Vodafone Group Plc - Strong Cash Flow Funding Despite COVID-19 Scenario

Vodafone Group Plc (LON: VOD) is an FTSE 100 listed telecommunication company, providing a range of services including mobile communication, fixed communication, unified communication, internet of things (IoT), cloud hosting and security & carrier services.

Trading Performance in Q1 FY2021 (24 July 2020)


(Source: Quarterly Report, Company Website)
 
The Company maintained commercial momentum, and service revenue stood in line with management expectations. The organic service revenue stood resilient with a decline of 1.3%, due to the impact of covid-19. The Group delivered stable organic service revenue and showed resilient performance from German business. The customer loyalty from mobile contract improved for the seventh successive quarter with 429,000 broadband customer add-ons in the European region. The leading tower infrastructure company based out of Europe, Vantage Towers, is on track for IPO in 2021, which will unlock value for shareholders of Vodafone. Reflecting lower automotive activity, project delays, lower prepaid revenue in a few smaller markets and lower visitors and roaming revenue, impacted the organic service revenue growth. The Group remained on track to deliver net opex reduction of around €0.4 billion in the European region in FY2021. The outlook for Adjusted EBITDA remained flat or slightly down. The Company restated guidance of free cash flow to around €5.0 billion.

Share Price Performance


Daily Chart as of July 24, 2020, before the market close (Source: Refinitiv,Thomson Reuters)

Vodafone Group Plc shares were trading at GBX 123.54 at the time of writing before the market close (at 9:56 AM GMT+1) on 24 July 2020 and down by 4.08% versus the previous day closing price. Stock 52 week High and Low were GBX 169.46 and GBX 92.76, respectively.

From the technical standpoint, 14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Valuation Methodology


*Peers: Deutsche Telekom AG, Orange SA and Talktalk Telecom Group Plc.
*Currency exchange rate taken for 1 EUR = 0.9112 GBP.
 
Key Risks

The Group expects economic pressure to impact customer revenue over time and is experiencing a direct impact on the roaming revenue from lower international travel. Furthermore, the sector is exposed to political, financial, and operational risks, each of which has the potential to significantly impact the Group performance.

Conclusion
In the first quarter of the financial year 2021, despite the decline in organic service revenue, the Company maintained commercial momentum and service revenue remained in line with expectations. In Germany, VOD delivered stable organic service revenue with resilient performance and customer loyalty from mobile contract improved in Europe on a year-on-year basis. The Group is looking to unlock value for shareholders through IPO of Vantage Towers in early 2021. The growth of organic service revenue was impacted due to lower automotive activity, project delays, lower prepaid revenue and lower visitors and roaming revenue. The outlook for Adjusted EBITDA remained flat or slightly down.
Considering the uncertainties and market dynamics, we are currently maintaining the “Hold” stance at the current price of GBX 123.54 (as on 24 July 2020, before the market close at 9:56 AM GMT+1) and will recommend fresh buying at the right time.

BT Group Plc – Creating Capacity for Value-Enhancing Investments to Attain Sustainable Growth

BT Group Plc (LON: BT. A) is an FTSE 100 Company, which provides communication and connectivity services. It provides services related to broadband, fixed-voice, mobile and TV to the consumers in the United Kingdom.
The Company will release the first-quarter results on 31 July 2020.

Revised Policy Assessment on Huawei in 5G networks (14 July 2020)

As per the revised proposal to remove 5G equipment from Huawei by 2027, the Company initial assessment showed it would require an implementation cost of around £500 million in removing and replacing Huawei equipment from an existing mobile network.

Financial Highlights – Financial Year 2020 (31 March 2020)


(Source: Annual Report, Company Website)
 
For the financial year ending 31 March 2020, due to decrease in legacy products, the impact of regulations, lower-margin business, the revenue declined by 2 per cent to £22,905 million (FY2019: £23,428 million). The adjusted EBITDA fell 3 per cent to £7,907 million in FY2020 (FY2019: £7,392 million) due to lower revenue and investments. The profit before tax stood at £2,353 million in FY2020 (FY2019: £2,666 million), which was affected by COVID-19 related provision. The Groups’ operating net cash inflow surged by 47% to £6,271 million in FY2020 from £4,256 million in FY2019. The net debt surged to £17,969 million in FY2020 (FY2019: £11,035 million). Considering the challenging scenario, the Company suspended the final dividend.

Share Price Performance


Daily Chart as of July 24, 2020, before the market close (Source: Refinitiv,Thomson Reuters)

BT Group Plc shares were trading at GBX 111.57 at the time of writing before the market close (at 9:59 AM GMT+1) on 24 July 2020 and down by 1.04% versus the previous day closing price. Stock 52 week High and Low were GBX 212.25 and GBX 98.39, respectively.

From the technical standpoint, 14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Valuation Methodology

Key Risks

The confidence of investor and future strategy can be impacted by changing political conditions. Covid-19 is adversely affecting the sales activity and demand due to reduced roaming and suspension of sports events.

Conclusion

The performance for the financial year 2020 remained in line with the expectations of the management. The Company have growth potential for growth in revenue and profitability from new services and products. BT has decided not to pay any dividend until the situation gets normal to preserve cash for an uncertain period and long-term prospects. The Group has a long-term, transformational plan in place to simplify systems and processes, which shall bring efficiency in future, and therefore, improve margins. The Group expect demand for full-fibre broadband technology to increase in future and has been making continues investment for the long and bright prospect. Moreover, the simplification programme is expected to generate GBP 2 billion of annualised savings over the next five years. At present, the Company is not able to quantify the impact of covid-19 and did not provide any guidance for FY2021. The recent ban on the use of Huawei 5G equipment will bring additional an implementation cost of around £500 million.

Based on the decent prospects which are supported by valuation done using the above method, we have given a “Hold” recommendation at the current price of GBX 111.57 (as on 24 July 2020, before the market close at 9:59 AM GMT+1).
 
*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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