Vodafone Q3 trading update: what to expect
Vodafone has shown signs of recovery but its radical restructuring, huge debt pile and problems in India still weigh on investor’s minds.
When is Vodafone’s Q3 trading update?
Vodafone will release a trading update covering the third quarter (Q3) of its financial year on Wednesday, February 5, 2020. This will cover the three months to the end of December 2019. The update will only provide revenue figures and an insight into its strategy.
Vodafone Q3 trading update: What to expect
Vodafone will be hoping to bounce back after posting a €1.9 billion loss when it released its interim results last November, as a return to top-line growth was overshadowed by a major court ruling against the company in India. Vodafone shares have slumped more than 9% since then.
Below are some key questions for investors to ask when Vodafone releases its Q3 results.
Can Vodafone get a grip over the troubles in India?
The situation for Vodafone’s business in India is critical. Last October, the Supreme Court of India ruled that Vodafone and others were liable for billions in back charges related to licensing charges and fees. The company said the court’s submission suggests the liability could be as much as €3.7 billion, but has said it was ‘unable to confirm as to their accuracy’.
The ruling is the result of a decade-long dispute between India and telecoms companies, and comes less than a year after Vodafone merged its unit, Vodafone Idea, with peer Ideal Cellular to create the largest telecoms company in the country. Vodafone is hoping the sum can be reduced at the very least, and warned last year that the entire operation could be at risk of collapse if it has to pay the full charge.
This decision has already prompted Vodafone to adjust its cashflow guidance and a bill of that size, if pursued by the courts, could heavily impact Vodafone’s cashflow and ability to deliver its financial goals. Investors will be hoping that Vodafone can provide a more detailed update when it releases its Q3 results, although it is not clear how quickly progress – if any – will be made. If Vodafone has indeed picked out the maximum potential penalty, any reduction will be favourable for the business.
Will Vodafone sustain its improved performance?
Vodafone’s interim results released last November were overshadowed by the problems in India, but the rest of the business showed signs of improvement at the top line. Organic service revenue had slumped 0.2% in Q1 of the financial year but bounced back to grow 0.7% in Q2 (giving an overall H1 figure of 0.3%), and investors will be hoping this improved performance has been sustained in the latest three-month period. Vodafone’s chief executive Nick Read said the company expected this to continue in the second half.
In Europe, the two most troublesome markets are Spain and Italy, where revenues are contracting quickly. Revenue from Spain was down 8.7% in the first half (down 9.3% in Q1 and 8% in Q2), with adjusted earnings down 11.3%. In Italy, revenue was down 3.5% (down 3.8% in Q1 and 3.2% in Q2) while adjusted earnings fell 3.5%. Both markets continue to be a drag on the business, but the contraction was slower in Q2 than Q1 in both markets and investors hope the recovery can continue.
Will the Liberty Global deal make an impact?
Vodafone has started to integrate the assets it acquired in Germany, Romania, Bulgaria and the Czech Republic from Liberty Global for €18.4 billion. The new assets were formally added to the business from the start of July, meaning Q3 will be the first full quarter of contribution. The deal added 17 million more cable customers to Vodafone’s business and means Vodafone’s addressable market is much bigger, giving it access to 127 million potential broadband customers compared to 73 million before.
The acquisition is one for the long term, but investors will want to start seeing the benefits as soon as possible. It is a vital component to its cross-selling strategy, whereby it is trying to sell multiple services to customers such as mobile, broadband and cable, which it believes makes customers spend more money and stay with the business for longer. Vodafone is aiming to deliver €535 million of annual cost and capex savings from the deal by the fifth full year post completion.
Is Vodafone managing debt levels with M&A?
With a whopping €48.1 billion of net debt following the Liberty Global deal, it is a concern for Vodafone’s investors. Vodafone intends to partly reduce the sum by selling off other assets, demonstrated by the €2 billion sale of its operations in New Zealand. It is simplifying the business to focus on two geographical regions: Europe and sub-Saharan Africa.
