Vodafone upgraded its profit and cash-flow guidance for the year as chief executive Margherita Della Valle’s turnaround showed signs of traction – even as the headline figures were dominated by a €3.6bn statutory loss due to impairment charges.
Stripping out the noise, the underlying picture showed some signs of improvement, particularly in the UK, where Vodafone recorded some welcome organic growth.
Group organic service revenue rose 5.8%, with adjusted core earnings up 6.4% on the same basis and the margin a touch higher at 29.5%.
The reported 11.4% jump in total revenue to €21.9bn is far less impressive than it looks, flattered by the consolidation of newly acquired or expanded businesses including Safaricom, VodafoneThree and Telekom Romania.
Vodafone nudged up full-year guidance to €13.2bn-€13.4bn of adjusted earnings and €2.8bn-€3.0bn of adjusted free cash flow, and raised the interim dividend 2.5% to 2.306 eurocents.
“Vodafone’s multi-year recovery continues to gather momentum, with strong growth enabling management to raise full-year guidance,” said Garry White, Chief Investment Commentator at Raymond James.
“Service revenue growth remained healthy across most markets, supported by strong performances in Africa and continued progress in the UK following the VodafoneThree merger, while the group’s cost-cutting programme helped drive further growth in profits and cash flow.”
The massive €3.6bn loss stemmed from two large non-cash charges: a €4.85bn impairment in Germany, driven mainly by adverse interest-rate moves, and a €2.2bn write-down of UK tax assets following the buyout of its partner’s stake in VodafoneThree, only partly offset by a €3bn accounting gain on the Safaricom deal.
But there are operational weaknesses. Germany, still Vodafone’s largest market, remains the laggard: organic service revenue crept up just 0.4% and core earnings there fell 3.2%, dented by a lost court case over historical broadband price rises that forced it to stop booking the disputed revenue. And net debt has ballooned to €33.5bn from €25.4bn in March, swollen by the £4.3bn buyout of the remaining 49% of VodafoneThree and the purchase of a larger Safaricom stake.
“Indeed, Germany might be Vodafone’s big beast by total revenue, but growth is undeniably sluggish. Organic service revenue shifted into reverse gear in Q2 as its mobile business reckons with a reduced pool of customers spending less money, while fixed service and business revenue growth decelerated from Q1 levels,” said Duncan Ferris, Analyst, Freetrade.
“The picture is much brighter elsewhere. In the UK, headline numbers got a healthy injection from the Three merger, but underlying performance showed continued progress as the business remains on course to meet its upgraded £1bn cost savings target by 2032.”