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Vodafone - on track for full year

Third quarter revenue rose 3.7% on an organic basis to €11.7bn, largely driven by growth in Services revenue...

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Third quarter revenue rose 3.7% on an organic basis to €11.7bn, largely driven by growth in Services revenue.

Performance was in line with higher guidance from November, with Vodafone expecting full year underlying cash profits of €15.2 - €15.4bn. CEO Nick Read also said: "We are also committed to creating value for our shareholders through proactive portfolio actions".

The shares rose 2.8% following the announcement.

View the latest vodafone share price and how to deal

Our view

With pandemic restrictions in retreat, Vodafone's business levels have ramped back up. Handset sales are normalising after customers ventured back into the world, while lucrative roaming fees are back as international travel resumes. The underlying trend seems to be one of gathering momentum.

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 prices more than expected when companies bid to use chunks of the electromagnetic spectrum for mobile data, putting pressure on cash flows.

Vodafone's net debt pile stood at €44.3bn at the last count, after the acquisition of Liberty Global assets in Europe and the sale of some European tower assets in the Vantage Towers IPO. That leaves the group at the upper end of its 2.5-3.0x net debt to cash profits target - manageable as its stands, but not a level we'd like to see increase further.

Keeping debt under control is all the more crucial given Vodafone's bull case has long been based on an attractive dividend. After a recent cut the rebased dividend was well covered by full year free cash flow forecasts and should be sustainable, although there are no guarantees. The question now is whether the sharper focus on the European consumer markets can help the group grow shareholder returns over time.

The Liberty deal should help.

The acquisition created more cross-selling opportunities. Vodafone's long been focused on rolling out broadband, fixed line and TV services across its European markets, since customer retention is significantly better among those taking multiple products. Vodafone also reckons Liberty can deliver €535m a year in operating and capital expenditure savings within 5 years of completion, and already delivered a sizeable chunk of that last year.

Outside Europe the Vodacom subsidiary 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.

Unfortunately, these initiatives don't really address 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 Italy and Spain.

Speed-tiered unlimited data plans seem to be making some progress, allowing the group to price discriminate between customers based on how willing they are to pay for extra speed. But ultimately we don't think there's much preventing competitors from copying it if it proves to be a winner.

All-in-all then, while we think the portfolio changes and strategy make sense the fundamental challenges that go with being a telecom remain. With balance sheet pressure mounting and spectrum costs not going away Vodafone still has work to do before it can be said to be in rude health.

Vodafone key facts

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 results

In Germany (29% group revenue), service revenue rose 1.1%, with improvements in Business partially offset by lower variable call usage. Retail activity in the fixed service products is still being impacted by the pandemic. Vodafone's TV customer base fell by 75,000 reflecting lower commercial activity. Mobile service revenue increased by 1.7%, partly because of strong demand in the Business segment.

Service revenue rose in Other Europe (€1.3bn) and the UK (€1.3bn) but declined in Spain (€940m) and Italy (€1.1bn). The strongest performer was Other Europe, where revenue rose 2.9%.

Strong growth in South Africa and good demand in international markets meant Vodacom's total service revenue rose 4.4% to €1.2bn. There was again strong growth in Business.

Other Markets service revenue grew at a similar rate to the previous quarter, rising 19.8% to €867m. There was a "strong" customer base, as well as growth in average revenue per user. Vodafone reiterated its agreement to transfer its 55% shareholding in Vodafone Egypt to Vodacom Group, its listed African subsidiary.

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 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 disclosure for more information.

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Written by
Sophie Lund-Yates
Sophie Lund-Yates
Lead Equity Analyst

Sophie is a lead on our Equity Research team, providing research and regular articles on a selection of individual companies and wider sectors. Sophie's specialities are Retail, Fast Moving Consumer Goods (FMCG), Aerospace & Defence as well as a few of the big tech names including Facebook and Apple.

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Article history
Published: 2nd February 2022