total assets, liabilities and equity for the most recent financial year. In addition, the market data or stock data for the closing price of Vodafone shares will be also used to evaluate its worth (Vishny and Zingales, 2017).

Methodology

Gordon Growth Model

The formula of the Gordon Growth Model is used to evaluate the intrinsic value of the company based on its future dividend payments:

Where Value is the worth of Vodafone,  is the worth of most recent dividend, g is the growth rate of the dividend, r is the required rate of return.

Multi-stage Growth Model

Multi-stage Growth Model is effectively used to value companies where dividend growth rate remains constant. In contrast, the multi-stage growth model allows for applying a varying growth rate over distinct periods (Vernimmen, Quiry and Le Fur, 2022). In practice, such model appears to be more realistic when a business goes through different growth phases.

Market Multiple Approach

The value is assigned to the company based on other similar companies in the same sector. The key to this approach is selecting a group of companies acting in the same sector based on some common characteristics (Landi et al., 2022). Second, it is essential to calculate key valuation multiples, i.e., the average proportion of value to be received by one unit of Vodafone.

3. Key Assumptions

1. Discount Rate: The Weighted Average Cost of Capital is assumed to be 7.5% for Vodafone.
2. Dividend Growth Rate: in the Gordon Growth Model, it is assumed to be 2% given that it is stable.
3. Forecast Period: if the forecast period for the Multi-stage Growth Model in 5 years and different growth rates for each growth trajectory.
4. Comparable Companies: they should be like Vodafone in the terms of industry, geography, scale, and financial performance.
5. Market Data: the closing market price for Vodafone’s stocks is assumed at the end of March 2023.

4. Empirical Analysis

Gordon Growth Model Analysis

Through using the Gordon Growth Model, we can easily estimate the intrinsic value of Vodafone based on its dividend payments.

Here is given the most recent annual dividend payment ​ of £0.09 per share and a growth rate g of 2%, the value is calculated as:

Thus, the intrinsic value of Vodafone shares as per the Gordon Growth Model is £1.67 per share.

Multi-stage Growth Model Analysis

For the Multi-stage Growth Model, we project Vodafone’s free cash flows over a 5-year period with varying growth rates and calculate the terminal value for the stable growth period.

Free Cash Flow Projections (in £ billions):

Year	2023	2024	2025	2026	2027
FCF	3.37	3.54	3.72	3.91	4.10

Terminal Value Calculation

Enterprise Value Calculation

Subtracting net debt (£38.80 billion) from the EV gives us the equity value:

Dividing by the number of shares outstanding (26.8 billion):

Market Multiple Approach Analysis

We select a group of comparable companies, including BT Group PLC, Deutsche Telekom AG, Orange S.A., Telefonica S.A., and AT&T Inc., and calculate their average valuation multiples.

Key Financial Metrics of Comparable Companies

Company	P/E Ratio	EV/Revenue	EV/EBITDA	P/B Ratio
Vodafone	12.5	1.6	6.5	0.9
BT Group	11.2	1.4	5.8	0.8
Deutsche Telekom	13.5	1.7	6.7	1.0
Orange S.A.	10.8	1.5	6.0	0.9
Telefonica S.A.	12.0	1.6	6.4	0.8
AT&T Inc.	14.0	1.8	7.0	1.1

Average Multiples of Comparable Companies

• Average P/E Ratio: 12.8
• Average EV/Revenue: 1.6
• Average EV/EBITDA: 6.4
• Average P/B Ratio: 0.92

Using these multiples, we value Vodafone:

P/E Multiple Valuation

EV/Revenue Valuation

EV/EBITDA Valuation

5. Conclusion

Market Comparison and Investment Decision

March 2023 Closing Market Price: £1.25 per share

Shares Outstanding: 26.8 billion

Market Capitalization

Equity Value per Share Calculation

Using the DCF method:

Using the Comparable Multiples method:

Based on our valuation models, the equity value per share of Vodafone ranges between £0.77 (DCF) and £1.12 (Comparable Multiples). Given the closing market price of £1.25 per share in March 2023, Vodafone appears to be overvalued.

Recommendation

Given the intrinsic values derived from our analyses, we recommend SELL for Vodafone shares. The calculated equity values do not support the current market price, indicating that the shares are overvalued.

Key Assumptions and Risks

Assumptions

1. Discount Rate (WACC): 7.5%
2. Dividend Growth Rate: 2%
3. Forecast Period: 5 years
4. Comparable Companies: Selected based on industry, geography, and financial performance.
5. Market Data: March 2023 closing market price.

Risks

1. Market Volatility: Unexpected market conditions could affect Vodafone’s financial performance.
2. Regulatory Changes: Changes in the regulatory environment could impact operations and profitability.
3. Technological Advancements: Rapid changes in technology could affect competitiveness.
4. Global Economic Conditions: Economic downturns could impact revenue and growth rates.

