Vodafone tries to change tack

It was a case of saying all the right things for Vodafone’s (VOD) new chief executive Margarita Della Valle, and to her credit, the successor to the short-lived Nick Read was at least direct and honest about the problems that the telecoms company faces. In short, Della Valle must turn a company around that has seemed content to ignore most of its structural issues for the past 20 years in favour of maintaining a broadly mediocre performance. This was underlined by another year of relative decline, with reported profits grossly inflated by the €9bn (£7.8bn) one-off income from the disposal of Vodafone’s Vantage Towers business. However, at the underlying level investors were served another bowl of thin gruel.

Relative decline was most evident in adjusted cash profits – which excludes items like spectrum fees and tax phasing – and this was 1.3 per cent lower at €14.7bn caused by higher input costs and a worrying underperformance in Vodafone’s core Germany market. Service revenue in the German area was 1.6 per cent lower overall, which explained the near 3 per cent decline in country margins to 40.6 per cent. As Ms Della Valle made clear, addressing the German problem would be one of her top priorities and would include reviewing its pricing policy now that there is more competition entering the market after years of relative stasis.

Dealing with Vodafone’s structural issues also means confronting some uncomfortable truths in its biggest European markets. The return on capital in Europe is below the sector’s weighted average for cost of capital. In Vodafone’s case, ROCE came in at an anaemic-looking 6.8 per cent in these results and reflects the vast capital cost of setting up new wireless infrastructure, as well as paying high spectrum fees every time there is a government-sponsored auction.

Indeed, Valle was emphatic, “More importantly, Vodafone’s relative performance has declined over time, which is reflected in the experience of our customers.” The company intends to trim costs by cutting 11,000 jobs over the next three years and it booked around €200mn of savings in these results alone. The aim of this would be to free up resources to improve customer service and experience.

In valuation terms, at an adjusted price/earnings ratio of 11 times consensus earnings for 2024, Vodafone is not an expensive FTSE 100 share. Investors have heard many plans for its renewal over the years, it has yet to deliver on any of them. Hold.

Last IC view: Hold, 98p, 15 Nov 2022