The telecoms Goliath misses quarterly forecasts as Italian and Spanish austerity bites.
This morning, telecoms giant Vodafone (LSE: VOD) became the latest in a long list of London-listed companies to warn of slowing revenues from Europe's troubled southern nations.
Trouble down below
When reporting weaker-than-expected results for the final quarter of 2011, Vodafone warned that "southern Europe [is] becoming more challenging".
With "economic conditions in southern Europe showing further deterioration", the FTSE 100 mega cap reported a 5.4% decline in service revenue (from calls and data, but excluding handset sales) in Italy, plus an even steeper slump of 9.3% in Spain.
Meanwhile, northern Europe was holding up well, with service revenue growth of 0.6% in the UK and 0.2% in Germany. Predictably, Vodafone's strongest growth came from emerging-market economies, with growth of 23.5% in Turkey and 6.3% in India.
In the US, Verizon Wireless (of which Vodafone owns 45%) reported service revenue ahead 6.8%, driven by strong growth in both customers and data revenue.
Cash flow slows
At group level, Vodafone reported total revenue down 2.3% to £11.6 billion, hit by lower mobile termination rates. Service revenue dipped by 3.2% to £10.6 billion, with Europe down 3.1% to £7.4 billion. Africa, the Middle East and Asia Pacific contributed £3.2 billion to service revenue, sliding 1.5%.
One problem for Vodafone and its shareholders is that its free cash flow has been weaker in 2011. In the final quarter of 2011, free cash flow was £1.5 billion, or £0.4 billion ahead of Q4 2010, largely due to the timing of tax payments. However, over three quarters, cumulative free cash flow was £4.1 billion, down £0.5 billion on 2010/11, due to higher working capital and capital expenditure outflows.
At the end of the year, Vodafone had net debt of £25.5 billion, following £0.8 billion spent on share buybacks, £1 billion of spectrum fees and proceeds of £0.8 billion from the sale of Polish telecoms group Polkomtel. Even so, net debt is a comfortable 29% of Vodafone's market value of £87 billion.
Vodafone's valuation
Vodafone's chief executive, Vittorio Colao, said of these latest results:
"We are continuing to make progress in the key strategic areas of data, enterprise and emerging markets. Despite the further deterioration of the southern European economic environment during the quarter, our broad geographic mix is delivering a resilient overall performance. Our improved value perception, strong cash generation and healthy balance sheet give us confidence that we can continue to execute well."
The group also confirmed unchanged full-year guidance for adjusted operating profit, between £11.4 billion and £11.8 billion, and free cash flow, £6 billion to £6.5 billion.
As I write, Vodafone shares are down fractionally at 173.6p. At this level, they trade on a forward rating of 11 times earnings, and offer a prospective dividend of 5.1%, covered a healthy 1.8 times. Given Vodafone's strong growth in data revenue (+21.8%) and rising smartphone penetration in Europe (24.4% versus 16.5% in 2010), these are undemanding fundamentals.
In short, while Vodafone no longer enjoys the go-go growth of the Nineties and Noughties, Britain's biggest brand is still worth buying!
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