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25 Jul 2022
Is 0.5% peak European growth?
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Is 0.5% peak European growth?
Vodafone Group Plc (VOD:LON) | 66.8 0.4 0.9% | Mkt Cap: 18,079m
- Published:
25 Jul 2022 -
Author:
McHugh Sam SM -
Pages:
9
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...