Interactive Investor

Vodafone recovery continues in Q1 but lots still to do

23rd July 2021 08:13

Richard Hunter from interactive investor

Vodafone runs the risk of becoming a perennial “jam tomorrow” stock, but professional investors remain fans after these results.

Vodafone’s (LSE:VOD) grind towards higher growth continues, with a combination of strategic success and an improving trading environment playing into the mix.

A more obvious thorn in the side of late has been the inevitable reduction in roaming and visitor revenues, given the extremely limited amount of international travel. The current glass can be seen as half-full or half-empty, with revenues ahead by 56% year-on-year, but still down by 54% on pre-pandemic levels. The improvement is likely to continue, but there is clearly some way to go before the issue can be eliminated from dragging on profits.

At the same time, the group is leaving its guidance for full-year profits and free cash flow unchanged, and notes that the operational and retail environment is not yet back to normal conditions. Retail footfall is still 40% below pre-pandemic levels, and where there have been some easing of restrictions, the immediate benefits of signing new customers become clear, as has been the case in the UK.

With increasingly substantial investment required given the rollout of 5G, and simple price competition in the sector seeming to be the key differentiator, the challenges remain demanding.

Even so, there are signs of progress.

The strategy to focus on Europe and Africa, while offering the converged “quadruple play” of bundled landline, broadband, mobile and TV, is proving relatively successful. Meanwhile, the upgrades to speed and capacity, alongside unlimited mobile plans, adds to the attraction from the consumer standpoint. Within the pipeline of its digital offering, especially to businesses, the availability of security, cloud and the Internet of Things also provide further scope for growth.

Indeed, over the quarter there has been an overall rise in service revenues of 3.3% and total revenue growth of 5.7%. Within these numbers, there has been a notable increase of 45% in volumes from the relatively new African payment system M-Pesa, while service revenues within Vodafone Business, which accounts for 27% of the total, rose by 2.7%. 

For all its progress, however, there remains a disconnect between unbridled investor optimism on prospects and the share price performance. 

Over the last three years, the shares are down by 35% and, in the last year, the underperformance is striking, with a decline of 11% comparing with a gain of 12% for the wider FTSE100 index. Vodafone does run the risk of becoming a perennial “jam tomorrow” stock, but in the meantime market consensus remains resolutely positive, coming in at a 'strong buy'.

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