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Paying the price for strategic mistakes in Germany Q3 FY25 results, an EBITDAaL guidance downgrade and more cautious messaging on mid-term growth suggest Germany (40% of EBITDAaL) is faring worse than expected. Management hope that competition will improve in FY26, but we expect things to get worse before they get better (Pricing Tracker 4Q24). We see this as a direct result of VOD''s decision to take the 1and1 MVNO contract away from TEF in 2023. As a result, we think VOD will likely exit this year (March ''25) with service revenue -6% and EBITDAaL -15%. We cut estimates and now expect FY26 service revenue/EBITDAaL to decline as well (-1%/-3% on reported basis - see charts enclosed). AMAP provides some support and the UK is doing well (at BT''s expense), but to convince the market that another reset and meaningful capex increase isn''t required, Germany needs to start improving. What do we know today that we didn''t yesterday? Guidance for sequentially lower German EBITDAaL in 2H was the main negative today, offsetting better results in Turkey and the UK (particularly broadband). Management mostly blame higher mobile competition (see DT''s recent 20% price cuts, extended to March), plus delays to the 1and1 revenue stream and some one-offs. There is no update yet on the impact of consolidating 3UK''s mobile business, but we also expect this to be dilutive to FCF over the next few years. Changes to estimates - we meaningfully lower German estimates, no growth in the mid term We cut German revenue/EBITDAaL by -3%/-10% in the medium term. This is partly offset by better Vodacom/Turkey numbers (we also switch to spot FX forecasting, vs. depreciation assumption previously). We reduce our group FCF estimates by -4% for FY26, leaving us -12% below company cons. Our SOTP-based target price falls from 65p to 60p, which would see VOD trade on an underlying 9% FCFE yield under the current perimeter - but we think this is likely to be diluted further in the near term by...
Vodafone Group Plc
We have adjusted our estimates. We make minor changes to revenues in Germany, Turkey and SA. We do not consider the changes to be material; our rating is unchanged.
German pressure remains Vodafone Q1 FY25 trading statement showed that VOD has still not passed the low point in Germany with net adds continuing to disappoint, notably on broadband. But there were some encouraging takeaways as well, notably the first time disclosure of 5% quarterly EBITDA growth. What did we learn that we did not know yesterday? 1. Germany''s commercial performance continues to disappoint. Vodafone had guided for sequentially improving net adds in German broadband but the rebound remains lacklustre with no real improvement. Q1 2. MDU pressure building. The loss of high-margin MDU revenues also kicked in with a EUR40m loss in Q1 FY25 and guidance for a EUR120m loss in Q2 FY25. So next quarter will be even more challenging. 3. More encouraging the UK commercial trends were healthy including hitting an all-time low in UK mobile. MSR slowed sharply (annualising price hikes) but this was expected, even if it leaves a question of what growth will look like as pricing tailwinds fade further next year. 4. 5% EBITDA growth. For the first time ever in 30+ years VOD disclosed quarterly group EBITDA with 5% growth, above the organic guidance rate for FY25. While growth will slow as revenue pressures build in Q2/Q3 (MDU/lapping price hikes) this suggests that VOD is still comfortably on track for FY25 EBITDA guidance. Has our investment thesis changed? No Near term we struggle to see VOD shares recovering while Germany is still deteriorating. Longer term we believe the key risk remains whether the lacklustre performance might eventually lead to a need to step up fibre investment. The increased investment by US mobile peers into FTTH is interesting and most other cable players in Europe are also increasingly moving towards full fibre. Changes to estimates We make minor EBITDA changes (1%). Our (unchanged) DCF implies a target fully adjusted FCFY of 8% which is a slight premium to the sector - and reasonable in our view.
We have adjusted our estimates. We have changed the phasing of revenues in Portugal (5% of revenues). We make no other changes. We do not consider the changes to be material; our rating is unchanged.
Vodafone FY25 FCF guidance was 2%+ ahead of consensus but we do not see the results materially changing the outlook for the business and leave our TP unchanged. The 3-market strategic review and capital allocation updates are behind, and the stock''s outlook simply hinges on whether Germany turns around or not. We believe the evidence on that front from H2 FY24 trends is at best mixed. What did we learn that we did not know on Monday? 1. Net adds in Germany remain poor with postpaid adds of 51k (Q3 95k), broadband -62k (Q3 -76k) and TV -653k (Q3 -136k). Ger EBITDAaL was also weak (-6% y/y). Service revenue trends were surprisingly strong (0.6% y/y) despite initial TV headwinds but mgmt. said this would turn negative (in FY25 ditto EBITDAaL). 2. UK also weaker than we expected with -9k postpaid subs and service revenue growth slowing 1.6pp to 3.6% y/y. But UK was not all bad: broadband adds were solid (50k) and EBITDAaL were both strong. VOD said UK rev growth would slow to low single digits on lower price hikes in FY25. 3. FCF for FY24 was better than expected (EUR2.6bn vs cons EUR2.4bn PF) but this was explained by EUR0.1bn German tax one-off and EUR0.1bn Spain recharges that will not recur. 4. Spain deal has now closed and VOD started the first EUR500m/qtr buyback today (May 15), equivalent to c.15% of daily volumes for the next 2 years. Has our investment thesis changed? No Trends in Germany remain weak and we cut EBITDA in Germany 1-2% for FY25-FY27. The sustainability of the better revenue trends is debatable in our view, given VOD will annualise price hikes in Q2 FY25 and KPIs remain weak. NPS scores are improving at VOD but they remain poor and are improving more at peers, as we showed in our recent STAMP analysis. Changes to estimates We update our model for the change in treatment of Italy/Spain, leading to a 6-9% adj FCF FY25-FY27 downgrade. The stock would be worth ~66p at an 8% post spectrum/restructuring FCFY, close to our SOTP of 65p.
We recently published STAMP 2024: (I Can''t Get No) Satisfaction surveying 20k consumers across our key markets with 100m cumulative datapoints. In this note, we dig into the detailed findings for Vodafone and in particular its German business (50% of OpFCF post Italy/Spain exit). The debate: Back to fundamentals With the three-market strategic review complete and the cash returns announcement out of the way, we believe the main driver for VOD from here on is once again the fundamental outlook for the group - and we are 8% below FY25 consensus FCF. The most important question in our view is whether VOD Ger can return to sustainable top-line and EBITDA growth (consensus expects Germany EBITDA -2.5% in FY25 but +4.7% in FY26). We believe this is likely to prove challenging. Vodafone Germany - no longer deteriorating but not improving either VOD Ger broadband trends have been the big disappointment in recent years, and at this point we do not see sufficient evidence that a stabilisation in the customer base is close, let alone a return to growth (we expect -200k broadband subs in FY25). Satisfaction with price and quality is down in broadband as is relative NPS, and churn intentions remain elevated. Mobile customer perceptions are better, but the brand is seen as moving down-market and lags on relative NPS. In the absence of a clear-cut recovery, we believe there will remain a question of whether VOD needs to step up investments into Germany to re-accelerate the business. There was no capex hike as part of the use of the EUR12bn disposal proceeds, but we believe the risk remains while VOD Ger struggles. Vodafone UK - better but price hikes have hurt customer perceptions VOD UK has been a healthier performer with a clear status as a B2C challenger in both mobile and broadband. This year it has seen a dip in customer perceptions on the back of outsized price hikes, and it remains to be seen if growth can be sustained as price tailwinds ease. More...
Vodafone''s operating performance remains under pressure following a disappointing performance in Germany (again), and we model 12% downside to FY25 consensus FCF. We are cautious ahead of a dividend reset and guidance-setting for a still-tough FY25 in May 2024. What did we learn that we did not know Friday? 1. Germany revenues likely to remain weak for some time. VOD should see better B2B revs in Q4 FY24, but the housing association drag kicks in then, so management merely expects flat Q4 FY24 revs in Germany despite an easier comp. In FY25, German rev growth is likely to remain under pressure before an eventual FY26 recovery. 2. B2B growth was very strong but with less EBITDA benefit. B2B growth should accelerate in Q4 FY24. However, the margin on some B2B revenue streams is low, so it is unclear how much of this will translate into EBITDA growth. 3. There was little news in terms of capital allocation, but it is clear that the new framework will be in place in May (we expect a ~50% divi cut and a framework for excess cash to be distributed). We believe this suggests a deadline of sorts for resolving the strategic review of Italy. Has our investment thesis changed? No With downside to consensus FCF forecasts and risk to the dividend, we continue to see the Vodafone equity story as more challenged than peers. Longer term we also believe that consensus has not yet captured the FCF-dilution from Spain exit, UK / potential Italy merger (at least initially), i.e. there might be further FCF downgrades from the portfolio reorganisation. That said, the shares have been weak since our downgrade, so we see this as more of a relative call at this point. Changes to estimates and valuation We make only minor forecast changes (FY25 EBITDA changes 1%) with a small cut to forecasts in Germany and a hike in UK/smaller markets. Vodafone shares are now trading on a FCF yield of 9% in FY25, but with downside to consensus this is unlikely to re-rate the shares.
