Vodafone Group PLC (LON: VOD) – Sustainable Business Model and Accelerating Digital Transformation

Vodafone Group PLC is a UK based technology communication company with a global footprint. The major services of the Company include fixed-line communications, mobile communications and IoT for businesses. It has Europe’s largest fixed next generation-network (NGN) footprint covering 136 million households, and it is providing customers with gigabit-capable speeds. The Company has a strong mobile network and deep spectrum position. In Africa, the mobile payment platform M-Pesa had 41.5 million customers and close to 12 billion transactions were carried out on the platform in FY20, and it is the leading payment platform. In FY20, the Vodafone business, along with its SD-WAN coverage was available to 182 markets with around 103 million internet of things (IoT) users. The Company generates a regular stream of income through monthly recurring contracts and subscriptions. Vodafone is listed on the FTSE-100 index.

Vodafone PLC will release its Q3 FY21 trading update on 3 February 2021.

Strategic Priorities

(Source: Company website)

Growth Prospects and Risk Assessment

Over the last few decades, the growth of the Company has been driven by rapid technological change, and it will continue to revolutionize the growth of Vodafone. The deployment of 5G will further support the growth through combination and radio spectrum of new 5G and infrastructure deployed for 4G. The NGN infrastructure which has superseded the legacy copper technology would support the fixed communication business growth. Vodafone has the largest NGN footprint in Europe that allows the Company to gain more market share in the fixed-line segment. The Company can also upsell speed-tiered data packages and 5G. The Company is expanding its range of products that includes security and handset insurance.

The Company also has an immense opportunity in the financial services domain through its digital payment platform M-Pesa, and that would be underpinned by the mobile data growth in the African market. The Company has a leading position in IoT, and through its Vodafone Business, it provides services to small and medium-sized (SME) and small-office home-office (SOHO). These services will also be a key catalyst in future growth.

Growth Drivers

 (Source: Company website)

The Company provides technology communication services, and failure to deliver business and IT transformation in a timely and efficient manner would impact the business. The lack of proper integration of new business or underutilization of the assets is another critical risk. Any external or internal security attack or security breach could lead to loss of customer trust and regulatory fines. The disruptions caused by global events such as the pandemic would impact financial performance. Failure in critical services and service disruption can severely affect the customer’s trust.

Industry Outlook Dynamics

The European telecommunication market has been weaker than the other regions primarily due to its fragmented approach to spectrum licensing and market structure as compared with North America and Asia. The four-player market structure in the certain Member States artificially drove the price down and eroded the incentive for the capital investment. However, now the national governments are increasing support to improve the rural networks. The EU has a Recover Fund of €750 billion and 20% of it would be used for the digital initiatives in 2021. The digital transformation strategy would drive the change in the telecommunication sector, and artificial intelligence, robotics and 5G would be at the forefront.

After understanding the industry dynamics, we will analyse some key fundamental and shareholders statistics of Vodafone Group Plc.

Recent Developments

On 4 November 2020: The Company stated that Vodafone Egypt had acquired 40 MHz of 2.6 GHz TDD spectrum from the NTRA (National Telecommunications Regulatory Authority), with an initial payment of US$270 million (€230 million) and two further payments of US$135 million (€115 million) due in 2021 and 2022, respectively. It will expand network capacity and has a ten-year licence term through to 2030.

On 5 October 2020: Vodafone stated that it had agreed to proceed with the merger of Bharti Infratel Limited and Indus Towers  Limited. After receiving consent from Vodafone’s existing lenders, to make the merger scheme effective, the parties will approach the National Company Law Tribunal.

On 1 October 2020: The Company announced that Antonio Coimbra, CEO of Vodafone Spain, stepped down from his current executive role. While Antonio was appointed on 1 November 2020 as a Non-Executive Chairman of Vodafone Spain.

