Assessing Vodafone

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- By Mark Yu

Vodafone (VOD) promised higher dividends to shareholders as its cash flow was set to jump. In its fiscal year ended in March, the $75.6 billion U.K.-based telecommunication services company delivered 4.4% revenue decline to 47.6 billion euros ($53.325 billion) and a disappointing 6.3 billion euros in losses compared to 5.4 billion euros in losses in the previous fiscal year.


As observed, Vodafone's bottom line was hit by billions of charges in relation to tax expenses, 4.8 billion euros and another 4.1 billion losses in relation to discontinued operations.

As for 2018 outlook, Vodafone sees its the company-defined free cash flow figure "around 5 billion euros," whereby for the 2017 financial year was reported to be at 1.27 billion euros (1).


"Our focus on excellence in customer experience has enabled further improvements in our overall commercial and financial performance during the year. Sustained investment in network quality has provided the platform to offer more generous plans to our mobile customers in Europe, stabilizing contract ARPU, and has allowed us to capture strong data growth in our emerging markets operations. We continue to be Europe's fastest-growing broadband provider, seizing the opportunities created by convergence and winning revenue market share, supported also by our Enterprise business which continues to outperform its peers.

"This translates into organic revenue growth, which combined with a reduction in our cost base has expanded our adjusted EBITDA margin, accelerated our adjusted EBITDA growth to 6% and improved our cash generation. Additionally, the proposed merger of Vodafone India and Idea Cellular will create a new champion for Digital India, while capturing synergies with an estimated net present value of US$10 billion.

"We expect to sustain our momentum in the coming financial year, generating free cash flow of around EUR5.0 billion. Our confidence in the outlook is demonstrated by another 2% increase in our dividend." - Vittorio Colao, group CEO



Vodafone shares climbed 4% post earnings release.

Valuations

Vodafone does not have any trailing earnings but had forward price-earnings (P/E) and sales ratios of 33 times and 1.5 times having used average fiscal 2018 earnings per share and sales expectations. In addition, Vodafone had 0.95 times price-book (P/B) value multiple vs. the industry figure of 1.96 times and a price-sales (P/S) ratio of 1.43 times vs. 1.62 times for its industry (Reuters data).

Vodafone also had trailing dividend yield of 5.34% despite no profits in the trailing 12 months.

Total returns

Vodafone's ADR shares outperformed the broader Standard & Poor's 500 index this year by more than double with 18% total gains vs. 8.1% for the index (Morningstar data). In the past five years, though, the company underperformed the market with 7.8% total gains vs. the index's 15.05% gains.

Vodafone PLC

Vodafone is a telecommunications company. The company provides a range of services including voice, messaging and data across mobile and fixed networks. Vodafone also acquires spectrum and licenses to use radio frequencies that deliver mobile services (2).

According to Reuters, Vodafone's fourth generation (4G) roaming network reaches over 90 countries while its subsidiaries include Vodafone GmbH, Vodafone Ltd., Vodafone Marketing U.K., Quickcomm Pty. Ltd., Vodafone Espana, S.A.U., CWGNL S.A. and Vodafone Albania Sh.A, among others.

Vodafone has two segments based on geographic regions: Europe and from Africa, Middle East and Asia Pacific.

Europe

Europe segment includes geographic regions, such as Germany, Italy, the United Kingdom, Spain and Other Europe. The Other Europe includes the Netherlands, Portugal, Greece, Hungary and Romania, among others.

In the 2017 financial year revenue in the Europe segment declined by 5.2% to 34.6 billion euros - 72% of total unadjusted sales - and delivered an adjusted margin of 5.5% vs. 5.3% in 2016.

Africa, Middle East and Asia Pacific

The segment includes India, South Africa, Tanzania, Mozambique, Lesotho, Africa, Turkey, Australia, Egypt, Ghana, Kenya, New Zealand and Qatar among others.

