Vodafone finals

Vodafone Group PLC is engaged in providing voice and data communications services for both consumers and business customers, with a significant presence in Europe, the Middle East, Africa and the Asia Pacific region.  I have a holding in my income portfolio (epic code: VOD).

Vodafone reported their final results today, reporting revenue up 10.1% to £42.2bn, with a LFL decline of -0.8%.  Service revenues declined -1.6% on a LFL basis, but in the fourth quarter saw 0.1% growth, the first for almost three years, reflecting a steady recovery in Europe and continued growth in Africa, Middle East and Asia Pacific.  Sales in Europe represented 66% of Group revenue, up from 63% in 2014, due to acquisitions in Germany, Italy and Spain.  India was the best performing territory growing 9.6% and represented 10.2% of Group turnover. 

Adjusted operating profit was down -18.6% to £3.5bn and reported operating profit was £2bn compared to a reported loss of £(3.9bn) last year.

Adjusted EPS was 5.55p down -27.8%, with reported EPS at 21.42p compared to 41.77p last year, 2015 included a 4.8bn tax credit, while 2014 included a much larger £16.6bn tax credit.  A final dividend of 7.62p was declared, making 11.22p for the year up 2% and covered 2.8x.

Free cash flow (FCF) was weak with a £(0.3bn) outflow, but was an improvement on last year's outflow of £(1.7bn).  Although operating cash flow was up 71% at £8.4bn, the substantial capital spend of £8.7bn caused the FCF outflow; the high capital spend is mainly due to Project Spring, that has a further year to go and then capex will decline to 13-14% of revenue, plus any spend on spectrum purchases.

Net debt increased by £9.1bn to £28.2bn, the majority of the increase was due to the negative FCF, payments for dividends of £2.9bn, a £3.2bn net cash outlay on acquisitions plus the assumption of £3bn of debt on those acquisitions.

Guidance from the management for 2016 has EBITDA in the range of £11.5bn to £12.0bn (£11.7bn for 2015) and positive free cash flow after all capex, although this does exclude spectrum and restructuring costs.  They also stated that they intend to grow dividends per share annually.
 
Vodafone fell 2.9% on the release to 227p, which places it below book value at 0.9 and on an historic yield of 4.9%.  This might be good value as an income share, if the FCF is improved in 2017 (after Project Spring is completed) and is able to cover the proposed increasing dividend payments.  If this improvement is not made, it will place increasing pressure on its financial structure, although gearing is not excessive at 42.6%, the low cover of operating cash flow to net debt of less than 30% is weak and paying a proportion of the dividends from debt will weaken the position further.

From a quality perspective, Vodafone is the weakest holding in my portfolio.