Only drastic action stands a chance of convincing investors that Vodafone is capable of being revived. A history of value destruction by her predecessors has put an even greater burden on Margherita Della Valle, now the permanent chief executive, to prove that the telecoms company can return to growth and comfortably balance the competing demands on its capital.
A 3.7 per cent organic increase in its service revenue during the first quarter, the highest in 15 years, is not a bad opening shot from Della Valle. That comes out at 1.8 per cent if the hyperinflationary Turkish market is stripped out. The low bar implied by that milestone indicates just how dire Vodafone’s revenue growth track record has been.
But it is hardly set on a clear path to recovery, either. Three of its four European markets were still in decline, including Germany, its largest and responsible for 29 per cent of group revenue. The country racked up its fifth straight quarter of slide in this key metric, down 1.3 per cent over the first three months of the year.
• Price rises help Vodafone to ring up better figures
Price increases have done the heavy lifting in pushing the top line forward. It lost broadband customers in Germany, Italy and Spain, with higher prices in that first, crucial market pushing up churn.
True, Germany returned to adding more mobile customers than it lost during the quarter, but they were still lower than a year ago. Numbers were “broadly stable” in Britain and still declining in Spain.
Such is the competitive pressure in Europe that consolidation is one of the few obvious answers for anaemic top-line growth. The long-rumoured merger with Three in the UK is the best hope in a while. Yet scale is no surefire remedy. Vodafone and Three both generate a return on capital of between 1 per cent and 2 per cent in the UK, despite the former having twice the market share.
If completed, at least the tie-up would provide some tangible proof that Vodafone is capable of executing M&A. Last year it rejected an approach from Iliad, a French competitor, and Apax Partners, a British private equity firm, to acquire its Italian business, arguing that it was “not in the best interests of shareholders”.
There is still a question mark over whether the deal will clear regulators. O2 tried to buy Three in 2016, but was blocked. True, growth in so-called virtual network operators such as GiffGaff might have helped to change the terms of judgment.
There is no word on the future of the Spanish business, which is up for strategic review. Della Valle has said she will be more ruthless in allocating capital only where it can generate a decent return, much-needed when the return on capital employed has been trumped by the cost of capital for over a decade. But the underperforming Italian business looks like another likely candidate for the review.
Cost is an easier place to start in improving returns. More than 11,000 jobs are due to go over the next three years and the number of mobile tariffs offered to customers has been cut to reduce the cost of service. There are also efforts to allocate more decision-making to national leadership and to overhaul an overly complex organisational structure.
Adjusted free cashflow is put at €3.3 billion, lower than the €4.8 billion generated last year, an effort to reset investors’ expectations to a more realistic level against which cashflows can grow. The next question will be what that means, if anything, for the annual nine cents-a-share dividend. The stock’s double-digit dividend yield hints at it being unsustainable. The payment could be next for a reset if Vodafone gets even more serious about upgrading its service.
ADVICE Avoid
WHY Organic revenue growth is still sluggish and investment needs could hit the dividend
Moneysupermarket.com
External crises have cast a long shadow over the price comparison site Moneysupermarket.com: first the pandemic, then the insurance price-walking ban and rounded off with rising energy prices that crushed competition for fixed-rate deals within the market.
Yet the fog is starting to lift and profit this year is expected to be at the upper end of market expectations. Analysts now expect pre-tax profit of £102 million, compared with the £96.5 million that had been forecast in January.
Why? The impact of the Financial Conduct Authority’s insurance price review, which caused a double-digit decline in switching volumes, is in the rear-view mirror. With premium inflation still at racy levels, shopping around has returned. The number of motor insurance products on the platform has risen by almost a quarter.
For Moneysupermarket.com, which earns a flat fee based upon each user that buys a product sourced from its website, the result was a 23 per cent increase in revenue generated by insurance business — half the group total — over the first six months of the year. That means the dividend has been raised for the first time in three years, a payment that analysts at Shore Capital think will total 12p a share this year. And that would leave the shares offering a decent enough dividend yield of 4.3 per cent at the present price.
Cross-selling is one self-help measure that is starting to pay off. The revenue generated per active user rose to £17.64, from £15.86 over the same period last year.
The next step is the return of competition in the energy market. For that to happen, there needs to be a big enough gap between the wholesale cost of energy and Ofgem’s price cap. A kick-up in marketing isn’t expected this year.
The rapid rise in borrowing rates has quashed demand for loans and mortgages, a feature expected to continue in the coming months. Also bear in mind that overall pre-tax profits are expected to be roughly flat on where they were five years ago. But the trough is more convincingly behind the business.
ADVICE Hold
WHY Lower wholesale energy costs could return another key market to growth
