Vodafone Group plc (VOD) USD0.20 20/21
HL comment (24 July 2020)
First quarter organic service revenue (OSR) fell 1.3% to €9.1bn, reflecting the negative impact of COVID-19. The virus has primarily resulted in lower roaming revenue and Business project delays.
Progress towards the sale of Vodafone's European tower assets has continued and the group is targeting an early 2021 IPO for the newly formed Vantage Towers in Frankfurt.
The shares fell 2.9% 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 the focus should be 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 recently reached EUR42.2bn, 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.
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 6.4%. 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.
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.
The group's also launched a series of speed-tiered unlimited data plans, as it looks to 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, which Vodafone has found out 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
- Forward Price/Earnings Ratio: 17.9
- 10 year average forward Price/Earnings ratio: 19.4
- Prospective yield: 6.4%
We've introduced this section in response to recent survey feedback.
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.
Q1 trading update (underlying growth rates)
In Germany OSR was flat at €2.8bn as 2.4% growth in fixed line revenue was offset by a 3.0% fall in mobile revenue. Roaming, visitor and wholesale mobile revenue fell but was partially offset by the lapping of last year's international call rate regulation.
Italy saw OSR fall 6.5% to €1.1bn due to lower roaming and Business revenue due to project delays. The UK faced similar headwinds and OSR fell 1.9% to €1.2bn, partially offset by growth in the customer base.
In Spain OSR fell 6.9% to €920m due to lower roaming revenue, service suspensions in Business and lower relative pricing.
In Other Europe OSR fell 3.1% to €1.2bn, in part due to lower roaming revenue, decreased top ups in Portugal and Greece and increased competition in Ireland.
Vodacom OSR grew1.5% to €950m as growth in South Africa was partially offset by problems for M-Pesa. OSR from Other Markets grew 9.1% to €840m due to strong growth in Turkey and Egypt.
Management maintained its guidance for at least €5.0bn in free cash flow this year and the outlook for underlying cash profits (adjusted EBITDA) remains "flat to slightly down". The group is on track to make €400m in operating cost savings this year.
Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. 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 original HL content, published by HL.
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