Sound switch poorly communicated
Vodafone investors are already well acquainted with the group’s next CEO, Nick Read. He has been CFO since 2014, having joined as UK Finance Director in 2001. If anyone was being groomed as successor to Vittorio Colao, who will step down on 1st October, it was Read. Hence the news of the transition isn’t an outright surprise, though the timing appears to be, because investors were mostly in the dark. Vodafone shares traded as much as 5% lower on Tuesday. Succession planning turns out to have been quite adroit, but the group’s recent commentary has been bereft of signals. As such, once the surprise passes, stock selling is likely to fade as possible advantages from CEO designate Read—whom large investors have dubbed a safe pair of hands—come to the fore. Chiefly, these include that he has been the architect of a number of Vodaf0ne’s complex financing schemes over the years, including the multi-part methodology for purchase of Liberty Media’s eastern European assets announced last week. Furthermore, considering Vodafone’s relative laggard status among European rivals in terms of long-term returns, it would indeed be remarkable if Nick Read managed to do much worse. Over five years, Vodafone’s total reinvested returns were fair at 37.3%. But Deutsche Telekom’s, for instance, were 77% whilst France’s Orange generated 124%.
Q4 and full-year financials were largely positive news. The group’s key sales gauge of organic service revenue, which VOD shareholders are typically sensitive to, continued its recent strong phase with another consensus-beating rise of 1.4% in the fourth quarter, better than the 1.1% uptick indicated by forecasts. That’s another point arguing for the stock to stabilise in the near term. