Vodafone Group PLC (VOD) has kept its dividend unchanged as revenue growth improved in the fourth quarter but with the outlook clouded by the coronavirus pandemic.
The FTSE 100 telecoms group reported €45bn of revenue for the year to 31 March, up 3.0% on the previous year, with a big boost coming from the €18.4bn acquisition of the European operations of Liberty Global last summer.
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Helped by growth accelerating to 1.6% in the fourth quarter from 0.8% in the third, organic service revenue increased 0.8% for the year.
Underlying profits (EBITDA) rose 2.6% to €14.9bn but at the reported level the group made a €0.5bn loss as gains at the operating level and from disposals were more than offset by losses relating to write-downs in India and impairments in Europe.
Net debt ended March at a massive €42.2bn, up from €27bn a year earlier due to the Liberty Global acquisition, with the ratio of net debt to EBITDA at 2.8x and so within the board’s target range of 2.5-3.0x.
Free cash flow increased 4.7% to €5.7bn before mobile spectrum costs, some of which will be used to pay a final dividend of 4.5 euro cents, which is flat on last year.
On the outlook, Vodafone said its business model should be resilient but not immune from the economic impact of Covid-19, with a direct impact being felt on roaming revenues from lower international travel and other effects expected over time.
While the business is seeing significant increases in data volumes and reductions in customer churn, guidance was only given for free cashflow to be at least €5bn pre-spectrum for the coming year, with a guesstimate that adjusted EBITDA “may be flat to slightly down”.
To take the edge off the virus hit, a new target of €1bn of annual of run-rate savings is eyed by the end of 2023, while early 2021 is being targeted for the separation of the European Towers business, which is hoped will take a big chunk out of the debt mountain.
The shares were up 9% to 122.86p by late morning on Tuesday, though still down 17% since the start of the year.
Analysts at UBS said the results were "reassuring on a number of fronts", with four main positives and one negative.
The four positives were: organic service revenues were notably ahead of the consensus for the fourth quarter of 0.9%, with the improvement driven by notably lower declines in Spain and Italy; the €1bn of run-rate savings versus €400mln that had previously been factored in; that monetisation of European Towers that “should lead to a step-down in leverage”; and finally that the dividend remains “intact and well covered” by equity free cash flow for a 7%-plus dividend yield.
On the negative side, the analysts said the outlook implies a marginal trimming of the ratio of EBITDA to free cash flow compared to consensus forecasts given impacts from COVID-19.
“Nevertheless, we think there are enough positives for VOD to reverse its recent underperformance vs the sector.”
Richard Hunter, head of markets at Interactive Investor, said: “At any given moment, Vodafone is spinning many plates but there are signs that the overall picture is improving after some difficult times.
He picked out the improvement in revenues and a return to underlying profits from a previous loss of €2.6bn was a case in point, noting that the increasingly important German business reaping the rewards of retail growth, offering cost synergies and a potentially rich seam of cross-selling opportunities, including from the company's 5G roll-out reaching 97 cities across eight European markets.
“The company remains a prodigious cash generator, and the fact that it has maintained the dividend will be a pleasant relief to increasingly starved income-seekers. The projected yield of over 7%, even if partly driven by a weaker share price, is nonetheless particularly attractive given not only the current interest rate environment but also the relative lack of income options elsewhere,” Hunter said.
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