Q3 results from Vodafone reveal a sixth consecutive quarter of improving revenue trends. On an organic basis group service revenue increased 1.4%, with continued recovery in Europe (-0.6%); and sustained momentum in AMAP (Africa, Middle East, Asia Pacific; +6.5%). The group has confirmed its full year EBITDA guidance of Â£11.7 billion to Â£12.0 bn, with free cash flow to be positive after all capex, but before spectrum purchases and restructuring costs. The shares rose by 1-2% in early morning trading.
- In Europe, trends in mobile continue to improve with Q3 mobile service revenue declining 2.0% (Q2: -2.3%). Fixed service revenue grew 3.7% (Q2: +3.1%).
- Continued to make "very good progress" on Project Spring. Now nearing the end of the deployment phase having completed 92% of the mobile build.
- Customer demand for data across the Group has continued to grow rapidly, driven by 4G adoption in Europe and 3G in emerging markets. Total data traffic grew 68% year-on-year.
- Continue to make good progress towards becoming a full service integrated operator. The group added 414,000 broadband customers in the quarter, taking the total to 13.0m.
Vodafone consists of a recovering European business, but that recovery is still far from uniformly spread. Its AMAP division serves fast-growing countries like India and Turkey, where often, mobile phones are the primary form of communication, because fixed line infrastructure never got built.
By broadening services out beyond mobile and into broadband, cable TV and fixed lines, Vodafone is moving toward quad-play services, one market at a time. The obvious omission here is the UK, where Vodafone has seen its position marginalised by BT's purchase of EE and the merger of O2 and Three. It is attempting to catch up now with a mobile broadband marketing campaign underway and a pay TV offering due shortly.
Data growth is very strong, but it is hard to see that it is translating into extra revenues. Vodafone's challenge is to charge adequately for the increasing data it is distributing. Historically mobile voice pricing has been falling, partly due to regulatory actions, partly due to competition. Network consolidation, as is happening in the UK could provide respite.
Revenues in Spain and Italy have fallen so far that there ought to be pent-up demand. Growth in the emerging markets is likely to be strong longer term; mass adoption of smartphones seems to be taking off, as evidenced by 78% Q3 data growth in the AMAP region.
The stock offers a yield of circa 5.3% and the board are targeting dividend growth. A eurozone economic recovery would help here. Analysts are forecasting minimal growth in the dividend over the next few years. The guidance that accompanied the interim results rather bears this out. The consensus dividend for the current financial year is 11.4p and by FY 2018, the average forecast has only grown to 12.1p
Eurozone recovery plays are quite hard to find in the UK equity market, and Vodafone is easily the largest and most liquid that we can identify. That yield means you are sort of being paid to wait, to see if Mario Draghi can turn the Eurozone ship around. Data demand in the emerging markets looks to be taking off too, which can't hurt. Investors just need to bear in mind that if the Eurozone slips back into recession, Vodafone will feel the pain.
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