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Vodafone - Europe improves but competition growing in India

George Salmon | 15 November 2016 | A A A
Vodafone - Europe improves but competition growing in India

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Vodafone Group plc USD0.20 20/21

Sell: 111.16 | Buy: 111.22 | Change 1.88 (1.72%)
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Europe improves but competition growing in India

In its half-year results, Vodafone says that Europe is performing ahead of plan, however competitive intensity in India has increased. Group service revenue fell by 3.1%, but rose by 2.3% on an organic basis (which strips out the effect of M&A activity and currency movements). The shares rose 1.4% on the news.

Our View

Vodafone consists of a recovering European business and the AMAP division, which serves fast-growing countries like India and Turkey. Often in these emerging economies, mobile phones are the primary form of communication as fixed line infrastructure never got built. This represents a growth opportunity for Vodafone, but competitive pressure is rising.

In general, data growth is very strong, but Vodafone's challenge is to charge adequately for the increasing amount it is distributing. Not much differentiates telecom providers from one another other than the price they charge, there is little to prevent customers simply going with the cheapest deal. Network consolidation, as is happening in the UK, could provide some respite, but the pressure on pricing remains a significant challenge.

The role out of 4G provides an opportunity here, and underpins Vodafone's 'more-for-more' strategy of selling bigger data bundles for a higher price. Vodafone has found that once customers have taken a 4G package, they tend to increase data usage significantly. Despite rapid growth, only 30% of European customers currently take 4G services providing plenty of scope for growth.

In Europe, Vodafone is also rolling out broadband, fixed line and TV services. The more customers it can get on these contracts, the less likely they are to switch provider, meaning higher quality revenues.

While the more-for-more and cross-selling strategies seem sensible to us, the group's extra spending has sent net debt over EUR40bn, almost 3 times expected earnings before interest tax, depreciation and amortisation. So while it is good to see signs of progress in Europe, longer term, the group will need to improve its cash flow if debts are to come down while the dividend goes up. By some measures, free cash flow has been negative 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 shares offer a prospective yield of just over 6%.

Half-year results in detail:


Organic earnings before interest, tax, depreciation and amortisation (EBITDA) grew 3.1% to EUR5.3bn. This represents around two thirds of group earnings. EBITDA margins improved by 0.9 percentage points to 30.2%, reflecting revenue growth and strong cost control.

Organic group service revenue increased by 0.6%. Average revenue per user stabilised somewhat on the introduction of the 'more-for-more' pricing policy.

Although service revenue declined by 2.7% in the UK, growth was positive across mainland Europe, with Spain returning to growth or the first time since 2008.

In total, 525,000 new broadband customers were added, increasing the European broadband customer base to 12.9m. 4G roll-out continues, with 15m customers joining, taking the total to 39.3m.

Africa, Middle East and Asia Pacific (AMAP):

Organic group service revenue increased by 7.4%, with EBITDA up 9.2% to EUR2.8bn, around one third of the group total.

Customer numbers continue to grow, and usage is increasing throughout the AMAP region. 7.2m mobile customers were added in the half, with voice and data volumes up 6.3% and 61% respectively. However, competitive pressures are rising in India, leading the group to take a net non-cash impairment of EUR5bn. In October, Vodafone paid EUR2.7bn to increase its Indian spectrum holding by 62%.

The group's expectations for the full year remain for EBITDA to grow organically by 3-6%; implying a range of EUR15.7bn to EUR16.1bn. Vodafone expects full year free cash flow of at least EUR4bn, before the impact of M&A, spectrum payments and restructuring costs.

The interim dividend of 4.74 eurocents is up 1.9%.

Unless otherwise stated, all estimated figures, including prospective dividend yields, are taken from a consensus of analyst forecasts compiled by Thomson Reuters. These estimates should not be taken as a reliable indicator of future performance.

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.