Our rating on Vodafone Group plc (NGS: VOD), a major international telecom provider, is BUY. We expect these efforts to boost earnings over time as the company monetizes its rising data traffic and growing customer base.
At the same time, the company has heightened its focus on its European and African operations while selling assets in India. In addition, it plans to spin off Vantage Towers – a wholly owned European cell tower infrastructure company. VOD management is targeting an early 2021 IPO in which it expects to raise roughly $5 billion in a Frankfurt-based listing.
For domestic investors, owning Vodafone provides international diversification in a balanced portfolio along with high income that we regard as secure.
On an IFRS basis, the company reported basic EPS of 0.0445 euros (US$0.54 per ADS based on an exchange rate of $1.18/euro and the ratio of 10 ordinary shares for each ADS). Adjusted EPS came to 0.0411 euros, up from 0.0085 euros per share in the prior-year period. The improvement in the bottom line was attributable to a one-time expense in 1H20 that did not recur in 1H21. On the top line, VOD group service revenue came to 18.42 billion euros, down from 18.54 billion euros a year earlier, reflecting lower roaming revenues due to coronavirus-related travel restrictions. In addition to providing fiscal 1H21 operating results, management reaffirmed its FY21 adjusted EBITDA guidance of 14.4-14.6 billion euros.
Management also updated investors on the planned spinoff of Vantage Towers, a European cell tower infrastructure company wholly owned by Vodafone. VOD management is targeting an early 2021 IPO and expects to raise roughly $5 billion in a Frankfurt-based listing. With the transition to 5G still heating up in Europe, the spinoff comes at an opportune time that could see Vantage fetch top dollar. Vodafone plans to remain a majority shareholder for an unspecified period following the IPO.
EARNINGS & GROWTH ANALYSIS
In Europe (77% of 1H21 revenue) and Rest of World (20%) – the remaining 3% is not material. We discuss the company’s recent earnings trends by geographic segment. Germany accounted for 41% of group EBITDA in 1H21; this subsegment saw a 1.3% year-over-year increase in total adjusted EBITDA, to 2.84 billion euros, as cable network penetration improved, ARPU increased, and cost synergies related to the Liberty integration were realized.
Italy accounted for 11% of group EBITDA in 1H21; this subsegment saw adjusted EBITDA decline to 800 million euros, down 11.1% year-over-year as revenue declined by 7.2% due to pricing pressure. Operating costs declined 6.0%, not enough to offset revenue declines. The UK accounted for 9% of group EBITDA in 1H21; this subsegment saw a 2.3% decline in adjusted EBITDA to 636 million euros, as high-margin roaming revenues fell due to coronavirus-related travel restrictions. Spain accounted for 7% of group EBITDA in 1H21; adjusted EBITDA rose 6.0% to 488 million euros as the customer count increased. Other
Europe accounted for 12% of group EBITDA in 1H21; adjusted EBITDA fell 2.2% to 870 million euros due to a decline in high-margin roaming revenues. Finally, Africa’s Vodacom segment, which accounted for 13% of group EBITDA, saw adjusted EBITDA increase 3.6% to 891 million euros, helped by strength in South Africa. Looking ahead, management expects to boost shareholder returns in FY22 and subsequent years. It has cited top-tier gigabit connectivity infrastructure and a simpler operating model as key growth drivers. For FY22, we are maintaining our adjusted earnings estimate of $0.95 per ADS.
FINANCIAL STRENGTH & DIVIDEND
Earnings covered the dividend and the payout ratio was 77%.
For all of FY20, the company paid a total dividend of 0.09 euros per share. Management said that it would maintain this dividend in FY21.
However, they have risen strongly since late October 2020.
Our FY21 earnings estimate, near the peer group average of 18.5. Our peer-indicated value is approximately $23 per share. For domestic investors, owning Vodafone provides international diversification in a balanced portfolio along with high income that we regard as secure.