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Vodafone - roaming revenue rebounds

William Ryder (Equity Analyst) | 23 July 2021 | A A A
Vodafone - roaming revenue rebounds

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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: 115.28 | Buy: 115.34 | Change 1.36 (1.19%)
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Vodafone's total first quarter revenue for the 2022 financial year rose 5.6% on an organic basis to €11.1bn. Service revenue grew 3.3% organically to €9.4bn.

At a group level, roaming and visitor revenue grew 56%, but is still another 54% behind its pre-pandemic level. This contributed to growth across most markets.

Vodafone confirmed it is on track to meet full year guidance of underlying cash profits after leases (EBITDAaL) of between €15.0bn and €15.4bn and adjusted free cash flow of "at least" €5.2bn.

The shares rose 3.7% following the announcement.

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Our view

COVID-19's impact has mainly been to reduce roaming revenue, as fewer of us have used our phones abroad. However, this is now recovering, so 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 stood at €40.5bn after the acquisition of Liberty Global assets in Europe and the sale of some European tower assets in the Vantage Towers IPO. The group is targeting 2.5-3.0x net debt to cash profits, which feels reasonably comfortable to us.

Against a tough 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 the group managed €500m in savings last year.

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 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, as Vodafone has discovered to its detriment in India and Spain.

Vodafone also has some exciting growth opportunities in Africa, including M-Pesa which offers mobile financial services. Africa could become increasingly important as the region develops, and Vodafone's leading position in several markets means it's well positioned to benefit.

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: 12.8
  • Ten year average 12m forward Price/Earnings ratio: 20.4
  • Prospective yield: 6.7%

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.

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First quarter trading update (all changes are organic)

In Germany service revenue rose 1.4% to €2.9bn. Roaming revenue increased as more people have begun going abroad again after 12 months of reduced international travel. However, this was offset by lower variable call usage, which peaked during lockdown last year. The group switched off its German 3G network on 1 July and has reassigned the spectrum to 4G. Total revenue rose slightly to €3.2bn.

Italy saw service revenue fall 3.6% to €1.1bn, reflecting continued price competition. The improving trend primarily reflects a weak comparable period last year. Roaming and visitor revenue increased year-on-year, and Business activity was also higher. Total revenue was broadly flat at €1.2bn.

In the UK service revenue rose 2.5% to €1.3bn, which management said reflects both weakness last year and strong trading this year. Vodafone reported higher roaming revenue, a good performance from Consumer prepaid, and the resumption of fixed project work in Business. These positives were offset by a reduction in mobile termination rates. Total revenue rose from €1.5bn to €1.6bn.

In Spain service revenue rose 0.8% to €925m, primarily due to increased roaming revenue. The group also acknowledged a weak comparable period last year and ongoing price competition. Total revenue rose slightly to a little over €1.0bn.

In Other Europe service revenue rose 4.2% to €1.2bn with growth in all markets, reflecting higher roaming revenue and increased prepaid top-ups. Total revenue rose from €1.3bn to €1.4bn.

Vodacom's service revenue grow 7.9% to €1.1bn. This was thanks to increased M-Pesa transaction volumes and the reintroduction of peer-to-peer fees, which were suspended in some markets last year due to the pandemic. Growth in South Africa was slower, which management attributed to a strong comparable period last year as government support was withdrawn. Total revenue rose from €1.2bn to €1.5bn

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.