Vodafone (VOD) could potentially see its shares trade on a high multiple of earnings this year after being targeted by an activist investor.

Cevian Capital is rumoured to have built up an undisclosed stake in the mobile network operator. Reports suggest the Swedish activist fund wants to put pressure on the FTSE 100 company to sell parts of its global operations, consolidate its position in key markets, return cash to shareholders and bring more telecoms experience onto the board.

While analysts at Numis Securities remain sceptical about the extent to which Cevian Capital may be able to force Vodafone’s hand, they do believe that the fund’s targeting of the company could spark a re-evaluation of Vodafone’s business model, strategy and scope for profits recovery.

‘Vodafone’s senior management has worked consistently and at pace from the start of its tenure in October 2018 to extract significant value from the firm’s assets, organically and inorganically,’ says Numis.

The plan has so far included spinning off mobile masts business Vantage Towers, refocusing the portfolio through a range of disposals and mergers, and positioning the company for ever-greater consumption of data.

Yet the reshaping of Vodafone has yet to result in any meaningful re-rating of its stock market valuation, with Covid-19, understandably, delaying progress, says Numis.

Vodafone’s share price more than halved between the beginning of 2018 and the start of 2022. The current 128.5p level means the stock is still more than 45% off its five-year highs.

Numis believes that ‘the sum of all uncertainties about Vodafone’s investment proposition’ does not justify it currently trading on a low price to earnings multiple of 11-times full year to March 2023, 12.4% free cash flow yield and 6.1% dividend yield.

Based on the broker’s own calculations, the out-of-favour European telecoms sector is currently trading an equivalent 13.8 PE multiple, with free cash flow and dividend yields at 9.4% and 5.5% respectively.

Several FTSE 100 companies have come under the scrutiny of activist investors with change being demanded at GlaxoSmithKline (GSK), Shell (SHEL), Unilever (ULVR), Aviva (AV.) and SSE (SSE), while there is also an activist investor on the shareholder register of Sainsbury’s (SBRY). All of these stocks apart from Unilever have seen share price gains during the past 12 months.

According to Numis forecasts, Vodafone earnings for the year to March 2023 are set to jump nearly 20% to €0.136. Numis believes that the stock could hit 180p during the next 12 months, 40% higher than the current level.

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