Must read: Vodafone, Burberry, Rolls-Royce

VODAFONE FULL YEAR – TUES 11 NOV

Richard Hunter, Head of Markets, interactive investor says, “Turning around a super tanker is never an easy task, especially when the company is in the midst of a highly competitive arena, but there are some signs that Vodafone Group (LSE:VOD) is beginning to ring the changes.

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The group 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 over the previous year, which reduced net debt to €22.4 billion from a previous €33.2 billion, although this remains an ominous weight on the group.

General proceeds are also being funnelled to an ongoing share buyback programme totalling €4 billion, which is now half complete. In addition, despite halving the dividend payment, the yield is a respectable 4.6%.

The most obvious thorn in the group’s size remains the German operation, which is the group’s largest and accounts for 35% of overall service revenue, which declined by 3.2% in the first quarter, although an improvement from the 6% drop previously reported. for the year. The unit is still suffering from 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, where the previous number of 8.5 million has been reduced to 4.2 million households.

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More promisingly, the UK business is one which the group is aiming to strengthen, and its planned mega-merger with Three UK is now complete and lead to cost synergy savings of around £700 million per year on completion. In addition, the Africa operation is an area of particular promise, now accounting for 20% of group income. Vodafone is well positioned to benefit further from some potentially explosive growth in the region, particularly given the more widespread availability and use of the services which the industry provides, and where it is an established player.

Even so, the telecoms sector is one which is of course based on reliability, but equally importantly on price, where there remains ferocious competition. Recent years have also required huge investment as the industry moves on, such as being part of the new 5G network, with the benefit of any payback not being felt for any number of years. The group’s turnaround efforts have been recognised by a share price increase of 25% so far this year, although this comes from a low base and is not sufficient to arrest a decline of 17% over the last three years.”

BURBERRY HALF YEAR – THURS 13 NOV

Richard Hunter says, “A chequered update at the first quarter numbers in July highlighted the scale of the challenges ahead for Burberry Group (LSE:BRBY), although there were some encouraging signs. While comparable store sales fell by 1% on the corresponding period, not only was this less than the 3% decline which had been expected, but it also represented the third consecutive quarter of improvement since the new CEO was installed.

A revenue decline of 2% at constant currency to £433 million comprised a mixed bag by geography. The Greater China and Asian Pacific regions remain areas of particular concern, with sales declines of 5% and 4% respectively. Indeed, consumer sentiment was on shaky ground even before the reciprocal tariffs which could yet damage the US and Chinese economies, and the outlook is uncertain.

In addition, Burberry had previously pointed out that UK business continues to be seriously impacted by the withdrawal of VAT refunds for overseas visitors, which has led to the UK being the least competitive destination in Europe for tourist shopping. In contrast, there was a positive outturn from the Americas, where sales growth of 4% was attributed to new customers. There may be a caveat here however, since it is unclear how much of this additional spending is the result of consumer purchases being pulled forward in anticipation of wider tariff impacts.

The outlook comments are proof if it were needed of the turnaround hurdles. Although the group estimates cost savings of £80 million this year, it is also prioritising investment which will result in capital expenditure of £130 million, while the current level of exchange rates could add a hefty £85 million hit to revenues.

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Amid the noise, the “Burberry Forward” strategy which the group announced last November is clearly beginning to have a positive impact, but the transformation will take time to filter through. The Burberry brand is one 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. The group wishes to return to a more focused and traditional luxury brand, with particular emphasis on the outerwear for which it has become traditionally known, which is currently outperforming expectations.

A share price increase over the last 12 months of 37% - and 22% this year alone – meant that Burberry regained its place at the top table in September, being promoted again to the FTSE100. However, the price has fallen by 54% since its record high which was set in April 2023, reflecting that the focus on the group’s recovery remains of paramount importance.”

ROLLS ROYCE TRADING UPDATE – THURS 13 NOV

Victoria Scholar, Head of Investment, interactive investor says, “Rolls-Royce Holdings (LSE:RR.) has been a standout stock market winner, rallying around 100% so far this year. It is a popular stock among interactive investor customers, frequently finding itself on our list of most-bought stocks each month, and for good reason – it reported a stellar set of earnings in July, sending shares to a record high thanks to impressive engine demand as well as strength in defence. It is guiding for full-year underlying operating profit of between £3.1 billion and £3.2 billion, although profit in the second half is expected to be slightly lower than the first.

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Despite supply chain and Trump tariffs headwinds facing the sector, Rolls-Royce shares continue to fly. CEO Tufan Erginbilgic who took to the helm in January 2023 has spearheaded nothing short of a miraculous recovery at the previously unloved company. The former longstanding BP executive has defied the odds, bringing about this remarkable corporate transformation, by cutting unnecessary costs, investing heavily in improving engines and embracing a digital transformation. The backdrop of higher global defence spending amid the uncertain geopolitical environment and a post covid revival in international travel have also supported Rolls Royce.

Investor appetite for the stock remains undiminished and the market consensus of the shares as buy will almost certainly remain intact."