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Vodafone - Sales up, but trends weaker in Europe

George Salmon | 1 February 2018 | A A A
Vodafone - Sales up, but trends weaker in Europe

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Vodafone Group plc USD0.20 20/21

Sell: 121.78 | Buy: 121.84 | Change 0.26 (0.21%)
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Vodafone's third quarter sales were in line with prior expectations. Revenues were EUR11.8bn, up 1.1% on an underlying basis. Within this, Emerging Markets sales were stronger than the prior quarter, but trends in some European markets weakened.

The shares fell 1.8% on the news.

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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 now deconsolidated its Indian operations ahead of a planned 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, and customer retention is significantly better among customers taking up multiple products.

Vodafone is also finding its higher-tariff, higher-allowance (more-for-more) offers are proving popular, which has helped offset the trend for customers to plump for SIM-only contracts.

Nonetheless, the cost of delivering these extra services, including spending on infrastructure and mobile spectrum, is huge. The result has been that free cash flow hasn't always covered the dividend.

Vodafone's stated policy is to increase the payout each year, and the prospective yield is 5.7%. This will look attractive to many, but in the long run, it's only useful if the group can generate the cash to back up the promises.

While there's plenty of reasons for optimism in the short term - debts are reasonably manageable, sales trends have been improving, and spending on mobile spectrum and physical infrastructure should moderate - spectrum and capital expenditure costs could limit growth in returns to shareholders.

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Trading details (at constant exchange rates)

European third quarter revenues were EUR8.6bn, a decline of 2.8% on the prior year. On an organic basis, which means excluding the deconsolidation of Vodafone Netherlands, and changes in currency movements and handset financing, service revenue rose 0.3%. Nonetheless, this was behind Q2's 0.8% growth, as an improving performance in Germany and the UK was offset by weaker trends in Spain and Italy.

Average revenue per user is stabilising in mobile, despite a shift in sales mix towards SIM-only contracts in many European markets. In fixed line, a record net 496,000 customers were added to the high speed next generation network.

In the AMAP division, revenues were EUR2.3bn. While this represents a year-on-year decline of 5.6%, the drop was driven by unfavourable exchange movements. Strong customer growth and demand for data across all markets helped organic service revenue rise 6.8%, up from the 6.2% increase in Q2.

The Vodacom business (which serves countries in Southern Africa) delivered revenue of EUR1.1bn, with organic service revenue rising 5.3%. Continued growth in Turkey and Egypt contributed to growth of 8.3% in the rest of the AMAP division, where revenues totalled EUR1.2bn. India, which has been deconsolidated for reporting purposes ahead of the proposed tie-up with Idea Cellular, saw organic service revenue decline 23.1% as competition remains intense.

The group reiterated its full year guidance for organic adjusted EBITDA growth of around 10%, with pre-spectrum free cash flow to exceed EUR5bn.

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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.

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.