Stabilisation and expansion
Organic service revenue growth of 2.2% year-on-year is the satisfactory outcome from Vodafone’s first quarter, signifying that remedies for last year’s disastrous value destruction are working. There’s been no let-up of “intense” competition in India though, the root-cause of Vodafone’s €6.1bn annual loss in 2016/17. But at least there’s been no deterioration since the last quarter, with service revenues stabilising there, the group said. Market forecasts of the group’s preferred underlying sales measure were as low as 1.4%, after the group scraped together 1.5% in the final quarter of its last financial year, Vodafone’s long-term run rate. The better-than-forecast showing in Q1 is being welcomed with a 1.3% rise of the stock as I write. Hopes that the ‘Fit for Growth’ cost efficiency programme, now underway, may eventually elevate long-run organic service growth, are intact. Even better, so is guidance of a 4%-8% rise in core earnings.
As CEO Vittorio Colao says, Q1 was a good start to the year. Even so, problem regions of the last few quarters are still giving cause for concern, even as Vodafone (LON:VOD) is at the head of the pack in regions where growth is rapid. The latter include the group’s Africa, Middle-East and Asia-Pacific demarcation, where organic growth was 7.9%, and Turkey, up a blistering 13.9%. The quality of such growth is certainly worth scrutinising—churn outside of established markets tends to much higher—though investors prefer that Vodafone is among the operators participating in the land grab rather than absent.
Europe ‘fit for growth’
Frontier expansion is not offsetting static conditions in the group’s mature markets though. Italy’s post-deregulation explosion helped account for that region’s 5% total rise and 3.2% underlying advance, the group’s best Q1 organic showing in Europe but, the region as a whole crawled just 0.8% higher in Q1. Germany, still the group’s largest revenue generating country, remained the biggest drag, halving to +0.6%. And whilst the UK account transfer debacle may be over, Vodafone’s home market remains an embarrassment, falling 2.7%, though better than in Q4.
Europe is the low hanging fruit for ‘Fit for Growth’, but Vodafone underlines that it is also attempting to get ahead of growth trends as well. It’s focusing on the rise in 4G and data at the heart of a ‘more for more’ propositions, which have seen a 39% rise in data usage per smartphone customer in Europe. Impressive as these metrics are, they do not quite remove doubts about whether the current strategy can deliver a bigger quantum of growth over the medium-to-long-term, and that is a long-standing quibble of Vodafone’s investment case, last year’s Indian misadventure aside.
Investors will settle for more of the same
As a volatility play Vodafone isn't exactly up there these days, though it had its moments in the past. Having participated in dot.com boom and bust, the stock infamously soared to its all-time high above 400p at the end of February 2000, before crashing to a low of around 80p in September 2002. Things have been more sedate in recent years. Vodafone's 5-year price return is virtually the same gain an investor would have received had they bought the stock on 1st January 2002 and held it till Thursday's close: around 22%.
For investors, it doesn't matter much that the stock has not been a particularly fast-mover. Vodafone's total return over 15 years is 286%; 73.7% over 5. In short, action-packed Vodafone share price stories are uncommon. Unless, that is, the dividend appears to be threatened. And it's also easy to see why the shares have been subject to a persistent discount over the last few years due to nagging concerns that inertia on diversification (AKA quad-play) might impact cash generation. Cash that might not then find its way back to shareholders.
Still, there were no new fires to extinguish in the first quarter, and that in itself is backing for Vodafone’s pledge to turn up the notch on cash flow generation, and in turn to boost the dividend. Not so much 'more for more' as 'more of the same', for investors going into the second half.
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