Cash and earnings surprise
Vodafone’s history of less than perfect execution is longer than its run of upside surprises, so shareholders are offering fulsome applause to unexpected profit and cash flow upgrades. These give traction to the narrative that the group could unveil a higher than forecast dividend rise for the current year and subsequent pay outs. Tuesday’s palpable share price relief is reminiscent of that seen in July, when the group drew a line under a year of value destruction. In fact, the stock’s multiple to 17/18 earnings is now well above comparable peers. That suggests market optimism may have overshot. But the group has now raised the possibility that free cash flow will come in above €5bn, having previously said the result would be ‘around €5bn’. With operational momentum at play there’s a fair chance the result beat expectations enough for the board to positively review pay-out plans.
For now though, no such C-suite thought process is detectable. Dividends are tracking in line with forecasts; up 2.1% in H1.
Still paying the price in India
The group does after all remain rough around the edges following years of strategically convoluted logic and a few outright debacles, chiefly the misguided race to the bottom in India in pursuit of Jio. Whilst the merger with Idea Cellular, aimed at fixing the situation, is progressing, service revenues continue to bleed, falling another 15.8% in H1 as competition is still intense. Vodafone (LON:VOD) needs signs of consolidation among Indian operators to gather pace in order to improve the region’s economics. If not, the draw on cash flow will cap the odds of higher shareholder pay-outs. Facing stronger comparable earnings, standout regional growth could become more equivocal too. AMAP service revenues were a robust 7%, a tick lower than 7.1% in the second half of last year, but with H1 16/17, when the region grew 8.2%, looking even more like a peak. Elsewhere, laggardly Germany and the UK remain far from capable of heavy lifting. UK organic sales remain negative and Germany, Vodafone’s largest European business region, posted the third consecutive fall in core growth.
Breathing space in Italy
Still, the later than anticipated launch of Iliad’s Italian mobile offer (it was expected to launch in this quarter) offers Vodafone some breathing space there. The delay coincides with Vodafone’s third straight half year of organic growth in Italy. Presumably this easier environment will be over when the new competitor launches. But with European traffic growth yet to reach a peak and Vodafone’s most demanding capex phase over, chances of a much sought after increase in shareholder pay outs are still live. Vodafone stock was up almost 16% for the year at the end of May. Tuesday’s update can underpin the upswing from September’s 5-month lows to a price return moderately above end-May levels by year end.
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