Little to excite in Vodafone’s half-year results

For Vodafone Group (LSE:VOD), years of underperformance are being addressed, with a major transformation of its business well underway. Even so, turning around a super tanker is never an easy task, especially when the company is in the midst of a highly competitive arena.

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What will emerge from the turnaround is a smaller and less geographically diverse, but more focused operation. Asset sales in Italy and Spain, as well as a reduction of its stake in Vantage Towers are reflected by cash proceeds of €5.4 billion in the period, which has enabled net debt to be reduced from €33.2 billion as at the end of March to €31.8 billion, although this remains an ominous weight on the group.

General proceeds are also being funnelled to an ongoing share buyback programme totalling €4 billion, €1 billion of which has now been completed. The planned halving of the dividend payment will nonetheless result in a yield of 5.1%, effectively paying investors to wait as the transformation continues, although some of the elevated yield level comes from a decreasing share price.

At the same time, the telecoms sector is one which is of course based on reliability, but equally importantly on price, where there remains ferocious competition. Recent years have also required huge investment as the industry moves on, such as being part of the new 5G network, with the benefit of any payback not being felt for any number of years. This becomes especially pertinent when margin protection tends to come with sheer volumes as opposed to the ability to raise prices indiscriminately.

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Indeed, in Germany which is the group’s largest unit accounting for 33% of overall income, service revenues declined by 6.2% in the second quarter, with the unit still suffering from customer losses which were largely attributable to enforced price increases last year.

In addition, the change to German TV law has resulted in a recontracting of customers, where the previous number of 8.5 million has been reduced to 4 million households, in line with the group’s own projections and perhaps not as severe as had been feared. 

Overall, total revenues increased by 1.6% in the half to €18.3 billion, underneath which service revenues grew by 4.8%. Adjusted profit of €5.4 billion represented growth of 3.8%, and the pre-tax return on capital employed improved from 6.4% to 7.2%, leading to the group leaving its guidance unchanged for the full year, with expected adjusted profit of around €11 billion.

One particular area of promise is the Africa operation, which now accounts for 20% of group income. Service revenue grew by more than 3% in the half-year (and by 9.7% in the second quarter), with the group well positioned to benefit further from some potentially explosive growth in the region, particularly given the more widespread availability and use of the services which the industry provides, and of which Vodafone is an established player.

The UK business is another region which the group is aiming to strengthen, and its planned mega-merger with Three UK is progressing. The final decision from the Competition and Market Authority is expected next month, with the group hopeful of completion early next year. The proposed merger would truly change the domestic landscape, while also providing new revenue opportunities at scale as well as some cost synergy savings on completion. In the meantime, the unit accounts for 19% of group income and saw total revenue growth of 2.1% for the period. 

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There is little to catch the eye of the bulls in this release, with the end game still some way off, and the share price has reacted accordingly. The decline adds to a drop of 4% over the last year, which compares to a gain of 10.4% for the wider FTSE100 and the not so steady decline – the shares are down by 70% over the last ten years and by 54% in the last five – leaves the price languishing at multi-decade lows.

While some progress is clearly being made, prospects for the group remain uncertain. There is a major difference of opinion in those covering the stock’s performance, leading to a market consensus which remains at a hold, with any positive catalysts seemingly remaining further down the line.