Summary

• Vodafone Group PLC (Vodafone) is the largest mobile & fixed network operator in Europe and mobile data & financial services provider in Africa.
• Dividend yield is 6.72% and the management is committed to dividend. It is well covered by free cash flow but not earnings.
• The company’s revenue has been in the long-term downtrend. But in the first half of 2021 it is up 5% over year driven by service revenue. Its main market is Germany with 31% of service revenue generated there.
• After losses in the last two years Vodafone returned to profit in 2020. In the first half of 2021 adjusted EBITDA was up 6.5%. Revenue growth and improving operational efficiencies should lead to the improved profitability in the future.
• The company’s debt is high. However the operating profit is 5 times higher than the interest payments and an operating cash flow well covers the debt.
• The stock price is in downtrend despite the recent relatively good financial performance. Profits could easily be hurt by a competition. So the future profitability is highly uncertain.

Dividend    Revenue    Profitability    Financial Strength    Investment Case

British telecommunication company Vodafone (VODI) offers a range of connectivity products and platforms to consumers and businesses across Europe and Africa. It is the largest mobile and fixed network operator in Europe. The company is focused on converged connectivity markets in Europe and mobile data & payments in Africa. It consistently grows customer base. In Europe Vodafone has almost 8M converged customers (when consumers take bundle of mobile, landline, broadband and TV services), 113M mobile connections, 142M marketable NGN broadband homes and 98% coverage with 4G (in markets where it operates). There are 178M customers in Africa. Vodafone currently deploys mobile network infrastructure to deliver 5G connectivity. It launched 5G in 240 cities in 10 markets. In April it became the first operator in Europe to launch a standalone 5G network. It enables higher speed, reliability and uses 20% less energy on customers’ devices.

Vodafone has the following platforms:

• TV platform with over 22M users
• Internet of Things (IoT) platform with 123M connections
• M-Pesa – mobile payment platform in Africa with 48M users and 15B transactions per year
• MyVodafone app.

It aims to become a new generation connectivity & digital services provider.

Revenue by regions was as follows in 2020.

In May 2021 Vodafone raised over EUR 2B in the initial public offering (IPO) of Vantage Towers (EUR 13.2B market capitalization) by selling 18.3% stake in that company. Vantage Towers was created in 2019 and has over 80K towers in Europe.

The company’s CEO, Nick Read, was appointed in October 2019.

The name of company comes from Voice, Data, Fone (Phone).

Financial year 2020 started on April 1 2020 and ended on March 31 2021.

  Dividend

Dividend	Dividend Yield	5Y Growth	PayOut Ratio
EUR 0.09 per share	6.72%	-7% per year	2250%

After a cut in 2018 the dividend has been the same in the last 3 years. The company has a firm commitment to it. However the dividend is not covered by earnings. Free cash flow, EUR 5B, well covers dividend payment of EUR 2.6B. In 2021 adjusted EBITDA is expected to be at least EUR 5.3B.

In the future we could expect that dividend remains at the same level as current dividend since the management would prioritize debt reduction over dividend increases. For H1 2021 the company announced interim dividend of EUR 0.045 per share with ex-dividend date of November 25, 2021.

  Revenue

Revenue	5 Years Growth	Revenue growth in 2020	Company Outlook 2021
EUR   43.8B	-1.6% p. a.	Total sales                  -2.6% By divisions: Germany                    +7.5% The UK                        -5% Italy                             -9.3% Spain                           -3% Vodacom                    -6.3%	Revenue growth both in Europe & Africa

Total revenue declined by 2.6% to EUR 43.8B (EUR 37B of it is the service revenue). Vodafone benefited from the acquisition of Liberty Global’s assets in Germany and other countries but had lower revenue from roaming, visitors and handset sales. The company’s revenue is resilient as it generates sales primarily through monthly recurring subscriptions. Developments in the main markets were as follows:

• Germany – Good Performance

Service revenue has increased only in Germany. 31% of the company’s service revenue is generated in this country. It was 7.7% higher than last year. The revenue increase reflected the consolidation of acquired Liberty Global’s assets for the full year. On organic basis revenue was up only by 0.5% with growth across all customer segments in the second half of the year. Other countries reported a decrease in total revenue.

Total broadband customer base increased by 161K to 10.9M in the country. TV customer base declined by 236K due to the lower retail activity during the pandemic. ‘DAZN’ Pay – TV channel and new Apple set-top box product were launched. Converged propositions, led by ‘GigaKombi’, let customers to combine mobile, landline, broadband and TV subscriptions for one monthly fee. There are 1.6M consumer converged accounts. Almost 6M IoT connections were added during the year due to a strong demand from SMEs.

• The UK – Good Momentum

13% of the Group service revenue comes from the UK. Revenue decreased by 5% mainly due to the depreciation of GBP versus EUR. On an organic basis it is lower by 0.8%. Vodafone in the UK has been growing faster than market for 2 years.