Vodafone remains the great telco hope trade, with investor excitement that a break-up could release sum-of-the-parts upside and trigger a large share buyback. However, breaking up can be hard to do, in life as in telecoms. The merger options on the table ultimately mean exchanging profitable businesses for stakes in (at least initially) less profitable ones. We show how Vodafone''s FCF is likely to continue to decline as it exits or merges its major units in Spain, the UK and Italy. Current consensus for FCF and dividends do not reflect this, in our view. Coupled with our more cautious view on Germany, we are 15% below consensus FCF in 2024 and lower the stock to Underperform with a new TP of 68p. Also see our accompanying reposts published today. TELECOM OPERATORS OUTLOOK: 10 themes for 2024: The call is breaking up TELIA: Margin relief - upgrade to Neutral
A slightly better performance than in the previous quarters in the Q2, thanks to Germany whose service revenue returned to growth supported by broadband price increases. The question of whether Vodafone will be able to maintain its dividend remains open in the eyes of the market. We believe Vodafone will have to cut its dividend by at least 25%. We remain however at Buy although we see no short-term catalyst in this release likely to revive sentiment on the stock.
Incorporating Spanish exit-expect a dividend cut VOD''s sale of its Spain unit underscores our view from our recent research ''Call waiting'' that there is SOTP upside from a break-up but it is hard to crystalise. Exiting Spain is the right strategic move but a 4-5x exit EBITDAaL multiple is low and likely to trigger a dividend cut in our view. Perhaps VOD''s investment case becomes more enticing once the dividend and FCF consensus have been rebased, but for now we prefer to be exposed to higher quality earnings stories in Europe. What we learned that we didn''t know Monday? 1) While the price had been trailed in the press we did not expect a full exit, ie VOD crystalised more of VOD ES than we had expected. 2) The impact of the TSA recharges reimbursements falling away is in our view negative and means that the deal is more FCF dilutive than perhaps had been anticipated by consensus. 3) There is still some risk around financing till the equity raise is completed, in our view. It is unclear what happens to the deal if the equity raise is insufficient. 4) VOD was very open on the need for reviewing capital allocation post close (targeted in Q1 24). This increases our confidence that the dividend will be roughly halved in May-24 with the FY24 results. Read-x to the wider Spain telco market is negative on balance VOD ES under Zegona ownership would be a more levered player - and arguably therefore more capital constrained. While there was some encouraging comments about seeking to stablise revenues and reduce promotions we also believe the appointment of a disruptive new mgmt. team, greater focus on growing the no-frills segment and expanding in the wholesale risk reads means that the ownership on balance bodes negatively for the state of competition in the market. Changes to estimates Deconsolidating VOD ES leads to a 7-8% cut to FY25-27 FCF and dividend cover is likely to come down. The EUR5bn EV is higher than our SOTP of EUR3.5bn so we raise our...
It''s so tempting to be contrarian. Sentiment is as low as we can ever remember, shares are at near 25-year lows, the discount to SOTP is enticing, and a strategically smart portfolio reset could put a rocket under the share. Caveat emptor: consensus looks too high, not least on the Achilles heel of the Germany unit, and potential buyers for the assets are thin on the ground. So, while we increase FY25 FCF by 7% and our TP to 80p from 73p, we retain our Neutral rating. Little respite in the short term across Europe With the exception of the UK, Vodafone''s European businesses are performing poorly. The disappointing FY24 guidance in May did reset expectations somewhat for EBITDA, but consensus still looks high for FCF: we are 7% below on FY24 and 12% on FY25. Germany: Sturm und Drang We expect energy costs and broadband churn to reduce EBITDA by 5% in FY24, before some stabilisation in FY25 as energy headwinds reverse - though TV is likely to be a headache. We might have to wait for the kick-in of the new 1and1 National Roaming Agreement in FY26 for EBITDA growth. Asset sales: Breaking up is very hard to do We estimate a blue-sky break-up valuation of nearly 120p. Vodafone could thus slim its global portfolio, earn a rerating, and reinvest proceeds on shoring up its key European operations with higher capex/in-market MandA. We see few buyers, however, as rates cut into multiples. How low can the dividend go? A cut is consensual, but we estimate that Vodafone is currently paying out around 2x its normalised FCF, adjusting for normalised spectrum and restructuring, suggesting the dividend could be halved. Underlying valuation broadly in line with peers Vodafone shares trade on a guidance-basis FCFY of 14%. However, factoring in spectrum replacement/restructuring, adjusted FCFY is close to peers at ~6%.
Inflecting - but still facing headwinds next year VOD reported a revenue inflection in Europe (Q1 FY24 +0.4% vs Q4 FY23 -0.8%) and a return to a positive top-line, providing some short-term relief. VOD has passed the low point for revenue growth and subscriber losses (for now). However, absolute trends remain weak with growth rates still far below inflation, and H1 FY24 is likely to see EBITDA contract by high single digits y/y (though H2 FY24 should be commensurately better). Net adds also remain very weak in absolute terms. What do we know now that we didn''t know last week? 1) Germany net adds trends turning faster than expected. Broadband losses only deteriorated by 40k q/q (''better than business case'') and Q2 FY24 losses should be similar despite carrying bigger brunt of hikes. 2) Mgmt. more upbeat on TV subs loss risk. VOD carried out a new trial where it managed to retain ~60% of TV subs. This is more encouraging than the biggest trial to date (far lower retention), but it remains to be seen if this can replicated at scale. 3) Tough H1 FY24 phasing, as all the energy inflation (EUR300m/5% group drag) falls in H1. This implies H1 FY24 EBITDA of ~EUR6.2bn (VA cons EUR6.4bn) and H2 FY24 EBITDA of ~EUR6.9bn (VA cons EUR6.8bn). For FY24 the phasing is irrelevant, but for the near term equity story it means ''jam tomorrow'', as the EBITDA rebound is backloaded this year. Has the investment case changed? No We recently upgraded VOD to Neutral, as we argued its outlook remains challenging but with the shares down ~35% over the past year we believe this is increasingly well understood. There is downside risks in Germany EBITDA in FY25 but VOD is also a beneficiary from falling energy costs. Changes to estimates - we remain Neutral with unchanged TP 70p We make only minor changes to our forecasts (1% change to FY24/FY25 EBITDA) with small hike in Germany (better net adds) but small cut to UK (we expected bigger price hike flow-through).
Contraction of service revenue in Germany & Europe (36% & 72% of group EBITDAaL in FY23) was less than expected by consensus (compiled by Visible Alpha), helped by 3.3% YoY growth in VOD Business sales. But today's Update was about revenue only, not profit & FCF too, and this just for 1
A slightly better performance than in the previous quarters in Q1, thanks to Germany whose service revenue improved supported by broadband price increases. The question of whether Vodafone will be able to maintain its dividend of nine euro cents for the FY24 remains open in the eyes of the market. H1 FCF won’t be known for 3 months. We remain at Buy but see no short-term catalyst in this release likely to prompt a revival in sentiment on the stock.
Vodafone and Hutchison will combine their UK businesses. It’s globally a good deal over the long term but it won’t have any positive impact on Vodafone’s cash flow before 2026. Therefore, the question of whether Vodafone will be able to maintain its dividend of €9cents for the financial year 2023/4 remains open. We remain at Buy on the stock but for the time being we don’t see any catalyst in the short term.
We think non-holders should not spend time considering investing in VOD despite its depressed share price. The outlook for its financials is unlikely to improve anytime soon, and, in addition, VOD seems unwilling to unlock material value through disposals. Our downgraded forecasts are at the cautio
An opportunity missed - structural overhangs remain Vodafone''s first set of results under the new CEO neither delivered the kitchen sink (on FCF outlook and dividend) nor a more confident message on the strategy and outlook for the group that some were looking for. Instead, management provided a realistic outlook for FCF (FY24: GBP3.3bn) that disappointed vs consensus (GBP3.6bn) but leaving enough uncertainty as to whether this would rebound in FY25. With the dividend pay-out now c. 100% post restructuring costs, and certainly uncovered post any kind of normalised spectrum spend. Vodafone''s appeal as an investment remains more limited to shorter term event-focused investors, rather than the long-only community who may have been tempted to buy off the back of a dividend cut and de-risked FCF outlook. What do we know today that we didn''t on Monday? Vodafone have been conducting some trials on the transition of German TV customers from bulk to individual contracts, but their best efforts led to just 65% retention of TV subs in the first trial, and the second trial seeing only a fraction of this (retention rate). This all but confirms our fears over the high margin GBP800m revenue stream, that we think will weigh on German profitability and the FCF outlook into FY25 (Good times over?). KPI''s in Germany are expected to worsen in the coming quarters, consistent with the findings of our recent STAMP consumer survey work (Alarm bells still ringing), whilst group EBITDAaL trends (broadly stable target for FY24) will be back end weighted. Has the investment case changed? No. We cut estimates further as our PT falls to 70p Our thesis on Vodafone remains unchanged - price rises are only likely to offer temporary relief for a business that has seen their competitive position structurally undermined over the last few years, whilst idiosyncratic risks like the Nebenkostenprivileg in Germany remain underappreciated by consensus. The weak operating results...
