Vodafone shares hit six-week high after Q1 results

There should be enough going on at the mobile phone giant to generate interest in its underperforming shares, but the company has a mountain to climb. Our head of markets analyses its position.

The announcement of a mega-merger and fresh blood in the boardroom would normally be enough to light a fire under a share price, but Vodafone Group (LSE:VOD) investors are taking an understandable wait and see approach.

The merger with Three UK is expected to close by the end of next year and is subject to regulatory approval, which could yet prove to be more of a hurdle than Vodafone is suggesting. If passed, however, expected annual cost savings of £700 million by year five clearly underline the attraction of the deal, notwithstanding the likely £500 million of integration costs leading up to that point.

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In the meantime, the group is well aware that it has a mountain to climb. Higher energy costs in the background have not helped, while a deteriorating performance in Germany, which accounts for around 26% of revenues, has been seen amid intense competition and new legislation in the pipeline.

The decline in revenues of 1.3% for the last three months is an improvement from the 2.8% drop reported in the previous quarter and was largely driven by price increases in the broadband service, although this has inevitably come at the cost of losing some cost-conscious customers.

Elsewhere in Europe, performance has been mixed, with similar pressures to the German experience weighing in markets such as Spain and Italy. The UK fared rather better, reporting a service revenue increase of 5.7% compared to 3.8% the previous quarter, while 42,000 broadband customers were added, taking the existing total of customers to 1.3 million.

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From a group perspective, a reported revenue decline of 4.8% in the first quarter masked organic growth of 3.7%, where the African business continues to make a notable contribution. Vodacom revenues grew by 9% over the quarter from a previous 7%, with South Africa and Egypt being beacons of light. Indeed, there are some exciting growth opportunities in Africa (it now has 73.5 million financial services customers) and more broadly its multi-play offering (TV, broadband, fixed line) often results in “stickier” customers when they have chosen the bundle.

Guidance for the year is unchanged and the accompanying management comments recognise the scale of the challenges to come, while the performance of the Business segment and certain geographical regions provide some grounds for optimism.

In the meantime, net debt remains something of a concern to investors, although the group is reportedly comfortable with the current levels. The dividend yield of 10.6%, partly the result of a declining share price, is of scant solace to long-suffering investors, even if the yield of itself is extremely punchy.

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The shares have reacted positively at the market open on Monday to the glimmers of hope which have been reported, but there remains a significant amount of ground to make up.

Over the last year, the shares have dropped by 43%, as compared to a gain of 5.3% for the wider FTSE100 index, while over the last five years the price has plunged by 59%. Investors will be hoping that the positive noises emanating from the group prove to be the thin end of the wedge, but in the meantime the jury remains out, with the market consensus of the shares as a 'hold' likely to remain intact.