Vodafone’s 2016/17 earnings, as widely forecast, show the ravages of a year of putting out fires at home and abroad.
The €6.1bn loss whilst eye-watering had been flagged, following the group’s expectation of a large tax impairment related to India. Tuesday morning’s share price reaction still looked forgiving, though a 4% advance at the time of writing also had an eye to Vodafone (LON:VOD) sticking to plan with a 2% rise in the final dividend at €10.03. There had been concerns that downgraded earnings guidance in February might presage a chill on shareholder pay outs, a further means of preserving cash after the sudden upsurge of price competition in India.
In the event, despite aggressive price cuts by Indian rival Jio, a major driver of Vodafone’s merger of its unit there with Idea, the UK group slightly exceeded organic core earnings growth expectations with a 5.8% rise to €14.1bn. Margins were steady too, up 1.3 percentage points. Promising traction of costs measures may also be showing in Vodafone’s main gauge of medium-term health, organic service revenue. Their growth kept track with the longstanding run rate in the final quarter of 2016, rising 1.5%. Vodafone may be about shuffle assets more broadly, which will also help profits and cash at the margin. It announced on Monday that it would transfer its 35% stake in Kenya's Safaricom (NR:SCOM) to majority-owned Vodacom (JO:VODJ).
Performance of the group’s developed regions also showed qualified strength. Whilst contract losses in the UK hit the headlines, Germany, Vodafone’s most important developed market, grew by a robust 6% vs. 3% in the first half. Investors hope that growth will help stabilise European operating profits after a €10.4m H2 loss for Europe as a whole.
These initiatives give credibility to robust free cash flow guidance—another key reason for the market’s forgiving mood, despite Vodafone’s biggest ever loss. The group is expecting to put away €5bn in the current year, a surprising 36% above forecasts of around £3.6bn. More cash on hand than expected means more firepower for the world’s No.2 mobile phone company to deploy in India and other crucial growth markets, where the battle for market share will intensify this year. A refocus on cash flow growth sets Vodafone on the right track.
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