ii view: Vodafone slumps to post-Covid low after profit downgrade

Shares in this once mighty telecoms giant are down by more than 15% year-to-date. We assess prospects. 

First-half results to 30 September

• Total revenue up 2% to €22.93 billion
• Service revenue up 2.5% to €19.2 billion
• Adjusted profit (EBITDA) down 2.6% to €7.24 billion
• Interim dividend payment unchanged at 4.5-euro cents per share

Guidance:

• Expects full-year adjusted profit of between €15 billion to €15.2 billion, down from a previous €15 billion to €15.5 billion

Chief executive Nick Read said:

"In the context of a challenging macroeconomic environment, we are delivering a resilient performance this year, alongside making good progress with our operational and portfolio priorities.

“We are confident that the ongoing delivery of our organic strategy and portfolio actions will underpin long-term growth and create value for shareholders."

ii round-up:

Telecoms giant Vodafone Group (LSE:VOD) today downgraded its full-year profit expectation as it continued to battle its own rising costs, including those for energy across its geographical regions. 

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Full-year adjusted profit is now expected to come in at between €15 billion and €15.2 billion, down from a previous €15 billion to €15.5 billion and potentially below last year’s €15.2 billion.

Vodafone shares fell by 9% in UK trading having come into this latest announcement already down by more than 6% year-to-date. They've not been this low since March 2020. Shares for owner of mobile rival EE, BT Group (LSE:BT.A) are down by just over a quarter during 2022, with major US network providers Verizon Communications Inc (NYSE:VZ) and AT&T Inc (NYSE:T) down by a similar amount. 

Vodafone’s adjusted profit for the six months to the end of September fell by 2.6% to €7.24 billion, hindered by a 7.4% fall for its largest market Germany following regulatory changes preventing automatic contract renewals. Both broadband and TV customers numbers fell. 

In the UK, its second biggest market, adjusted profit rose 6.6% despite battling rising costs, aided by a 6.7% improvement in revenues and pushed higher by increased product or contract prices.

Total group service revenues rose 2.5% to €19.2 billion, with losses across Germany, Italy and Spain countered by gains in the UK, Africa, and other markets such as Turkey. 

A new €1 billion plus cost saving target is to be pursued, focusing on streamlining and further simplifying the company. An interim dividend of 4.5-euro cents per share stays unchanged from that paid last year.

A third-quarter trading update is scheduled for 1 February.  

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 new strategic priorities since 2018, including business sales to simplify its portfolio and the stock market float of its Vantage Towers AG Ordinary Shares (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. 

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For investors, the tough economic backdrop including a cost-of-living crisis and rising group costs such as energy and wages cannot be ignored. Regulatory changes such as those seen in Germany can impact, too, and competition across the industry remains intense. Group net debt of over €40 billion also leaves room for improvement.

More favourably, its simplification strategy is ongoing, with the pursuit of costs still firmly in management’s sights. A diversity of geographical regions helps counterbalance ups and downs for each, while room for further consolidation across the industry remains. 

On balance, there is certainly reason for caution given the economic conditions and work needed by Vodafone to get the business into shape. Investors trying to pick the share price low have had their fingers burned before. For investors willing to take that risk, there is at least the reward of a forecast dividend yield of over 7%. 

Positives

• Geographical diversity
• Attractive dividend payment (not guaranteed)

Negatives

• Uncertain economic outlook
• Intense competition

The average rating of stock market analysts:

Strong hold