Interactive Investor

Vodafone shares respond to more confident update

Consensus remains positive following this quarterly update, writes our head of markets.

5th February 2020 10:55

Richard Hunter from interactive investor

Consensus remains positive following this quarterly update, writes our head of markets.

Having spent some time in the doldrums, Vodafone (LSE:VOD) is showing signs of renewed vigour.

The group’s sheer scale gives it some competitive edge in the markets in which it operates. Signs of recovery in the UK and Spanish regions are welcome developments, Germany is showing growth and in the rest of the world the revenue figures are strongly ahead. 

Indeed, overall third-quarter revenues jumped 6.8%, underpinned by those pockets of strength. Assets are being tidied up with a reduction to net debt in mind, such as the sale of its stake in Vodafone Egypt. 

Even more significant will be the demerger of the European Tower Company which is now coming to fruition and may well result in an IPO next year. While this will reduce a relatively stable income stream, it will nonetheless help reduce a net debt figure which, after the Liberty Global assets purchase, currently stands around an immense €50 billion. 

Source: TradingView Past performance is not a guide to future performance

In the meantime, the company’s cash generative power is still in evidence and, even after the drama of the company’s forced dividend cut last year, the shares are still on a prospective yield of 5.2%, which remains attractive by any yardstick in the current interest rate environment. 

Full-year guidance is reiterated for adjusted EBITDA of €14.8-15 billion and free cash flow of around €5.4 billion.

Strategically, Vodafone continues to spread its wings and partnerships with the likes of Deutsche Telekom have significant potential, which, alongside the synergies and cross-selling opportunities of the Liberty Global move, could result in a further boost to income. The company is also part of the pioneering 5G crowd, having launched the service in seven European markets to date.

It is certainly not all plain sailing, however, and, in terms of the challenges for Vodafone, the song remains the same. Unwaveringly intense competition, high spectrum auction costs and the overhang of back levies by the Indian government were and remain significant potential drags on cashflow, which resulted in the poorly-received reduction to one of the main strands of the Vodafone investment case, the dividend.

Even so, the projected yield remains attractive and the steps the company is taking should mean that the current level is sustainable. 

Meanwhile, despite the size of the group, Vodafone is showing that it can be fleet of foot, an important characteristic in a quickly evolving landscape, where, in certain areas such as mobile, there is little to differentiate competition other than price alone. As such, its presence in the 5G vanguard and its constant product and service innovation may yet give the company a new lease of life.

The shares have seen a guarded return to form, having risen 9.5% over the last year, as compared to a 3.7% hike for the wider FTSE 100 index

There is still much damage to repair, since the shares have lost over 30% in the last two years, but, for the moment, the market is buying into the recovery story with the consensus of the shares as a “strong buy” remaining resolutely in place.

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