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.
Companies: Vodafone Group Plc
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.
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Gamma has delivered this morning another strong set of results for H1 to June. Despite the COVID-19 challenges, the business has grown organically, and the acquisition programme is delivering well on its promise of European expansion. The group is positioned well to build revenues on and around Microsoft Teams, which is clearly benefiting from the work-from-home trend. We raise our profit estimates for all three forecast years as a sign of confidence in ongoing growth and look forward to further strong performance (and potentially even further M&A) into H2 and beyond.
Companies: Gamma Communications Plc
Coverage of the equity securities of the following companies has been discontinued. Investors should no longer rely upon our previously published reports, valuation theses or estimates.
Companies: Ace Liberty & Stone Toople Plc
Following continued delays of a Brexit agreement, few sectors within the UK market have remained attractive to investors despite low valuations. One sector which has continued to outperform despite the political drama has been the UK video gaming sector (henceforth UK gaming), which we are fans of. We believe a combination of sector-leading growth, strong cash conversion and timely cyclical positioning support our positive view on the UK video gaming sector.
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Bigblu Broadband (BBB) has reported a strong set of FY19 results that demonstrate strong organic growth, and are in line to ahead of the previous consensus estimates. This establishes a strong foundation for BBB’s future growth, and we expect that BBB will see revenue, EBITDA, and EPS growth in FY20 and FY21 despite the uncertainty caused by Coronavirus. This reflects that BBB has a robust and resilient investment case, which we explain in depth in this report. We consequently believe that BBB is undervalued on 12m fwd multiples of 5x EV/EBITDA and 7x adj P/E, and initiate with a TP of 155p or 15x FY21 adj EPS.
Companies: Bigblu Broadband Plc
Trading statement for FY20
Companies: Trakm8 Holdings Plc
FY20 results: inline with guidance
Gamma is acquiring around 80% of HFO Holding AG (HFO), one of the leading SIP Trunk providers in Germany, for an initial consideration of €20.4m in cash with an option to purchase the remaining shares over the next three years. In line with its stated strategy, Gamma can invest and use its commercial strength and expertise to accelerate HFO’s growth and replicate the Group’s success in the UK by developing a market leading position in Germany. Noting net debt of €2.9m when the deal closed, the implied historical EV/EBITDA multiple of about 10x compares with Gamma’s equivalent of 18.7x. We estimate that the deal will be 4% earnings enhancing in the first full year of ownership and our estimate upgrades reflect that. The European markets for cloud telephony in which Gamma is now represented will ultimately overtake the UK in size, providing Gamma with significant future growth potential. We view this acquisition as another significant step in Gamma’s strategic aim to expand into Europe via exposure to another lucrative market opportunity.
Gamma’s performance continues to speak for itself. The positive trading update for H1 20 reflects a similar tone to that of its recent AGM statement, containing an acknowledgement of the current operating environment while reporting a good performance for the six months. A high rate of recurring revenue, ‘minimal’ contract cancellations and no increase in bad debts remain key features. It was a busy first half with continued demand (albeit COVID-19 affected in Q2) for Cloud PBX and UCaaS (Unified Communications as a Service) products in the UK. Acquisitions in Spain and the UK were swiftly followed by the HFO deal in Germany in early July and the purchase of GnTel in the Netherlands last week. Management expects that EBITDA and EPS will be ahead of consensus for the year. We note the strong momentum in the business but, as we are at the upper end of the consensus range, we leave our estimates unchanged at present.
A poor Q2 performance for Telefonica although this had been expected given, in particular, the double penalty linked to the South American currency weakness vs the Euro (in particular the Brazilain Real) during the pandemic. For 2020 Telefónica nonetheless remains on track to deliver a slightly negative to flat EBITDA-capex yoy in organic terms but… at constant currency. The key point thus remains that the 2020 dividend is confirmed at €0.40.
Companies: Telefónica SA
Good H1 performance from the provider of communications and radio frequency solutions given the global backdrop with revenue growth in all three divisions (Antenna, Mottech and Distribution) and overall growth of 3% to $19.6m. Operating profit increased significantly (+28% to $1.9m) with EBIT margin +190bps, reflecting operating leverage and cost savings. Strong cash conversion resulted in net cash of $7.6m (H1 FY19: $5.0m), post April’s final dividend payment ($1.8m). MTI’s diversified business (sector and geography) has provided some protection against COVID-19 as different countries have entered/emerged from lockdown as evidenced by recent Mottech contract wins in China. Management’s confidence in the outlook is underpinned by order book strength and MTI is currently on track to meet our FY20 profitability expectations. Forecasts and 46p/share fair value, equivalent to 13x FY21 EPS, remain unchanged.
Companies: MTI Wireless Edge Ltd.
Pebble Beach Systems has reported interims to June 2020, reflective of the global challenges posed by COVID-19. Revenue declined 20% to £4.5m (1H19: £5.6m) as prospective customers cautiously delayed large-scale broadcast infrastructure projects in the immediate term. This masked robust performance in SLA contract renewals, increasing to 42% of group revenue from 31% YoY (£1.9m; 1H19: £1.9m), delivering a greater proportion of recurring business during the period. Whilst cognisant of the potential impacts of COVID in H2, the board remains focused on maintaining its market-leading position through ongoing innovation, and optimising the business through leveraging cost efficiencies and de-gearing the debt balance. The group enters H2 with a strong order backlog (£4.1m) and a growing pipeline, underpinned by recurring SLA renewals, leaving the board confident on the outlook for FY20.
Companies: Pebble Beach Systems Group Plc
Today’s results for YE March 2020, are somewhat historic having been flagged by the trading update back in April. However, they do reflect the impact that COVID-19 has had on international business, as well as actions SRT has taken to secure its future. Lockdowns put a hold on existing and new system projects, causing a delay in both revenues and expected contract signings during the final months of FY 2020 through H1 2021. Also, we highlight that SRT has prudently impaired an existing long-standing contract for a monitoring system in the Middle East to clear the decks for a new larger contract that includes both monitoring system and transceivers. Existing Systems contracts are again under way, with £8.5m received on deliveries, and negotiations have restarted on the expected new contracts. Meanwhile, the Transceivers business grew by 24% in the FY 2020, and surprisingly, is reported to be trading marginally ahead of last year in FY 2021 to date despite COVID restrictions.
Companies: SRT Marine Systems Plc
CAP-XX Ltd* (CPX.L, 4.5p/£19.9m) | Gfinity plc* (GFIN.L, 3.8p/£28.9m) | MTI Wireless Edge Ltd* (MWE.L, 44p/£38.7m) | Newmark Security plc* (NWT.L, 1.175p/£5.5m)
Companies: CPX GFIN MWE NWT