In short, we think VOD is becoming uninvestable. Its performance remains bad; not just "not good enough". As Mrs Della Valle, CEO, said, "what is more important (than the fact all telcos struggle to make money) is that, within the sector, our comparative performance has also worsened over time". Ye
Vodafone has reported an overall weak FY23 performance although in line with expectations. The worrying point is that FY24 free-cash-flow is expected to be down by c.20% yoy and lfl. Margherita della Valle has announced a plan to straighten out the group with 11k of job cuts. The stock is down by 3% this morning which is probably an opportunity to invest in Vodafone for the long term although caution on the FY24 free-cash-flow could dampen investor enthusiasm.
Meeting Notes - May 10 2023
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We congratulate Mrs Della Valle for taking VOD's helm permanently, but urge her not to be the continuity CEO, changing things only around the edges. The Board has cared far too little, far too long about the interests of VOD's owners: VOD stock keeps trading at a deep discount to the out-of-favour
This is our first report on a telecommunication giant, Vodafone Group ADR. The company produced a resilient financial performance in 2022. Despite a downturn in Europe, partially offset by a stronger performance in Turkey and Africa, Vodafone's service revenue remained constant at 2.5%. They are making strong progress on their operational and portfolio priorities, such as forming a joint venture in Germany for their fiber-to-the-home construction and making big IT and network enhancements there. They also completed the Towers transaction, which satisfied their three strategic goals at a competitive price of 26x EBITDA. Besides that, Vodacom has strong growth rates and is investing in the financial services sector, which is expanding by over 20% annually. We initiate coverage on the stock of Vodafone Group with a 'Buy' rating. Baptista Research looks to evaluate the different factors that could influence the company's price in the near future and attempts to carry out an independent valuation of the company using a Discounted Cash Flow (DCF) methodology. In this report, we have carried out a fundamental analysis of the historical financial statements of the company. We also have a dedicated analysis of the company's Environmental, Social, and Governance (ESG) risk scores in order to evaluate the sustainability risk. We have added reasonable forecasts of the annualized income statement and cash flows and carried out a DCF valuation of the company using its Weighted Average Cost of Capital (WACC) to determine a forecasted share price.
In 2022 our annual proprietary STAMP survey highlighted several Warning Signs that led us to downgrade Vodafone to Underperform. In an accompanying report published today, STAMP ''23 we share the results of our 2023 survey. In this note we dig into the detailed findings for Vodafone. The debate: consensus expects a rebound in commercial momentum and more MandA in 2023 Vodafone is embarking on its widest range of price increases in memory across their key European markets and consensus now credits Vodafone with a return to positive European service revenue growth in FY24 alongside a recovery in commercial momentum (broadband and mobile net-adds). Vodafone Germany - still struggling, we anticipate further downgrades Vodafone''s German customers have become a lot more price conscious and less satisfied with price of their service this year. Brand perception of Vod DE continues to deteriorate, whilst NPS scores are falling in broadband and lag mobile peers. Rising mobile churn indications for Vod DE suggest another step up in handset subsidies may be needed in FY24. Contrary to consensus, we no longer anticipate an inflection in German broadband net-adds and expect further weakness here and in mobile KPIs. Our German EBITDAaL estimates remain 10% below consensus in the medium term. STAMP 2023 and Vodafone: Italy/Spain poor, new entrant risk in Portugal but UK strong Vodafone is losing pricing power across almost all markets covered by our survey and the company scores poorly across key metrics leaving them a as a clear laggard in our 2023 survey. We remain materially below consensus on Vod Italy and Spain where their negotiating position in MandA remains undermined by poor operating prospects. Our work gives good reason to worry about new entrant risk in Portugal. The UK offers some relief for Vod, where STAMP results are more encouraging. We cut our EU service revenue estimates by 1% and take medium term FCF down c .6% With lower service revenue...
Meeting Notes - Feb 02 2023
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No quick fix to German headwinds Vodafone continues to see European service revenue growth fall well short of inflation (-1.1% in 3Q22/23 vs inflation of c. 8.5%) with their biggest and most important market of Germany seeing deteriorating KPI''s and top-line trends. Talk of MandA and pricing measures dominates much of the discussion, but the core issue facing Vodafone is German underperformance - where as detailed below we see no quick fix to their issues. What do we know today that we didn''t on Tuesday? Vodafone now expect the energy cost headwind to be c. EUR400m in FY24 vs EUR500m previously, but are now c. 80% hedged, meaning they will not benefit from the current lower spot prices. Having resolved their IT and other issues in Germany, Vodafone now have fallen behind competitors in terms of go to market proposition (e.g. family plans), necessitating another tariff refresh. Has the investment case changed? No - still in need of a reset We downgraded Vodafone off the back of our STAMP survey data that suggested the growth outlook for Vodafone in Europe (and German in particular) was deteriorating (Warning Signs). Recently we argued that the turnaround in Germany embedded in consensus would be difficult to achieve (Nebenkostenprivileg a big headwind). We think Vodafone is in need of a new capital allocation policy - necessitating a c. 50% dividend cut in our view (see Time to push the reset button). Change in estimates We also update for FX and latest results, with small cuts to our German estimates (that were already meaningfully below consensus - German Telcos: Are the good times over?). We now see FY24 EBITDAaL (ex-Vantage and Hungary) at EUR13.23bn (down from EUR13.3) some 9% below consensus. We also cut our VodafoneZiggo associate dividend income expectations from EUR265m to just EUR100m in FY24 and onwards given pressure on the JV''s FCF (cost inflation, capex and tax). Our Vodafone defined FCF (again ex Vantage/Hungary) stands at...
In line with what Margherita Della Valle, interim Group CEO, said in today's Update, VOD's YoY service revenue growth in 3Q FY23, especially in Europe, was not good enough; far from it. We remain buyers of the stock only because of the dividend yield (which we still think is very safe) and the fast
Vodafone''s endured a challenging 2022 as some of the issues highlighted in our STAMP survey (Warning Signs) came to the fore, culminating in a downgrade of FY23 guidance at 1H22/23 results and the departure of the CEO in December. In a note also published today we take a deep dive look at the prospects of Vodafone''s biggest market - see Germany - are the good times over?. We combine this with a deep dive on Vodafone''s medium-term prospects, focusing on FCF generation, leverage and dividend cover to assess the quantum of the reset risk once a new CEO arrives. Vodafone faces more durable headwinds than peers in Germany, we remain cautious The slowdown in German top-line and EBITDAaL growth has been the biggest undoing of Vodafone in 2022, and our work suggests that there are further issues ahead. We provide unique insights into mobile data monetisation; we use several 3rd party and proprietary survey data to assess the potential headwinds arising from the end of the ''Nebenkostenprivileg'', and we size the risk from upcoming spectrum renewals in Germany. We cut our Vod Germany estimates further, and in contrast to consensus we do not expect Vod DE to return to sustained top-line growth this decade, leaving our German EBITDAaL estimates 10% below consensus in the medium term. We now see FY24 EBITDAaL at c. EUR13.3bn and FCF of c. EUR3.65bn We incorporate changes to German estimates with several other changes into our estimates; our FY24 EBITDAaL estimate falls to EUR13.3bn (c. 9% below consensus) from EUR14.25bn. Divestments constitute a large part of this change, with underlying cuts of c. 1-2%. We now expect Vodafone to suffer 1-2% EBITDAaL declines in the medium term, and our price target falls to 75p. Our FCF analysis leads us to cut our dividend forecasts by 50% as we remain Underperform We also undertake a more sceptical analysis of Vodafone''s FCF generation, arguing FCF quality has deteriorated materially in recent years. This,...
