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Vodafone - A strong start to the year

George Salmon | 21 July 2017 | A A A
Vodafone - A strong start to the year

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Vodafone Group plc USD0.20 20/21

Sell: 115.00 | Buy: 115.04 | Change -0.90 (-0.78%)
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Excluding the deconsolidation of Vodafone's Indian and Dutch operations, organic service revenue increased 2.2% at constant currency, representing a better than expected performance in many countries, including the UK. The shares rose 1.9% on the news.

Our View

Vodafone consists of a recovering European business and the Africa, Middle East, Asia-Pacific (AMAP) division which serves fast-growing Emerging Markets.

In many emerging nations, fixed line infrastructure never got built so mobile phones are the primary means of communication. Emerging Markets therefore represent a great growth opportunity for Vodafone. Until recently, India was the jewel in the crown.

However, Jio, a new rival in the Indian mobile market, upset the applecart by significantly undercutting the group. Vodafone has been forced to slash prices to stay competitive, and is deconsolidating its Indian operations via a merger with rival Idea Cellular. This should create a telecoms giant capable of going toe-to-toe with the challenger.

The troubles in India symbolise a long-standing issue for many telecom companies. It doesn't matter where you are, in reality not much differentiates providers other than the price they charge. There's little to prevent customers simply going with the cheapest deal.

Vodafone is making efforts to change that. It is rolling out broadband, fixed line and TV services across its European markets, to sit alongside its existing mobile offer. Early indications are that the tactic is working, with churn rates roughly half the level of households who take a single product. Vodafone is also finding its higher-tariff, higher-allowance (more-for-more) offers are proving popular.

Nonetheless, the cost of delivering these services, including spending on infrastructure and mobile spectrum, is huge. Together with the cost of servicing the multi-billion euro debt burden, Vodafone's free cash flow (FCF) has been squeezed 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 5.7%.

First Quarter results

Vodafone says it has made a good start to the year in Europe, where commercial momentum remains robust, and growth accelerated across AMAP. The group is gaining profitable market share in broadband, and increasingly monetising strong demand for mobile data through its 'more-for-more' propositions. Previous guidance for the full year, for organic adjusted EBITDA growth of 4%-8%, is left unchanged.


European organic service revenue increased 0.8%, however Vodafone says this would have been 1.8% were it not for increased regulation. Customer numbers rose in both mobile and fixed line, and ARPU (average revenue per user) stabilised across many of its major markets.

Growth was supported in Italy, up 3.2%, and a better performance from the UK. UK organic service revenues had declined by 4.8% in the final quarter of last year, but fell by 2.7% in Q1. Growth in Germany was 0.6%, behind the 1.2% seen in Q4, as a higher customer base was offset by regulatory headwinds and lower wholesale revenues.

AMAP and India

AMAP (Africa, Middle East & Asia Pacific) saw organic service revenues grow 7.9%, ahead of the 6.8% seen in Q4. This improved performance was aided by strong customer additions and data demand in South Africa.

The recently deconsolidated Indian business reported a decline of 13.9% as competitive pressures continue. After adding 4.4m Indian customers in the previous quarter, the group added 2.9m this time.

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.