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Vodafone - making progress

Sophie Lund-Yates, Equity Analyst | 12 May 2020 | A A A
Vodafone - making progress

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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: 139.04 | Buy: 139.08 | Change 1.80 (1.31%)
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Vodafone's full year revenue increased 3% to EUR45.0bn, reflecting the impact of the Liberty Global acquisition and the disposal of Vodafone New Zealand. The group made a loss of EUR455m, compared with a EUR7.6bn loss last year. The loss reflects the impact of adverse legal judgements in India, as well as write-downs in the value of some assets, which offset profits from operations.

Vodafone is not giving detailed financial guidance thanks to the uncertainty generated by COVID-19, but thinks underlying cash profits could be flat, or decline next year. Vodafone also expects to generate at least EUR5bn in free cash flow before spectrum costs in 2021.

The group declared a final dividend of 4.5 eurocents, bringing the total dividend for the year to 9 eurocents, level with last year.

The shares rose 3.9% following the announcement.

View the latest vodafone share price and how to deal

Our view

Vodafone, and telecoms generally, have some exciting opportunities ahead with the roll out of 5G. However, competition remains intense, capital expenditure eye watering, and governments continue to raise more than expected when companies bid to use chunks of the electromagnetic spectrum for mobile data, putting pressure on cash flows.

Vodafone's debt pile has recently reached EUR42.2bn, thanks primarily to the recent acquisition of Liberty Global assets in Europe. The planned sale of some of the group's European tower assets will help reduce the debt burden, as will the sale of its 55% stake in Vodafone Egypt. The group is targeting 2.5-3.0x net debt to cash profits, which feels reasonably comfortable to us.

Still, the tower sale will mean the group's losing an attractive asset. Mobile providers pay tower owners rent, which generates a steady return.

Against that hostile background, the bull case for Vodafone has long been based on an attractive dividend. A lower share price combined with a 40% dividend cut last year means the stock now offers a prospective yield of 7.0%. The rebased dividend is well covered by free cash flow and should be sustainable, although there are no guarantees. The question now is whether the sharper consumer focus can help the group grow shareholder returns over time.

The savings to be had from the Liberty deal should help. Vodafone reckons it can get EUR535m a year in operating and capital expenditure savings within 5 years of completion.

The acquired Liberty businesses also create more cross-selling opportunities. Vodafone's long been focused on rolling out broadband, fixed line and TV services across its European markets. It's finding that customer retention is significantly better among those taking up multiple products.

The group's also launched a series of speed-tiered unlimited data plans, as it looks to offer customers something different. The initiative's showing early signs of success in some markets, but ultimately there isn't much preventing competitors from copying it if it proves to be a winner.

That's the industry's biggest challenge. Despite the multi-billion investments in mobile spectrum, there's not much differentiating mobile providers other than the price they charge. Customers often just go with the cheapest deal, which Vodafone has found out to its detriment in India and Spain.

All-in-all then, while we think the portfolio changes and strategy make some sense, there's no guarantee the group can thrive from here.

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Full year results (underlying growth rates)

Group Organic Service Revenue (OSR) increased 0.8% to EUR37.9bn and cash profits (adjusted EBITDA) rose 2.6% to EUR14.9bn, reflecting strong cost control measures.

Germany (34% of cash profits) saw flat OSR at EUR10.7bn, with growth excluding the impact of the Unitymedia acquisition. This reflects 1.1% growth in retail OSR, offset by declines in wholesale and the impact of international call rate regulation. Cash profits rose 2.5% to EUR5.1bn thanks to a focus on more profitable channels and strong cost controls. The underlying cash profit margin was 42%.

Italy (14% of cash profits) saw OSR fall 3.9% to EUR4.8bn, reflecting a 7.4% fall in mobile service revenue largely due to "intense" competition at the value end of the market. Fixed service revenue grew 8.2%, helped by a strong performance from the Business division in the final quarter. Cash profits fell 6.6% to EUR2.1bn, which includes the impact from higher regulatory provisions.

In the UK (10% of cash profits) OSR increased 0.5% to EUR5.0bn as growth in both fixed and mobile was offset by falls in wholesale and international call rate regulation. Cash profits increased 10.5% to EUR1.5bn, largely thanks to cost control measures.

In Spain (7% of cash profits) OSR fell 6.7% to EUR3.9bn and cash profits fell 1.7% to EUR1.0bn. In Other Europe (12% of cash profits) OSR rose 3.0% to EUR5.0bn and adjusted cash profit rose 4.7% to EUR1.7bn. Vodacom (14% of cash profits) saw OSR grow 3.3% to EUR4.5bn as trends in South Africa stabilised. Cash profits grew 1.1% to EUR2.1bn.

Vodafone generated EUR5.7bn in free cash over the year before spectrum costs, an increase of 4.7% which was better than expected. Including spectrum costs, free cash grew 12.2% to EUR4.9bn. Net debt increased 56% to EUR42.2bn, mostly reflecting the impact of EUR18.5bn incurred in the acquisition of Liberty Global assets. Net debt was 2.8x cash profits at the end of the financial year, within the target range and ahead of expectations.

View the latest vodafone share price and how to deal

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 disclosure for more information.