As Vodafone (LON:) continues to ring the changes, there are increasing signs that the transformation is beginning to reap rewards.
In terms of strategy, the group had quite simply been fighting fires on too many fronts while dealing with an increasingly onerous debt burden, leading to the need for a significant transformation. What is now emerging is a smaller and less geographically diverse, but more focused operation. Asset sales in Italy and Spain, as well as a reduction of its stake in Vantage Towers were reflected by cash proceeds of €13.3 billion over the previous year, which reduced net debt to €22.4 billion from a previous €33.2 billion. However, this has spiked again to €25.4 billion – in part due to the VodafoneThree integration – and remains an ominous weight on the group.
Even so, there are some promising signs at the group level, where Vodafone has hit its own guidance for the year and is in line with expectations. Overall revenues grew by 8% to €40.5 billion, within which service revenues spiked by 8.8% to €33.5 billion. Adjusted earnings rose by 3.8% to €11.4 billion, all of which propelled a pre-tax profit of €1.86 billion, which compares to a loss of €1.48 billion in the previous year.
Meanwhile, adjusted free cash flow grew by 2.9% to €2.6 billion, with net cash flow reducing by 3% to €1.8 billion, although this was higher than the €1.57 billion which had been estimated. In terms of outlook, the group is forecasting adjusted free cash flow in the coming year in a range of €2.6 billion to €2.9 billion, and adjusted earnings between €11.9 billion and €12.2 billion, with cost and capital expenditure savings of €700 million per year expected by 2030.
All is not plain sailing, however. Despite an improving outlook, the most obvious thorn in the group’s side remains the German operation, which is the group’s largest and accounts for 30% of total revenue. Service revenue fell by 0.2% over the last year, although growth of 1.3% in the fourth quarter could be a more promising signal of things to come. Nonetheless, contract customer and broadband customer losses of 103000 and 202000 over the year were an obvious headwind. At some point, the unit is hoping finally to shake off the effects of these customer losses which were largely attributable to enforced price increases last year, competitive activity elsewhere and the lingering effects of the change to German TV law which resulted in a recontracting of customers.
More promisingly, the UK business is one which the group is aiming to strengthen, and its mega-merger with Three UK has now progressed further – the company announced last week that it would now be taking full ownership of VodafoneThree, buying out the 49% stake of Chinese part owner CK Hutchinson for £4.3 billion. In addition, the Africa operation is an area of particular promise, now accounting for 21% of group income, and saw growth in service revenue of 12.9% for the year. Vodafone is well positioned to benefit further from some potentially explosive growth in the region – it now has around 100 million financial services customers – particularly given the more widespread availability and use of its services and where it is an established player.
Of course, the telecoms sector is one based on reliability, but equally importantly on price, where there remains ferocious competition. Recent years have also required huge investment as the industry moves on, such as being part of the new 5G network, with the benefit of any payback not being felt for any number of years.
Overall, the direction of travel should provide some relief although unfortunately, years of underperformance weigh heavily on investors’ minds and it will take some time for those painful memories to be erased. The shares have languished for some considerable time, having fallen by 59% since the most recent peak of May 2015, although more recent progress has been rewarded with a bounce of 71% over the last year, as compared to a gain of 19.3% for the wider . While the strategy is clear, the transformation in train and the valuation undemanding, investors will need to see stronger progress before the market consensus of the shares as a hold has any chance of being upgraded. The negative reaction to the update, exacerbated by the wider market fall, is a signal that the corner is far from having been turned just yet.