What to Expect for Vodafone's Growth

We expect a slowdown in some key driving markets such as Turkey and India, but organic revenue growth can increase a bit faster in the future

Allan C. Nichols, CFA 10 November, 2010 | 9:48AM
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Vodafone (VOD) reported solid fiscal first-half results. Reported revenue growth was 3.9% year over year, which included currency gains. On an organic basis, revenue improved 1.7%, spot on with our full-year expectation. Europe continues to decline (down 1.3%), as Spain continues to struggle and Italy also declined slightly. These countries' problems offset improvements in the UK and Germany. In Africa and Central Europe, service revenue grew 4.8% as the turnaround in Turkey continues to deliver (up 26.8%) and Vodacom also improved. In the Asia-Pacific and Middle East division, service revenue jumped 11.4% as India added 14.7 million customers during the half year, taking its total to 115.6 million. Australia also grew 12.4%. We expect Spain's problems to slowly decrease but also expect Turkey and India's growth to slow over time. That said, we think organic revenue growth can increase a bit faster in the future.

On the margin side, Vodafone is doing a good job of cutting costs. Its share of the results from Verizon Wireless (VZ) was also better than we expected. Together the firm's EBITDA margin, including results from associates, is better than we predicted. If we exclude a £800 million ($1.3 billion) write-down of its stake in Greece, Vodafone's EBITDA margin came in at 44% versus our full-year expectation of 41.9%. The higher margin provides potential upside to our fair value estimate. The firm also announced it will sell the interests it received in Softbank (when it sold Softbank its Japanese business in 2006) back to Softbank in two tranches. Vodafone will receive £3.1 billion split approximately evenly in December 2010 and April 2012. We expect Vodafone will continue to shed assets with its stake in SFR likely to be sold in 2011 to Vivendi.

 

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar
Rating
Vodafone Group PLC67.48 GBX-0.27Rating

About Author

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

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