With investors being concerned about Vodafone's poor share price performance this year, what do the interim results look like?
Vodafone's results for the half-year to September 2009, released on Tuesday, revealed pretty much what the market had expected, both in terms of financial performance and cost-cutting plans.
Revenues and profits came in almost bang on forecasts. Total group revenue was up 9.3% on the first half last year, at £21.8bn (though organic revenues were down 3%), and earnings before interest, tax, depreciation and amortisation (EBITDA) rose by 2.9%, to £7.5bn.
Adjusted earnings per share came in at 8.7p (up 16%) and the interim dividend was raised by 3.5% to 2.66p. The company reiterated its guidance for the full year, suggesting that the current full-year consensus of earnings of 14.5p per share and a dividend of 8.1p per share is still on the cards.
Operating cash flow also improved at the interim stage, up 6.1% to £7.6bn.
Underperforming share price
The share price on the day fell a bit, to 133p at the time of writing, suggesting a prospective P/E for the full year of just over 9 and a dividend yield of 6%. For a company that has been managing decent earnings and cash flow for the past few years, is expected to continue to do so for the next couple, and is paying a good dividend (which looks to be easily covered), the share might, as I have suggested before, look cheap.
But, in fact, the shares have lagged the FTSE-100 by more than 15% this year, so why aren't investors convinced by Vodafone's prospects? I think the answer is probably twofold.
Firstly, although the group is growing revenues overall, core revenues in the biggest markets in Europe are falling -- saturation of the markets, increasing price-competition, and erosion of differentiation between different providers' offerings mean that, to grow revenues, Vodafone is relying more and more on expansion in developing countries. There is, of course, only a finite number of those, but the more important limiting factor is probably the rate of market growth that those developing economies can support, especially in the tighter economic climate that is likely to reign for at least the next few years.
Lots of debt
Secondly, investors will surely be concerned about Vodafone's high levels of debt and costs, and in his statement, Chief Executive Vittorio Colao, did address that issue. The company's previously announced £1bn cost-cutting target is now expected to be met a year ahead of plan, by March next year, and a further cost reduction programme is to be put in place, with a target of a further £1bn to be slashed off operating costs by 2012
However, even cutting costs by that much will still leave a sizeable debt on Vodafone's books. With long term borrowings at the last year-end standing at £31.7bn, which isn't far off half of the company's total market cap of £72bn, investors will probably be somewhat disappointed to see that having risen slightly to £32.3bn. Deferred tax liabilities have also risen, to £7.6bn (from £6.6bn), which doesn't help, and scrutiny will surely be directed towards the next full-year balance sheet.
The outlook?
I've been fairly bullish about Vodafone in the past, having bought some earlier in the year at around 120p, and though I still think they're fair value, the size of that debt and its apparent reluctance to shift, coupled with falling business in the sector in general, does give me cause for concern.
Vodafone is planning to save money over the next few years mainly by cutting expenditure on information technology, which accounts for about half of the company's operating costs. But IT sounds like something of importance for a telecoms company, and with no breakdown of the details, it's hard to be sure how much of a good thing that is right now.
Further cost savings will also come from network sharing and outsourcing, the former of which has to be good, but I'm wary of outsourcing, as with lower costs can come inefficiencies.
So we'll have to wait and see -- and what I'd really like to see is some of those cost savings and that improved cash flow being used to pay down some debt.
Alan owns shares in Vodafone.
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