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Vodafone has ‘pockets of optimism’ amid sluggish growth

Vodafone shares were down marginally on Monday after the group announced 4.7% organic revenue growth in Q3 and a 1.4% decline in reported revenue growth.

The update provided nothing for investors to get excited about and shares slipped 0.4%. However, the update did demonstrate Vodafone were addressing the problems that have ravaged shares in recent years as German revenue grew 0.3%.

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“We’ve made good strategic progress in the first nine months of the year, with improving customer satisfaction and three consecutive quarters of service revenue growth in Europe,” said Margherita Della Valle, Vodafone Group Chief Executive.

Despite stabilisation in Germany, group revenue fell 2.3% as southern Europe continued to drag on revenue.

Italy and Spain were causes for concern with negative revenue growth while the African business Vodacom was again the bright spot with service revenue growth of 8.8%.

“Vodafone’s third quarter had some pockets of optimism for investors to cling to. Growth was in line with the second quarter, arguably a better result than some had feared. The key German market managed to scrape its way into growth territory but saw a slowdown. Comparisons to the second quarter were always going to be tough, with some non-recurring revenue streams not repeating. Regulatory changes in Germany are set to kick in this year, adding a layer of uncertainty to operations in the region,” said Matt Britzman, equity analyst, Hargreaves Lansdown.

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“Streamlining the business remains a top priority and potential deals in Italy are still on the table. There’s scope for upside in the region if a deal can be found, but whether that would translate to a meaningful share price reaction remains to be seen. Deals in the UK and Spain failed to stir up too much excitement.

Britzman highlighted the value in Vodafone shares but cautioned the dividend may come under pressure as analysts predict dividend cuts.

“Vodafone looks cheap by most measures and with a forward yield of 9.2% it’s easy to see the attraction. But an argument can be made that the dividend is under some pressure in the near term. The Spanish sale, while a positive move for earnings given it’s a loss-making region, will be a hit to free cash flow. A capital allocation review is on the cards post-completion, and some analysts are already pencilling in dividend cuts as a result.”

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