Vodafone shares buoyant on inflation warning

Vodafone Group warned that inflation will negatively impact its earnings figures in the coming year. The mobile phone company told investors at its full-year results for 2022 that the current macroeconomic climate “presents specific challenges, particularly inflation” and that this is likely to “impact our financial performance in the year ahead.”

Shares rose 2% on Tuesday to 120.3p but dropped back 1% to 118.76p on Wednesday.

Revenues rose 4% to €45.58 billion, boosted by growth in service revenue in Europe and Africa. Operating profits increased by 11% to €5.7bn (from €5.1 billion last year) thanks to the increase in earnings and a reduction in depreciation and amortisation costs compared to the same period in 2021.

Free cash flow also improved to €3.3 billion (from €3.1 billion last year) and Vodafone says its cost-cutting programme has delivered €1.5 billion of efficiencies over the past two full years. However, pre-tax profits fell to €3.95 billion (from €4.4 billion in 2021). Net debt also increased by 2.6% to €41.6 billion due to its €2 billion share buyback programme.

Rising costs to hit the mobile phone giant

“We delivered a good financial performance in the year with growth in revenues, profits and cash flows, in line with our medium-term financial ambitions,” chief executive Nick Read told shareholders. “Our organic growth underpinned a step-change in our return on capital, which improved by 170bps to 7.2%.

“Whilst we are not immune to the macroeconomic challenges in Europe and Africa, we are positioned well to manage them and we expect to deliver a resilient financial performance in the year ahead.”

Management expect adjusted earnings to come in at between €15 billion and €15.5 billion for the full-year 2023, while adjusted free cash flow is forecast to be around €5.3 billion.

Meanwhile, Vodafone is negotiating a long-term energy deal with Centrica to keep costs down.

Read says he is focused on improving the group’s performance in Germany, which he says is disappointing and pursuing merger opportunities with Vantage Towers. “These actions, together with the simplification of our portfolio and the ongoing delivery of our organic growth strategy, will create further value for our shareholders,” he said.

Vodafone faces pressure from activist shareholders

Vodafone has been under pressure from activist investor Cevian, led by Carl Icahn, which built up a stake earlier this year, to shake up the company and consolidate the European telecoms sector.

Since then, a new majority shareholder – UAE-owned Emirates Telecom – has emerged with a stake of around 10% in the company. Emirates Telecom says it supports Vodafone’s strategy.

Read says that he is committed to finding acquisition targets in Europe. However, nothing has yet transpired despite interest from Iliad in its Italian arm and negotiations with Spain’s Masmovil. The company is, nevertheless, currently talking to Hong Kong-based CK Hutchinson to combine its UK business with Three UK.

Analysts at Citigroup initiated coverage on Vodafone shares, setting a price target of 165p.

Vodafone shares have long disappointed. However, at 118.76p, they remain a long term buy on activist investor interest.

*Based on revenue excluding FX (published financial statements, June 2020).