There is a lot of activity to keep up with. Vodafone has already started to restructure its tower businesses that operates the infrastructure needed for Vodafone, and those that piggyback off its network, to serve its customers. It is currently combining its tower unit in Italy with that of Inwit SpA and hoping to release €2.1 billion of proceeds. It said the deal should be cleared by regulators sometime before the end of June 2020.
Going one step further, it has said that it will legally separate and spin-off its European towers business so it can ‘monetise a substantial proportion’ of the unit before the end of February 2021. However, that will depend on the condition of the market at the time. Investors are hoping that the separation will allow Vodafone to make a serious dent in its debt pile. The current debt pile is 3.0x the amount it expects to deliver adjusted earnings this financial year but it is aiming to reduce leverage toward the ‘lower end of our 2.5x-3.0x range within the next few years’.
Other assets are actively being sold-off too. It agreed in December to sell its business in Malta for €250 million, which it hopes to complete before the end of March 2020. More recently, it announced a deal to offload its 55% interest in its Egyptian arm to Saudi Telecom Co for €2.17 billion. Vodafone said the deal should close before the end of June 2020 and any update will be welcome.
Will Vodafone maintain its guidance, outlook and expectations?
Vodafone tweaked its guidance for the full year when it released its interim results last November to account for the impacts of the Liberty Global acquisition and the sale of its operations in New Zealand. Vodafone anticipates the net impact will be beneficial, boosting adjusted Earnings before interest, tax, depreciation and amortisation (Ebitda) by €800 million.
As a result of this, plus the return to growth and its cost-cutting efforts, the company said it was aiming to deliver between EUR14.8 billion to EUR15 billion in annual adjusted Ebitda, up from its original guidance range of €13.8 billion to €14.2 billion. It said organic adjusted Ebitda, which excludes the net impact of M&A, should grow 2% to 3%.
However, it also said free cashflow, before accounting for spectrum costs, would be ‘around €5.4 billion’, having previously said it would be ‘at least’ that figure. It said the €100 million boost it expected from the Liberty Global deal would be more than offset by the charges in India and lower dividends from its mobile tower business in the country, Indus Towers.
How to trade the Vodafone results
The 22 brokers covering Vodafone currently have a Buy rating on the telecoms stock as of February 3, 2020, according to a Thomson Reuters poll. Of these, eight of them recommend a Strong Buy with an equal number recommending Buy. Four believe Vodafone is adequately valued while two recommend Sell.
IG’s client sentiment also suggests that the market is bullish on Vodafone’s future. Of all of IG’s clients that have an open position on Vodafone, 96% have gone long and therefore expect the share price to rise while just 4% have gone short and expect its share price to decline.
Vodafone trading update: on the road to recovery, but with a lot of hurdles
Vodafone is having to spend a lot of money at present. The amount it is paying for spectrum auctions, which are used to buy capacity on the radio frequencies to deliver its services, and rolling-out 5G continue to be higher than expected, weighing on cashflow. Plus, it is having to spend more money because the assets acquired from Liberty Global have ‘materially higher capital intensity than our existing business’. Capital expenditure over the next three financial years (including this one) is expected to equal around 17% of revenue, higher than its targeted range of the ‘mid-teens’. The court ruling in India looks set to become another cost burden for the company.
As an asset-intensive business, the amount of cashflow Vodafone can deliver is important. Cashflow has been under strain and in-decline for several years and the fear is that any material growth will fail to materialise. Vodafone cut its dividend for the first time ever in the last financial year.
Vodafone is radically changing itself. Apart from cutting costs and trying to make the business more efficient, it is simplifying and concentrating on its cross-selling strategy in Europe and sub-Saharan Africa. The Liberty Global deal has pushed up debt at a time when spending is increasing, concerning investors, but it has broadly been welcomed as a good fit for Vodafone over the long-term. However, it is having to sell-off profitable businesses, such as its Egyptian and tower infrastructure arms, as a result, and there is no guarantee that the sweeping changes it is making will yield the desired outcome.
Still, the mood is bullish toward Vodafone despite the headwinds. The return to growth has suggested Vodafone has started down the road to recovery and brokers are bullish on the stock and see plenty of upside to profit from – but there is plenty of things that could get in the way.
Read more: How to buy and sell Vodafone shares
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