Meeting Notes - Nov 28 2022
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VOD's CFO hosted meetings with sell-side analysts yesterday. Nothing new was disclosed. Investors keep disliking VOD materially more than they dislike the European telco sector, yet its Board seems to think VOD should keep doing what it has been doing for several years now and investors will come r
Our revised forecasts do not make for a 'pretty' picture', mainly because VOD has only just got back on its feet from its self-inflicted stumble in Germany, and no one knows when headwinds from significant energy and other cost inflation will start to ease (Tables 1 & 2). Thankfully, VOD sells
Selling the house to pay the mortgage Vodafone need to raise service quality and / or re-invest in price to re-establish their value for money proposition with customers (to sustain gross adds and keep a lid on churn). This means (a combination of) lower prices, higher opex (branding, subsidies, loyalty) and capex is needed. Vodafone are tentatively taking some of these steps, but unfortunately we believe the balance sheet, dividend policy and management LTIPs don''t leave enough flexibility to re-invest more fully to protect long term value, leaving Vodafone as an easy target for competitors to pick off. Meanwhile selling a Vantage stake and moving German capex off balance sheet help leverage and cash flow short term but leave behind a lower margin business more exposed to tough telco competition. What do we know today we didn''t on Monday? Vodafone downgraded their FY23 EBITDAaL and FCF guidance. At spot/fwd prices Vodafone warned energy costs will grow another c. EUR500m in FY24 vs FY23. Vodafone expect Germany to see a sequential deterioration in service revenue trends in 2H. Has the investment case changed? For us no Our bearish view on Vodafone was predicated on weak commercial outlook in Germany and rest of Europe (Warning Signs), which would require re-investment in price, opex and capex at a time when macro (Feeling the pinch?) and inflation are biting (Escape Velocity) and balance sheets are coming under closer scrutiny (Mountain of Debt). We have now seen Vodafone commercial momentum slow, a step up in opex investment (handset subsidies) in Germany/UK, Vod warn on Energy costs, downgrade FY23 guidance and set up a FTTP JV with Altice in Germany (off balance sheet capex warning). So, what more is left? FY24 estimates and beyond continue to look over-optimistic, and despite the Vantage divestment, leverage remains an issue hinting at a bigger longer-term reset. We now see FY24 EBITDAaL at EUR14.25bn and FCF (ex VT growth capex) at...
Post VOD's 1H FY23 results release this morning, we think investors are concerned about (i) net debt/EBITDAaL rising from 2.7x to 3.1x in the 6 months to the end of 1H FY23; (ii) VOD's ability to deliver its trimmed guidance for FY23 EBITDAaL (€15.1bn at the mid-point, vs c.€15.3bn before) given re
A disappointing H1 report with EBITDAaL down by 2.6% and a downward revision to the EBITDA and FCF guidance. However things are now moving and we can credit the CEO for making the recent Vantage deal and the combination with Three. Missing opportunities in Italy with Iliad could also evolve as Niel bought a 2.5% stake in Vodafone last September. This disappointing release and the sell off in the stock market this morning is an opportunity to invest in the stock.
Europe slipping into negative growth territory once again as energy costs continue to rise We expect Vodafone sequential European service revenue to slow as they lap the Postemobile MVNO gain in Italy (from August) and as the VirginO2 MVNO contract moves from a tailwind to headwind from 2H22/23 (these two contracts represented a c. 80-90bps tailwind to European growth of +0.5% in 1Q22/23). Combined with an ongoing German slowdown means we expect Vodafone Europe to split into negative Service Revenue in the coming quarters (-20-30bps). What do we know today that we didn''t yesterday? At spot prices (and 85% hedged) Vodafone expect energy costs to rise c. EUR300m in FY23 vs FY22, up from the EUR200m guided in May when hedging was at 75%. Management argues it''s too early to call the headwind for FY24 (to paraphrase ''it remains a long way away and the market is volatile and energy costs will become a tailwind again at some point''). Still with 40% of energy cost hedged for FY24, the EUR100m step up in the 15% unhedged portion of energy costs for FY23 implies a minimum of a c. EUR400m step up again in FY24 vs FY23 based on spot prices. Has the investment case changed? In downgrading Vodafone in March this year, we argued the outlook for their core German market was deteriorating and the outlook for growth in Europe remained muted, which with cost inflation implied material downside to consensus numbers. Since then, consensus German EBITDA expectations have been revised down 5% and group EBITDA by c. 4%. We continue to see downside risk to estimates and believe MandA upside will be difficult to crystallise. We remain Underperform with a 110p price target Our updated estimates see FY23 EBITDAaL at EUR15.12bn (c. 1% below consensus) down from EUR15.3bn, leaning towards the low end of their EUR15-15.5bn guidance range. We forecast EUR5.25bn of FCF (including a EUR200m working capital inflow, but as with many peers it is unclear how long working...
VOD's execution is tracking “well in line” with FY23 EBITDA/FCF guidance. Despite high inflation/macroeconomic uncertainty, VOD has yet to experience any signs that consumers are 'optimising' their spend on its services; in B2B, VOD has seen good acceleration in service revenue growth and no slowdo
A bland trading update with Q1 service revenues up by 2.5% yoy and lfl (vs+ 2.5% in Q4). We maintain our opinion at Buy. The stock is currently around the 130p level. We are still waiting for a catalyst to boost the stock which remains discounted to its peers due to the scepticism and mistrust towards its CEO (under fire after missing opportunities in Italy, Spain and with Vantage).
The stock is +9% this week and several bullish points came out of the Group CFO's meeting with sell-side analysts yesterday. Thus, and also because VOD's adjusted equity FCF yield remains >10%, we think the stock will keep drifting up.
Meeting Notes - May 23 2022
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Stocks sometimes rerate without company-specific news. All things considered, including current valuation multiples, we think VOD's share price may well drift up materially before, for example, it proves that 4Q FY22 was "the commercial low point in terms of customer losses" in Germany, or unveils
VOD remains confident it is doing the right things to bring about consistent FCF growth. But the risk of high inflation continuing and countries going into recession has replaced the C-19 crisis as the major headwind to VOD's progress in the near term. In terms of VOD unlocking value through inorga
A correct release globally in line with expectations (slight slowdown in revenue growth in Q4 but a slightly better than expected FCF for the full year) but the outlook given by management for 2022/23 is quite cautious (this is the upper range of the guidance which corresponds to our estimates). We maintain our opinion at Buy. Note, however, the CEO Nick Read is rather under fire after missing opportunities in Italy (Iliad), Spain (Orange-Masmovil merger) and with Vantage.
Thoughts ahead of FY22 results on 17-May
The sell-side has been reminded of still high energy prices and material inflation pressure on staff costs. For VOD Europe (c.74% of group EBITDAaL in FY21), these expenses equal c.2% and c.15% of service revenue respectively. VOD discussed these risks, and potential mitigants, in Feb-22, during th
In two separate notes (STAMP 2022 and Hiding in Telcos) we outline our latest sector views; this work has led us to double downgrade Vodafone from Outperform to Underperform with a 110p price target (down from 155p). Owing to lower European growth estimates and higher investment in Germany we cut our group FCF by 15% over our forecast period. Our estimates are below medium-term growth guidance and 10% below consensus FCF for the year (FY23) ahead. Management is under pressure to deliver on medium term objectives Vodafone had promised to be proactive in MandA to re-shape their portfolio. We remain optimistic on a tower deal, synergies / value creation here are relatively small for Vodafone shareholders, but having missed out on consolidation in Spain and rejected Iliad''s offer for Vodafone Italy (Iliad now closing in on a sharing JV with Hutch) management are under increasing pressure to deliver on their medium-term plan of delivering mid-single digit EBITDA and FCF growth - is this achievable? Investor focus will have to return to fundamentals - what does STAMP 2022 tell us? Vodafone''s underperformance in Germany must now come under more scrutiny as the MandA story wanes/plays out. Using our 2022 STAMP data and pricing trackers we look to address two questions 1) how do the operating prospects of Vodafone Europe stack up vs peers, and 2) Why is Vodafone underperforming in Germany and should we expect it to turn around? We also include an analysis of European telecom pricing trends to assess the prospects for ''price inflation''. STAMP data for Vodafone shows broad weakness, with Germany particularly worrying Vodafone have seen a surprisingly broad deterioration in key metrics in our 2022 STAMP survey (NPS, price satisfaction, churn, etc), which all augur poorly for future growth. Our German deep dive suggests Vodafone''s recent share loss is attributable to structural change in the hierarchy of this market suggesting consensus expectations of a...
VOD wants to effect mobile network consolidations in the UK/Spain/Italy/Portugal, and thinks regulators are now more likely to clear these without punitive remedies, and faster. Last month, Ofcom published a paper discussing its future approach to mobile markets. It is willing to consider network c
Iliad makes an offer to buy 100% of Vodafone-Italia for c.€11-11.5bn. These mobile activities with a solid 35% EBITDA margin could help Iliad conquer a significant market share on the fixed side by financing its launch and ramp-up. But Vodafone may not be very eager to sell these assets, so this offer won’t be enough to tilt the balance. These takeover proposals show, however, that telcos are undervalued while they are still considered primarily as dividend stocks.
