Must read weekly preview: Vodafone, Burberry, Aviva

Vodafone half-year – Tuesday 10 November

The first-quarter update in July revealed that Vodafone Group (LSE:VOD) had a strong start to the year as its transformation gained some traction, with total revenue rising by 9.7% to €10.3 billion and service revenue by 9.8% to €8.6 billion. In terms of strategy, 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.

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The UK business is one which the group is aiming to strengthen, and its mega-merger with Three UK recently progressed further as the company announced it would 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 21% of group income, and saw growth in service revenue of 12.9% in the first quarter, compared to 10.9% in the final quarter of the previous financial year. The additional 20% stake Vodafone has taken in Safaricom, increasing its holding to 55%, has resulted in upgrades to annual earnings and cash flow numbers.

All is not plain sailing, however. Despite an improving outlook, the most obvious thorn in the group’s side remains the German operation, which is the group’s largest and accounts for 30% of total revenue. Service revenue fell by 0.2% over the last year, although growth of 1.3% in the fourth quarter could be a more promising signal of things to come and was followed by a rise of 1.2% in the first quarter.

With a clear strategy, the transformation in train and the valuation undemanding, investors are beginning to warm to the stock once more, as evidenced by a share price rise of 35% over the last year and of 63% over the last two. As such, expectations for a continuing recovery will be sought by investors to maintain momentum.

Burberry half-year – Thursday 12 November

Burberry Group (LSE:BRBY) has declared its strategy is working, and there can be little doubt that the group’s new leadership has injected a breath of fresh air into the brand’s fortunes. The group previously described the full-year results in May as a meaningful inflection point, and with good reason. This followed a previous annus horribilis which included the change of chief executive, suspension of the dividend and a first-half loss which sent the shares into a tailspin. However, the famous brand is regaining momentum, and the latest trading update reported a further increase in sales which represented the seventh consecutive quarter of improvement since the new CEO was installed.

Retail revenues grew by 5% to £455 million in the first quarter, driven largely by particular strength in the Americas and Greater China, which added 12% and 9% respectively. Asia Pacific growth of 3% was achieved, despite a 2% drop in Japan which suffered from the continued decline of tourists from China, but offset by 11% growth in South Korea due to increased domestic and tourist spend. One fly in the ointment came from the Europe, Middle East, India and Africa (EMEIA) region, where sales declined by 3% given the ongoing fallout from the Middle East conflict and lower tourist spend.

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Progress is being achieved by measures on many fronts, including the attraction of 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. Indeed, for the first quarter there was a double-digit increase in Gen Z sales, with a strong contribution from Greater China. There is also a particular emphasis on the outerwear for which it has become traditionally known, which is currently outperforming expectations.

Burberry’s general outlook comments were optimistic but not cavalier. The group fully recognises that the transformation is still in its early stages, and that of course the fashion industry can be a fickle business. 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 fully re-established. More broadly, investors will be looking for any improvements in the beleaguered luxury sector, from which Burberry has not been exempt despite its progress. The shares have fallen by 18% so far this year and by 37% over the last two which is stark evidence of its ongoing challenges.”

Aviva Q3 – Friday 13 November

Following the interim results in August, it was evident that Aviva (LSE:AV.) is on a roll, with any number of metrics steaming past both expectations as well as the numbers from the corresponding period, underlining progress the group has made in the last year alone.

Its previous purchases of AIG Life UK, which boosted its protection presence, and Probitas, which provided exposure to the Lloyd’s of London market and an estimated addressable market of £200 billion of distribution opportunities, were important and timely moves. These were then trumped by the announcement of the Direct Line acquisition, which was well received, and with good reason. The Direct Line integration is progressing seamlessly, cost synergies are well on track to meet targets and the boost to group profitability already in evidence.

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Perhaps most importantly, it further cements Aviva’s leading positions particularly in the home and car insurance markets. While car insurance has seen a substantial increase in premiums to the exasperation of many drivers, the space has been affected by both higher average new car prices (equating to higher insured valuations) as well as the costly nature of repairing increasingly complex and technologically advanced vehicles.

Aviva is continually looking to strengthen its suite of products while also edging towards a more capital-light framework, where it estimates that more than 75% of profit will fall under this description on completion of the three-year targets. Those targets seem within easy reach following the latest update, and the Wealth business is seen as being core to its longer-term strategy as a major growth opportunity.

While the costly cash requirements of the Direct Line deal have prevented any share buybacks of late – although such a return may not be far off – a dividend yield of 5.5% is more than adequate compensation for shareholders in the interim. The obvious attractions of a group which continues to play to its strengths has resulted in the share price having risen by 8% over the last year and by 61% over the last two years. As such, the group will be looking to maintain momentum while investors will also be interested to learn of any further strategic initiatives or indeed news on the resumption of buybacks.