In 2017 revenue in the segment fell by 1% to 11.8 billion euros - 24.7% of total unadjusted sales - and had an adjusted margin of 19% (most profitable segment) vs. 16.3% in 2016.

Cash, debt and book value

As of March, Vodafone had 8.8 billion euros in cash and cash equivalents and 46.6 billion euros in borrowings leading to a debt-equity ratio of 0.63 times compared to 0.67 times in the company's previous fiscal year.

As observed, overall borrowings had declined by almost 20%, but equity has declined as well, by 13%, secondary to accumulated losses thus leading to a leverage ratio with minimal reduction, or 6%.

Of Vodafone's 154.7 billion euros in assets 30% were identified as goodwill and intangibles while having had a book value of 73.7 billion euros compared to 85 billion euros in the previous financial year.

Cash flow

For the year ended in March, Vodafone recorded 14.2 billion euros in cash flow from operations - similar to 14.3 billion figure in its 2016 financial year. Capital expenditures, including purchase of intangible assets, were 8.9 billion euros leaving Vodafone with 5.4 billion in free cash flow compared to 453 million in its previous year.

For the year, Vodafone allocated 77%, or 4.12 billion euros, of its free cash flow in dividends to its shareholders and to other minority and non-controlling shareholders. In the past three financial years, Vodafone provided an average of 517% of its free cash flow in dividends.

The company also allocated 1.9 billion euros in interests and borrowing repayments, net any debt issuance.

Conclusion

Promising increased dividend payouts is just what prospecting investors would like to hear. Adding improved (company-defined) free cash flow further increases the likelihood of some following and even investment purchases whether for short- or long-term purposes.

Nonetheless, Vodafone has a very unstable history in exhibiting stability in both its revenues and profit generation, in fact, the recent fiscal year still delivered heavy amounts - billions of euros - in losses.

Despite the hardships, Vodafone was still able to take care of its balance sheet and at the same time was amazingly able to provide payouts to its shareholders in recent years.

Two analysts have an average price target of $34.16 a share, 18% upside from today's share price of $28.8 a share. Using three-year average sales growth and price-sales multiple following by a 25% margin application would indicate a value of 47.4 billion euros or $52.5 billion in today's exchange - about $20 per ADR share.

In summary, Vodafone is a pass.

Notes

1.*Free cash flow is usually calculated by subtracting capital expenditures from cash flow from operations.

(Earnings release)

Vodafone: Operating free cash flow and free cash flow for the year ended March 31 excludes 266 million euros (2016:252 million euros) of restructuring costs. Operating free cash flow and free cash flow are alternative performance measures which are non-GAAP measures that are presented to provide readers with additional financial information that is regularly reviewed by management and should not be viewed in isolation or as an alternative to the equivalent GAAP measure. See "Alternative performance measures" on page 29 for more information and reconciliations to the closest respective equivalent GAAP measure and "Definition of terms" on page 39 for further details.

2. Reuters:

Vofafone's information technology (IT) estate provides its data centers, customer relationship capability, customer billing services and online resources. Vodafone Global Enterprise (VGE) serves the company's multinational customers. The company has a customer base comprising individuals, domestic businesses of all sizes, multinationals and public sector departments, with a range of communications needs. The company reaches its customers through direct sales teams, indirect partners, and telesales channels.

The company provides a range of mobile services to its customers, enabling them to call, text, access the Internet, stream music and watch videos. It provides a range of communication services, including mobile, video content, cloud and hosting, and Internet of Things offerings. It provides these services through its network of approximately 300,000 base station sites. Vodafone provides a range of fixed services in its markets, including voice, broadband and television services to consumers and a range of services to its enterprise customers, including cloud and hosting and Internet Protocol-Virtual Private Network (IP-VPN). It is also engaged in the carrier services business. The company's M-Pesa, a money transfer service, supports a network of approximately 261,000 agents in over 10 countries.

Disclosure: I do not have shares in any of the companies mentioned.

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