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Morningstar | Vodafone Reports Weak Fiscal 1Q Sales Due to Foreign Exchange; Maintaining FVE; Shares Undervalued

Vodafone reported fiscal first-quarter sales that were below our expectations, but we plan to maintain our GBX 250 per local share fair value estimate and narrow moat rating. We believe the shares are undervalued. The firm reported revenue declined 4.9% year over year due to the adoption of IFRS 15 and currency movements versus our full-year projection of a drop of 0.9%.

In Europe, Germany remains the leader, with 2.4% service revenue gains. This is why Vodafone is trying to buy Liberty Global’s German operation. While we remain skeptical of regulatory approval, we think it is a good strategic move if it succeeds. Elsewhere in Europe, Vodafone’s 4.9% revenue decline in the United Kingdom was less bad than we anticipated, while its struggles in Spain and Italy were worse. Iliad entered Italy at the end of May and gained 1 million customers in its first 50 days with an aggressive price offer of EUR 5.99 per month. This price was supposed to be for just the first million subscribers, but was extended to the first 1.2 million. Vodafone has countered with a low-end brand of its own priced at EUR 6.99 per month. However, its focus remains on higher-value customers. We expect to make some revenue adjustments within countries, but not to change much for the company as a whole.

Importantly, the firm continues to grow its 4G wireless and broadband bases, and customers are taking its converged services. Throughout Europe it gained 128,000  contract wireless customers and 453,000 broadband subscribers. Its converged customer base increased by 289,000. The increase in converged subscribers and the demand for its higher-quality networks following “Project Spring” are showing reduced churn rates, which is a good sign for Vodafone’s long-term success. In its Africa, Middle East, and Asia-Pacific, or AMAP, region the firm continues to perform well, with organic revenue growth of 7%, but this was more than offset by currency movements leading to a reported revenue decline of 6%.

In India, which is counted as a discontinued business, Vodafone has received conditional approval for its merger with Idea Cellular and expects the deal to close in August. The merged company will be a joint venture with Vodafone and the Aditya Birla Group, which currently controls Idea, having equal voting rights along with a publicly traded stock. This deal will increase the firm’s scale in the country and provide lots of cost-cutting opportunities to help bring some margin relief. Reliance Jio’s aggressive price moves continue to roil the market, with service revenue down 22.3% year over year. However, there appears to be some stabilization as service revenue dropped only 0.2% in local currency terms excluding mobile termination rate cuts. However, the lower rates have driven significant demand for data usage, which quadrupled and hopefully leads to better pricing at some point. Average data usage in India reached 4.6 GB per customer per month, which is higher than its European customers at 2.8 GB and AMAP at 2.3 GB.