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Vodafone - Trading in line

Nicholas Holt | 22 July 2016 | A A A
Vodafone - Trading in line

No recommendation

No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

Vodafone Group plc USD0.20 20/21

Sell: 112.30 | Buy: 112.32 | Change 2.60 (2.38%)
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First quarter results show organic Group service revenues growing 2.2%, but a 4.5% decline at the reported revenue level driven largely by a 5.3 percentage point negative impact from foreign exchange movements (Vodafone is a Euro reporter). The shares rose 3% following the announcement.

Data traffic grew 63% in the quarter, with the 4G customer base doubling year-on-year to 52.5m, with 5.7m customers added this quarter. The group added 348,000 new broadband customers in the quarter, including 254,000 in Europe.

The Group saw a 0.3% increase in European service revenue, with total revenue down 3.2% at the reported level. Total revenue was impacted by a 1.9 percentage point negative currency effect and falls in other revenues. The group saw organic growth across all European markets except the Netherlands, Greece and he UK (where organic service revenues declined 3.2%).

Organic service revenues in Africa, Middle East and Asia Pacific (AMAP) increased 7.7%, down 6.2% at the reported level following a 12.6 percentage point currency headwind. The region saw customer growth of 2.8m with 12.9m active data users added in the quarter. Voice and data usage increased 6.4% and 63% respectively. The Group continues to prepare for an IPO of the Indian business which saw 6.4% organic service revenue growth in the quarter.

CEO Vittorio Colao commented "Customers in multiple markets are attracted by our 'more-for-more' commercial offerings of larger data bundles and extra services, while we are seeing continued success with our fixed broadband and enterprise strategies."

Trading remains in line with expectations.

Our View

Vodafone consists of a recovering European business, but that recovery is still far from uniformly spread. The AMAP division serves fast-growing countries like India and Turkey, where often, mobile phones are the primary form of communication. Fixed line infrastructure never got built. In Europe, Vodafone is aiming to provide services across mobile, broadband and fixed lines, often with TV services too.

Data growth is very strong, but it is hard to see that it is translating into extra revenues at the moment. Vodafone's challenge is to charge adequately for the increasing data it is distributing. Network consolidation, as is happening in the UK could provide respite.

The role out of 4G as part of Project Spring provides an opportunity here. Despite rapid growth only 30% of the European customer base is currently taking 4G services. Once customers have taken a 4G package they tend to increase data usage dramatically (a roughly 57% increase in Europe) for which Vodafone are able to charge still more.

The market may be spooked by the rising capital expenditure but after the billions spent on Project Spring it's good to see growth in organic service revenues more or less across the board. The Group's assertion that dividends will rise each year only really stacks up if Vodafone can eventually restore the business to reliable growth in revenues and earnings. By some measures the group has seen negative cash flow for the last 6 years.

Eurozone recovery plays are few and far between in the UK market and Vodafone is easily the largest and most liquid that we can identify. The prospective yield of 5.1% means you are sort of being paid to wait, to see if Mario Draghi can turn the Eurozone ship around.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.