First-quarter revenue rose 9.7% to €10.3bn, with growth boosted by the addition of Three UK revenue. Organic Service revenue growth was 5.2% to €8.6bn, with all segments contributing positively.
Adjusted cash profit (EBITDAaL) rose 6.2% organically to €2.9bn, with margins up 0.6 percentage points to 28.5%.
Full-year guidance has been updated to include nine months of Safaricom following completion of the transaction. Vodafone now expects adjusted cash profit of €13.0-13.3bn and free cash flow of €2.6-2.9bn, with performance expected at the upper end of both ranges.
The shares were up 3.8% in early trading.
Our view
Vodafone’s first quarter was another step in the right direction. Growth was broad-based, and there’s new guidance that suggests upgrades to consensus. The turnaround is gaining credibility, but there’s still work to be done.
Sales in the telecom sector should be relatively robust, as broadband and mobile services are hardly optional. Yet, over the last decade, telecom giants have had to pump huge sums of cash into building out fibre networks and snapping up parts of the 5G spectrum. The main challenge has been the low sales growth relative to spending in telecoms compared to other sectors.
In response to several years of underperformance, Vodafone has evolved its strategy. There have been job cuts, the merger of its UK business with Three UK, and sales of the underperforming Spanish and Italian divisions.
Vodafone also plans to buy the remaining 49% stake in VodafoneThree. The original agreement included an option to acquire the stake after three years, so moving after just one year suggests confidence in the early integration progress. Owning the whole business should make it easier to move quickly and capture the planned benefits, but it also increases Vodafone’s financial exposure if delivery falls short.
We welcome the changes, but this turnaround is far from complete.
Germany remains Vodafone’s toughest nut to crack, but the direction of travel is improving. Service revenue growth continued in the first quarter, helped by wholesale revenue and better fixed-line performance. The branded customer business remains under pressure, though, and cash profit still needs to stabilise. Sustained growth, rather than a handful of better quarters, remains the real test.
Outside Europe, the Vodacom subsidiary continues to offer attractive growth opportunities across connectivity and financial services. Bringing Safaricom into the group adds another quality African asset and increases the region’s importance to the investment case. The opportunity is meaningful, but currency movements and exposure to faster-changing markets can bring added volatility.
Asset sales and a focus on debt reduction have improved the balance sheet in recent years. There’s still a lot of debt, and the £4.3bn cash cost of taking full ownership of VodafoneThree will push leverage higher. Stronger cash flow offers some support, and management still expects to grow the dividend gradually, but investment demands and integration costs leave limited room for error, and no dividend is guaranteed.
All in all, Vodafone’s portfolio is stronger and first-quarter trading adds weight to the turnaround story. But the valuation has already improved over the past year and now looks about right to us. Sustained progress in Germany, successful delivery of the VodafoneThree benefits and continued cash flow growth will be needed to justify further optimism.
Environmental, social and governance (ESG) risk
The telecom industry is low/medium in terms of ESG risk. Data privacy and security is the most significant risk driver, not only because customers are increasingly concerned about privacy, but also because cybersecurity breaches can be costly. Product quality is another key risk, particularly given the networks they manage are considered critical infrastructure. Carbon emissions, human capital and business ethics are also risks worth monitoring.
According to Sustainalytics, Vodafone’s management of material ESG issues is strong.
Vodafone has a board-level ESG committee to oversee its ESG program and track key targets. Executive pay is partly based on ESG performance, with a 10% weight in long-term incentives. The company is certified for information security management, meeting industry best practices. Vodafone also has a third-party ethics hotline for anonymous reports and a specialist team for negotiations. However, the company has faced regulatory scrutiny and fines for quality and safety issues, indicating possible gaps in product governance.
Vodafone key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
