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Vodafone shares gain as it reports wider full year loss but points to growth in 2018

Vodafone expects an increase in earnings and free cash flow in the current year as it merges its India arm with Idea Cellular
Vodafone's full year revenue fell as it was hit by regulatory headwinds in Europe

Vodafone Group plc (LON:VOD) widened its full year loss due to an impairment charge for its troubled India business but shares jumped as the telecoms company sounded a confident outlook.

Shares rose 3.97% to 219.55p in morning trading as the group said it expected a stronger performance in the current year after its India and UK divisions dragged on results last year.

Vodafone sees organic adjusted core earnings growth of between 4% and 8% in fiscal year 2018, boosted by stabilising average revenue from its contract customers and lower spending.

Free cash flow is anticipated to reach €5bn from €4.1bn in fiscal year 2017 and €1.2bn the year before.

Chief executive Vittorio Colao said Vodafone expects to “sustain our momentum in the coming financial year” as it merges its India business with Idea Cellular in an effort to tackle fierce competition in the country.

The merger is expected to be completed in the current fiscal year, subject to regulatory approval, and Colao believes the deal will “create a new champion for Digital India, while capturing synergies with an estimated net present value of US$10bn”.


Vodafone facing fresh competition in India with Jio...

However, analysts have warned that the entrance of mobile network operator, Jio, in India adds to the competitive pressures Vodafone is already facing.

“Most of Vodafone’s woes stem from India, where the entrance of Jio, a new network backed by Mukesh Ambani, India’s richest man, means competition in the Indian mobile market is far more intense than it could have imagined,” said George Salmon, senior analyst at Hargreaves Lansdown.

“Going forward, Vodafone India is to be de-consolidated and merged with Idea, so the struggling business will at least be at arm’s length in the future. “

Lower cash flows as a result of increased competition in India meant the compnay suffered a €3.7bn impairment charge, sending the group deeper into the red.

Full year loss widens, revenue falls... 

Vodafone's loss for the year to 31 March expanded to €6.1bn from €5.1bn a year ago.

Revenue fell 4.4% to €47.6bn, in part due to foreign exchange headwinds and regulatory headwinds in Europe, including cuts to roaming charges and mobile termination rates.

Organic service revenue growth slowed to 1.5% in the final quarter from 2.1% in the third, due to regulatory pressures but this is expected to ease in the year ahead.

The European business delivered 0.6% growth in annual organic service revenue on improved consumer and enterprise average revenue per user.

Revenue growth in Germany, Spain and Italy was offset by a decline in the UK where it was hit by a poor performance in mobile and fixed service revenues. Vodafone has been making improvements to its UK service through its Project Spring programme to turnaround the business. 

“The UK business is still suffering a nasty hangover from the mistakes made when implementing a new billing system 18 months ago, and there is the small matter of a €6.1bn loss on the bottom line,” Salmon said.

“However, at the operating level Vodafone is still in the black, and the European businesses are improving nicely.”

Excluding India, the Africa, Middle East and Asia Pacific division posted a 7.7% jump in organic service revenue, driven by mobile customer growth.


Vodafone hikes dividend...

The company raised its final dividend by 2.0% to 10.03 euro cents, bringing the total dividend for the year to 14.77 euro cents, a 2% increase.

 “Our confidence in the outlook is demonstrated by another 2% increase in our dividend,” Colao said.

Salmon said he thinks Vodafone has the “perennial problem of balancing fierce competition on tariffs with the punitive costs of acquiring spectrum and refreshing infrastructure, which are for the most part unavoidable”.

“As far as investors go, this has translated into a dicey balance between Vodafone’s free cash flow and the dividends it pays out to shareholders. Hopefully, coverage can improve in future.”

Russ Mould, investment director at AJ Bell, said the 2% increase in the total dividend "reaffirms Vodafone’s position in the elite group of 26 FTSE 100 firms to have increased their shareholder pay-out each and every year for the past decade".

However, Mould reckons the 5.5% dividend yield seems necessary to compensate investors for the modest underlying sales and profit increase in the full year and the company's weak long-term record of growing book, or net asset, value.

He added that dividend growth has slowed markedly and Vodafone’s 10-year compound annual growth rate is the third lowest among those to have managed this feat, including Intertek, Micro Focus International and Ashtead. 

“This suggests Vodafone has had to work ever harder to fund higher pay-outs so investors will be pleased to see a jump in free cash flow from €1.2bn to €4.1bn in the year just finished and CEO Vittorio Colao target €5bn for the year just begun."

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