Interactive Investor

ii view: Vodafone maintains forecast for flat annual profit

Shares in this major telecoms operator have underperformed the FTSE 100 index year-to-date. We assess prospects.

14th November 2023 11:59

by Keith Bowman from interactive investor

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Vodafone company sign 600

First-half results to 30 September

  • Total revenue down 4.3% to €21.9 billion
  • Service revenue up 4.2% to €18.6 billion 
  • Adjusted profit up 0.3% to €6.38 billion
  • Interim dividend unchanged at 4.5 eurocents per share
  • Net debt down 20% to €36.24 billion

Chief executive Margherita Della Valle said:   

“Vodafone's transformation is progressing. Our focus on customers and simplifying our business is beginning to bear fruit, although much more needs to be done. 

“We have also announced transactions to strengthen our position in the UK and exit the challenging Spanish market in order to right-size our portfolio for growth."

ii round-up:

Mobile phone network provider Vodafone Group (LSE:VOD) today detailed improved revenue growth, but maintained its expectation for flat annual adjusted profit as it continues to battle intense competition and elevated energy costs. 

First-half service revenues climbed 4.2% from an increase of 3.7% in the first quarter, aided by a return to growth for its biggest market Germany and following customer price rises. Adjusted profit rose by just 0.3% year-over-year to €6.38 billion, with full-year profit also expected to prove about flat at €13.3 billion.

Shares in the FTSE 100 company fell by around 1% in UK trading having come into this latest news down by close to tenth year-to-date. That’s similar to former US partner Verizon Communications Inc (NYSE:VZ), and in contrast to a near one-tenth rise for rival BT Group (LSE:BT.A) in 2023. The FTSE 100 index itself is little changed year-to-date. 

Relatively new head Margherita Della Valle is now pushing a transformation plan to make Vodafone a leaner and simpler organisation. Recent moves have included exiting the Spanish market, merging its UK business with Hutchinson’s Three and reducing 2,700 jobs out of a planned 11,000 over a three-year period.

Group operating profit fell 44% year-over-year to €1.1 billion, lowered by previous disposals including those for its Hungarian and Ghanaian businesses along with adverse currency moves.

Business sales helped Vodafone’s net debt fall by a fifth from this time last year to €36.24 billion, with the interim dividend again being left unchanged at 4.5 euro-cents per share. 

A third-quarter trading update is scheduled for 5 February. 

ii view:

Vodafone is a major mobile phone and fixed broadband data network provider. It has over 300 million customers across 17 countries, along with mobile phone network partnerships in a further 40 plus countries. Germany generates its biggest slice of service revenues at 31%, with the UK and Italy coming in at 15% and 11% respectively. Its Africa focused Vodacom business, including South Africa and Egypt, is another major sales generator at 16% of service revenues, with other markets including Turkey at 4%. 

For investors, the tough economic backdrop for its customers including heightened borrowing costs cannot be ignored, while group costs such as energy remain elevated. Competition in markets such as Italy is intense and, while net debt of €36.24 billion (£31.5 billion) is down, it compares to a stock market value nearer £20.5 billion. Meanwhile, adjusted earnings of 11.45 eurocents in its last full financial year only just covered its full year dividend payment of 9 eurocents per share.

More favourably, a transformation programme is being pushed including cost cuts via staff reductions. Vodafone is also diverse in terms of business type and geography, energy costs for industry more broadly have recently reduced, while UAE telecommunications company e& continues to hold a significant stake in Vodafone, raising speculative hopes and potentially applying further pressure on management for change.

While a lack of profit growth may for now deter new investors, some might decide to back a recovery under the new CEO. A forecast dividend yield of over 9% might also keep income investors interested.

Positives

  • Business and geographical diversity
  • Attractive dividend payment (not guaranteed)

Negatives

  • Uncertain economic outlook
  • Currency headwinds

The average rating of stock market analysts:

Strong hold

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