Vodafone's results undermined by sluggish German performance

Vodafone’s (VOD) troubles in Germany are holding it back after it delivered strong organic growth in both the UK and Africa in its first results since announcing the sales of its Italian and Spanish businesses.

The debt-laden telecoms company has been selling its less profitable assets to bolster its balance sheet and enable it to focus on the UK, German and African markets. Given the anaemic growth over the past few years, these results are a step in the right direction. Organic revenue grew 6.3 per cent while organic adjusted cash profit was up by 2.2 per cent.

Somewhat surprisingly, given the doom and gloom around the economy, the UK was one of the best performing markets. Organic revenue increased 5 per cent, driven by strong performance from consumer mobile and even with rising energy costs the cash profit margin expanded by 0.8 percentage points to 20.6 per cent.

This contrasted with its biggest market, Germany, where revenue was flat. The company has blamed changes in the German TV laws for lost growth opportunities in Europe's largest economy. The adjusted cash profit margin was dragged down 1.9 percentage points to 38.7 per cent due to rising energy costs and wage inflation. The fact German revenue growth is flat during a period of inflation is bad news as you would at least hope it would move in line.

The most exciting part of the business is Africa, which now makes up around a fifth of revenue. Organic service revenue was up 9.2 per cent which means, excluding Turkey, it is the fastest-growing region. Vodacom operates in Egypt and South Africa where mobile phones are used extensively for banking services. To take advantage of this dynamic, Vodafone has a money transfer service called M-Pesa which grew 13.4 per cent and now makes up over a quarter of the service revenue.

This growth helped the group’s adjusted cash profit and free cash flow come in ahead of expectations. The company guided for adjusted cash profit of €10.7bn (£9.22mn) and free cash flow of €2.4bn, whereas the actual figures were €11bn and €2.6bn, respectively. For next year, the company has guided for the figures to be roughly flat.

The problem now is finding enough cash to service the debt while still investing to further growth. Management has already announced it was going to cut the dividend, which has seemed inevitable for the past year. This means it has an implied 2025 dividend yield of 7 per cent, down from over 10 per cent previously.

FactSet consensus gives EPS of 7.37¢, rising to 9.11¢ in 2026.

The German market is by far its most profitable segment, but it hasn’t showed many signs of bouncing back from the post-pandemic inflation surge. Progress there is needed, so for now we stick to hold.

Last IC View: Hold, 75p, 14 Nov 2023