Vodafone’s European services need to be better than its UK ones

<p>Vodafone, the company whose recent fortunes have hinged on its ability to improve sales from services, has gained a reputation for shoddy treatment of customers.   The world’s […]</p>

Vodafone, the company whose recent fortunes have hinged on its ability to improve sales from services, has gained a reputation for shoddy treatment of customers.

 

The world’s second biggest mobile phone company in subscriber and sales terms recently achieved another less laudable record by becoming the most complained-about UK pay-monthly mobile provider.

Complaints jumped to 32 per 100,000 customers in the final three months of 2015, vs. 20 in the previous quarter, regulator Ofcom said. Vodafone was the only company among its rivals to receive more complaints than the industry average of 10 per 100,000 customers.

There’s little risk that poor UK service will snuff out the group’s ‘run’ of improving quarterly sales though, given that its biggest single revenue generating country is Germany, which accounted for 20% in the 2015 financial year. That compared with 15% from the UK, and a combined 32% from Vodafone’s largest group of European operations.

Vodafone will release preliminary full-year earnings on Tuesday 17th May.

In February the group reported a sixth straight quarter of rising organic service revenue, its key sales metric which excludes takeovers and handset sales. The 1.4% advance in the three months to the end of 2015 came after European sales showed signs of turning a corner. Service revenues in that region shrank 0.6%, but that was less than in the quarter before, as VOD made efforts to taper out weak prices. German sales fell 0.4% after -1.8% in Q2.

Vodafone indicated its more buoyant top line left it on course for a targeted £11.7bn-£12bn for the year, in its preferred filter of underlying earnings: Earnings before Interest, Taxation, Depreciation and Amortisation (EBITDA).

However, the market has been less impressed by Vodafone’s recent progress than the company itself, particularly in Europe. The company said in February it was making “steady progress” in the region towards a return to underlying sales growth.

But given a more cautious recent stance among local competitors, we see a risk that these sales will come in around £11.6bn, below even the lower end of Vodafone’s range.

On the other hand, low expectations could leave room for a moderate VOD stock price ‘pop’ if the group’s forecasts turn out to be more accurate than analysts’. Especially with the shares 13% below 15-year highs marked in June 2015, even after VOD recouped a similar amount from 2016 lows under 200p in February.

 

 

Aside from sales, expect investors to pick out India and the Netherlands for particular scrutiny among the sprawl of the group’s major country operations.

India looks set to become VOD’s worst-performing emerging market, judging by recent quarters, and the Netherlands is the focus of Vodafone’s complex deal with telecom-to-cable conglomerate Liberty Global.

The lacklustre performance of VOD stock this year can at least partly be put down to its decision, announced in February, to combine its Netherlands businesses with Liberty’s Ziggo in a 50-50 JV which would require a proposed Vodafone down-payment of €1bn.

That disappointed shareholders given that the pair had initially discussed merging assets in a wider swathe of Europe, before talks collapsed.

Any sign of goalposts moving on the leverage front—slated at 4.5-5 times the JV’s EBITDA, or in estimated savings—so far seen at €280m five years after completion—will place the stock under renewed pressure.

The group expects the deal to close late in 2016, subject to antitrust approvals.

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