It’s not been a particularly good last two years for the Vodafone share price, with the shares losing half their value since the beginning of 2018, on a combination of concerns over rising debt levels, and underperformance across all of its divisions.

Last year the company reduced its dividend due to concern over its rising debt levels, with the company taking a £1.9bn loss in November due to problems in India, as a result of a court decision that ruled in favour of a government demand to pay $4bn.

Vodafone share price: reasons for optimism

On a more optimistic note management did raise their guidance for the year after improvements in performance from South Africa, Italy and Spain, and this guidance has been maintained this morning.

When the company reported its full year numbers in May, they announced that group revenues rose by 3% to just shy of €45bn, which was slightly below expectations. 

Operating profits rose to €4.1bn. However, most of this was wiped out by the huge provision last year for losses at its Indian operation. The acquisition of cable assets from Liberty Global in Germany helped the full-year revenue number, and this should continue to act as a tailwind, in what has become its biggest market, contributing just over €12bn in revenue, with the UK behind on €6.5bn. The sale of its New Zealand operation also helped boost the numbers.

The UK market has been a particular underperformer with the company lagging behind BT and O2, in terms of market share, so management will be hoping the addition of Amazon Prime and YouTube Premium, to their mobile entertainment plan, on top of Sky Sports TV, and NOW TV entertainment pass, will help close the gap in this regard.      

The completion of the deal to create Europe’s largest towers portfolio with Italy’s TIM, has also yielded £2.1bn as it looks to monetise its 61,700 Europe-wide towers infrastructure, with management saying that they expected this to start adding value from early next year, as any rental income starts to come in.  

The next stage of this process was to have been an IPO of this towers business, which could help free up extra capital of up to €5bn, and help to fund the rollout of 5G, and this looks set to take place in early 2021 in Frankfurt, under the name of Vantage Towers, with Vodafone keeping a majority stake.

In June the company announced that it would be removing Huawei technology from its core network at a cost of €200m. This now looks set to happen well within the window set out by the UK government earlier this month, while net debt rose to €42.2bn, largely as a result of the Liberty Global acquisition.    

The company is also facing challenges as it strives to compete with BT and Telefonica in light of the latter’s deal to buy the Liberty Global UK broadband and TV assets.

In a time of big consolidations and deals in the telecoms sector and Vodafone is still lagging behind its peers, despite the recent OPPO deal as well as the completion of the Vodafone Hutchison, TPG Telecom merger in Australia.

Building on a positive Q1

Today’s Q1 update shows that the business performed better than expected during the quarter, with Q1 organic revenue sliding 1.3% to just below €9bn, however expectations were for a 2.4% decline. This decline was driven primarily by a fall in roaming and visitor revenues, not altogether surprising given the Covid-19 lockdowns.

Fixed service revenues showed decent gains, however it wasn’t enough to offset the drag from mobile revenue, with Italy and Spain showing the biggest falls.

The company also kept guidance for the free cash flow of its pre-spectrum business unchanged at €5bn.

In terms of guidance, the company kept its outlook unchanged with slight risks to the downside.

At a time when dividends have either been cut, or are under threat this looks like good news and suggests that one year on from its last dividend reduction, there doesn’t seem to be an imminent threat to the current payout level of about 6%. It remians to be seen whether the Vodafone share price will be able to recover to its early 2018 levels.

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