Must read: Vodafone, Burberry, ITV

A Vodafone shop in Dorchester, United Kingdom. Photo: Finnbarr Webster/Getty Images.

Vodafone FY – Tuesday 12 May

Despite a slight revenue miss at the third-quarter numbers in February, the shares have had a good run as the company continues to ring the changes. 

• Our Services: SIPP Account | Stocks & Shares ISA | See all Investment Accounts
• Week Ahead: Vodafone, Aviva, Imperial Brands, Burberry

Vodafone Group (LSE:VOD) had quite simply been fighting fires on too many fronts while dealing with an increasingly onerous debt burden, leading to the need for a significant transformation. What is now emerging is a smaller and less geographically diverse, but more focused operation. 

Asset sales in Italy and Spain, as well as a reduction of its stake in Vantage Towers were reflected by cash proceeds of €13.3 billion (£11.5 billion) over the previous year, which reduced net debt to €22.4 billion from a previous €33.2 billion, although this then spiked again to €25.9 billion and remains an ominous weight on the group.

More promisingly, the UK business is one which the group is aiming to strengthen, and its mega-merger with Three UK has now progressed further – the company announced this week that it would now be taking full ownership of VodafoneThree, buying out the 49% stake of Chinese part owner CK Hutchinson for £4.3 billion. 

In addition, the Africa operation is an area of particular promise, now accounting for 20% of group income, and saw growth in service revenue of 13.5% in the second quarter. Vodafone is well positioned to benefit further from some potentially explosive growth in the region – it now has 93.7 million financial services customers - particularly given the more widespread availability and use of its services and where it is an established player.

• Share Sleuth: how I decided which firm to trim to raise cash
• ii view: Shell hikes dividend as profit receives Iran war boost

Overall, the direction of travel should provide some relief. The company reiterated its guidance for the year in February of earnings at the upper end of the €11.3 billion to €11.6 billion range previously estimated and free cash flow between €2.4 billion to €2.6 billion. One of its remaining challenges is the most obvious thorn in the group’s side, namely the German operation, which is the group’s largest and accounts for 31% of total revenue. Growth is pedestrian and has been hampered by the effects of previous customer losses which were largely attributable to enforced price increases last year, competitive activity elsewhere and the lingering effects of the change to German TV law which resulted in a recontracting of customers.

Unfortunately, years of underperformance weigh heavily on investors’ minds, and it will take some time for those painful memories to be erased. The shares have languished for some considerable time, having fallen by 53% since the peak of May 2015, although more recent progress has been rewarded with a bounce of 61% over the last year. While the strategy is clear, the transformation in train and the valuation undemanding, investors will need to see further strengthening of the group in order for the shares to retain their momentum.

Burberry FY – Thursday 14 May

Burberry Group (LSE:BRBY) has had a chequered past of late – the shares are down 55% from its most recent peak in April 2023 – but the famous brand is regaining momentum. At its third-quarter numbers in January, Burberry reported a further increase in sales which represented the fifth consecutive quarter of improvement since the new CEO was installed.

Group sales increased by 3% in the quarter, compared to a decline of 4% in the corresponding period last year, with revenues up by 1% to £665 million. The growth was boosted by sales in both the Greater China and Asia-Pacific regions, where the group has revealed double-digit growth in Gen Z customers despite intense competition, which not only is a vindication of the new “Burberry Forward” strategy but is also a promising sign of the brand remaining relevant to a younger generation.

There is also a particular emphasis on the outerwear for which it has become traditionally known, which is currently outperforming expectations. The ongoing campaign to promote the line saw the benefit of extra success during the festive season, with both outerwear and scarves seeing double digit sales growth. By region, declining tourist spend kept Europe flat, but this was more than offset by the growth seen elsewhere, with the Americas adding 2% as well as the notable 6% and 5% rises in those Greater China and Asia-Pacific regions.

The outlook comments were optimistic but not cavalier. Burberry fully recognises that the transformation is still in its early stages and, at the same time, a brand which had moved away from its traditional British traits of heritage and innovation, which had such appeal to overseas buyers and particularly tourists with an aspirational and stylish look, still needs to be reestablished. 

The previously proposed European tariffs announced by the US have weighed in particular on luxury fashion stocks, taking some of the shine from Burberry’s performance of late. The shares have nonetheless risen by 60% over the last year, enabling the group to rejoin the premier index in September. As such, investors remain ready to accept but are not yet fully convinced of a sustained recovery.

ITV Q1 – Thursday 14 May

In investment terms, ITV (LSE:ITV) has tended to be a tough watch, weighed down by the endlessly deep pockets of some of its competitors in the streaming space and the structural decline in linear advertising as viewing habits change.

At the full-year results in March, the numbers were mixed, with group revenues declining by 0.5% to £4.12 billion and adjusted pre-tax profit by 5% to £448 million. Cost savings of £63 million cushioned some of the blow from the decline in advertising revenue, which itself came up against some tough comparatives given the Men’s Euros football tournament the previous year, although this year’s upcoming World Cup should provide new opportunities.

In terms of the immediate outlook, however, there is perhaps only one show in town. ITV confirmed in November that it was in talks with Sky over a potential £1.6 billion sale of its Media and Entertainment business, which would include ITVX as well as its free-to-air channels. The shares spiked on the news, although engagement between ITV and Sky has reportedly slowed over recent months. It is possible that the price tag is the cause of the delay and a deal, should it happen, would basically leave the Studios business alone, perhaps itself then vulnerable to a bid, and in a best case scenario with its true value being unlocked by its solitary status.

• Tony Blair Institute’s radical proposal to overhaul state pension
• Sign up to our free newsletter for investment ideas, latest news and award-winning analysis

Guidance for the coming year includes optimism ahead of the upcoming Men’s football World Cup tournament, which begins in June and where the group will be showing more matches and at peak times. As such, with some advertisers holding back their budgets ahead of the tournament, revenues, margins and profits are likely to be weighted to the second half of the year, with an adjusted margin in a range of 13% to 15% and further cost savings of £20 million estimated for the year as a whole. Aside from any potential break-up, a punchy dividend yield of 6.4% is an ongoing attraction. That being said, investors have been skittish on prospects, with ITV flitting in and out of the FTSE 100 over recent times. The shares have managed a gain of just 2% over the last year, although the sale talks have boosted the price by some 16% over the last six months.