Vodafone has plenty of work to do after mixed Q3

Turning around a super tanker is never an easy task, and for Vodafone Group (LSE:VOD) years of underperformance are being addressed, even though any transformation is still in its early days.

There have been some big strategic calls of late which should improve the group’s fortunes, leading to a more simple and leaner organisation. The planned disposal of the Spanish business, a merger with Three UK (which remains subject to regulatory and shareholder approval) and the reduction of 11,000 jobs over a three-year period will all contribute to the new look.

At the same time, the group is looking to revisit the future of the Italian business, although the latest blow to the share price came last week after the announcement came that Vodafone had rejected a merger proposal in the region with Iliad of France.

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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.

Indeed, in Germany which is the group’s largest unit accounting for 29% of overall revenues, higher broadband revenues in the quarter were offset by customer losses which were largely attributable to enforced price increases. Customer losses of 76,000 in the quarter followed declines of 133,000 and 121,000 in the previous two quarters.

More positively, mobile contract customers increased by 95,000, while the customer base overall in the country remains at 2.4 million. Competition in the “Internet of Things” (IoT) business and changes to German law around bulk TV contracting add to the more immediate challenges. 

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The UK business, which is responsible for 15% of group revenues, had a respectable quarter, adding 39,000 broadband customers to take the base to 1.3 million. Business revenues also increased by 5.8% supported by higher IoT growth, while the proposed merger with Three UK would truly change the domestic landscape and provide new revenue opportunities at scale as well as some cost synergy savings on completion.

The Vodacom business continues to show particular promise, with continued strong performance in the likes of South Africa and Egypt. Service revenue growth in the quarter was 8.8%, similar to the previous quarter’s number of 9%.

The group remains 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 dividend yield of 11.2% is eye-watering and a clear attraction, even though some of the elevated figure comes from the weakness of the share price, the two being inversely related.

Indeed, the net debt pile is one of some concern for investors, while more recently adjusted earnings have barely covered the dividend payout, and dividend cover of 0.9 at the moment is significantly shy of the 1.5 which is widely considered to be the minimum figure of comfort.

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The share price continues to languish at multi-decade lows and over the last year alone has declined by 28%, as compared to a drop of 3.6% for the wider FTSE100 index.

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.