According to an article in the Financial Times, published moments before last night’s close, “Iliad has offered more than €11bn to buy Vodafone’s Italian business”. If true, we think this is a very good offer, also because VOD’s stock has performed poorly for a very long time. At least as important
Meeting Notes - Feb 03 2022
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Let''s be glass half full - what''s not to like about the Vodafone (+, 155p) story? Vodafone is a value stock with 1) an improving top-line outlook, 2) consolidation / MandA optionality, 3) portfolio rationalisation potential (Vantage, Australia, Ghana), with a backdrop of 4) rhetoric of improving price discipline, and 5) activists sniffing around - what''s not to like? In this context the recent re-rating is easily justifiable, in our view. Our more cautious side worries about poor German execution / network investment needs, cost inflation and weak results in Italy/Spain undermining Vodafone''s negotiating position (Italian MSR down 3% y/y, Spain broadband subs declining -5%). What do we know today that we didn''t yesterday? Relatively little Vodafone remain committed to pushing the sector towards more rational competition through consolidation and new pricing regimes (contracts with CPI links now active in 5 markets), and Masmovil are reportedly looking again at a Vodafone Spain acquisition (El Confidencial). Vodafone cautioned costs were rising more than normal, with energy/employee costs two areas of pressure; at spot rates the unhedged energy costs in Europe are running c. EUR150m higher for FY23. IT implementation issues, network capacity constraints, low market churn and reduced footfall led Vodafone to lose broadband customers in Germany for the first time in memory (maybe ever). Has the investment case changed? We remain Outperform Vodafone Vodafone is relatively cheap (c. 7-8% FCFE yield post spectrum), has portfolio rationalisation/MandA options that could boost deleveraging and shareholder returns, and has lower than average cost inflation risk, making it our preferred ''value'' telco (Escape Velocity). We believe there is enough upside (c. 20%) on a standalone basis, together with additional upside (see Vodafone/Cevian) from potential deals, buybacks, or synergies to offset lingering concerns over the standalone outlook. Updates...
Vodafone Group Plc Vantage Towers AG
VOD's CEO and CFO answered questions confidently throughout the session they hosted earlier today. We think the key messages are: (i) VOD is confident that its service revenue momentum will continue; (ii) still weak commercial performance in Germany will not last, or halt VOD's continuing good fina
The Sunday Times reported that activist investor Cevian has “moved in" on VOD, "triggering speculation that it may be forced into big corporate takeovers or sales”. We think little of what the article speculates VOD may be made to do, because its top team has worked consistently and at pace from th
The sum of all uncertainties about VOD’s investment proposition does not justify it currently trading just on 10.3x FY23 P/E, 13.5% FCF yield and 6.4% DPS yield, vs. the still-out-of-favour European telco sector trading on 13.5x, 9.4% and 5.5%. Also, we estimate VOD-ex-Vantage Towers (VT) trades on
VOD's key financials were slightly ahead of consensus estimates; FY22 guidance edged up slightly, and management gave a comprehensive update on the raft of actions the group is taking to deliver sustainable growth in revenue, EBITDAaL, FCF and ROCE. The aggregate of this matters because the stock r
Stock up by 5% following a good H1 release. Revenues were globally in line with expectations but EBITDAaL was better than expected (+6.5% yoy). The group has also raised its full-year free cash flow from €5.2bn to €5.3bn. Remember, the fact that it would be down by 10% over two years had worried the market six months ago and led to a continued decrease of the stock price (-25% in six months, however, also due to the pressure on rates).
VOD's performance in 1Q FY22 was clearly better than what most sell-side analysts expected; management's tone was confident throughout the Q&A session earlier today, and the stock remains significantly undervalued at these levels. Separately, we note that those who discuss how VOD may grow, YoY
Vodafone released this morning a solid Q1 in terms of revenue, a good performance that is quite logical however as there is partial recovery compared to Q2 20. Remember, the key point which had worried the market three months ago with the annual release was that free cash flow would be only €5.2bn for 2021/22 vs €5bn in 2020/21 but vs €5.7bn in 2019/20. Vodafone has confirmed this number this morning. We maintain our Buy opinion on the stock.
VOD continues to mine mainly material cost efficiencies from its superior operating scale. A key message from yesterday's CMD is that the group will keep doing this for a good few years yet, but now it is also in the process of mining significant, high-ROCE revenue growth opportunities as well. Hen
Group CFO, Margherita Della Valle, hosted a Q&A session for sell-side analysts yesterday. Last week, the equity market 'voted' to register its displeasure with VOD for announcing it has chosen to invest extra capex to accelerate its growth. Hence, on our FY22 estimates, the stock now trades on
Last week, the market 'voted' to register its displeasure with VOD for announcing it has chosen to invest extra capex to accelerate its growth. Therefore, on our FY22 estimates, the stock now trades on 4.6x EV/EBITDA, 11.4% FCFE yield and 6.1% DPS yield. When the dust settles, we think the market w
Vodafone''s capex warning was clearly the main new news at FY21 results In pricing the shares down 9% the market has taken this higher capex (more on this below) and assumed no incremental return, which given the track record of the sector is perhaps fair for now. The good news is looking ahead to the next 12 months there are good reasons to believe Vodafone''s top-line can improve: 1) Vod has been a relative COVID loser in telcos and 2) The incremental capex is geared towards capturing new growth arising from COVID and the EU Recovery Fund. The opportunity is hard to quantify and model, but our recent work suggest there is incremental growth on offer in these areas (Rule of Seven, Need for Speed, Flight to Quality) giving us some solace that Vodafone are investing in the right areas to underpin new revenue guidance. What do we know today that we didn''t on Monday? Vodafone will spend c. EUR8.2-EUR8.3bn of total capex in FY22; up c. EUR900m from pre COVID levels (roughly split 1/3rd for Vantage growth capex, fixed network capacity and B2B/Digitisation efforts). Vodafone guided to EUR5.2bn of FCF ex-Vantage growth capex for FY22 - with c.EUR260m of Vantage growth capex on our FY22 numbers, this implies Vodafone FCF will be c.GBP5bn, c.8% below pre results consensus. The step up in spend gave management additional confidence to lay out medium term ambitions for revenue growth in Europe/Africa, MSD EBITDAaL and Adjusted FCF growth (excluding Vantage growth capex). We remain Outperform, but Vodafone are under pressure to deliver We argued Vodafone were entering a period of accelerated top-line growth, critically with a return to growth in Europe (now confirmed in guidance). Having cautioned mobile capex may need to step up (Vodafone''s quality edge vs peers had eroded) we believed this risk was already in numbers post the Vantage IPO (Quality Growth). We were wrong. Clearly additional capex spend is needed. The good news is that the stock is...
We think the key message today was that, on a worst case scenario, to deliver the EBITDA growth that consensus expected over time (mid-single digit percent), capex will need to be c.€0.5bn (6%) more than the market anticipated. Thus, in FY22, FCF will be 9% less than consensus expected until now; f
At first sight a reassuring release with a correct EBITDAaL outlook… if there was not a worrying detail: capex will be higher than expected. The stock was indeed down by 5% this morning. Capex should indeed grow by 6% yoy in 2021/22 but, as for most telcos, this is for a good cause. Certainly the dividend should remain flat for 2021/22 but, given its current 7.5% dividend yield, we maintain our Buy recommendation on this stock with increasingly solid German fundamentals.
Inflation in focus for Vantage In our recent work on the European tower stocks, see (The Rule of Seven and Quality Growth - is it enough?) we argued a more cautious stance on Vantage was warranted near term due to lower inflation caps on their MSA vs Cellnex/INWIT and also near term cost pressure, leading us to forecast a more gradual margin progression towards their medium term guidance of high 50% EBITDAaL margins. Guidance for FY22 has borne out that concern, with margins expected to be ''broadly stable'' y/y - somewhat below consensus expectations. All in we expect OPEX to grow c. 4.4% y/y in FY22 and with MSA inflation just +1% in Germany/Spain this year it''s clear lease optimisation and co-location growth are needed to pick up the slack. What do we know today that we didn''t last week? Vantage FY21 net-debt came in c. EUR100m lower than guided (at 3.8x vs 4.0x) and management believe they will be able to retain c. EUR70m of the benefits, whilst the remainder is likely to reverse in working capital below RFCF in FY22. Guidance for FY22 calls for revenue of EUR995-1010m, broadly stable EBITDAaL margins (54.2%) and consolidated RFCF of EUR390-400m. Has the investment case changed? For us no Whilst there is a lot to like about Vantage Towers, near term we favour both Cellnex and INWIT for those looking for tower exposure. Why? Vantage is most exposed to a potential margin squeeze from high inflation near term, whilst they also face more concentrated binary event risks near term vs peers (our forecasts assume they do win some business from 1and1 in Germany), and their exposure to potential benefits arising from the EU Recovery Fund is lower than peers. Remain Neutral with broadly unchanged estimates and EUR27 target price Our FY22 revenue estimates fall just below the mid-point in guidance and we forecast 54.4% adj. EBITDAaL margins, leading to RFCF of c. EUR394m, just below the mid-point of the range. On our numbers Vantage trades on a...
