Vodafone can shake off coronavirus

Demand for Vodafone’s (VOD) services has apparently never been higher - indeed, any business that places connectivity at its core should have enjoyed a stellar past few months. But the group’s top line was hit by reduced levels of international travel in the six months to September, as roaming and visitor revenues dipped. That came alongside lower mobile phone sales, as consumers watched their spending more closely as unemployment rates across Europe ticked upwards.

As such, the impact of coronavirus prompted management to cut operating expenditure in Europe and common functions by a net €300m (£270m). But free cash flow still dropped to negative €101m in the period, compared with an inflow of €34m last year. With this in mind, investors should keep an eye on the group’s balance sheet, given net debt to adjusted cash profits (Ebitda) sat at the top of its 2.5 to 3 times' target range at the period end.

Reducing this leverage should be aided by the initial public offering of Vodafone's masts business on the Frankfurt stock market, which management says is on track for early next year. Bloomberg reported last week that the company, which will be called Vantage Towers, could be valued at around €20bn. 

But Vodafone has also managed to pull back costs under its own steam, moving in line with its three-year target to deliver €1.2bn of net savings from operating expenses in Europe and common functions. As of September, €1.1bn had already been achieved, and management is so confident in its ability to reduce overheads that it is now targeting at least another €1bn in savings over the next three years. 

The market pushed the shares up around 3 per cent on the publication of these results, likely encouraged by a clearer guidance range of adjusted Ebitda between €14.4bn and €14.6bn in 2021. But with mostly resilient trading (its largest market in Germany posted 14 per cent revenue growth in the period), ongoing cost controls and an incoming cash injection from the Vantage Towers IPO, we do not think that coronavirus will create long-lasting damage. Hold. 

FactSet places consensus forecast earnings at 6.1ȼ per share for the 12 months to March 2021. 

Last IC View: Hold, 123p, 24 Jul 2020