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Vodafone key sales called to rebound

A recovery in organic service revenues would help soothe persistent worries over India and South Africa

Overview

The notion that Vodafone had capped lingering challenges in India could be dealt a blow when it reports half-year and quarterly results on Tuesday. Still, if promising signs of a rebound in the group’s key sales prove to be accurate, the shares could extend their modest advance this year.

The key: organic service revenues

Consensus forecasts point to a rebound in the European mobile phone giant’s main sales measure, with faster-growing regions offsetting the stagnant performance of mature regions like the UK and Germany. The average estimate in a survey compiled by Bloomberg shows organic service revenues rising 0.2% year-on-year in the second quarter compared with a 0.2% fall in Q1.

Vodacom, Liberty contract bode well

The group’s South African subsidiary, Vodacom, released half-year earnings that improved on weaker first quarter results. Service revenue in the region rose 1.5%, helping pave the way for a recovery at group level. Vodacom added users despite a weakening economy and regulatory pressure for price cuts. In another potential boost, Vodafone’s sales outlook ought to be underpinned after Liberty Global recently switched to the mobile group from BT for wholesale services. Vodafone has reportedly avoided such deals in the past due to their low margin nature. A change of heart could pave the way for a number of likely single digit percentage contributing wholesale deals, though investors will scrutinise the terms carefully.

What’s at stake?

Increasing stability in the group’s most challenged European regions of Italy and Spain will be required to keep Vodafone on track to meet a full-year Ebitda target of €13.8bn-€14.2bn, slightly lower-to-in-line with the year before, and also to keep pre-spectrum cash flow steady around €5.4bn. A rebound of service revenues would be among the clearest signs that the group can meet these targets. The ‘rebased’ dividend and other cost measures, including disposals and the proposed carve out of its transmitter infrastructure should also remain in focus given that such plans are also aimed at reducing top-line pressure.

Vodafone Idea still worries

Favourable reads on these fronts will help offset any potential write down of Vodafone’s troubled joint venture in India. Competition there scarcely seems to have abated since the company made a €7.8bn loss after being forced to merge with rival Idea Cellular last year amid a price war. The tough market combined with steep declines of shares of jointly owned Vodafone Idea raise the risk of a €1bn write down. Vodafone CEO Nick Read has pledged to avoid pumping more cash into the venture, but with fears that the business could soon become essentially worthless, the choice may eventually be to shore-up or close-up entirely.

Stock price outlook

VOD shares have bounced from a 20% slump into the middle of the year to trade 5% higher so far in 2019. It’s best chance of extending those gains hinge on lifting organic revenues as stated above and meeting Q2 total sales expectations of €10.87bn, up just 0.1%


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