Our STAMP 2021 survey shows that Germany is still one of the most attractive EU telco markets, with happier customers willing to spend on faster broadband speeds and more mobile data. Whilst there is some near term headline risk on cable TV regulation we think DT and VOD are both well placed for growth. We remain cautious on TEF DE''s mobile outlook despite recent network improvement, and Drillisch''s network build plans could ultimately result in lower wholesale revenue. DT is our top pick ahead of the upcoming CMD (May 20th), and raising estimates on higher TMUS synergies means the stock offers +5% EBITDA CAGR and 7% proportionate FCF yield (2023E). Good German Growth - DT (+) and Vodafone (+) benefit from the flight to quality Our survey results show that DT is clearly identified as the premium German operator, in a good position to monetise new FTTH investments. Broadband switching data also suggests VOD should enjoy a recovery after poor trends in 2020, helping to offset risks from potential changes to cable TV bundling. In mobile German customers are generally more satisfied y/y with quality, as market pricing remains inflationary. Vod/DT and 1and1 look better placed to benefit than O2. 1and1-Drillisch network build unlikely to be disruptive, but still a long term risk for TEF DE (=) New wholesale deal terms and better tower access have improved Drillisch''s opportunity to build a network. But our analysis still suggests that the operator cannot afford to be more price disruptive, with 15% market share already. That is reassuring for incumbents, but TEF D remains vulnerable on the retail side and given that DRIG wholesale fees likely account for 60% of OpFCF. DT''s CMD (May 20th) can be a positive catalyst - we also raise numbers for TMUS (+) Our latest STAMP results show that TMUS is still the best brand in US mobile, with opportunity to win more share in underpenetrated rural/suburban areas and also wireless broadband over time. We...
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In short, VOD Business (VB) has the determined ambition of a challenger, its parent's significant geographic reach and scale economics, and a strategy that fully leverages these advantages and is well aligned with customers' evolving needs. The unit earned 27% of group service revenue in 1H FY21 an
Very good UK spectrum auction result
Vodafone Group Plc BT Group plc
FX rates, in aggregate, have moved in the right direction for VOD's reported financials. Separately, in Spain (an ongoing source of negative sentiment for VOD's share price), key rivals, Telefonica and Orange, last week talked extensively about wanting and acting to 'repair' the market. VOD's share
Meeting Notes - Feb 23 2021
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We believe VOD shares will perform strongly in March so we reiterate our BUY rating. First, we think VOD is likely to list its TowerCo before Easter. Vantage Towers is a top-quality asset, and, most importantly, proceeds from its IPO are likely to reduce VOD's indebtedness meaningfully. Second, VOD
Top line recovery, underpinned by strong B2B trends Vodafone saw a marked improvement in organic service revenue trends this quarter (+0.4%/ -1.1% for group/ Europe vs. -0.4%/ -1.8% last quarter). Germany, the most important market, was particularly strong at +1% organic and the recovery in Spain also looks encouraging despite what continues to be a very promotional environment. This leaves management (and us) confident that European operation can return to growth later this year which we believe could catalyse a rerating; VOD now offers an 6% dividend yield and is one of the key ''COVID recovery'' names identified in our recent cross-sector report One to run with. What do we know that we didn''t know on Tuesday? B2B service revenue growth returned at +0.7% in the quarter vs a -0.2% decline in Q2, with B2B growing fixed service revenue +5.2%. This echoes our recent argument that Vodafone are one of the better placed operators to capture increased demand in the enterprise segment given their challenger positioning - management highlighted that this is particularly the case in Germany and the UK and will provide more detail at an upcoming investor briefing (March 18th). On Spanish consolidation, which has been in the headlines again recently, Vodafone stated that they are happy with their standalone progress (as evidenced by stabilising revenue and EBITDA trends) but would not rule out future deals. Management did note however that VOD Spain both extracts and provides benefits from being part of the broader European footprint, perhaps suggesting that a merger or JV structure is more likely than an outright sale of the asset. Has the investment thesis changed? These results and mgmt commentary support the investment case laid out in our original upgrade; improving top-line, ongoing cost savings, end of 5G spectrum auction and de-leveraging all drive a re-rating. This is likely to come to the fore in FY22, having suffered from a ''COVID delay'' in...
VOD's Trading Update for 3Q FY21 exceeded consensus expectations, and the key message from the conference call was that the group continues to have good commercial and financial momentum. The latter point will be further underpinned by VOD hosting five business briefings in 2021, and listing Vantag
Service revenues returned to slight growth in Q3, as they were up indeed by 0.4% yoy: an expected number confirming, however, an improving trend as they were respectively down by 0.4% and 0.8% in Q2 and Q1. We believe that Vodafone should be able to maintain its dividend at its current levels. Given the modest growth that the group should clock in the coming years, notably in Germany, we maintain our Buy recommendation on the stock which is still 12% below its pre-COVID-19 prices.
VOD will report mainly revenue metrics for 3Q FY21 on 3-Feb. We think this event will be meaningfully positive for its share price. The stock remains significantly undervalued even though, for one, VOD has reported underlying service revenue growth in each of the last five quarters (and EBITDA marg
Vodafone - with the market wanting to buy value Vodafone is an obvious candidate In May we argued Vodafone''s FY21 guidance seemed to incorporate a worst case for roaming / COVID headwinds, and it seems 1H201/21 have vindicated this view. Organic service revenue (declining 40bps, but growing +1.5% ex-roaming) and EBITDA (c. 4% ahead of consensus) both handsomely beat lowered expectations. We think Vodafone is the obvious ''deep value'' candidate in the sector, levered to a roaming recovery without all the structural overhangs of incumbents. What do we know today that we didn''t yesterday? Progress in 4 key areas Vodafone made a decent argument that 1)their lobbying for a better social contract for telcos was having some effect (better spectrum outcomes in Hungary, NL, some state support for rural rollout in the UK etc) 2) Spain has undergone bigger structural changes than people give them credit for (which is evidenced by the better than expected results), 3) they can continue to grow and take share in the business segment from structurally challenged incumbents, and 4) German underlying results remain robust, despite ongoing Unity Media issues (a risk we flagged in March) that they are working on fixing. Has the investment case changed? In upgrading Vodafone in 2019 we argued that post dividend cut the argument over the sustainability of the balance sheet would evaporate, just as top-line growth would re-emerged (supported by our more bullish STAMP data), which could be boosted by further cost cutting leading to could lead to solid EBITDA and cash flow growth for Vodafone, and then organic de-leveraging could be augmented by disposals. COVID blew a significant hole in that thesis, but ultimately a temporary one, and now one can look forward to a better 12 months ahead. Changes to estimates We update our model to reflect 2Q21/21 results, driving a 1-2% upgrade to our medium term EBITDA estimates, which follows through to a c.5-7%...
As in Q1, a quite correct resilience to the COVID-19 impacts in Q2. The good news is indeed the H1 EBITDAal margin, which was stable yoy despite the slight decline in revenues. Free cash flow should therefore be at least €5bn for the whole year. So we have no concerns about Vodafone’s dividend and we remain at Buy on the stock.
Taking advantage of Vantage If Vodafone want to take advantage of tower valuations they still have work to do - whilst the incremental detail was helpful, unveiling it alongside a profit downgrade (more on that below) for the unit was certainly not. Meanwhile, in our view, their focus needs to be on articulating their tower growth strategy more clearly; details or even an outline on small cells, organic growth, fibre to the site, build to suit potential were all distinctly lacking from the slides and QandA responses. A coherent story here will be key to creating a credible tower investment story. To be fair it remains a work in progress we suspect there is a decent growth story within Vantage; once this emerges the focus on ''T0'' financials will quickly shift to the longer term growth potential, in our view. What do we know today that we didn''t on Thursday? Vodafone''s recent update brought a slightly better than feared revenue decline, but expectations of a further deterioration next quarter and a lower than previously disclosed tower EBITDA perimeter were in focus. Vodafone''s fledgling tower business has a name - Vantage towers. Vodafone''s experience so far with COVID impacts is broadly in line with their expectations/guidance. Has the investment case changed? Not really As Vodafone approaches (another) nadir in service revenue trends (calendar 3Q contains a large proportion of roaming) the ''COVID comps'' mean things will naturally become easier into next year, although there does remain some uncertainty over the pace of the recovery as government support measures begin to ease. In our view strong focus on cost control and a conservative set of assumptions for EBITDA/FCF guidance mean Vodafone has scope to surprise in the next 6-12 months, and on that time horizon the current price represents a decent entry point given the margin of error that the current valuation allows. That said trends will get worse first and we still have spectrum...
