What's new:
■ Sluggish European performance
■ Rapid emerging markets sales growth
■ 4G investment under way
Europe's economic malaise took its toll on third-quarter trading for UK telecom giant Vodafone (VOD), overpowering strong emerging markets sales. Ignoring mergers, acquisitions and exchange rate swings, group's service revenue, which makes up around 90 per cent of overall revenue and excludes handset sales, slipped 5 per cent to £9.86bn.
The problem countries were Spain and Italy, where organic revenues tumbled 14 per cent and 17 per cent respectively, while UK revenue dipped 5 per cent. Better news was that emerging markets service revenues rose 6 per cent, including a 13 per cent jump in India. This mixed performance comes after US telecom titan AT&T declined to make a bid for Vodafone, dampening hopes of an imminent takeover.
Another concern is the group's dawdling in the 4G wireless network market as consumers' appetite for mobile data continues to grow. Vodafone launched its service last August, 10 months after rival EE, which boasts 2m UK customers and recently teamed up with carrier Three to invest a further £1bn in 4G network infrastructure. Although Vodafone plans to use the windfall from its disposal of US carrier Verizon to ramp up investment and make acquisitions, it may be playing catch-up for a while.
Bernstein Research says...
Hold. Europe was a little worse than expected, but we expect some easing of these trends next quarter as emerging markets growth continues. If a bid isn't forthcoming, Vodafone will have to review its strategy in Europe. It could embark on selective disposals to create a company that is easier for AT&T to swallow, while paying handsome dividends and buying a few necessary assets in Europe. Selling more stuff would also be a spoonful of sugar to shareholders while they take the medicine of wireless-asset purchases. We retain our 250p price target and expect full-year EPS of 11.8p.
Espirito Santo says...
Sell. Foreign-exchange movements dragged Vodafone's top line down by about 2 per cent last quarter, and could reduce it by around 5 per cent this quarter. Its performance in the German market was disappointing, as the region will drive about one-third of Vodafone's enterprise value after the Verizon disposal. We remain concerned that Vodafone still faces competitive threats across many of its European markets, including from BT (BT.A) in the UK and Deutsche Telekom in Germany. Our price target stands at 238p, and we expect pre-tax profit of £2.89bn and adjusted EPS of 9.8p.
