Coronavirus - we're here to help
From how to access your account online, scam awareness, your wellbeing and our community we're here to help.

Skip to main content
  • Register
  • Help
  • Contact us
  • Log in to HL Account

Vodafone - Higher margins help profits rise

George Salmon | 16 May 2017 | A A A
Vodafone - Higher margins help profits rise

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: 127.26 | Buy: 127.30 | Change -0.58 (-0.45%)
Chart View factsheet

Market closed | Prices delayed by at least 15 minutes | Switch to live prices

Full year underlying EBITDA (earnings before interest, tax, depreciation and amortisation) grew 5.8%, with performance in the second half of the year ahead of prior expectations.

Vodafone has proposed a 2% increase in the final dividend, to 10.03 eurocents per share. This gives a total dividend of 14.77 eurocents per share. The shares rose 2.5% on the news.

Our View

Vodafone consists of a recovering European business and the Africa, Middle East, Asia-Pacific division which serves fast-growing emerging markets. However, developments in India have thrown a spanner in the works.

In many emerging nations fixed line infrastructure never got built, so mobile phones are the primary means of communication. These places should represent a great growth opportunity for Vodafone.

However, a new rival in the Indian mobile market has upset the applecart. The Jio network offered an introductory period of free calls and data, and customers flocked to it. Vodafone has been forced to slash prices to stay competitive, and is deconsolidating its Indian operations via a merger with rival Idea Cellular, creating a telecoms giant which can slash costs and go toe-to-toe with the challenger. With backing from India's richest man, Mukesh Ambani, Jio has the firepower to fight it out.

In Europe, data growth is generally strong, but the group still faces competitive challenges. It doesn't matter where you are, in reality not much differentiates telecom providers other than the price they charge. There is little to prevent customers simply going with the cheapest deal.

Vodafone is making efforts to change that, and is rolling out broadband, fixed line and TV services across its European markets, to sit alongside its existing mobile offer. Known as 'Quad-play', it's a familiar trick in the industry, based on the assumption that multi-service customers will be less likely to switch provider.

Nonetheless, the cost of these services, including infrastructure and mobile spectrum, is huge. This, together with the cost of servicing the multi-billion euro debt burden, has squeezed Vodafone's free cash flow (FCF) in recent years.

The dividend hasn't always been covered by FCF, and with the roll-out of 5G around the corner, one could be forgiven for questioning the feasibility of Vodafone's policy of increasing the dividend each year. In this regard, it was a relief to see cash conversion improve in full year results, but we'll still be keeping an eye on things in the future. At present, the shares offer a prospective yield of 5.8%.

Full year results (excluding India):

Adjusted EBITDA was flat at EUR14.1bn, as an improved margin (up 1.2 percentage points to 29.7%) offset a decline in service revenues, which dip 3.7% to EUR43bn. On an underlying basis, which removes the impact of foreign exchange movements and M&A activity, service revenue grew 1.9%, with Q4 up 1.5%.

In Europe, which accounts for c.73% of group revenue, organic service revenue grew 0.6%, with growth in both its consumer and business divisions offsetting the headwind of new EU roaming regulations. The UK continues to struggle, with weaker margins and service revenues meaning adjusted EBITDA fell 15.8% over the year. Overall however, European adjusted EBITDA rose 3.1%. Improving momentum in service revenues and tight cost control in Spain and Italy saw profits rise 8.8% and 10.6% respectively, with profits in Germany also up, by 4.5%.

In AMAP c. 25% of revenues (Africa, Middle East and Asia Pacific) organic adjusted EBITDA grew 13.2% with adjusted EBITDA margins up 1.5 percentage points to 32.7%. Organic service revenue was up 7.7% year-on-year, with growth in all major markets. Q4 growth was 6.8%.

Free cash flow was EUR4.1bn, EUR350m ahead of company consensus. Net debt (excluding Vodafone India) at 31 March 2017 was EUR31.2bn (2016: EUR28.8bn). The increase in net debt can be primarily attributed to a EUR3.6bn capital injection into India to fund spectrum acquisitions, and a EUR1.4bn hit from foreign exchange rates.

For the year ahead, Vodafone is guiding investors to expect organic adjusted EBITDA growth of 4%-8% (EUR14.0-EUR14.5bn) and free cash flow of around EUR5bn.

Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

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.