First-half revenue rose 11.4% to €21.9bn (€21.2bn expected), helped by acquisitions including Safaricom. Within that, Service revenue came in at €18.4bn, reflecting organic growth of 5.8%.
Underlying cash profit (Adjusted EBITDAaL) grew 6.4% organically to €6.5bn.
The underlying free cash outflow narrowed from €0.6bn to €0.4bn. Net debt ended the period at €33.5bn, up from €25.4bn in March, reflecting the VodafoneThree buyout and the Safaricom deal.
An interim dividend of 2.306 eurocents was announced, up 2.5%.
For the full year, Vodafone now expects underlying cash profit of €13.2-13.4bn (previously €13.0-13.3bn) and free cash flow of €2.8-3.0bn (previously €2.6-2.9bn).
The shares were broadly flat in early trading.
Our view
Vodafone's first half showed the benefits of a more diversified business. Africa and the business services division are doing the heavy lifting, and a second guidance upgrade this year puts cash flow growth firmly back in focus. Europe, and Germany in particular, is where the picture is more mixed.
Sales in the telecom sector should be relatively robust, as broadband and mobile services are hardly optional. Yet, over the last decade, telecom giants have had to pump huge sums of cash into building out fibre networks and snapping up parts of the 5G spectrum.
In response to several years of underperformance, Vodafone has evolved its strategy. There have been job cuts, the merger of its UK business with Three UK, and sales of the underperforming Spanish and Italian divisions.
Vodafone now owns all of VodafoneThree, having bought out its partner well ahead of the original timeline. Full control should make it easier to move quickly, and the UK cost-saving target has been raised. Early synergies are coming through, but the bulk is still to come, and Vodafone now carries all the risk if delivery falls short.
Germany remains Vodafone's toughest nut to crack. Service revenue slipped back in the second quarter as a boost from wholesale revenue faded, and the mobile market remains competitive. A court ruling over historic price rises has added a fresh headwind, and cash profit fell again. More job cuts should help, but sustained growth still looks some way off.
Outside Europe, Africa continues to shine, with double-digit growth across connectivity and financial services. Taking control of Safaricom has made the region a bigger part of the group, at around a third of cash profit. The opportunity is meaningful, but currency movements, faster-changing markets and an ongoing legal challenge in Kenya could bring added volatility.
Asset sales and a focus on debt reduction have improved the balance sheet in recent years. There's still a lot of debt, and the UK buyout and Safaricom deal have pushed leverage up to the middle of the group's target range. Stronger cash flow offers support, and the dividend continues to grow gradually, but investment demands and integration costs leave limited room for error, and no dividend is guaranteed.
All in all, Vodafone's portfolio is stronger and first-half trading adds weight to the turnaround story. The shares haven't kept pace with rising earnings expectations, which has pulled the valuation into more attractive territory. But we're not fully convinced just yet. Progress in Germany, delivery of the UK savings and continued cash flow growth all still need to come through.
Environmental, social and governance (ESG) risk
The telecom industry is low/medium in terms of ESG risk. Data privacy and security is the most significant risk driver, not only because customers are increasingly concerned about privacy, but also because cybersecurity breaches can be costly. Product quality is another key risk, particularly given the networks they manage are considered critical infrastructure. Carbon emissions, human capital and business ethics are also risks worth monitoring.
According to Sustainalytics, Vodafone’s management of material ESG issues is strong.
Vodafone has a board-level ESG committee to oversee its ESG program and track key targets. Executive pay is partly based on ESG performance, with a 10% weight in long-term incentives. The company is certified for information security management, meeting industry best practices.
Vodafone also has a third-party ethics hotline for anonymous reports and a specialist team for negotiations. However, the company has faced regulatory scrutiny and fines for quality and safety issues, indicating possible gaps in product governance.
Vodafone key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. 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.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by LSEG. 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.