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Vodafone - Profit expectations rise on strong results

George Salmon | 14 November 2017 | A A A
Vodafone - Profit expectations rise on strong results

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Vodafone Group plc USD0.20 20/21

Sell: 165.80 | Buy: 165.84 | Change -2.92 (-1.73%)
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Vodafone has delivered first half organic revenue growth in both the European and Emerging Markets businesses. With a further reduction in operating costs, adjusted earnings before interest, tax, depreciation and amortisation (EBITDA) rose 13% to EUR7.4bn.

The group has raised full-year guidance for adjusted EBITDA growth to around 10% from 4%-8%, and has also nudged up free cash flow expectations. The shares rose 4.1% on the news.

The interim dividend rises 2.1% to 4.84 eurocents per share.

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 deconsolidated 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 trouble in India reflects 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's 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. In Europe, average revenue per user is stabilising, despite regulation and SIM-only contract adoption rising.

Nonetheless, the cost of delivering these services, including spending on infrastructure and mobile spectrum, is huge. Together with the cost of servicing the EUR32bn debt burden, Vodafone's free cash flow (FCF) has been squeezed in recent years.

Vodafone's stated policy is to increase the dividend each year, and the prospective yield is 6%. A progressive policy is great if it can be paid, but the dividend hasn't always been covered by FCF. While there have been some encouraging improvements recently, with the roll-out of 5G around the corner, one could be forgiven for wondering if it'll always be covered in future.

First half results

Reported revenue declined 4.1% to EUR23.1bn, due to the deconsolidation of Vodafone Netherlands and foreign exchange movements. On an adjusted basis, organic service revenue grew 1.7% to EUR20.6bn.

Of the group's EUR7.4bn profits, EUR5.6bn was generated in Europe (up 13% at constant currency). European organic service revenue growth remained steady at 0.8%, with all markets other than the UK delivering steady growth.

Strong prior year comparatives and a lower contribution from carrier services saw growth in Africa, Middle East and Asia Pacific (AMAP) slow over the half. After growing 7.9% in Q1, second quarter growth was 6.2%. Following the deconsolidation of the Indian business, adjusted EBITDA was EUR1.9bn, up 8.5% at constant currency.

The 'Fit for Growth' programme continues to deliver cost savings. Across the Group, 19 out of 26 markets grew adjusted EBITDA faster than service revenue in H1, driving a 2.5 percentage point improvement in adjusted EBITDA margin to 32%.

Higher earnings, plus lower capital expenditure and working capital saw free cash flow improve to EUR0.4bn from an outflow of EUR0.4bn in the prior year. This comes despite spectrum costs rising EUR0.6bn. Vodafone's guidance is for full year free cash flow before spectrum costs to be at least EUR5bn.

Data traffic accelerated over the half to rise 88% during the half, driven by AMAP. Average data usage in Europe and AMAP is now 2.1GB per month.

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.

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