Vodafone Group PLC (LON: VOD) – Customer demand continues to accelerate

Vodafone Group Plc is an FTSE-100 listed telecommunication company having a global footprint. VOD was founded in 1984 and is headquartered in Newbury, the United Kingdom. It provides various services such as mobile communication, unified communication, fixed communication, cloud hosting, the internet of things (IoT), and security & carrier services. VOD generates its revenue on a consistent basis through monthly recurring contracts and subscriptions. VOD has established a strategic partnership with Open Fiber. The Company has its footprints in two broad geographic regions – Europe and AMAP (Africa, Middle East, Asia and Pacific).  VOD has a strong technology roadmap, and the Company is transforming to deliver growth.

On 23 July 2021, VOD would release its Q1 FY2022 trading update.

Recent Trend of dividend payments

  (Data Source: LSE Website, Research done by Kalkine Group)

The chart above demonstrates the consistent dividend payment done by VOD from FY2016 to FY2020. In FY2020, VOD paid a total dividend of EURO 0.09 per share. The last dividend of FY2020 of EURO 0.045 per share was paid on 7 August 2020.

In FY2021, VOD so far paid an interim dividend of EURO 0.045 per share. It was paid on 5 February 2021. The ex-dividend date for it was 17 December 2020. VOD announced a final dividend for FY2021 of EURO 0.045 per share on 18 May 2021. The ex-dividend date for it is 24 June 2021, and the dividend would be paid on 6 August 2021.

(Source: Company Presentation)

Growth Prospects

• Accelerating Customer Demand: VOD’s customer demand accelerated over FY2021 is growing rapidly. In Africa, connectivity and digital payments are driving demand. In general, demands are fuelled by the cloudification of communication, and device and service proliferation across IoT, media streaming, big data, cloud gaming, etc.
• Solid technology roadmap: VOD is a leader in 5G private networks. It has set up new network sharing models. VOD is driving the Open RAN Telecom Infra Project as a founding partner. By FY2023, VOD targets to achieve more than 51 million self-built gigabit-capable fixed homes using its broad hybrid fibre cable.
• Capital allocation to drive returns: VOD invests efficiently in connectivity infrastructure with a focus on simplification and efficiency. It is partnering with global technology leaders to invest in digital opportunities with attractive returns. Hence, VOD is allocating its capital effectively to drive future growth.
• Transformation to deliver growth: VOD has transformed its operating model and implemented a new single technology organisation in Europe. The new operating model would improve the shared platform approach and significantly reduce product lead times, driving growth.
• European network fully powered by renewable sources: VOD’s entire European network would be powered by electricity generated from renewable sources effective 1 July 2021. It would help VOD’s customers to reduce their own carbon footprint, helping VOD to acquire more customers.

Key Risks 

• Ineffective digital growth: Digital services are the top priority for telecommunications service providers. However, they need to develop innovative business models, strategic alliances and diversification to effectively achieve digital growth.
• Data privacy and security: Customers’ concerns about the privacy and security of their online data continue to rise. Hence, VOD faces the growing challenge of ensuring the safety and security of its customers’ data.
• Disruption in many regions: If the Indian variant of Covid-19 drives the government to enforce fresh lockdowns, there could be disruption challenges in many regions in the UK, affecting VOD’s business.
• Growing capex burden: VOD has a wave of network investment from 5G to gigabit fiber. However, the returns on this significant capex remain uncertain.
• Evolving disruptions: There is a rising demand for intelligent connectivity in the market. Hence, well-funded entrants could introduce disruptive technologies to snatch market share from established players.
  

Now we will analyze some key fundamental and shareholders statistics of Vodafone Group PLC.

Recent Development

Share Buy-back: On 24 June 2021, VOD announced that it had purchased 5,707,175 ordinary shares as part of its share buy-back programme.

Financial and Operational Highlights (for the year ended 31 March 2021 as of 18 May 2021)

(Source: LSE Website)

• The acquisition of Liberty Global's assets drove the momentum in FY2021. But roaming and visitor revenue was impacted by Covid-19. Hence, VOD’s revenue in FY2021 declined by 2.6% YoY.
• However, driven by lower gains on disposals and no impairment losses in FY2021, operating profit surged by 24.3% YoY.
• It led to VOD making a net profit of EURO 0.536 billion in FY2021 versus a loss of EURO 0.455 billion in FY2020.
• On the downside, adjusted EBITDA was down 1.2% YoY in FY2021.
• Also, free cash flow declined by 11.9% YoY due to lower adjusted EBITDA and increased investment in network performance.
• Supported by the free cash flow, net debt declined by EURO 1.5 billion in FY2021.
• VOD listed its infrastructure asset subsidiary Vantage Towers on the Frankfurt Stock Exchange. In the process, VOD raised over EURO 2 billion in the initial public offering.

Financial Ratios (FY2021)

Share Price Performance Analysis

(Research done by Kalkine Group)

On 25 June 2021, at 8:20 AM GMT, VOD’s shares were trading at GBX 124.00, down by 1.04% against the previous day closing price. Stock 52-week High and Low were GBX 142.74 and GBX 87.11, respectively.

On a daily chart, VOD's price is sustaining around 200-day SMA of about GBX 124.90, indicating the possibility of an upward movement. The momentum indicator RSI (14-period) is trading at ~35.07 level and moving towards the oversold zone.

In the last six months, VOD’s stock price has delivered a positive return of ~1.67%.  However, it has underperformed the FTSE AIM All-Share Telecommunications index with a return of around 13.85% and the FTSE 100 index with a return of about 9.35%.

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

Peers used in the valuation methodology (Price/NTM Earnings)

Business Outlook Scenario

VOD delivered a resilient performance in FY2021, with operating profit rising 24.3% YoY. It was achieved with a sales of EURO 43.8 billion. VOD made a net profit of EURO 0.536 billion in FY2021 versus a loss of EURO 0.455 billion in FY2020. VOD raised over EURO 2 billion in the initial public offering of Vantage Towers. The management remains focused on the delivery of the next phase of its strategy, which provides further confidence for FY2022 and beyond. The Company is benefitting from its solid technology roadmap, accelerating customer demand, efficient capital allocation, the transformation of the operating model and having its European network fully powered by renewable sources going into FY2022. The Company recently approved the creation of the ESG committee as a leading committee of its Board. The management also strives to achieve net-zero carbon emissions for itself by 2030 and for its entire value chain by 2040.

The Board is confident that VOD’s transformation into new generation connectivity and digital service provider would drive its growth in the medium term.

Considering the resilient performance, the benefits of the acquisition, increasing demand from customers, the Company’s strong technology roadmap, decent profitability and liquidity profile of the business,  and support from the valuation as done using the above method, we have given a “BUY” recommendation on Vodafone Group Plc at the current price of GBX 124.00 (as on 25 June 2021 at 8:20 AM GMT), with lower-double digit upside potential based on 17.223x Price/NTM Earnings (approx.) on FY22E earnings per share (approx.).

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

*The dividend yield is subject to change as per the stock price movement.

*The reference data in this report has been partly sourced from REFINITIV

Disclaimer

References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.

This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332. Kalkine Limited is authorised and regulated by the Financial Conduct Authority under reference number 579414.

The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated. Kalkine does not intend to exclude any liability which it is not permitted to exclude under applicable law or regulation.

Kalkine does not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not intend to exclude any liability which it is not permitted to exclude under applicable law or regulation. Kalkine’s non-personalised advice does not in any way endorse or recommend individuals, investment products or services for your personal financial situation. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional authorised financial planner and adviser. You should be aware that the value of any investment and the income from it can go down as well as up and you may not get back the amount invested.