2023-10-23 15:43:53 ET
Summary
- Vodafone's shares have fallen by over 50% since my sell recommendation 2.5 years ago.
- The lack of growth and declining revenues continue to be major concerns for the company.
- High competition in Germany and price pressure in Italy and Spain cast a shadow over strong growth in other markets.
- Vodafone plans to invest in customer experience and brand, as well as in fiber and 5G networks to improve competitiveness.
- However, these future investments and a doubtful turnaround plan are threats to the dividend safety and make Vodafone shares an unattractive investment.
Introduction
Two and a half years have passed since my first coverage of Vodafone Group ( VOD ). The shares have fallen by more than 50%. I argued that the shares traded above fair value back then because of shrinking revenues, volatile earnings and a high valuation compared to its peers. Investors who bought Vodafone for its dividend must be disappointed. As a result, it is time to look at Vodafone's valuation again. Is it a buy after more than two disappointing years for its stockholders?
Business developments
The first development that I also criticized in my first article is the lack of growth. The revenue trend is still disappointing, with no major turnaround in sight.
year | 2017 | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | change |
revenue (bn $) | 50.5 | 49.4 | 46.3 | 47.7 | 46.5 | 48.3 | 48.5 | -3.97% |
EPS (per ADR/$) | -2,39 | 0,93 | -3,09 | -0,32 | 0,02 | 1,20 | 4,54*(1,20) | n.a. |
(*including the Vantage Tower Sale in 2022)
Last year's earnings were heavily impacted by the sale of Vantage Tower stake. Without this special one-time effect, earnings and revenues were flat. Despite a recent revenue uptick, the latest earnings report for Q1 2024 from July showed a revenue decrease of 4.8%.
A positive trend is the improvement of Vodafone's balance sheet by reducing net debt by $8.7 billion within a business year. The equity ratio also increased by 5 bp to more than 40%. However, the losses of the last seven years and the lack of growth have increased Vodafone's total liabilities by 15% to $97 billion while equity decreased by more than 10% to $68.8 billion from 2017 to 2023.
The latest report mentions the group's main problems: customer losses in Germany and price pressure in Italy and Spain. A good performance in the UK where Vodafone shows customer growth and price increases and growth in other markets did not offset high competition in three of its major markets. The group showed organic growth of 3.7% for the first quarter of 2024, however, it also said that "organic growth presents performance on a comparable basis, excluding the impact of foreign exchange rates, mergers and acquisitions, the hyperinflation adjustment in Turkey and other adjustments to improve the comparability of results between periods." Reported revenue decreased from $11.95 billion to $11.40 billion (-4.8%). As long as Vodafone struggles in its major markets, the company won't report significant growth near term.
Turnaround strategy
The management is aware of the current problems in the telecommunication sector. It has realised that "the European telecommunication sector has amongst the lowest ROCE in Europe, alongside the highest capital investment demands [and that] this has resulted in ROCE being below WACC for over a decade, impacting Total Shareholder Returns." Furthermore, it has recognised that the "comparative performance of Vodafone has worsened over time, which is connected to the experience of our customers " which explains the customer losses in Germany and other markets. So what is the strategy to improve customer experience and competitiveness?
First of all, Vodafone plans to invest significantly in customer experience and brand, which includes advertising investment increases of 23% . The group must invest a big amount in glass fiber and 5G networks to compete with E.ON ( EONGY , ENAKF ) which owns Innogy and with Deutsche Telekom ( DTEGY , DTEGF ). The company recently stated that it has lost more than 120,000 TV customers, which can be a result of freenet's ( FRTAF , FRTAY ) Waipu.TV, a brand that grew its customer base by 950% within six years.
Secondly, Vodafone promotes "simplicity" with a third of 11k role reductions in Group & markets over three years, a tariff mobile simplification in Germany and a sales channel restructuring plan in Spain.
Thirdly, the company plans several pricing actions in most of its markets. It remains unclear how Vodafone will profit from pricing action without losing more customers. In the UK, it announced a merger with Three UK to strengthen its market position and pricing power.
All in all, Vodafone has identified its major operational problems in its critical markets but it has not really convinced investors yet that the turnaround strategies will help to challenge competitors in Germany or Spain. In the UK and other markets like Africa Vodafone seems to have a stronger market position which is shown by revenue growth.
Valuation
The company has 2.71 bn. shares outstanding (ADR) and with a current share price of $9.35, the market cap is $25.34 billion. The company's market value decreased by 52.3% since my sell recommendation in April 2021. The fundamentals for the company have improved since then due to the share price reduction:
P/E | P/B | ROE % | P/FCF | yield % | growth % |
2.1 (7.8 ex Vantage Towers) | 0.37 | 3.9 | 5.0 | 10.2 | -4.8% |
The company pays a high dividend with $0,95 per ADR, which is far above the last seven years' average earnings of $0.13 (including the Vantage Towers Sale). In 2023 the dividend represented 52% of adjusted free cashflow. Over the last two and a half years, the price to book ratio, price to free cashflow, price to earnings and yield have improved while all other ratios like return on equity and expected growth (excluding VT) have deteriorated. If Vodafone's turnaround plan does not work out, the company will probably cut its huge dividend.
Peer comparison
Compared to major competitors like Deutsche Telekom and Orange, Vodafone seems to offer greater value. However, the market rewards better growth over the last years.
All in all, Vodafone's current undervaluation compared to peers is justified by its uncertain growth opportunities, diffuse turnaround plan and strong competitors in Germany and Spain.
Conclusion
Despite a halving of market capitalization in more than two years, a high yield and attractive P/FCF- and P/B- ratios, Vodafone is not an attractive investment opportunity since the dividend safety is low, revenues haven't grown for years and the success of the management's turnaround plan remains doubtful as Vodafone still suffers in its most important markets.
For further details see:
Vodafone Group: Is It A Buy Now After Halving Of Share Price?