Vodafone's total third quarter revenue fell 4.7% to €11.2bn, although the organic decline, which excludes the impact of exchange rates and acquisitions or disposals, was just 0.3%. Growth was driven by a strong performance in Germany, Vodafone's largest market.
Vodafone reiterated its full year guidance for between €14.4bn and €14.6bn in underlying cash profit (EBITDA) and €5bn in free cash flow before spectrum and restructuring costs.
The Vantage Towers IPO remains on track.
The shares rose 4.1% the announcement.
Correction: this view has been updated, a previous version incorrectly stated Vodafone was selling its Egyptian operations.
COVID-19's impact has mainly been to reduce roaming revenue, as fewer of us have used our phones abroad. However, this should recover in the future, and means investors should be focused on the bigger picture.
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 reached €44.0bn, 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. The group is targeting 2.5-3.0x net debt to cash profits, which feels reasonably comfortable to us although the group is currently right at the top of this range.
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. After a recent cut 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 €535m a year in operating and capital expenditure savings within 5 years of completion, and management says this is currently ahead of schedule.
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.
A series of speed-tiered unlimited data plans is another attempt 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, as Vodafone has discovered 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.
Vodafone key facts
- 12m forward Price/Earnings ratio: 15.0
- Ten year average 12m forward Price/Earnings ratio: 20.0
- Prospective yield: 6.5%
All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.
Third quarter trading update (underlying growth rates)
Group Organic Service Revenue (OSR) grew 0.4% to €9.4bn.
In Germany OSR rose 1.0% to €2.9bn, driven by higher variable use during lockdown, a strong Business performance and a smaller decline in roaming and visitor revenue. Retail service revenue grew 1.5%.
Italy saw OSR fall 7.8% to €1.1bn, reflecting competition at the value end of the mobile market and lower roaming revenue. In the UK OSR fell 0.4% to €1.2bn as roaming revenue fell.
In Spain OSR fell 1.1% to €957m, reflecting price competition, and in Other Europe OSR fell 0.7% to €1.2bn. Growth in South Africa saw Vodacom OSR grow 3.3%, to €1.1bn.
Across the business Vodafone is "competing well" in Consumer divisions. Speed tiered unlimited plans continue to drive growth in the premium segment of the market, while second brands compete at the value end.
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