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Vodafone - slowdown in growth driven by declines in Europe

Vodafone reported third quarter revenue of €11.6bn, reflecting organic growth of 2.7%. Service revenue was up 1.8% to €9.5bn...

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Vodafone reported third quarter revenue of €11.6bn, reflecting organic growth of 2.7%. Service revenue was up 1.8% to €9.5bn. Excluding Turkey, which is experiencing high levels of inflation, service revenue rose 0.5%.

Service revenue growth fell quarter-on-quarter, reflecting declines in Europe as roaming revenue growth slowed. Germany, Italy, and Spain were the main detractors, offset somewhat by growth in the UK and Other Europe.

Full year guidance remains, with underlying cash profit expected between €15- €15.2bn and underlying free cash flow of €5.1bn.

The shares fell 2.6% in early trading.

View the latest vodafone share price and how to deal

Our view

One comment from interim CEO, Margherita Della Valle, stood out from third quarter results - "we can do better". We're inclined to agree, performance has been lacklustre to say the least.

Service revenue growth is slowing in many of the most important markets across Europe. In fact, the only large market posting revenue growth was the UK and even that was lower than the prior quarter.

At the half year mark, management pointed to weakening economic conditions and higher energy costs as the main headwinds. Whilst we agree, there are also some Vodafone-specific challenges.

Price hikes throughout Europe are already underway, with eight markets now linking prices directly to inflation. That should help provide some shelter from increasing costs, but the competitive landscape is challenging and there are signs customer loyalty's being pushed to the limit.

Looking more broadly, 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.

But it's proving challenging and issues in the key market of Germany are a perfect example. After more than €20bn of investment, growth trends continue to decline. IT systems have been slow to adapt to new regulation and network performance continues to lag competitors. A new management team in Germany is now in place, which we support, it now needs to deliver.

Outside Europe the Vodacom subsidiary has some exciting growth opportunities in Africa, including M-Pesa which offers mobile financial services. Vodacom's targeting mid-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.

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.

Vodafone's net debt pile stood at €45.5bn at the last count, and that doesn't include €12.0bn of lease liabilities. We'd expect debt levels to come down a touch over the second half due to the timing of cash flows. Plus, the Vantage Tower sale which should generate a minimum of €3.2bn.

The prospective yield is high, due to a drop in share price more than anything else. At current levels, it's still well covered by cash flows, so we aren't too concerned for now. Of course, there are no guarantees.

All-in-all then, while we think the portfolio changes and strategy make sense, the fundamental challenges that go with being a telecom remain. And with growth trending in the wrong direction, 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
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: 1st February 2023