On the eve of today’s first half results, Vodafone shares were down a whopping 39.7% from January’s 2.5yr highs, trading 9-year lows. The driver was a combination of concerns about slowing organic growth/competition, overspending to reignite growth (e.g. 5G, International) and the risk of the dividend being slashed/re-based to preserve cash and help deleverage a big debt pile.

A big first half loss certainly doesn’t make for great reading, but it can be explained by an exceptional loss related to its disposal of Vodafone India. And this was easily countered by a good news on several fronts;

1. Q2 organic services revenue growth was stronger than expected (+0.5% vs consensus -0.6% and Q1 revised up to +1.1% from +0.3%).
2. Full year 18/19 free cash flow generation guidance was increased to €5.4B (from €5.2B).
3. Full year 18/19 underlying organic adjusted EBITDA growth guidance was narrowed to +3% (from +1% to +5%).
4. The frozen dividend was spared, confirming an annual dividend of 9% yield.
5. The aim to lower European net operating expenses by >€1.2B by FY 2021 plays in favour of further preserving cash to support margins, help further deleverage and, most importantly, protect the dividend.

So gains of 8.5% today (adding 14pts to the UK 100 ) are understandable, traders breathing a collective sigh of relief. It may even mark the early days of a bullish turnaround, having escaped from a 3-month falling channel. Work to do, for sure, but it’s the best results-based news to have benefited the share price this year. The only other big positive moves this year were linked to its acquisition of UK 5G spectrum in April (+3.3%) and activist investor Elliott Advisors taking a stake end-July (+3.6%).

With the dividend safe for now, and the outlook for costs and cash generation looking more rosy, might the shares see renewed interest as both an income and capital growth play, helping them retrace some of 2018’s annus horribilis?

Mike van Dulken, Head of Research, 13 Nov 2018