In conclusion the detailed analysis using various valuation methods indicates that Vodafone shares are overvalued compared to their intrinsic value. Therefore, a sell recommendation is prudent, considering the company’s financial outlook and market conditions.

Q1 Distributions of Returns Analysis

To conduct the required return analysis on Vodafone Group PLC from December 2018 to December 2023, we have used Microsoft Excel, the report is attached in an Excel file.

Statistic	Value
Mean	-0.00030411
Standard Error	0.000242295
Median	-0.00024223
Mode	0
Standard Deviation	0.008655051
Sample Variance	0.0000749099
Kurtosis	9.213658644
Skewness	-0.620692446
Range	0.125161439
Minimum	-0.072637131
Maximum	0.052524308
Sum	-0.388044004
Count	1276

Mean

The average daily return of -0.00030411 shows that on average daily return for all Vodafone Group PLC over that period is slightly negative. This very tiny negative mean implies that the stock price would decrease greater than increasing over years (Tran, Tran and Rakitzis, 2019).

Standard Deviation

The standard deviation of 0.008655051 indicates the volatility of the daily return. Its value is close to 0.87% implying that over the period the returns fluctuated around this percentage difference.

Skewness

The skewness is left skew meaning the distribution of daily returns in slightly left-skewed. The value -0.620692446 shows that the losses are more than gain.

Kurtosis

The kurtosis measure value of 9.213658644 is significantly higher than the normal distribution kurtosis of 3. Therefore, the distribution of the daily return of Vodafone Group PLC is a leptokurtic distribution.

Range

The range of daily return of Vodafone Group PLC is 0.125161439, this tell there high a high extreme value or outlier in the dataset. The more extreme value observed because of the high number of kurtosis value (Hartwig et al., 2020). This range is an estimated percentage that the return fluctuated from the mean.

Minimum and Maximum

The minimum daily return of and the maximum daily return of 0.052524308 are the minimum and maximum values within the dataset. The minimum value indicates the largest loss in one day while the maximum value shows the largest gain on any single day during the time period.

Key Patterns

The fact that the distribution is negatively skewed means that small losses are more common than small gains. The data is highly leptokurtic, in that the actual kurtosis is significantly higher than that expected in a normal distribution. Extreme values are indicated by the high kurtosis, moderate volatility is implied by the standard deviation of, and the wide range reflected by the difference between the minimum and maximum values.

Outliers

Given the data, the high kurtosis and the minimum and maximum reflect that the stock experienced significant outliers. This could be as a result of the rest of the market performing poorly, or an economy announcement, or an individual announcement about Vodafone that has led to its price drastically changing on specific days.

Implications for Investors

Given the data, several implications are that, since there are significant outliers and moderate volatility, the stock would require strong risk management on the part of the investor. While the data has negative skewness, there are large positive returns on specific days. This would open the door for investors willing to take the chance of the stock suddenly increasing in value to make a return (Orlando and Bufalo, 2021).

Overall, the descriptive statistics reveal a slightly negative trend with moderate volatility and a rather limited range of fluctuations. The distribution of returns is characterized by a considerable number of outliers that seem to affect both the skewness and excess kurtosis (Luo et al., 2018). Both the spread and kurtosis tests support the idea of a normal distribution of returns, and the data can be considered as unimodal based on analysis of the histogram. From a combination of these results, we would want to draw two points.

 Investors can benefit from efforts to diversify their portfolios which should help to minimize the impact of Vodafone’s stock volatility on their entire wealth. Second, a longer-term investment perspective might also be a good idea if one wants to mitigate the effect of these outliers.

Q2. Analysing News for Impact on Asset Markets

News Article Summary

News Title: Vodafone Raises $1.8 Billion in Indus Towers Stake Sale

Published Date: June 19, 2024

Authors: Filipe Pacheco and Ashutosh Joshi

Main Points:

• Vodafone Group Plc subsidiaries raised $1.8 billion by selling shares in Indus Towers Ltd.
• The sale involved 484.7 million shares at 311.4 rupees each or an 18-percent stake in Indus Towers.
• Vodafone increased the number of shares it expected to sell by about 80 percent ahead of the sale.
• Bharti Airtel’s owned stake in Indus Towers has increased by a percentage point.
• Indus Towers stock fell 9.6 percent after the block trades but later reduced the decline to 4.2 percent.

The following theories and concepts can be applicable:

Capital structure theory bargain: it relates to decisions about the optimal mix of debt and equity financial structure (Yu et al., 2016). Through the sale of shares, Vodafone is in the process of adjusting its capital structure to enhance the performance of the firm financially.

Market efficiency hypothesis: a large block sell of shares has been absorbed in the market swiftly. This shows that the market is efficient in the allocation and pricing of shares based on all the available information.