An expected resilience to the COVID-19 negative impacts in Q1. The group can indeed congratulate itself on having strengthened in recent years its fixed activities: in Germany, which represents 40% of Vodafone’s activities in Europe, service revenues were flat yoy in Q1. The monetisation of its infrastructure assets is continuing and, given the slight growth that the group could offer in the coming years, we maintain our Buy on the stock.
Quite a good Q4 supported by improving commercial momentum in Europe. The annual EBITDA grew eventually by 2.6% yoy reflecting the cost programme’s success. The €0.09 dividend is maintained. Vodafone is more highly indebted after its deal with Liberty-Global, but its dividend (cut last year) seems now more in harmony with its balance sheet. Besides, the monetisation of its infrastructure is continuing. Given therefore the slight growth Vodafone should offer in the coming years, we maintain our Buy recommendation on the stock.
A quite correct H1 for Vodafone with a return to growth in terms of revenue in Q2. The performance is still very solid in Germany (which will represent next year 30% of Vodafone’s revenues) and trends are improving in South Africa, Spain and Italy despite fierce competition or regulation. We maintain our opinion at Add on the group with a 15% upside.
The correct but not more than a Q1 trading update has been largely overshadowed by the announcement in parallel of the creation of Europe’s largest tower company with preparations underway for a variety of monetisation alternatives, to be executed during the next 18 months, including an IPO. The EV of this company could be at least of around €13.5bn. It is obviously excellent news and could be the catalyst that everyone expected to boost the stock, finally. We maintain our strong Buy.
Vodafone has released its annual results. Although there was not much new on the operational side, the dividend was cut to €0.09, as was unfortunately expected (but it was probably the right thing to do). This corresponds to 6% of yesterday’s stock price (vs 10% previously). The major telcos, offering a 4.5-5.5% yield, lend it some upside if the market has confidence, like us, in the sustainability of the dividend. We maitain our Buy on the stock.
Although the Q3 numbers are not so bad and the dividend for 2018/19 should be maintained, the pressure on the stock to make Vodafone cut its dividend could continue in the coming months with uncertainty about future Vodafone numbers once the acquisition of Liberty Global’s operations in Germany, the Czech Republic, Hungary and Romania is completed. The only thing that could reassure the markets today would be the sale of some tower assets.
Following a correct H1 release from an operational viewpoint, management has announced it intends to propose a total dividend of €0.1507 per share for 2018/19, stable yoy. So, we still do not see a case for a cut in the dividend for 2018/19 or 2019/20. This is why we are sticking with our Buy opinion.
Q1 revenues declined by 2.1% yoy but this includes a 2.8% negative impact from forex and a 0.8% adverse impact from the disposal of Vodafone Qatar. On an organic basis, service revenue was quite as expected, increasing indeed by 0.3%. A number slightly lower than the 1.4% recorded in Q4 which still reflects strong growth in AMAP, but which was mitigated by a decline in Europe driven by the drag from UK handset financing and the EU roaming regulation. Excluding these factors, Europe grew by 0.5% yoy: a correct number but nothing more. AMAP grew by 7.0% yoy, as in H2 2017/18, with growth that was faster than local inflation in South Africa, Turkey and Egypt. Although Indian revenues (not consolidated) declined by 22.3% yoy due to price competition and MTR cuts, note that it was down by only 1.4% compared to Q4, reflecting finally an appreciated stabilisation. The full-year guidance was reiterated. The group expects EBITDA growth of 1-5%, excluding the impact of UK handset financing in both years, and the significant benefit in the prior year from regulatory settlements in the UK and a legal settlement in Germany.
In terms of service revenues, Q4 was quite as expected with organic growth at constant change of 1.4%, slightly better than the +1.1% recorded in Q3 but lower than the 2% recorded in H1. European growth, which had moderated to 0.3% in Q3, was 0.6% (excluding the positive impact of a legal settlement in Germany). Note that, in Europe, the increased drag from roaming regulation was completely offset by an improved global performance in mobile. In parallel, growth in AMAP was still strong at +7.7% during the quarter (vs 6.8% in Q3) but it was completely offset in reported terms by an 1.5ppt adverse impact from FX (particularly with regards to the Turkish lira). Note the group’s revenue for the whole year declined by 2.2% yoy in reported terms, primarily due to the deconsolidation of Vodafone Netherlands following the creation of the JV VodafoneZiggo and FX. Like in H1, the good news came from the EBITDA which was up organically by 10.6% yoy. Excluding the negative impact of net roaming declines in Europe and the benefits in the UK from the introduction of handset financing and regulatory settlements in the period, organic adjusted EBITDA grew by a solid 6.5% (lower, however, than the impressive +9.3% recorded in H1) with a broad-based EBITDA improvement in 20 out of Vodafone’s 25 markets. The group which had raised its full-year guidance to +10% last November (vs +4-8% previously) has eventually exceeded its target with an annual organic EBITDA growth of 11.8%. But the bad surprise was the announcement in parallel of the succession plan for the CEO. Effective from 1 October 2018, Vittorio Colao will be succeeded by Group CFO Nick Read. So it won’t be Colao(who was very much appreciated by investors) who will manage the recent big acquisitions made by the group (see our latest “_A brilliant deal which deserved a high price_”). As for 2018/19, the group expects EBITDA growth of 1-5%, excluding the impact of UK handset financing in both years, and the significant benefit in the prior year from regulatory settlements in the UK and a legal settlement in Germany. It’s a guidance that is a little bit disappointing, corresponding (on guidance FX rates) to an adjusted EBITDA range of €14.15-14.65bn for the year (we have €14.8bn in our model). Finally, note the final dividend per share of €0.1023, up 2%, giving the total dividends per share for the year of €0.1507. The board still intends to increase dividends per share annually.
Vodafone agreed two days ago to acquire Liberty Global’s operations in Germany, the Czech Republic, Hungary and Romania for an EV of €18.4bn. This deal values the acquired operations at 10.9x their current EBITDA before synergies but management expects to generate cost and capex synergies before integration costs of €535m per annum by the fifth year after completion (thus valuing these activities at 8.6x their future EBITDA before integration costs). Vodafone intends to finance the acquisition using existing cash, new debt facilities (including hybrid debt securities) and around €3bn of mandatory convertible bonds.
In terms of service revenues, Q3 was a little bit disappointing with organic growth at constant change of 1.1%, slightly lower than that recorded in the previous quarter (1.3% in Q2). European growth moderated to 0.3% or 1.9% excluding the impacts of the roaming regulation and the handset financing in the UK (these growths are indeed 0.5% below the Q2 numbers). Note, however, in parallel, growth in AMAP was still strong at +6.8% during the quarter (vs 6.2% in Q2). Note also that, as usual, reported numbers exclude the results of Vodafone Netherlands following the disposal of its consumer fixed business and subsequent merger into VodafoneZiggo (this has an impact of 5.3% on the European revenues).
In terms of service revenues, Q2 was quite as expected with organic growth at constant change of 1.7% yoy, slightly lower however than those recorded in the previous quarter (+2.2% yoy). Note that in Europe (+0.8% yoy in Q2 exactly like in Q1) the increased drag from roaming regulation was completely offset by an improved global performance in mobile. For once the slight global slowdown was indeed more driven by AMAP regions with an organic growth of +6.2% yoy vs +7.9% in Q1. Note group revenue for the H1 declined by 4.1% in reported terms, primarily due to the deconsolidation of Vodafone Netherlands following the creation of the JV VodafoneZiggo and forex. But the good news came from the H1 EBITDA which was up organically by 13% yoy! Excluding the negative impact of net roaming declines in Europe and the benefits in the UK from the introduction of handset financing and regulatory settlements in the period, organic adjusted EBITDA grew by an impressive 9.3%, with a broad-based EBITDA improvement in nine out of Vodafone’s ten largest markets. As a result the group is raising its full-year guidance: the EBITDA should be up by 10% this year (vs +4-8% previously). Remember also that, on 20 March 2017, Vodafone announced an agreement to combine Vodafone India with Idea Cellular. The transaction is subject to regulatory approvals and is expected to close during calendar year 2018. The combined company will be jointly controlled by Vodafone and the Aditya Birla Group. Vodafone India has been classified as discontinued operations for group reporting purposes.
