Markets up, Vodafone becomes activist target, and Ryanair comeback hit by Omicron turbulence

“A decent start to the week for markets in Europe and Asia hopefully sets the tone for a better five-day trading session for investors, given the carnage we’ve seen for most of January,” says Russ Mould, Investment Director at AJ Bell.

“Chatter about Vodafone being the next activist investor target put the telecoms company at the top of the FTSE 100 leaderboard, with several tech-related names close behind.

“The fact that Scottish Mortgage Investment Trust and Ocado are pushing ahead might suggest investors haven’t completely gone off tech investments.

“Some of the value stocks which have done well during the recent market rotation were among the biggest fallers on Monday, including Imperial Brands and Anglo American.

“However, it is far too early to firmly state the value rally is over, particularly as we would need to see significantly more than just a day’s trading to define a trend.

“The big event on the calendar this week will be the Bank of England’s interest rate decision, where it is almost certainly going to raise rates. This is widely expected by the market and unlikely to prompt any volatility among UK stocks unless the central bank is aggressive with the amount by which it puts up rates.”

Vodafone

“While the FTSE 100 has been enjoying a comeback this year with a better performance than many other major markets globally, it is also home to numerous sleepy or mis-managed companies ripe for being shaken up by activist investors.

“We’ve already got campaigns to change GlaxoSmithKline, Shell, Unilever, Aviva and SSE, and there is also an activist investor on the shareholder register of Sainsbury’s. Now it seems that Vodafone is the next FTSE 100 company set to be shaken up.

“Unlike most situations where an activist pops up on the shareholder register, Vodafone already has a plan in place to sharpen the focus of the business.

“That has so far included spinning off Vantage Towers, refocusing the portfolio through a range of disposals and mergers, and positioning the company for ever-greater consumption of data via mobile and fixed-line broadband networks. Dividends have also been cut to a more sustainable level.

“However, the reshaping of Vodafone has yet to result in any meaningful re-rating by the market – the shares are no higher now than they were in 1998.

“The debt burden which resulted from the Liberty Global cable deal in Europe, fierce competition in core mobile markets and a plunge in roaming business owing to the pandemic’s impact on global travel all continue to weigh, as does a group structure which still really makes Vodafone look like an investment fund which just owns as collection of telecoms assets.

“Looking at the classic list of activist strategies, Vodafone is the sort of name which might pop up on a hitlist – terrible share price performance, unwieldy group structure and potential for strong cash generation.

“However, its monster €44 billion debt pile looks to limit the scope for an increased share buyback scheme or higher dividends, at least in the absence of asset sales.

“Perhaps, therefore, Cevian will push for a further refinement of the portfolio through mergers or sales in a sector which has recently seen quite a bit of activity, including KKR bidding for Telecom Italia and Patrick Drahi and Altice snapping up a stake in BT.”

Ryanair

“The latest trading update from Ryanair, covering the last three months of 2021, was always likely to show strong growth on a year-on-year basis given the comparative quarter saw some of the tightest Covid restrictions.

“However, the numbers are not as good as they might have been had Omicron not intervened. With his typical tact Ryanair boss Michael O’Leary blamed ‘media hysteria’ about the new Covid variant for the impact on the business.

“Ryanair, never usually known for its generosity to customers with O’Leary once suggesting people would have to spend a pound to spend a penny on the carrier’s planes, is being forced to offer discounted tickets in the near-term to fill its flights.

“However, the longer-term picture for pricing could be more favourable for Ryanair given the capacity which has come out of the market and likely pent-up demand for foreign travel over the summer.

“Ryanair’s model isn’t about great customer service in the traditional sense but about low fares and getting people where they want to go on time and that proposition has proved a winning one over the years.

“Ryanair has one of the strongest balance sheets in the industry and this means it is very well placed for a full recovery in the aviation sector, with the means to invest in new routes and potentially even to swoop on ailing rivals. Notably, it has raised its 2026 annual passenger target today.

“In the short term, Ryanair is making no secret of the risk of further Covid disruption to come, with investors at least able to have some confidence it can steer a flight path through any turbulence.”

These articles are for information purposes only and are not a personal recommendation or advice.