Project Spring Boosts Vodafone

09/29/2016 10:00 am EST


Gavin Graham

Chief Strategy Officer, INTEGRIS Pension Management Ltd

This featured recommendation is a UK-based global telecom stock that is reasonably valued, in that it has only recovered around 10% from its post Brexit referendum low, explains Gavin Graham, contributing editor to Internet Wealth Builder.

Vodafone (VOD) is one of the largest telecom companies in the world with just over 400 million subscribers.

The company also provides broadband and TV services in a number of these markets. In Europe, Vodafone has 46.8 million 4G customers with 87% coverage as well as 13.4 million broadband customers.

Interestingly, has over 30% of its revenues from emerging markets, where mobile phone penetration is lower and still growing fast.  In emerging markets, it has 72.5 million 3G data customers.

In the year ended March 31st, Vodafone generated £40.9 billion in revenue, down 3% from 2014-15 but up 2.3% in organic terms after adjusting for foreign exchange movements and M&A.

Encouragingly, Europe (68% of revenues) saw organic growth of 0.6% in the fourth quarter, the first positive quarter since 2010, while Africa, Middle East, and Asia Pacific, grew 8.1% in the same period.

While it reported a net loss of £3.8 billion (£0.151 per share), free cash flow was effectively unchanged at £1 billion after £8.6 billion of capital expenditure, down 6.5% from the previous year as Vodafone finishes its Project Spring capital upgrade.

Vodafone has now completed its £19 billion Project Spring capital upgrade program. The result is increased 4G and 3G coverage, better dropped-call rates, extended fiber networks, and over 200,000 more base stations.

With forecast positive free cash flow of €4 billion per year (Vodafone switched its accounting to euros from 2016-17), organic EBITDA growth of 3%-6%, and a progressive dividend policy on its 5% yield, Vodafone is well positioned to benefit from stabilization in Europe and continued strong growth in Asia-Pacific markets.

As always with businesses with a large exposure to continental Europe, the continued slow growth of the Eurozone and resultant weak consumer spending poses challenges to Vodafone.

Buy for improving fundamentals, high and growing yield, and exposure to fast growing emerging markets.

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By Gavin Graham, Contributing Editor to Internet Wealth Builder

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