ii view: Vodafone shares toppled by Germany concerns

Third-quarter trading update to 31 December 

• Adjusted or organic service revenues up 5.2% (Q2: +4.2%)
• Total revenues up 5% to €9.8 billion (£8.2 billion)
• Adjusted German organic service revenue down 2.6% (Q2: -2.4%)
• Adjusted profit (EBITDA) up 2.2% to €2.8 billion

Guidance:

• Continues to expect year ahead 2025 adjusted profit (EBITDA) of €11 billion, unchanged on 2024’s €11 billion
• Planning to halve the dividend for the 2025 full year to 4.5 eurocents per share, but with ambition to then grow over time
• Final €0.5 billion tranche from the initial €2 billion buyback programme now commencing

Chief executive Margherita Della Valle said:

“We are continuing to invest in the turnaround of our German business and we are starting to see improving customer trends, although conditions have become more challenging in the mobile market.

“During the quarter, we completed the sale of Italy for €8 billion and received regulatory approval for Vodafone's merger with Three in the UK. When the UK merger completes in the next few months, we will have fully executed Vodafone's reshaping for growth.”

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ii round-up:

Mobile phone and broadband network provider Vodafone Group (LSE:VOD) today reiterated full-year profit hopes but offered a cautious outlook  for its key German market.

Driven by gains in the UK, Turkey and Africa, third-quarter service revenues stripped of new phone sales increased by 5.2%. That’s up from growth of 4.2% in the prior second quarter, with management reiterating its hopes for adjusted profit of around €11 billion in 2025 – unchanged from 2024. However, adjusted German sales, generating a third of overall revenue, fell 2.6%, worse than a fall of 2.4% in Q2, with Vodafone flagging a more challenging mobile market.

Shares in the FTSE 100 company fell 7% in UK trading having come into this latest news up 2% over the last year. That’s comfortably behind a 29% gain for UK rival and builder of national fibre broadband network BT Group (LSE:BT.A). The FTSE 100 index is up 12% over the last year.

Vodafone has been transforming in recent years, selling operations in Spain and Italy where it lacked major market share and adding to UK operations via the pending merger of Three’s UK mobile business with its own.

Third-quarter UK service revenues, accounting for a fifth of group-wide sales, climbed 7.6%, up from a gain of 2.9% in the prior second quarter. 

In December, the UK's Competition and Markets Authority (CMA) approved the combination of Vodafone and Three in the UK with the merger expected to complete in the next few months. After the merger, Vodafone and CK Hutchison will own 51% and 49% of the combined business, respectively.

Quarterly service revenue for the Africa business, generating a fifth of sales, rose 4.2%, improving from a gain of 0.3% in Q2. Adjusted services revenue for Turkey, accounting for 10% of group sales, improved 53.1% versus 49.5% in Q2.  

The final €0.5 billion tranche of an initial €2 billion share buyback programme, and arising from Spanish and Italian business sales, is now underway. 

Full-year 2025 results are due on 20 May.  

ii view:

Vodafone operates both mobile phone and fixed broadband networks. Operating in Europe and Africa and following business sales in Spain and Italy, key countries of operation now include Germany, the UK, Turkey, and South Africa. The company provides 5G mobile connection in over 230 European cities, with its fast broadband network passing more than 50 million European homes. Fast data broadband provision also makes it Europe’s second largest TV platform with around 17 million such customers.

For investors, a deterioration in adjusted German service revenues along with a cautious management outlook gives cause for concern. Germany generated close to half of all Vodafone profits in the full-year 2024. The sale of Italian and Spanish businesses leaves it less geographically diverse. The dividend payment is again being reduced and effectively halved given business sales, while group net debt of €31.8 billion (£26.4 billion) as of late September compares to a stock market value of £16.7 billion.

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More favourably, revenue growth outside of Germany is being achieved. Management initiatives now include increasing investment in customer experience and growing business-related sales. Its UK business merger with Three has received regulatory approval and is set to complete soon. A €4 billion share buyback to 2026 is ongoing, while UAE telecommunications company e& continues to hold a sizeable shareholding in Vodafone, potentially applying ongoing pressure on management for change and improvement.

In all, an awaited recovery at its core Germany business cannot be overlooked. That said, a rejigged business focused on growth opportunities and strong cashflows underpinning a forecast dividend yield of over 5%, may be enough to appease investors hanging on for a recovery. 

Positives

• Business and geographical diversity
• Ongoing management transformation programme

Negatives

• Intense competition
• Rebasing or cutting of dividend

The average rating of stock market analysts:

Strong hold