ii view: Vodafone repeats full-year profit hopes

Shares for the mobile phone and broadband giant have outperformed the FTSE All-Share index this year. We assess prospects.

First-quarter trading update to 30 June

• Service revenue up 2.5% to €9.51 billion
• Total revenue up 2.7% to €11.28 billion
• European mobile customers up 1.4% to 66.5 million
• European broadband customers down 0.4% to 25.5 million
• African mobile customers up 2.3% to 185.7 million

Guidance:

• Full-year adjusted profit expectation unchanged at between €15 billion and €15.5 billion

Chief executive Nick Read said:

"We have executed in line with our expectations, delivered another quarter of growth in both Europe and Africa, and seen an acceleration in business growth. Whilst we are not immune to the current macroeconomic challenges, we're on track to deliver financial results for the year in line with our guidance.”

ii round-up:

Telecoms giant Vodafone (LSE:VOD) today detailed quarterly revenue in line with City expectations as gains in the UK and Turkey helped offset a fall in its biggest market Germany. 

Service revenues for the first quarter to the end of June rose 2.5% to €9.51 billion year-over-year, as UK price hikes and high Turkish inflation countered a 0.5% decline in Germany following regulatory changes relating to automatic renewing of contracts. Unlike US counterparts Verizon Communications (NYSE:VZ) and AT&T (NYSE:T), Vodafone also reiterated its previously estimated full-year adjusted profit expectation. 

Vodafone shares were little changed in UK trading having come into this latest announcement up by almost 15% year-to-date. Shares for BT Group (LSE:BT.A) are up by just over 7% during 2022 while the FTSE All Share index is down 4.5%. 

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Service revenues retreated 0.5% in Germany for Vodafone to €2.86 billion as both its broadband and TV customers fell by 34,000 and 79,000 respectively. Government law changes now mean that customers have to agree a contract rollover renewal rather than it happens automatically. Customer losses were however below that seen in the previous quarter following the law changes in December 2021. 

Service revenues for its UK and second biggest business rose by 6.5% to €1.36 billion, helped by both price increases and higher roaming and visitor demand in the wake of the pandemic. Service revenues in Turkey rose by just over a third, pushed higher by elevated inflation. 

First-half results are scheduled for 15 November. 

ii view:

Vodafone operates both mobile phone and fixed broadband networks. It has fully owned operations in Germany, Italy, the UK, Spain and South Africa, with joint ventures in other markets. In Africa, it is using its data network to offer mobile financial services via its M-Pesa platform. 

It has been pursuing renewed strategic priorities since 2018, including business sales to simplify its portfolio and the stock market float of its Vantage Towers AG (XETRA:VTWR) business in 2021. Its current strategy focuses on customer commitments including having the best-connected products and services, being the most efficient operator and building leading gigabit networks.   

For investors, a cost-of-living crisis and rising interest rates offer a tough backdrop for its customers, one which could see it either downgrade or cut services, particularly if unemployment was to move higher. Regulatory changes such as those seen in Germany can impact, while competition across the industry remains intense. Group net debt of over €40 billion as of the end of its last financial year also leaves room for improvement.

More favourably, Vodafone's new major shareholder as of earlier this year, UAE telecoms company e&, could add pressure for corporate change and performance improvements. A diversity of geographical regions helps counterbalance ups and downs for each, while a forecast dividend yield of around 6% cannot be ignored in a low if rising interest rate environment. On balance, and with the consensus analyst estimate of fair value at over 155p per share, room for longer term optimism looks to persist.   

Positives

• Geographical diversity
• Attractive dividend payment (not guaranteed)

Negatives

• Uncertain economic outlook
• Intense competition

The average rating of stock market analysts:

Buy