Vodafone Group plc (VOD) USD0.20 20/21
HL comment (14 May 2019)
While Vodafone has met its guidance for the year, competition remains tough in many markets. Together with high spectrum auction costs, and a desire to reduce debts, that led to the decision to cut the full year dividend by around 40% to 9.00 eurocents.
The shares rose 2.1% in early trading.
Telecoms have fallen out of favour in recent years.
Vodafone's latest results give a fair indication of why. Competition is intense, debts are high and spectrum auctions continue to raise more than expected for European governments, putting pressure on cash flows.
While a dividend cut is never nice for investors, in the context of the many headwinds facing the group, and the impending EUR18.4bn acquisition of Liberty Global's German and Eastern European cable networks, we think the decision to rebase the dividend is sensible. And a falling share price means the group can still offer a prospective yield of over 5.5% for the coming year.
The question for investors is how much can the new policy of growing the dividend from the rebased level deliver?
The answer will be closely tied to Vodafone's fortunes in Europe. Having been focused on emerging market mobile growth, the Liberty deal, Vodafone's biggest in a generation, and a deconsolidation of the Indian business mean Vodafone's focus is now firmly on its home continent.
Vodafone reckons it can get EUR535m a year in operating and capital expenditure savings within 5 years of the Liberty deal completing. That'll help dilute the significant fixed costs of running a telecoms business, including the cost of infrastructure and mobile spectrum.
It should help the group roll out broadband, fixed line and TV services across its European markets. Vodafone's finding that customer retention is significantly better among those taking up multiple products, and adding millions of extra broadband customers through the Liberty deal opens the door to more cross-selling opportunities.
This is important because, despite all the investment in the upkeep of the network, there's not much differentiating mobile providers other than the price they charge. Customers often just go with the cheapest deal.
Still, the new strategy is far from risk-free. The cost of integrating the two businesses will be around EUR1.2bn, and then there's the impact on the balance sheet to consider. Vodafone's net debt position is already EUR27bn and it expects to take on another EUR10bn.
The anticipated increase in leverage has already contributed to a dividend cut, and explains the need to sell assets. The New Zealand business went for EUR2.1bn and the sale of the European towers business looks increasingly likely.
So, while we think the strategic shift and decision to rebase the dividend makes sense, there's no guarantee the group can thrive from here.
Full year results
Vodafone has reported an after-tax loss of EUR7.6bn, reflecting a 6.2% fall in revenue, losses in India associated with the Idea Cellular merger, higher financing costs and impairments in Spain and Romania.
However, on an underlying basis, which adjusts for M&A activity, accounting changes and exchange rate movements, service revenue rose 0.3% to EUR39.2bn. Cash profits (as measured by earnings before interest, tax, depreciation and amortisation, EBITDA) grew 3.1% on the same basis to EUR14.1bn, boosted by strong cost control.
In Europe, underlying consumer service revenue fell 1.1% to EUR30bn as tough mobile market conditions in Spain and Italy weighed on performance. Fixed service revenue rose 2.6%, and business revenue was broadly flat. Adjusted EBITDA was EUR10.5bn, down 0.5% on an organic basis.
Rest of World revenue fell 8.2% to EUR6.1bn due to weakness in the Turkish Lira. Underlying growth was 7.4%, with data demand rising 50%. Adjusted EBITDA was EUR2.2bn, up 6.3% on an organic basis.
Free cash flow pre-spectrum costs was stable at EUR5.5bn. This inflow, together with EUR2.1bn from the redemption of Verizon notes and EUR3.8bn raised through the issuance of a convertible bond, more than offset dividend, spectrum and restructuring payments, enabling net debt to fall from EUR29.6bn to EUR27bn.
The group expects to generate adjusted EBITDA of EUR13.8-EUR14.2bn in 2020, with at least EUR5.4bn in free cash flow before spectrum costs. Vodafone continues to target reducing European operating expenses by least EUR1.2bn by 2021, compared to 2018, with EUR400m of savings planned in 2020.
Vodafone will seek to reduce financial leverage (as measured by net debt to EBITDA) towards the lower end of its targeted 2.5x-3.0x range in the next few years.
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.
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