• Italy – Challenging Market

12% of the Group service revenue. Total revenue was 9.3% lower over year mainly due to continued price competition in the mobile market.

• Spain – Competitive Market

10% of the Group service revenue. Revenue lower by 3% mainly due to lower roaming, visitor and equipment revenue. Market remains highly competitive.

• Vodacom (Division in South Africa) – Strong Growth

11% of the Group’s service revenue. Total revenue decreased by 6.3% due to the depreciation of the local currency. On organic basis it is up almost 4%. In South Africa there is high demand for voice, data and financial services. Business connectivity was also strong as remote working and mobile broadband demand increased. Financial services customers in South Africa increased by 15% to 13.3M.

In the first half of 2021 Group revenue is up 5% over year mainly driven by service revenue. In the future the demand for connectivity and digital services will continue to increase. There is high demand for remote working, for connected devices and cloud technology. Vodafone could benefit from it through increased investment. The new growth areas are IoT, cloud & security and next-generation fixed-line services. The company invests in the following areas:

• Upgrading of fixed networks and rolling out of 5G
• Strengthening product offering, particularly in Vodafone Business
• Accelerating digital capabilities and strengthen direct channels
• Supporting Vantage Towers in its growth ambitions.

  Profitability

Profit	5 Yrs Growth	Net Profit Margin	ROE	Company Outlook 2021
EPS 0.004 EUR Net Profit EUR 0.54B	N/A	0.26%	0.2%	To grow adjusted EBITDA by mid-single digit percentage.

Over the last 5 years Vodafone has been making losses each year except 2017. In 2020 EPS is in positive territory. Operating profit increased by EUR 1B to EUR 5.1B with no impairment losses in that year. No losses related to Vodafone Idea were included as the asset was write down to nil in FY2019. However adjusted EBITDA decreased by 1.2% to EUR 14.4B due to the decline in revenue. That decline was partially offset by cost savings. Vodafone lowers its cost base by improving operational efficiencies through standardization, digitalization and the sharing of services. Those initiatives have generated savings of EUR 0.5 B in 2020.

In 2021 adjusted EBITDA is expected to be in the range of EUR 15-15.4B. In the first half of 2021 it is up 6.5% to EUR 7.6B from EUR 7B in H1 2020. However operating profit and net profit were lower in H1 2021. In the future Vodafone should stay profitable although profit growth is expected to be moderate.

  Financial Strength

Company Capital Structure

In EUR B

Year	2019	2020	1HY
Equity	61.41	55.804	55.892
Cash & cash equivalents	13.557	5.821	5.824
Debt incl lease liabilities	74.925	67.76	69.52
Net Debt as defined by Vodafone	42.047	40.543	44.298
Debt/Equity	122%	121%	124%

The company’s debt is high due to aggressive M&A activity in the past. It has been in uptrend since 2017. In 2020 the company managed to reduce debt due to the funds raised in IPO of Vantage Towers. However the debt is not the basis for concern as the operating cash flow is 25% of the debt and the operating profit is 5 times higher than the interest payments. The company aims to keep Net Debt to adjusted EBITDA ratio within 2.5-4x range. At present it is 2.8x. Vodafone has no short-term refinancing needs. It has strong liquidity position with cash and short-term investments of almost EUR 10B and unused facilities of over EUR7B.

  Investment Case

We do not make the estimate of future stock price based on P/E ratio, the calculations we usually do in this section. This is because of the high uncertainty related to the possible company performance in the future. With average P/E of 11.56 (see VODI) to justify the current stock price, EPS should be equal to EUR 0.116 per share. It means that EPS should increase 29 times from the current low level.

Over the last three years there have been positive changes in the company. It limited business activity to Europe and Africa, reduced debt somewhat and inched some profits. The company makes progress in Europe’s converged connectivity markets and in mobile data and financial services markets in Africa. Financial performance is relatively good and commercial momentum solid. Due to its size, leading position in main markets and improving efficiency the company could improve profitability substantially over time.

However investors are not convinced by those changes as the stock price is still in downtrend. The competition is very intense in Europe and it keeps prices under pressure, particularly in Italy and Spain. Defensive nature of business and high dividend yield makes Vodafone’s stock almost proxy to bonds. The stock price appreciation will depend on the company’s ability to grow profits.

Disclosure:

I have no position in the stocks mentioned in this article and do not intend to initiate any position within the next 72 hours.

Notes

Data source – the company’s financial reports and presentations. Source of pictures – the company website unless otherwise stated. Colored circles next to headings mean an author’s evaluation of the relevant performance criteria of the company: green means positive, yellow neutral and red negative evaluation. There are many ways to estimate the future stock price. We use only one of them, the one based on P/E ratio. All estimates made in the article are for the informational purposes only. No taxation, brokerage fees and other expenses related to investing are considered in the estimates. The estimates are the result of the rule of thumb assumptions and the real outcome might differ materially from those estimates. As the future unfolds, macro events, not mentioned in the article, could impact the company fundamentals. Use the information in the article only as a starting point for your own due diligence.