Valuation Station - Sun On Stores
Enough confidence back from our CEO Conference to buy Telcos? Management commentary from our CEO Conference earlier in June was relatively positive with an outlook, if not unchanged, helped by a renewed focus on connectivity. However, this also fuels the debate on whether the sector can benefit from lighter regulatory oversight or contrariwise, will be forced to put more Capex into the ground. Whilst the sector continues to look cheap on FCFE yield (48% discount to the market is well above the long-run average), on an unlevered yield basis the sector trades bang in line with its long-run average. Fundamentally, we still have many concerns over the sector; this has only been exacerbated by Covid-19 - see Five minutes of Fame and a first sequential deterioration in mobile pricing since 1Q19 - see our Trends Tracker preview. Fundamentals still down on 12-month view, with EBIT at c-9% and OpFCF at c-22.5% Consensus sales estimates were up +1.4% in June, reversing some of the earnings cuts of March as Europe opened back its doors (and shops). However, the more optimistic outlook is less clear on margin, with EBIT down -1.6% (but EBITDA up +0.6%). Capex estimates were also up +3.6% (but are only up +0.7% since February-end) leading to an overall OpFCF downgrade of -6.8% (proxy from EBIT; -2.4% from EBITDA). MAS(=) and EKT(-) were winners and FNET(-) and TT(-) the losers last month MasMovil''s take-out offer saw the stock rise above the EUR22.5 bid on June 1th whilst elsewhere in Spain, Euskaltel benefited from rising consolidation hopes. Contrariwise, Freenet''s dividend cut and larger COVID exposure continued to drive outflows whilst TalkTalk results raised investors'' worries on the cash-burn of the business (with the concerns further fuelled by the debate on the accounting treatment of ''contracts costs''). July trade: we prefer VOD(+) over TEF(-) Vodafone''s guidance looks the most conservative in the sector (Worst Case in the Price?) and its CEO...
VOD EN SCMN TIT BT.A TDE KPN DTE ORA TEL2B MOBB ELISA TELIA TEL UTDI ILD PROX LBTYA TNET FNTN DRI TALK O2D MAS ATC SRCG CLNX EKT INW AAF
03 Jul 20
Trends Tracker: 2Q20 Mobile Pricing
Our quarterly Trends Tracker compiles over 600 mobile price points across 11 markets, reviewing pricing trends over the past 4 years to help inform our outlook for future MSR growth. Combined with our other sector periodicals, Valuation Station (monthly consensus revisions), and European Phonebook (quarterly review of the sector), we use this to identify inflection points in individual markets. Together with our flagship thematic reports, STAMP 2020 and the 1, 3 and 5-year view, this framework seeks to provide investors with a range of ST and LT investment opportunities. Mobile pricing debate is more complicated than it seems Our work shows that median mobile prices increased +6.5% in Europe in 2Q20 with frontbook prices now 17% above last year''s backbook ARPUs. However this doesn''t tell the full story as (1) QoQ pricing saw the first sequential deterioration since 1Q19; (2) there is now enough data headroom to stream an extra 1h of Netflix every day; (3) pricing in the key 5-30GB segment fell -16% yoy; and (4) incumbents continue to raise prices, but challengers are maintaining their discounts to continue to take share. Excess data supply, and the low marginal cost in supplying more GBs, still leave us cautious on MSR growth. We forecast a -3.2% mobile service revenue decline in 2Q20 (down from -1.3% in 1Q20) as COVID-19 takes its toll. There''s still a wide variance between ''good'' and ''bad'' markets France continues to improve following the hefty promotional levels of last year, despite a slight sequential deterioration (Year of the Rat with ILD+ EN+ and ATC+). Norway, Finland (ELISA+ Irresistible Force Meets Immovable Object?) and Sweden (TEL2B+ The Winner Takes It All) continue to retain some ''safe haven'' status as should Germany (O2D+ Appetite for construction?), Switzerland (SRCG+) and the Netherlands to a lesser degree. Conversely, the UK (BT/A- How bad could it be?) screens poorly, following a rapid growth in data allowances and...
VOD EN SCMN TIT BT.A TDE KPN DTE ORA TEL2B MOBB ELISA TELIA TEL UTDI ILD PROX LBTYA TNET FNTN DRI TALK O2D MAS ATC SRCG CLNX EKT INW ATUS AAF
01 Jul 20
A slight growth story with a sustainable dividend
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.
12 May 20
A reassuring H1 but India still worries
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.
14 Nov 19
A trading update overshadowed by the creation of Europe's largest tower company
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.
26 Jul 19
Is the dividend cut a buy signal?
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.
14 May 19
A Q3 release under pressure from the markets
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.
25 Jan 19
Vodafone maintains its dividend
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.
13 Nov 18
Some relief in India
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.
25 Jul 18
A correct H2 but a slightly disappointing new guidance and... Colao's departure
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.
15 May 18
A brilliant deal which deserved a high price
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.
11 May 18
More moderate growth in Europe
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).
01 Feb 18
A good H1
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.
14 Nov 17
A Q1 once again reassuring for the future
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).
21 Jul 17
The truly pan-European telco of tomorrow?
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.
16 May 17
Creation of a new mobile Indian leader
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.
20 Mar 17
Q3 release: a good entry point?
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).
03 Feb 17
A good performance in Europe
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.
15 Nov 16
Continued strong growth in AMAP and further stabilisation in Europe
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).
22 Jul 16
Slight growth in Europe in Q4
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).
19 May 16
Further evidence of stabilisation in Europe
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.
04 Feb 16
Less and less suffering in its European mobile activities
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.
10 Nov 15