Vodafone still on the hook

Vodafone (VOD) may be feeling lonely ahead of Valentine's Day as its rivals continue to pair off: EE is engaged to BT and O2 and Three may soon also tie the knot. Judging by a third-quarter update, however, the mobile telecoms giant can cope on its own. Its struggles in Europe may be dissipating, and it plans to launch residential broadband and cloud-based TV services in the UK this year.

Strip out lower mobile termination rates - the fees Vodafone charges other operators to deliver calls to its network - and organic service revenue inched upwards for the first time since 2013. That reflects service revenue growth in the UK of nearly 1 per cent, compared with a second-quarter decline of 3 per cent, and slowing declines in the perennial trouble spots of Italy and Spain. The improvements were driven by rising data usage, more contract customers and the uptake of pricier, high-speed '4G' wireless technology.

Service revenues rose about 6 per cent in Africa, the Middle East and Asia Pacific as Vodafone grew its data customer base by 30 per cent to 59m - about 19 per cent of its regional user base. It also maintained double-digit service revenue growth in India and Turkey, reflecting rapid customer acquisition and soaring voice and data usage.

Vodafone reached the halfway point in Project Spring, its ambitious network investment plan. It has now expanded 4G coverage in Europe to roughly two-thirds of populated outdoor areas, encompassing around 222m people. The corollary was a 39 per cent surge in capital spending to £2.1bn and no free cash flow.

Besi Research says...

Sell. The recovery in Vodafone's service revenue was ahead of our expectations, and we now expect it to return to growth next year. However, we remain concerned about the threat of disruptive competition in the UK. TalkTalk and Virgin Media are successfully selling mobile services to their fixed-line customers and BT looks well-placed to do the same. Conversely, we're sceptical of Vodafone's capacity to move into fixed-line services: O2 tried and failed, and EE has made little progress.

Morningstar says...

Hold. Vodafone may struggle to reach our full-year projections. It continues to suffer from price cuts enacted during the depths of the recession in Spain and Italy, but we're pleased that the worst appears to be over. The group is performing particularly well in India, where its customer base grew over 11 per cent to about 179m. We think Project Spring is enhancing Vodafone's competitive 'moat' and will attract high-end customers seeking a better-quality service. We like Vodafone's long-term positioning, but the shares look slightly overvalued for now.