In terms of service revenues, Q1 was quite as expected with solid organic growth at constant change of 2.2% yoy, slightly better than those recorded in the previous quarter (+1.5% yoy). The trend is indeed similar to the 2% recorded during the first 9m of 2015/16, despite the negative impact in Europe of the roaming regulation. Excluding this impact, the global growth should have been… 3%, quite a good number in the telecom sector. Note growth in AMAP was still strong at +7.9% during the quarter. Remember that on 20 March 2017, Vodafone announced an agreement to combine Vodafone India with Idea Cellular. The transaction is subject to regulatory approvals and is expected to close during calendar year 2018. The combined company will be jointly controlled by Vodafone and the Aditya Birla Group. Vodafone India has been classified as discontinued operations for group reporting purposes. Service revenue has indeed declined by 13.9% yoy in Q1 as a result of continued price competition from the new entrant and incumbents but the sequential quarterly trend is clearly stabilising as SIM consolidation is beginning to improve ARPU in the low-value segment, helping offset pricing pressure in the mid and high-value segments of the base. Note also the reported numbers exclude the results of Vodafone Netherlands following the disposal of its consumer fixed business and subsequent merger into VodafoneZiggo (it has an impact of 4.2% on the European revenues).
Vodafone has released its full-year results at end March. First of all, remember that, on 20 March 2017, Vodafone announced an agreement to combine Vodafone India with Idea Cellular. The transaction is subject to regulatory approvals and is expected to close during calendar 2018. The combined company will be jointly controlled by Vodafone and the Aditya Birla Group. Vodafone India has been classified as discontinued operations for group reporting purposes. In terms of service revenues, Q4 was quite as expected with organic growth at constant change of 1.5% yoy. This is a number rather lower than the 2% recorded during the first 9m, but like in Q3 the recovery in Europe was partially offset by regulatory headwinds (in Q4 Europe would not have been flat but should have recorded growth of +1.4% if we exclude the roaming regulation). Note growth in AMAP was still strong at +6.8% during the quarter. The rather good news is that EBITDA (excluding India) has grown by 5.8% yoy organically for the whole year (and by more than 7% in H2!), growing by more than revenues: both Europe and AMAP have delivered margin improvements. The group has also given a solid guidance for 2017-18: excluding Vodafone India, the EBITDA should grow on an organic basis by 4-8%, implying a range of €14-14.5bn at guidance FX rates. This is quite a solid number, as we had in our model an EBITDA growth of 4.1% for 2017-18 (excluding India). As for India, note service revenue declined by 11.5% yoy in Q4 (vs -1.9% in Q3) as a result of heightened competitive pressure following free services offered by the new entrant during H2. EBITDA declined by nearly 25% yoy in H2 (-10.5% for the whole year after 2.6% growth in H1), with a 4.5ppt deterioration in the EBITDA margin to 25% (the EBITDA margin was flat during H1). Remember that in H1 Vodafone recorded a non-cash impairment of €6.4bn relating to its Indian business. Impairment testing at 31 March 2017, following the announcement of the merger of Vodafone India with Idea Cellular, gave rise to a partial reversal of that impairment. As a result, the impairment charge for the year reduced to €4.5bn.
Vodafone will combine its subsidiary Vodafone India (excluding its 42% stake in Indus Towers) with Idea, which is listed on the Indian Stock Exchange. The implied EVs are $12.4bn for Vodafone India and $10.8bn for Idea. This is a merger of equals with joint control of the combined company between Vodafone and the Aditya Birla Group (which controls Idea), governed by a shareholders’ agreement. Vodafone will indeed own 45.1% of the combined company after transferring a stake of 4.9% to the Aditya Birla Group for $579m in cash concurrent with the completion of the merger. The Aditya Birla Group will then own 26% and has the right to acquire more shares from Vodafone under an agreed mechanism with a view to equalising the shareholdings over time. Until equalisation is achieved, the voting rights of the additional shares held by Vodafone will be restricted and votes will be exercised jointly under the terms of the shareholders’ agreement. Vodafone India will be deconsolidated by Vodafone, reducing Vodafone’s net debt by c.$8.2bn and lowering Vodafone Group’s leverage by around 0.3x the EBITDA. The transaction is expected to close during 2018, subject to the customary approvals.
An as expected and quite correct Q3 trading update for Vodafone excluding the revenue decline recorded in India (however, also expected but reflecting the heightened competitive pressure following the quite disturbing arrival of Jio in the Indian mobile market some months ago): Q3 revenues were up by 1.7% yoy organically and at constant change (vs +2.4% and 2.2% respectively in Q2 and Q1) to €13.69bn with slowing growth in AMAP (+3.9% vs +7.2 and +7.1% in Q2 and Q1), but correct growth in Europe (+0.7% as in the two previous quarters with a good +3% in Italy, +1.8% in Germany and +0.8% in Spain). Management now expects to meet the lower end of the organic EBITDA growth range of 3-6% and achieve at least €4bn of free cash flow, as continued uncertainty in India is mitigated by sustained performance in Europe and Africa. We also remind that on 16/12/2016 the group announced the completion of the sale of its Dutch consumer fixed operation to T-Mobile Netherlands and, following receipt of all necessary regulatory approvals, completed in parallel the transaction with Liberty Global to combine its Dutch operations (3% of Vodafone’s global business) in a 50/50 JV called VodafoneZiggo on 31/12/2016 (which will be accounted for under the equity method).
Vodafone’s stock was up by 2-3% this morning following the confirmation of the rumours about merger talks between Vodafone and Idea Cellular in India.
Vodafone has released its H1 results. In terms of service revenues, Q2 was quite as expected with organic growth at constant change of 2.4% yoy. This is a number rather similar to the 2.2% recorded in Q1, but was led by a further improvement in Europe by 1% (vs 0.3% in Q1) thanks to the good performances in Germany and Italy and still strong growth in AMAP (+7.1% vs +7.7% in Q1). As a reminder, the group has decided to move to euro reporting for the year ending 31 March 2017 and that forex has a negative impact on the reported figures. The good news is that EBITDA has grown by 4.3% yoy organically, growing by more than revenues: both Europe and AMAP have delivered margin improvements.
An as expected but quite correct Q1 trading update for Vodafone: revenues were up by 2.2% yoy organically and at constant change (as in the…four previous quarters) to €13.38bn with continued strong growth in AMAP (+7.7%), and further stabilisation in Europe (+0.5%, of which a good +1.3% in Italy and a surprising 1.3% in Spain).
An as expected but quite correct Q4 release for Vodafone: revenues were up by 2.5% yoy organically and at constant change (as in the three previous quarters) to £10.28bn with continued strong growth in AMAP (+8.1%), further evidence of stabilisation in Europe (+0.5%, ow a good +1.3% in Italy but a still poor -3.2% in Spain). The H2 EBITDA grew by 3.6%, faster than in the first half of the year, reflecting better revenue performance and continued good cost control, including greater than anticipated synergy capture at Ono (the EBITDA has grown by 4.2% yoy in Spain despite the sharp drop in mobile revenues thanks to the Fixed activities). The group has confirmed its move to euro reporting for the year ending 31 March 2017, as previously announced. As for the 2017 outlook: - Organic EBITDA growth in the range of 3-6%, implying €15.7-16.2bn (£12.4-12.8bn) at guidance FX rates. - A free cash flow after capex, before M&A, spectrum and restructuring costs of at least €4bn (£3.2bn). - Post Project Spring capital intensity expected to be in the mid-teens as a percentage of annual revenue. Net debt as at 31 March 2016 was £29.2bn. Net debt includes the impact of renewing or acquiring spectrum for a total cash cost in the year of £2.9bn, including Germany (£1.4bn), India (£0.6bn), Turkey (£0.6bn), Italy (£0.2bn) and the UK (£0.1bn).
An as expected but quite correct Q3 release for Vodafone: Q3 revenues were up by 2.6% (as in H1) yoy organically to £10.28bn with continued strong growth in AMAP (+6.5%), further evidence of stabilisation in Europe (-0.6% ow only -0.3% in Italy and -3.1% in Spain) and a sixth consecutive quarter of improving revenue trends.
An as expected H1 release for Vodafone: H1 revenues were up by 2.8% yoy organically to £20.27bn (where we were expecting £20.1bn) with continued strong growth in AMAP, further evidence of stabilisation in Europe and a fifth consecutive quarter of improving revenue trends. And last but not least, EBITDA returned to growth, up by 1.9% yoy to £5.79bn (vs £5.75bn in our model). Consequently, the full-year guidance is slightly raised with an EBITDA range of £11.7-12bn vs £11.5-12bn previously. It should also be noted in passing that the group will change its reporting currency from sterling to euros from 1 April 2016 – a clear message for the upcoming EU referendum campaign in the UK. Remember also that on 28 September 2015 Vodafone announced that discussions with Liberty Global regarding a possible exchange of selected assets between the two companies had terminated.