A Glimpse of Business Segments (H1 FY21)

Financial and Operational Highlights (for the six months ended 30 September 2020 (H1 FY21), as on 16 November 2020)

(Source: Company Website)

• In H1 FY21, the Company reported a resilient performance, with Q2 service revenue growing by 1.5% excluding roaming and a good commercial momentum across the Group. The first half performance was also in line with the expectations.
• However, the total revenue declined by 2.3% year-on-year to €21.4 billion, with decent underlying momentum. The revenue was also benefited from the acquisition of Liberty Global's assets in Germany and CEE.
• Moreover, the Company was impacted by lower revenue from roaming, visitors and handset sales, the disposal of Vodafone New Zealand and foreign exchange headwinds.
• During the first half of FY21, Vodafone made a profit a €1.6 billion and has basic earnings per share of 4.45 eurocents. It also includes a gain of €1.0 billion, which was reported from the merger of Vodafone Hutchison Australia into TPG Telecom Ltd.
• Adjusted EBITDA declined by 1.9% year-on-year to €7.0 billion, with a net reduction in the Europe and Common Functions operating expenditure.
• The adjusted EBITDA margin stood at 32.8%, which was lower than the previous year.
• Led by the resilient adjusted EBITDA performance and higher dividends received from investments and associates, the free cash flow (pre-spectrum and restructuring) surged by 14.5% year-on-year to €0.5 billion.
• On 30 September 2020, the financial leverage stood at 3.0x and also maintained the leverage within a range of 2.x5-3.0x net debt to adjusted EBITDA.
• The Board has announced the interim dividend of 4.5 eurocents, which was same from the corresponding period of the last year and will be payable on 5 February 2021.
• Overall, the Company delivered success in the strategic priorities, namely growing the fixed broadband base, increasing customer loyalty, deliver 5G efficiently through network sharing, and driving digitisation to simplify the company and capture significant cost savings.
• In the past several months, the Company has launched 5G network in 127 cities across 9 of the European markets and 52 million homes passed with 1 Gigabit speeds.
• For the IPO of Vantage Towers, Vodafone Group is on track, with significant growth opportunities.
• For FY21, the Company is expecting an adjusted EBITDA to be in between €14.4-€14.6 billion and free cash flow (pre-spectrum and restructuring) to be at least €5 billion.

Financial Ratios (FY2020)

Share Price Performance Analysis

On 16 November 2020, at the time of writing (before the market close, at 9:00 AM GMT), Vodafone Group Plc shares were trading at GBX 122.50, up by 2.49% against the previous day closing price. Stock 52-week High was GBX 160.44 and Low of GBX 87.11, respectively.

From a technical standpoint, we could see a positive movement in the share price based on the 20-day SMA (GBX 110.03). MACD line is placed above the central line, indicating a bullish setup.

Based on 6-months performance, VOD performed better than the FTSE All-Share Mobile Telecommunications Index, but the performance was below the FTSE-100 Index. VOD generated a return of around 2.03%, whereas the FTSE All-Share Mobile Telecommunications Index return was close to 9.59%, and the FTSE-100 Index return was about 0.4%. In the last one month, Vodafone Group Plc share price has delivered around 6.71% return as compared to the approximately 5.81% return of FTSE 100 index, which shows that the stock has outperformed the index during the last one month.

Valuation Methodology: Price/Cash Flow Approach (NTM) (Illustrative)

Business Outlook Scenario

The Company delivered a strong performance in H1 FY21, and thus it is confident about the full-year outlook of FY21. The commercial services built the momentum in the first half, and it delivered 5G strong through network sharing. The fixed broadband base, digitalization and customer loyalty grew in the first half of FY21. The Company believes that the demand for its services is growing and its long-term strategy would help to transform Vodafone into a business that would help in generating sustainable and healthy returns for its customers. The current health crisis has impacted the roaming revenue of the Company as international travel declined.

Given the current macroeconomic situation, the adjusted EBITDA for the FY21 is expected to be in the range of €14.4 billion to €14.6 billion, of which the Company has already reported an adjusted EBITDA of €7.0 billion in H1 FY21. The free cash flow pre-spectrum and restructuring in FY21 is expected to be at least €5 billion. The guidance for FY21 is based on the assumption of no material change in the Group structure.

(Source: Company website)

Considering the resilient performance, sustainable growth momentum, the benefit from the acquisition, effective cost control measures, higher dividend from associates and investments, the growing demand in the services, decent operating & financial performance, the success of the strategic priorities, and support from the valuation as done using the above method, we have given a “BUY” recommendation on Vodafone Group at the current price of GBX 122.50 (as on 16 November 2020, before the market close at 9:00 AM GMT), with lower-double digit upside potential based on 3.75x Price/NTM Cash Flow (approx.) on FY21E cash flow per share (approx.). 

*All forecasted figures and Peer information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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