Vodafone Group has had a strong start to the year as the transformation gains traction, with total revenue rising by 11.4% to €21.9 billion (£18.3 billion) and service revenue by 12.8% to €18.4 billion, including 5.8% of organic growth. Adjusted earnings rose by 12.6% to €6.45 billion, including record quarterly business service revenue.
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.
The UK business is one which the group is aiming to strengthen, and its mega-merger with Three UK recently progressed further as the company announced it would 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 25% of group income, and saw growth in organic service revenue of 13.4% in the first half, compared to 12.9% for last year as a whole. The additional 20% stake Vodafone has taken in Safaricom, taking its holding to 55%, has resulted in upgrades to its earnings and cash flow numbers for the full year in order to reflect the additional boost.
The reported loss of €3.6 billion for the period is driven by non-cash accounting charges of €2.2 billion for a tax write down in the UK and an impairment charge of €4.85 billion in Germany, partly offset by a €3 billion Safaricom gain.
As a result of the VodafoneThree and Safaricom acquisitions, net debt has jumped by 29% to its previous level of €33.5 billion, which remains a weight to be watched. Far more positively, the group’s progress and €200 million of cost savings in the half en route to the €2 billion 2030 target, have resulted in upgrades to the full-year outlook, with adjusted earnings now expected to be in a range between €13.2 and €13.4 billion (previously €13-13.3 billion) and adjusted free cash flow of €2.8-3 billion (€2.6-2.9 billion).
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 28% of total revenue, and Vodafone recognises that there is more to be done.
Service revenue rose by just 0.4% over the half, although the move is at the very least a small step in the right direction. Nonetheless, contract customer and broadband customer losses of 75,000 and 198,000 over the half-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.
There are also wider factors at play. The inexorable rise of AI agents has already had an effect on US banks, where the concern is that these agents will constantly monitor the market and then switch the customer to the best rate on offer. This has obvious implications for other sectors such as the utilities and also, potentially, the telecoms providers. In addition, the recent Starlink spectrum purchase announcement in the US put the financial cat amongst the pigeons in terms of both pricing and competition.
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 54% since the most recent peak of May 2015, although more recent progress has been rewarded with a bounce of 62% over the last two years, and the price having risen by 32% over the last 12 months, as compared to a gain of 10% for the wider FTSE100.
The market consensus for Vodafone is finely balanced. On the one hand, the VodafoneThree and Safaricom acquisitions are part of a growth strategy which is showing a clear signal, Africa remains a hot prospect, guidance has been upgraded and the valuation is undemanding. Set against this are the concerns of a new spike in net debt, the situation in Germany and the wider industry threats.
As such, the general view of the shares as a hold is likely to remain in place for the time being, although maintaining progress such as reported today may well eventually tempt more buyers back into the fray.
