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Vodafone - pockets of optimism but lots to do

Vodafone reported third-quarter total revenue of €11.4bn. Within that, service revenue saw organic growth of 4.7% to €9.4bn...

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Vodafone reported third-quarter total revenue of €11.4bn. Within that, service revenue saw organic growth of 4.7% to €9.4bn. The key German market posted growth of 0.3%, slower than the 1.1% seen over the second quarter reflecting the effect of some non-recurring revenue. Vodafone Business saw growth accelerate to 5.0%, driven by strong performance in digital services.

The group continues to consider consolidation in Italy with several potential parties, but confirmed nothing has been agreed.

Full-year guidance was reiterated, with underlying cash profit (EBITDAL) and underlying free cash flow expected around €13.3bn and €3.3bn respectively.

The shares fell 1.6% in early trading.

View the latest Vodafone share price and how to deal

Our view

Vodafone's third quarter had some pockets of optimism for investors to cling to. Growth was in line with the second quarter, arguably a better result than some had feared. But the wider issues associated with recent lacklustre performance remain.

Sales in the telecom sector should be relatively robust, as broadband and mobile services are hardly optional. Yet, over the last ten years, telecom giants have had to pump huge sums of cash into building out fibre networks and snapping up parts of the 5G spectrum. The main challenge has been the low sales growth relative to spending when you look at telecoms compared to other sectors.

Vodafone's also been underperforming versus peers. Service revenue growth and customer satisfaction in key areas like Germany, Italy and Spain have struggled to keep pace.

In response, Vodafone has an evolved strategy. There are job cuts, the merger of its UK business with Three UK, and the recently agreed sale of the underperforming Spanish division. The Italian division's next, but no deals have been confirmed yet.

We welcome the change, but there's a lot to do.

The key market of Germany is a perfect example of the challenges at hand. After more than €20bn of investment, growing service revenue and customer numbers is proving a challenge. Vodafone was slow to adapt to changing regulations, and when it did, introduced a poor customer experience. There are further regulatory changes coming over this year which mean Vodafone needs to recontract over 8.5mn customers (c. €800mn in revenue).

Outside Europe, the Vodacom subsidiary has some exciting growth opportunities in Africa and is targeting mid-to-high single-digit cash profit growth over the next few years. Africa could become increasingly important as the region develops, and Vodafone's leading position in several markets means it's well-positioned to benefit.

Net debt rose to €36.2bn over the first half, which is a little lofty for our liking. And while operating cash flow is stable, cash demands remain high. The Spanish sale, while a positive move for earnings given it's a loss-making region, will be a hit to free cash flow. A capital allocation review is on the cards post-completion, and some analysts are already pencilling in dividend cuts as a result. Remember, no dividends are guaranteed.

All-in-all then, while we think the portfolio changes and new strategy make sense, the fundamental challenges that go with being a telecom remain. And with growth hard to come by, we'll need to see sustained positive progress before getting too excited.

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.

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
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 5th February 2024