Vodafone has mountain to climb after these Q3 results

A nascent recovery has begun to unwind after the mobile phone giant's latest trading update. Our head of markets talks through the big issues, its huge dividend and rebound potential.

Vodafone Group (LSE:VOD) faces the twin perils of an extremely competitive landscape and some deteriorating economic conditions, and the latest update for the third quarter highlights the effects of both.

In an industry where both reliability and availability are a given, the key differentiator is simply price. Yet price hikes in several of the company’s markets have become necessary due to inflation and higher energy costs, which is an unwelcome development due to the competitive pricing which is being seen elsewhere. In Europe, for example, eight markets are now working on an inflation-linked pricing model.

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In turn, this has resulted in some customer losses, particularly in Germany, which accounts for 29% of overall group revenues. Dealing with new legislation has also added to those local challenges, while there was also lower visitor and roaming revenue. Italy and Spain were also under pressure over the quarter due to price competition.

Vodafone’s troubles do not end there. Net debt of over €45 billion, tepid European growth and 5G capability comes with an enormous price tag.

All is not necessarily lost. The 5G capability in Vodafone’s network could give it an edge, it has some exciting growth opportunities in Africa (it now has 73.5 million financial services customers) and its multi-play offering (TV, broadband, fixed line) often results in “stickier” customers when they have chosen the bundle. Some growth was also seen in the group’s UK market, which totals 15% of overall sales, and where organic service revenue growth grew by 5.3%.

At the same time, Vodafone has grown overall organic revenues by 1.8% over the period, and is maintaining its full-year guidance, which includes a free cash flow number of €5.1 billion. Accompanying comments were cautious and highlighted the situation in Europe where “we can do better” with the emphasis on providing a better service, becoming a simpler business and delivering growth.

In addition, the group is targeting the debt situation. An ambitious €1 billion cost savings programme is under way, and the sale of Vantage Towers is progressing. Along with the recent sale of Vodafone Hungary, the two disposals should net Vodafone just under €5 billion. In the meantime, and from an investment perspective, there is also some scant solace in a dividend yield of 8.5%, which is punchy by any yardstick and is adequately covered for the time being. 

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However, the share price performance continues to reflect the enormity of the challenges ahead. Over the last year, the shares have declined by 28% as compared to a gain of 3% for the wider FTSE100, with the longer-term performance even weaker. Over the last three years the shares have lost 38% and over the last five 59%.

Whether the newly appointed CEO can revitalise fortunes remains to be seen, but there is unquestionably a mountain to climb. As such, the jury remains out on immediate prospects, with the market consensus coming in at a hold, albeit a strong one.