Vodafone Group Plc (LON: VOD): Delivering strategic priorities through its sustainable business model.

Vodafone Group Plc is an FTSE-100 listed technology company having a global footprint. It provides a range of services including mobile communication, fixed communication, unified communication, internet of things (IoT), cloud hosting and security & carrier services. VOD generates its revenue on a consistent basis through monthly recurring contracts and subscriptions. The Company has its footprints in two broad geographic regions – Europe and AMAP (Africa, Middle East, Asia and Pacific).

(Source: Company Presentation) 

Recent Trend of Dividend Payments

(Source: Company Website)

The Group has a progressive dividend policy of generating consistent returns for its shareholders, considering the underlying business performance. The Company had paid H1 FY21 interim dividend of 4.50 Eurocents on 05 February 2021. The ex-dividend date was 17 December 2020. VOD had paid the same level of interim dividend for the prior period, i.e. H1 FY20 as well. The dividend yield of the Vodafone Group is currently higher than the Mobile Telecommunications industry.

Growth Prospects and Risk Assessment

The Company has a substantial presence with its footprints all around the globe. VOD is currently operating its mobile network in 21 countries, operating through partnerships in around 48 more countries. Vodafone has around 300 million mobile customers, with over 27 million fixed broadband customers and above 22 million TV customers. The Company is making significant progress to show a substantial decline of 50% in greenhouse gas emissions by 2025. It has a strategic objective to purchase 100% of electricity from renewable sources by 2025.

However, the performance can be substantially impacted by the principal risk of disruption in global economic environment, geopolitical risk in supply chain, legal and regulatory compliance, Digital Transformation, adverse political and regulatory measures, and cyber threat & data security. VOD is also exposed to Covid-19 related risk and financial risk regarding the fluctuation of interest rates. 

Industry Outlook Dynamics

With reference to the latest report from Grand View Research, the market size of the global telecommunication services industry was USD 1.74 trillion in 2019. The industry is forecasted to grow at a CAGR of 5.0% for the period from 2020 to 2027. The consumer interest has been shifted towards cloud-based technology and mobile devices resulting in further significant investments on wireless communications infrastructure. Other factors like digital transformation, shift from 4G to 5G and Internet of Things (IoT) boost the telecommunication industry.

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

Recent Developments

On 11 February 2021: The Company stated that Vodafone Vierte Verwaltungs AG has fulfilled the completion condition set out in the offer document (as on 22 December 2020) for its voluntary tender offer to the investors of Kabel Deutschland Holding AG to acquire their no-par value bearer shares in Kabel Deutschland Holding AG against the payment of a cash consideration of EUR 103.00 per share of Kabel Deutschland Holding AG. The Company expects the Tender Offer to be settled on 19 February 2021.

On 11 February 2021: Vodafone has appointed Olaf Swantee as a non-executive director, effective from 27 July 2021. Also, Mr Swantee will become a member of the Company's Audit & Risk Committee.

A Glimpse of Business Segments (Q3 FY21)

Q3 FY21 Trading Update (as on 3 February 2021)

(Source: Company Website)

• The Company delivered a resilient trading performance, with an increase of 0.4% (organic growth) in service revenue growth. It also saw that Group returned to service revenue growth in Q3 FY21, supported by Germany.
• In Germany, the service revenue increased by 1.0% (organic growth), with a surge in all market segments.
• In the Other Markets, the service revenue grew by 12.3% (organic growth), with Service revenue in Turkey grew by 17.7% (organic growth) and Service revenue in Egypt grew by 8.8% (organic growth).
• Vodacom service revenue surged by 3.3% (organic growth), driven by the strong demand in South Africa and international markets recovering.
• During the quarter, the Company witnessed strong demand in high-speed connectivity, with adding NGN broadband customer in Europe. Therefore, on a year to date basis, total NGN increased to more than 1.1 million.
• It also expects that European networks will be wholly powered by renewable electricity in July 2021.
• It has donated more than €150 million to support from the Covid-19 crisis.

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.
• During the first half of FY21, Vodafone made a profit a €1.6 billion and has a 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.
• 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.
• 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.
• 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.

Financial Ratios

Share Price Performance Analysis

On 12 February 2021, at the time of writing (before the market close, at 8:15 AM GMT), Vodafone Group Plc shares were trading at GBX 132.48, down by 0.76% against the previous day closing price. Stock 52-week High was GBX 156.94, and Low was GBX 87.11, respectively.

From the technical standpoint, 20-day SMA (129.75) and 20-day EMA (130.49) support the upside potential.

In the last one year, Vodafone Group Plc’s stock price has delivered a negative return of ~6.83% return as compared to negative ~10.54% return of FTSE 100 index and a negative ~14.24% return of FTSE All-Share Mobile Telecommunications index, which shows that the stock has outperformed the benchmark index and the benchmark sector.

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

 

Business Outlook Scenario 

The H1 FY21 and Q3 FY21 performance demonstrated resilience in its operating model, and ensured, the performance was in line with the management expectations. VOD had anticipated its FY21 adjusted EBITDA to be ranging from €14.4 billion to €14.6 billion, while the pre-spectrum free cash flow is projected to be more than €5.0 billion. The H1 FY21 interim dividend of 4.50 Eurocents further depicts the long-term confidence in its prospects. The Group is targeting both sustainable growth and attractive returns by ongoing business transformation. The Company had accelerated its progress regarding the IPO of Vantage Towers, and it would be completed by early 2021. VOD had shown a robust business performance in its largest market, Germany during Q3 FY21. The Company had already terminated its plans of disposal of its Egypt business. VOD aims to reduce carbon footprint and achieve the target of bringing renewable electricity in its European networks by July 2021.

(Source: Company Presentation)

Considering the resilient performance, sustainable growth momentum, returned to service revenue growth in Q3 FY21, the benefits from the acquisition, effective cost control measures, sustainable dividend yield, decent operating & financial performance, 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 132.48 (as on 12 February 2021, before the market close at 8:15 AM GMT), with lower-double digit upside potential based on 22.76x Price/NTM Earnings (approx.) on FY21E earnings 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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