Demand and supply in equity markets: this is illustrated by the rapid absorption and willingness to purchase the increased number of shares. A supply of a quarter of the shareholder’s holding is still being successfully gobbled up in the market (Kelly, 2016).

Strategic divestment: this concept involves the sale of assets or a subsidiary unit that is becoming a drag and is no longer in line with the strategic goal of the divesting company (Faff, Gray and Tan, 2016).

Modern-day divestment by large companies: large companies are changing and opting out from businesses that are non-core or non-performing and in the process, trying to sell them off (Allen, McAleer and Singh, 2019). The divesting off the infected business units is done to ensure the company becomes lean and can survive in the face of cutthroat operational realities.

In the telco industry, we are witnessing such prevalent cases of large companies divesting at a rapid rate as well as making strategic realignment. The article reports that Vodafone group plc was able to raise $1,850 million, carry out the sale of shares. The article goes on to hold that the sales were heavily overbooked, implying that the market demand was high, hence, shows the strength.

The article also links the sale of shares and the strategic move by another company, Bharti Airtel, to increase its holding in Indus Towers to 37% from 36% (Bloomberg, 2024). The sell-off is shown to have short-term implications for the owning and selling off company. The article states that due to the sell of shares, the price of the shares in Indus Towers fell to 234 rupees.

In conclusion to the above, Vodafone’s profitable success with a stake sale is a good example of the company’s strategic decision. The firm is competent in optimizing its asset portfolio and capital structure. In addition, it also means the attractiveness of the Indian capital market and its positive investment climate. It provides opportunities not only for companies but also for a sustainable development tendency in the country.

Q3 Climate Change Analysis in the Investment Process

Introduction

Climate change has become a significant issue today as our planet is warming at an unprecedented rate due to the increased levels of carbon dioxide and other greenhouse gases in the atmosphere  (Scanlan, 2021). These changes can have economic, social, and physical impacts on the globe, and many already have. This report explores the economic and market implications of climate change, investor’s resources, and multiplication of information about climate change.

Economic and Market Implications of Climate Change

Climate change is a significant danger with economic risks and market implications, which must be considered by every investor. The global cost of climate change is estimated to be in tens of trillions of US dollars by the end of the century (Wright and Nyberg, 2017).

The following implications must be considered:

Asset Valuation: Many assets may become physically depreciated and lose value due to physical damage from extreme weather events. Real estate, infrastructure, and natural resources are especially at risk.

Operational Disruption: A supply chain is threatened by climate impacts and losses of profitability and operational capability suffer from a prolonged disruption.

Regulation: Countries across the world are headed towards a new regime of environmental regulations. For example, both implementation of new regulations and taxes as implemented in terms carbon are adding cost to firms (Ginbo, Di Corato and Hoffmann, 2021).

Market Opportunities: In transitioning to a low carbon economy there are new markets opening up like investments in renewable energy, energy efficiency technologies and sustainable agriculture. Firms that are able to adapt and innovate in this new reality are able to take advantage of those opportunities, including the ability to predict a new consumer demand for products and innovations that are sustainable.

There are a range of resources that investors now have access to in order to understand and manage the risks of climate change

Sustainability reports: Many mainstream companies who have responsibility to public shareholders or other stakeholders now produce sustainability reports. These reports layout the effect the company has on the environment, their carbon footprint, and what they are doing to fix that.

Environmental social governance ratings: Several agencies now provide environmental social and governance that rate companies on how well they are performing. These ratings can give investors a first pass look at which companies are able to better manage the risks of climate change and take on the opportunities (Gasbarro, Iraldo and Daddi, 2017).

Climate Scenario Analysis: TCFD asks companies to do scenario analysis and requires companies to in different climates evaluate the effect on their business. This type of reporting also creates benefit for investors and allows investors to evaluate which companies are best prepared to manage or take advantage of different climates.

Green Bonds and Sustainable Investment Funds: In fact, there are several financial instruments that invest into projects will a positive impact on the environment and social life (Tang and Demeritt, 2018).

Asset impairment: The companies are supposed to assess if they are likely to have their assets seriously impaired by the change that takes place because of climate change.

Provision for liabilities affected by climate change factors: The given provision is supposed to regulate the extent to which the companies’ reserves are tapped to take care of all the possible liabilities due to climate change effects.

Disclosures: Disclosures are vital and are there to ascertain that investor have the much required information on a company’s exposure to risks of the climate and the company’s strategies to tap in (Lohtaja, 2020). They must also disclose on a company’s level of carbon emission and the energy they use.

There are numerous of economic and market implications related to climate change. Such mechanisms as standard and its integrations into the consideration of climate change risks and opportunities can ease up the process. With the understanding of climate change, it is possible for investors to be more suited in their investment decision-making processes which need to lean towards sustainable consequences.

References

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