Key Segments
Europe: Italy, Germany, United Kingdom, Greece, Portugal, Hungary, Romania, Netherlands, etc.
AMAP: Ghana, Egypt, Kenya, India, Tanzania, South Africa, Mozambique, Turkey, Egypt, Africa, New Zealand, Australia, etc.

Key Management:
Gerard Kleisterlee, Chairman
Nick Read, Chief Executive Officer
Margherita Della Valle, Chief Financial Officer

Key Statistics


Main markets and Market share (as per 2018 annual report)

(Source: Company Annual Report 2018)

Financial Highlights – Q3 to 31st December 2018 (€million)

(Source: Quarterly Report, Company Website)

Takeaways from Q3 December 2018 Results
The company reported weak revenue numbers for Q3 FY19, and group revenue stood at 11 billion euro, down by 0.8 billion euro on Y-o-Y basis on account of sale of Qatar and FX headwinds. Revenue from European region was down by 5.6 per cent and revenue from ROW was down by 11.1 per cent. The company has shown an intention to extend its existing UK network sharing agreement with Telefonica O2 to include 5G services. The company reported adjusted EBITDA growth of 3 per cent and Free Cash Flow (pre-spectrum) of 5.4 billion euro.

Ratios

(Source: TR)

Ratios Commentary
Gross margin reported was 29.6 per cent in FY 2018, reflecting an increase of 2.2 per cent when compared with last year data. EBITDA margin of 31.9% for FY18 stood considerably higher than the industry median of 25.9 per cent. Return on equity stood at 6.3 per cent which was remarkably higher than the industry median of 2.7 per cent. At liquidity front, the company’s current ratio position was lower than the industry median of 0.80, reflecting insufficient current assets to pay short term obligations. Vodafone’s Asset/Equity ratio for FY18 stood at 2.15, compared to the industry median of 2.30. Debt/Equity ratio of Vodafone was 0.59 in FY18, compared to the industry median of 0.55 during the same period. It reflects that the company is more leveraged than its peers.

Industry Scenario 
Mobile data demand is growing rapidly, driven by increased penetration of smartphones, customers switching to 4G network, the growing use of social media, increasing YouTube viewers and increased online games. On an average, the consumer now uses 1.7Gb in a month compared to 0.1Gb five years ago. The crucial point for operators is to monetize this strong volume growth. Intensive competition led by price war is dragging the bottom-line of telecom operators across the globe. Telecom industry witnessed the highest consolidation in the last two years.

Share Price Commentary

Daily Chart as on 5th March 2019, before the market close (Source: Thomson Reuters)

On 5th March 2019, at the time of writing (before market close), Vodafone shares were trading at GBX 135.10, up by 2.8 per cent over the previous day closing. Stock’s 52 weeks High and Low is GBX 214.60/GBX 131.04. At the time of writing, Vodafone shares were trading at 38.79 per cent lower than its 52w High and 0.24 per cent higher than its 52w low. In the last one year, the share has fallen significantly by 34.00 per cent (as at March 05, 2019). The 5-day average trading volume of the stock was 73,032,558.80, and the 30-Day average volume of 69,104,219.50. The average traded volume for 5 days was up by 5.68 per cent as compared to 30 days average traded volume. On the valuation front, the stock was trading at a trailing twelve months PE multiple of 16.6x as compared to the industry median of 16x. The company’s stock beta was 1.23, reflecting higher volatility as compared to the benchmark index. On the dividend front, the dividend yield for Vodafone as of today stands at 10.14%. Total outstanding market capitalization was around £36.16 billion and a dividend yield of 10.14 per cent. 

Growth Prospects and Risks Assessments
Trading is expected to remain challenging, and the growth of EBITDA may be in low single digit with free cash flow generation of around 5.4 billion euro.Company’s revenue in the fiscal year 2019 will be slightly higher than in FY18, due to the elimination of the impact of UK handset financing under IAS 18, with no effect on free cash flow.

Valuation Methodology
Valuation Method – Price/Cash Flow Multiple Approach (NTM) (Cash Flow Per Share (FY19E approx.))

While valuing Vodafone on NTM Peers Price to cash flow, we have considered its peers like Deutsche Telekom AG (NTM P/CF 3.88x), Telefonica SA (NTM P/CF 2.87x), Swisscom AG (NTM P/CF 6.46x), and Orange SA (NTM P/CF 3.55x) respectively.

(Note: All forecasted figures and peers have been taken from Thomson Reuters. All Euro figures have been converted into GBP; EUR: GBP- 0.86)

Conclusion
The company growth prospects look favourable with an increase in the revenue and surge in the margins due to the elimination of the impact of UK handset financing. The company with its robust business model is maximising and sustaining the accretive growth and with its recent reorganisation of the business. Based on decent fundamentals performance and the valuation done using the above methods, we have given a BUY recommendation with single-digit upside potential based on 40x NTM Price/Cash flow on FY19E cash flow per share. 

*The buy recommendation is valid for the current price as covered in the report as on (5th March 2019).

Note- GBp or GBX are interchangeably used for Pence Sterling. 

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