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UK telco, Belgian brewer join top global stocks list

Emma Rapaport  |  05 Nov 2018Text size  Decrease  Increase  |  
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Vodaphone Logo

Vodafone has been significantly over-sold, says Morningstar analyst Allan C. Nichols

A British telco joins a global brewer and American investment manager in Morningstar's  Global Equity Best Ideas list.

While Vodafone has had issues in some countries, such as India and Italy, Morningstar senior equity analyst Allan C. Nichols says the company is growing revenue in local-currency terms in most markets.

The telco is currently trading at GBP£150.52, a significant discount to its fair value estimate of GBP£250. Currently ranked among the largest wireless carriers in the world, it has 275 million wireless subscribers, and 530 million when joint ventures are included.

"Its reported revenue has been hurt by currency moves as the euro has strengthened against most of the currencies where it has operations," Nichols says.

"We think the stock has significantly oversold relative to the issues it has faced. In the meantime, the stock yields 7.9 per cent while shareholders wait for a turnaround, and we believe the dividend is safe."

Moving from a wireless-only provider to a provider of converged services has been Vodaphone's longer-term focus, according to Nichols.

"Within Europe, fixed-line telecom services now account for about 30 per cent of revenue. We expect fixed-line service revenue to continue to grow faster than wireless services, so this percentage should continue to increase," he says.

Within mobile, Vodafone continues to transition customers to smartphones and 4G technology, both of which generally lead to higher data usage and higher revenue.
"We believe this trend will continue," Nichols says.

Side-entry to Alibaba

US-based investment management company Altaba is another new addition to the global top stocks list.

Formed after Yahoo sold its core business to Verizon in 2017, it then became a publicly-traded investment holding company. Altaba has most of its holdings in Chinese multinational conglomerate Alibaba.

Morningstar senior equity analyst Ali Mogharabi says his valuation of Altaba is based on the discounted fair value estimate of the firm’s holdings in Alibaba, plus net cash.

"While Altaba’s valuation is based on its holding in Alibaba, we expect it to be discounted, as the risk of a non-tax-efficient liquidation of that holding remains.

"However, at current levels, Alibaba is meaningfully undervalued, supporting our bullish view on Altaba," he says.

Mogharabi values Altaba at US$98 per share, based on his view that wide moat-rated Alibaba is meaningfully undervalued as compared with Morningstar's US$240 fair value estimate for Alibaba's US American depository receipt.

Altaba currently trades at US$61.73, and Alibaba at $147.59.

Corona Beer Beach

Corona is one of the global beer brands owned by AB InBev

The brewer too cheap to ignore

Among European stocks to make the Global Equity Best Ideas list is the largest brewer in the world and one of the world's top five consumer product companies (by EBITDA), Belgium based Anheuser-Busch InBev, or AB InBev.

Morningstar director Philip Gorham says the stock is currently "too cheap to ignore".
AB InBev, which boasts global beer brands Budweiser, Corona and Stella Artois, is currently trading at $76.51, a significant discount to its fair value estimate of $118.

"With the announcement of a dividend cut, to a yield of around 2.5 per cent, management has removed an overhang that has concerned investors for months," he says.

"We estimate that the incremental $4 billion to $5 billion in free cash flow that will be used to pay down debt will help deleverage the balance sheet to 3 times net debt/EBITDA by 2022."

AB InBev enjoys a wide economic moat, driven by a cost advantage in Africa and Latin America. Gorham says its dominant position in those markets, most of which are monopolistic competition markets, should ensure that AB InBev benefits from the growth these geographies offer.

"Africa is likely to grow volumes in the medium to long term, while Latin America offers a large mix opportunity," he says.

However, Philip says developed markets remain a drag, as "industry volumes are being pressured from consumer migration to wine and higher-quality beer."

"Any slowdown in craft growth could stabilise volumes in mainstream price segments and act as a catalyst for the stock."

 

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Emma Rapaport is a reporter with Morningstar Australia, based in Sydney.

© 2018 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782 ("ASXO"). The article is current as at date of publication.

is an editor for Morningstar.com.au

© 2020 Morningstar, Inc. All rights reserved. Neither Morningstar, its affiliates, nor the content providers guarantee the data or content contained herein to be accurate, complete or timely nor will they have any liability for its use or distribution. This information is to be used for personal, non-commercial purposes only. No reproduction is permitted without the prior written consent of Morningstar. Any general advice or 'class service' have been prepared by Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), or its Authorised Representatives, and/or Morningstar Research Ltd, subsidiaries of Morningstar, Inc, without reference to your objectives, financial situation or needs. Please refer to our Financial Services Guide (FSG) for more information at www.morningstar.com.au/s/fsg.pdf. Our publications, ratings and products should be viewed as an additional investment resource, not as your sole source of information. Past performance does not necessarily indicate a financial product's future performance. To obtain advice tailored to your situation, contact a licensed financial adviser. Some material is copyright and published under licence from ASX Operations Pty Ltd ACN 004 523 782. The article is current as at date of publication.

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