2023-11-29 07:18:09 ET
Summary
- Vodafone Group has seen strong customer lifetime value growth in the UK and German markets.
- The stock is trading at an attractive EV/EBITDA ratio.
- I take a bullish view on VOD.
Investment Thesis
I take a bullish view on Vodafone Group given strong customer lifetime value growth across the UK and German markets, as well as an attractive EV/EBITDA ratio.
Vodafone Group (VOD) is a leading telecommunications company in Europe, with a strong presence in markets including the United Kingdom, Germany, and Italy.
From a stock price standpoint, we can see that the stock has seen long-term downside since 2019.
The purpose of this article is to assess whether Vodafone Group could have the capacity to see a rebound in growth based on recent performance.
Performance
When looking at revenue growth for Vodafone Group, we can see that revenue for Q2 FY24 has fallen by nearly 4% from the prior-year quarter.
From the above, we can see that this was significantly influenced by the removal of Vantage Towers' revenue as well as a decline in revenue across Vodacom. However, revenue across Europe is also down from €8.662 billion in Q2 FY23 to €8.387 billion in Q2 FY24.
To examine the European market in more detail, I decided to analyse average customer lifetime value by a quarter across the German and UK markets - which are Vodafone's two largest markets by service revenue across Europe.
Here is a breakdown of LTV by quarter across the contract mobile segment for Vodafone Group - this segment is analysed instead of prepaid as contract customers show higher ARPU (average revenue per user) as compared to prepaid, as well as significantly lower churn rates. Customer lifetime value across the postpaid segment was calculated as ARPU / churn rate (%).
Germany: Customer Lifetime Value
Here is an overview of ARPU and churn by quarter for the German market.
Quarter | Year | ARPU (€) | Churn (%) | LTV |
Q2 | 2022 | 18.017 | 11.3% | 159.44 |
Q3 | 2022 | 18.247 | 12.3% | 148.34 |
Q4 | 2022 | 17.9499 | 14.9% | 120.46 |
Q1 | 2023 | 17.71 | 12.5% | 141.68 |
Q2 | 2023 | 17.63 | 12.4% | 142.17 |
Q3 | 2023 | 17.775 | 13.3% | 133.64 |
Q4 | 2023 | 17.408 | 11.3% | 154.05 |
Q1 | 2024 | 17.407 | 11% | 158.24 |
Q2 | 2024 | 17.925 | 12% | 149.37 |
Source: ARPU and Churn rates sourced from Vodafone Group Plc Additional Information H1 FY24. LTV calculated by author.
When looking at customer lifetime value for the German market using a heatmap visualization, we can see that LTV has seen significant growth for Q1 and Q2 2024 as compared to the prior year quarters.
Heatmap generated by author using Python's seaborn visualization library. LTV calculated by author using available data from Vodafone Group Plc Additional Information H1 FY24.
United Kingdom: Customer Lifetime Value
Here is an overview of ARPU and churn by quarter for the UK market.
Quarter | Year | ARPU (€) | Churn (%) | LTV |
Q2 | 2022 | 16.3 | 12.8% | 127.34 |
Q3 | 2022 | 16.5 | 12.5% | 132 |
Q4 | 2022 | 16.7 | 12.7% | 131.49 |
Q1 | 2023 | 17.6 | 12.5% | 140.8 |
Q2 | 2023 | 17.8 | 13% | 136.92 |
Q3 | 2023 | 17.7 | 13.4% | 132.08 |
Q4 | 2023 | 17.2 | 12.2% | 140.98 |
Q1 | 2024 | 18.8 | 14.2% | 132.39 |
Q2 | 2024 | 18.9 | 12.5% | 151.2 |
Source: ARPU and Churn rates sourced from Vodafone Group Plc Additional Information H1 FY24. LTV calculated by author.
We can also see that across the UK market, LTV saw a significant jump in the most recent quarter. This was due to a reduction in churn to 12.5% (coming in near the bottom end of the range across all quarters seen during the period), as well as a rise in ARPU to €18.90.
Heatmap generated by author using Python's seaborn visualization library. LTV calculated by author using available data from Vodafone Group Plc Additional Information H1 FY24.
From this standpoint, the strong LTV performance we have seen across the German and UK markets is encouraging, in spite of the downward pressure we have seen on overall revenue.
From a balance sheet standpoint, we can see that net debt saw an 8.6% increase due to a free cash outflow of €1.952 billion and equity dividends of €1.210 billion.
Overall, while growth in ARPU and customer lifetime value has been encouraging across both the UK and German markets - this has not translated into significant revenue growth.
Opportunities and Risks
Going forward, I take the view that performance across the German market will be of less concern than that of the UK - given that customer lifetime value for the former has been consistently higher than the latter. With Vodafone having returned to growth in Germany in Q2, the company is in a good position to bolster further revenue growth across that market.
In terms of the UK market - we have seen that Vodafone, along with other telecommunication providers - substantially raised prices of their services earlier this year. With customer lifetime value having seen significant growth in the most recent quarter given higher ARPU and a drop in churn - the fact that price hikes do not appear to have led to an increase in churn this quarter is encouraging. However, there is a risk that churn might increase if price hikes entice customers to switch providers - which would be expected to lower customer lifetime value and counteract higher ARPU.
Additionally, there is a significant opportunity for Vodafone to bolster its market share in the UK further through an agreement to merge its UK operations with Three - the deal still requires approval from regulators and there is the risk of the deal being blocked due to concerns that the merger could prove anti-competitive for customers. This would not be without precedent, as UK regulators had previously blocked an attempted takeover of O2 by Three in 2016.
While the merger represents a substantial opportunity for Vodafone - the stock could see downside if investors are not confident that the merger will ultimately be approved.
From an earnings standpoint, we can see that EV/EBITDA is trading near a five-year low while EBITDA per share is trading at a five-year high.
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In this regard, I take the view that should we see a rebound in overall revenue growth led by the German market, as well as continued growth across the UK - then this stock could be trading at good value.
Conclusion
My overall view on Vodafone Group is that given encouraging growth in customer lifetime value across the UK and German markets as well as an attractive EV/EBITDA ratio - Vodafone Group could see significant upside from here if overall revenue growth sees revitalisation on the back of encouraging performance across the UK and German markets.
For further details see:
Vodafone Group: Encouraging Growth In Customer Lifetime Value