Image source: Vodafone Group plc
Telecoms giant Vodafone (LSE: VOD) has just released its latest trading update, providing investors with new insights into the company's performance. With shares down around 20% in the past year, now trading at around 70p, could this be an opportunity to connect with a potential turnaround story? Let's dive in and check the numbers.
Some good news
The company reported healthy operating profit growth of 5.4% in the quarter, showing resilience in a challenging economic environment. This was driven by strong performance in Africa and Turkey, where revenue increased by 10% and 91.9%, respectively, organically.
The company's adjusted EBITDAAL (a key profitability metric) increased 5.1%, with margins holding steady at 29.7%. To me, this suggests that Vodafone is doing very well to maintain its efficiency despite inflationary pressures.
Vodafone Business, a key growth area, also saw service revenue increase by 2.6% organically. Although this looks sluggish compared to the previous quarter's growth of 5.4%, it still shows good momentum in this strategic segment.
The company reaffirmed its full-year guidance, reported adjusted EBITDAAL of around €11bn and adjusted free cash flow of at least €2.4bn. I like what I see here, and this consensus of view may provide reassurance to many nervous investors.
Bad news
However, it was not all smooth sailing. Vodafone's biggest market, Germany, saw a 1.5% decline in service revenue. This has been partly due to regulatory changes affecting TV services, but it also reflects competitive pressures in the market.
The UK, another key market, saw organic service revenue growth fall to 0%, down from 3.6% in the previous quarter. This disappointing decline is due to lower inflation-related price increases and ongoing price pressures.
For me though, credit levels remain a key concern. The debt-to-equity ratio stands at an eye-watering 80.1%, which would certainly limit financial flexibility at a time when uncertainty is rife.
Numbers
At its current price, Vodafone shares trade at a price-to-earnings (P/E) ratio of 18 times, which may seem high at first glance. However, according to discounted cash flow (DCF) calculations, the shares are actually trading 70.5% below their estimated fair value. Although not guaranteed, there could be significant price potential if management executes its turnaround plan.
One of Vodafone's most attractive features is its dividend yield, which currently stands at 11%. However, in March, the administration revealed plans to reduce this by 50% in FY25. In the coming years, management will need to carefully balance financial sustainability and attracting diversified investors. It's not easy in this area.
The future
Let's face it, the latest results present a mixed picture. The company is showing resilience in a challenging market, and most importantly maintaining its profitability. Strong performance in Africa and Turkey demonstrates the importance of Vodafone's geographic diversification.
However, struggles in key European markets such as Germany and the UK are concerning. These are mature, highly competitive markets where gaining market share can be an uphill battle.
So while the company faces challenges, especially in Europe, I feel that its global reach and potential upside could make it a great opportunity for patient investors. I will be adding Vodafone to my watch list for now.
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