Vodafone Group plc (VOD) USD0.20 20/21
HL comment (16 November 2021)
Vodafone reported a 5.0% increase in half year revenues, reaching €22.5bn, reflecting increased handset sales post-pandemic, and higher roaming charges, as well as good customer growth in Europe and Africa.
Underlying cash profits before leases rose 6.5% to €7.6bn, reflecting the increase in revenues and a favourable legal settlement in Italy. Guidance for full year underlying cash profits before leases rose slightly to €15.2bn - €15.4bn (previously €15.0bn - €15.4bn).
Vodafone announced an interim dividend of 4.5 eurocents per share, in line with what was announced last year.
Vodafone shares rose 4.0% in early trading.
With pandemic restrictions in retreat, Vodafone is starting to show signs of business returning to normal. Handset sales are up as consumers look to update their phones before venturing into the world, while lucrative roaming fees are back as international travel resumes. While there are a whole host of adjustments for ongoing restructuring muddying the picture, 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 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 stands at €44.3bn 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 is 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
- 12m forward Price/Earnings ratio: 12.4
- Ten year average 12m forward Price/Earnings ratio: 20.6
- Prospective yield: 6.9%
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.
Half Year Results
Germany, 30% of overall group revenues, grew 1.2% year-on-year to €6.4bn, with underlying organic service revenue growth of 1.2%. That reflects an increased number of customers, higher broadband revenues per user and growth in roaming fees, as international travel resumed. Underlying cash profits before leases rose 1.7% to €2.9bn, with organic growth of 7.7% as the group delivered meaningful cost savings.
In Italy, 12% of group revenue, total revenues were flat year-on-year at €2.5bn. A 2.8% decline in service revenues, driven by increased price competition in the market, more than offset progress elsewhere.
UK, 13% of group revenue, saw total revenue rise 6.0% to €3.2bn, with growth in both Service and handset sales. Adjusted cash profits before leases rose 0.3%, with 1.8% underlying organic growth, as the group invested in increased marketing.
Revenue in Spain, 10% of group revenues, rose 2.0% to €2.1bn, as higher equipment sales offset a fall in service revenues reflecting increased price competition. Adjusted cash profits before leases came in at €445m, a 0.6% decline on an organic basis as cost reduction failed to offset increased marketing and content costs.
Other Europe saw sales rise 3.3% to €2.8bn, with strong growth in Service revenue thanks to increased roaming charges. Adjusted cash profits before leases came in at €836m, down year-on-year at the reported level but up 4.5% organically thanks to good revenue growth and cost control.
Vodafone's African business, Vodacom, 12% of group revenues, reported a 20.8% increase in revenue to €2.9bn thanks to strengthening currencies in the region. Organic Service revenues rose 5.4%, with particularly strong growth in payments business M-Pesa. Adjusted cash profits before leases rose 5.6% on an organic basis, reaching €1.1bn.
Other Markets, 9% of group revenue, saw revenue rise 3.2% to €2.0bn, with strong organic service growth of 19.1% offsetting currency headwinds. Turkey and Egypt performed particularly well in the half. Adjusted cash profits before leases rose 13.6%, coming in at €683m.
The group plans to further reduce its holding in Vantage Towers post-IPO, with the division reporting half year revenue of €611m and adjusted cash profits before leases of €305m.
Vodafone reported a free cash outflow in the first half of €983m, versus a €101m outflow in the same period last year. That reflects higher working capital and increased spectrum costs (which rose from €286m to €482m).
The group finished the half with net debt of €44.3bn, up on the €43.9bn reported 12 months earlier.
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.
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