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16 Nov 2022
Struggling to balance the books + Q''s for mgt
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Struggling to balance the books + Q''s for mgt
Vodafone Group Plc (VOD:LON) | 66.8 0.4 0.9% | Mkt Cap: 18,079m
- Published:
16 Nov 2022 -
Author:
McHugh Sam SM -
Pages:
15
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...