ii view: Vodafone trading is not the main event

Buying Liberty Global's cable networks increases debt, but management has a plan.

First-quarter trading update to 30 June 2019

• Total revenue down 2.3% to €10.65 billion
• Service revenue down 0.2% to €8.99 billion
• European service revenues -1.7% (Q4: -2.1%)
• Rest of the World service revenue up 5.3%

Chief executive Nick Read said:

"Our service revenue growth improved during the first quarter, led by Italy, and mobile churn fell to another record low. Following a significant quarter of commercial activity, we expect the gradual recovery in our service revenues to continue, underpinning our financial outlook for the year."

ii round-up:

Vodafone (LSE:VOD) has mobile operations in 25 countries, partners with mobile networks in 41 more, and provides fixed broadband operations across 19 markets. It has around 700 million mobile customers and 21 million fixed broadband customers. The UK and Germany are two of its largest markets. 

Current group strategy includes cross-selling additional products to both its European consumers and business customers, increasing smartphone and data usage for its Emerging consumers and growing the proportion of customers acquired through digital channels, so reducing commission paid to third-party distributors.

The $22 billion acquisition of Liberty Global's cable networks in central Europe raises its potential to cross-sell to a whole new customer base. On the downside, group debt is being increased significantly. 

For a round up of first-quarter trading and other Vodafone news, please click here. 

ii view:

Mobile phone networks have arguably become increasingly commoditised. The rollout of faster 5G services does potentially differentiate the players, although this could be short lived. Vodafone's cable network acquisition provides scope for growth, increasing selling opportunities, but with higher debts to service. As such, today's news of a potential IPO or sale of its European tower infrastructure business TowerCo, with proceeds used to reduce debt, is a great idea and has been warmly welcomed. 

Despite a recent dividend cut, a forward yield of over 6% still offers appeal in the current low interest rate environment. Vodafone shares appear good value and, despite risks around the growth outlook, this kind of income provides cover for investors as Vodafone monetises other valuable parts of the company.

Positives

• 5G network for seven UK cities now up and running 
• Finally realising value of the phone mast business
• Targeting progressive future dividend policy

Negatives

• Dividend cut
• Increased competition in some markets
• Group debt has increased

The average rating of stock market analysts:

Buy