Vodafone Sales Hurt by Falling Pound

Equity analysts are pleased to see that Vodafone's second-quarter results are generally stronger than those of the first quarter, despite some weak areas

Allan C. Nichols, CFA 15 November, 2016 | 4:43PM

Vodafone (VOD) reported fiscal first-half results that continue to be hurt by negative currency moves. The firm’s reported revenue fell 3.9% year over year, versus our full-year projection of a 4.4% gain. However, group service revenue grew 2.3% on an organic basis. We believe this is the more relevant figure, and we don’t expect any significant changes to our fair value estimate. We are pleased to see that the second-quarter results are generally stronger than those of the first quarter, supporting management’s claims that Vodafone is benefiting from “Project Spring”.

While the U.K. is Vodafone’s home market, it accounts for only 13.2% of its revenue

In Europe, organic revenue service grew 0.6% as the firm increased its 4G subscriber base by 61.7% to 39.3 million and its fixed broadband base by 10.2% to 12.9 million. This growth is important, as 4G customers tend to use significantly more data than 3G users. The increase in 4G customers allowed average revenue per user to stabilise, and we expect it to increase over time. For the firm as a whole, 28% of broadband customers are now on converged services, significantly reducing churn and increasing the value of the subscriber.

In Vodafone’s Africa, Middle East, and Asia-Pacific region, organic revenue grew 8.9%, but was more than offset by currency declines. In India, the firm increased its wireless subscriber base by 6.7% from the year-ago quarter to over 200 million for the first time. However, data revenue growth slowed to 16% from 22% with the entrance of Reliance Jio, which pushed pricing down. While we’ve been talking to Vodafone for well over a year regarding the potential impact of RJio’s entrance, it was greater than anticipated, as Vodafone chose to take a €5 billion write-down on the value of its Indian subsidiary. While this is a concern, we’ve already reduced our expectations for this division due to RJio’s entrance.

The firm continues to work on reducing costs and generated an earnings before tax margin of 29.2% versus our full-year projection of 29%. We view shares as slightly undervalued.

The other country of concern is the United Kingdom, where revenue declined by 2.7%, and earnings before tax by 6.5%. Vodafone continues to struggle with a quality perception issue in its home market, which has been exacerbated by problems with a billing-system migration. However, it is important to remember that while the U.K. is Vodafone’s home market, it accounts for only 13.2% of its revenue, which is significantly lower than the home market for other European phone companies.

Additionally, about half of its revenue in the U.K. is driven from its enterprise business, which is more stable than retail customers. So, while we are disappointed with Vodafone’s results in its home country, this isn’t as critical as it first appears.

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Securities Mentioned in Article
Security NamePriceChange (%)Morningstar
Vodafone Group PLC186.78 GBX1.29
About Author

Allan C. Nichols, CFA  is a senior stock analyst and international investing specialist with Morningstar.