Vodafone reassures on dividend despite swing to loss

By Oliver Haill

Date: Tuesday 13 Nov 2018

Vodafone reassures on dividend despite swing to loss

(Sharecast News) - Vodafone swung to a large loss at the half-year stage after restructuring its business in India due to competitive pressures, though underlying earnings remained on track and there was reassurance provided on the dividend.

Group revenue fell 5.5% to €21.8bn for the six months to 30 September due to the sale of its Qatar business, the effect of new IFRS 15 accounting changes and currency swings, while the previous year's post-tax profit of €1.2bn crashed to a €7.8bn loss due to impairments in Spain, Romania and after the agreement to merge Vodafone India with Idea Cellular, plus a €3.4bn loss on disposal of Vodafone India following completion of the creation of Vodafone Idea, plus higher net financing costs and the de-recognition of a deferred tax asset in Spain.

Second-quarter organic service revenue growth of 0.5%, slowed down from the 1.1% in the first quarter as Italy and Spain were very weak, but this was as expected and slightly stronger than the 0.4% that analysts had expected.

At the bottom line there was a big swing to a loss per share of 29.00 eurocents from earnings per share of 4.03 cents a year ago.

Organic earnings were up 2.9% if excluding interest, tax, depreciation and amortisation and also handset financing and settlements, thanks in part to a further net reduction in operating expenses.

A flat total dividend for the year of 15.07 cents per share was declared, with an interim dividend also flat at 4.84 cents. In the face of much analysts angst over the sustainability of the payout, the board said it "will consider growing the dividend per share over the long-term, once the group's financial leverage has reduced towards the lower end of the revised target range of 2.5x-3.0x net debt/EBITDA".

Tightening up full year guidance, new chief executive Nick Read, who took over from Vittorio Colao 1 October, now expects adjusted organic earnings before to grow around 3% to €14.3-14.5bn for the year, with 1-5% growth having been pencilled in at the start of the year. He also nudged up the outlook for free cash flow generation to €5.4bn from €5.2bn and said he planned to lower European net operating expenses by at least €1.2bn by the 2021 financial year.

"Our performance in the majority of our markets has been good during the first half of the year, and we have taken decisive commercial and operational actions to respond to challenging competitive conditions in Italy and Spain," he said.

Read pointed to good underlying growth drivers, including good momentum in fixed broadband with 384,000 net adds and converged contracts with 616,000 net adds.

The European consumer business, which makes up 49% of group service revenues, saw sales decline 0.6% in the half, with fixed growth of 3.6%, much from Germany, offset by a mobile decline of 2.1%. Italy revenue shrank 6.3% due to mobile was not quite as bad as feared, while Spain's 7.2% deterioration was disappointing as both mobile and fixed-line dropped off and UK revenues reversed 5.1% including handset financing.

The enterprise business, which accounted for 30% of group revenues and is underging a groundbreaking rebranding as Vodafone Business, grew 1.0%, led by growth in the Internet of Things and cloud services.

The emerging consumer business grew 7.4% to make up almost 17% of group sales, with 18% data growth a key driver. In euro terms service revenue declined by 9.3%, due to Turkey's sharp devaluation. With low penetration of 4G services and smartphones, there is considerable further growth spied.

While he waits for various regulatory decisions over the agreed acquisition of Liberty Global's European operations Read said that general efforts to improve returns, the board was reviewing the best strategic and financial direction for a newly created "virtual internal tower company" across Vodafone's European operations. Analysts saw this as the first step in a possible sale of the towers.


Vodafone shares jumped over 9% to 157.7p, recovering the ground lost over the past month.

RBC Capital Markets said that revenue on an IAS18 accounting basis of €22.5bn was 2% ahead of the consensus forecast of €22.1bn, with adjusted EBITDA of €7.1bn beating consensus of €7.0bn.

"Vodafone is focused on broadband to improve group growth, prepare it for future convergence and lend scale to its post Project Spring strategy of being one of the two market leaders in each of its countries. Increasingly, broadband scale will give way to price rises and EBITDA growth, in our view," RBC analysts said.

Broker Hargreaves Lansdown said there were two reasons the results went down well with the market. "Reducing operating costs for a third consecutive year has helped earnings come in slightly ahead of prior expectations, while the group's confirmed a marginally more upbeat outlook for the full year. That's helped ward off fears of an imminent rebasing of the dividend - clearly good news for those holding Vodafone for its 8%+ yield," said analyst George Salmon.

He also said a potential sale of the towers business should lead to cost savings and add "a couple of billion" to the coffers, helping to trim the €30bn-plus debt pile.

"However, longer-term challenges remain," he said. "The cash demands of rolling out 4G and 5G services will be significant, so while these results provide some welcome short-term assurance, questions over the sustainability of the dividend will likely linger."

Analysts at Citi said the loss of wholesale market share in Germany was impacting numbers, but commercial momentum is strong in both broadband and mobile. Spain may be "the weak point" at present but "the worst should be over in terms of both churn and revenue weakness of football related churn should normalize in the coming quarters", while Italy was mixed but should be facing a more stable outlook as competition has been easing steadily since Iliad's lunch in June and the "UK showing further improvement as the market is on the mend".

"We believe that given the negative sentiment and concerns going into the results, both the numbers and the key messages should reassure," Citi said, with the uptick in free cash flow guidance and higher contribution from Ziggo "should give more confidence" on dividend cover.

"Given positive FX since the summer, there is another tailwind for consensus estimates, currently at €5.1bn. The stable dividend provides support but also shows an acknowledgement that growth is credible only if EBITDA/FCF growth can keep leverage in check, especially in light of the Italian spectrum outlay."


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