Vodafone Group plc (VOD) USD0.20 20/21
HL comment (16 November 2020)
Vodafone's first half revenue fell 2.3% to €21.4bn as COVID-19 reduced roaming revenue and handset sales. The group made a headline profit of €1.6bn, compared with a €1.9bn loss last year. Adjusted cash profits (EBITDA) fell 1.9% to €7.0bn, as lower costs partially offset the decline in revenue.
Vodafone reiterated its full year guidance for adjusted cash profits (EBITDA) of between €14.4bn and €14.6bn, and free cash flow before spectrum and restructuring costs of at least €5bn.
The group declared an interim dividend of 4.5 eurocents, in line with last year.
The shares rose 3.4% following the announcement.
COVID-19's impact has mainly been to reduce roaming revenue, as fewer of us have used our phones abroad. However, this should recover in the future, and means investors should be focused on the bigger picture.
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 debt pile has reached EUR44.0bn, thanks primarily to the recent acquisition of Liberty Global assets in Europe. The planned sale of some of the group's European tower assets will help reduce the debt burden, as will the sale of its 55% stake in Vodafone Egypt. The group is targeting 2.5-3.0x net debt to cash profits, which feels reasonably comfortable to us although the group is currently right at the top of this range.
Still, the tower sale will mean the group's losing an attractive asset. Mobile providers pay tower owners rent, which generates a steady return.
Against that hostile background, the bull case for Vodafone has long been based on an attractive dividend. A lower share price combined with a 40% dividend cut last year means the stock now offers a prospective yield of 6.9%. The rebased dividend is well covered by free cash flow and should be sustainable, although there are no guarantees. The question now is whether the sharper consumer focus can help the group grow shareholder returns over time.
The savings to be had from the Liberty deal should help. Vodafone reckons it can get EUR535m a year in operating and capital expenditure savings within 5 years of completion, and management says this is currently ahead of schedule.
The acquired Liberty businesses also create more cross-selling opportunities. Vodafone's long been focused on rolling out broadband, fixed line and TV services across its European markets. It's finding that customer retention is significantly better among those taking up multiple products.
A series of speed-tiered unlimited data plans is another attempt offer customers something different. The initiative's showing early signs of success in some markets, but ultimately there isn't much preventing competitors from copying it if it proves to be a winner.
That's 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 India and Spain.
All-in-all then, while we think the portfolio changes and strategy make some sense, there's no guarantee the group can thrive from here.
Vodafone key facts
- 12m forward Price/Earnings ratio: 16.4
- Ten year average 12m forward Price/Earnings ratio: 19.7
- 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.
Full year results (underlying growth rates)
Group Organic Service Revenue (OSR) fell 0.8% to €18.4bn.
In Germany (41% of cash profits) OSR fell 0.1% to €5.7bn, as higher variable use during lockdown use was offset by lower roaming, visitor and wholesale revenue. Cash profits rose 1.3% to €2.8bn despite lower revenue, which management attributed to strong cost controls. The underlying cash profit margin was 44.6%.
Italy (11% of cash profits) saw OSR fall 7.2% to €2.2bn, reflecting an 11.0% fall in mobile service revenue largely due to competition at the value end of the market, lower roaming revenue and the lapping of last year's price increases. Cash profits fell 11.1% to €800m despite lower operating costs.
In the UK (9% of cash profits) OSR fell 1.2% to €2.4bn as roaming revenue fell. Cash profits fell 2.3% to €636m, despite lower operating costs.
In Spain (7% of cash profits) OSR fell 4.4% to €1.9bn and cash profits rose 6.0% to €488m. In Other Europe (12% of cash profits) OSR fell 2.4% to €2.4bn and adjusted cash profit rose 2.2% to €870m. Vodacom (13% of cash profits) saw OSR grow 2.3% to €1.9bn reflecting growth in South Africa. Cash profits grew 3.6% to €891m.
Vodafone generated €451m in free cash before spectrum and restructuring costs, an increase of 14.5%. Including spectrum and restructuring costs, free cash flow was negative €101m. Net debt rose from €42.2bn to €44.0bn, reflecting the dividend payment, derivative and foreign exchange costs, partially offset by asset sales. Net debt was 3.0x cash profits at the end of the half.
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.
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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