Vodafone is performing a tricky juggling act as it battles with the economic slowdown. Annual results from the world’s largest mobile operator show the group fighting fires right across its sprawling empire. This should not distract investors from Vodafone’s continuing appeal as a growth stock.
Hiccups in Spain, Turkey and Ghana led to some £5.9 billion of impairment charges in the year to March 31, a reminder that Vodafone’s aggressive pursuit of growth carries risk in mature and emerging markets alike. A mixture of poor network capacity, weak distribution and over-optimistic economic assumptions were to blame. Vodafone underperformed rivals Telefonica and Turkcell when assessed on organic service revenue growth.
But at least Vodafone is hitting its targets under new chief executive Vittorio Colao. Group revenues of £41 billion for the year were bang in line with expectations. Growth in emerging markets is being offset by declines in maturing Europe and weakness in Central Europe. But underlying revenue growth of 1.3 per cent still looks pretty respectable during a global recession. Cash generation is also healthy, with free cash flow up 2.5 per cent to £5.7 billion.
Colao may have taken the razzmatazz out of Vodafone’s strategy. But his focus on good housekeeping is welcome. The group’s major troublespot, Turkey, benefits from a clear turnaround plan. Assurances that this should bear fruit by the end of the financial year are plausible. Likewise, a commitment to achieve two-thirds of a £1 billion two-year cost-cutting programme by 2010 sounds achievable.
Amid all the mess, it is easy to forget that Vodafone remains a growth stock. Its performance in the competitive Indian market remains impressive despite stiff competition. Vodafone is the second biggest player in the country, where mobile penetration is just 35 per cent. Vodafone’s US operations were also surprisingly buoyant. The group’s 45 per cent stake in the Verizon Wireless joint venture is generating almost $15 billion of annual free cash flow. Dividends back to Vodafone are approaching.
Vodafone shares trade at around only 9 times forward earnings, in line with European peers. Investors may be right to be wary of further slip-ups. Even so, the valuation is looking conservative.
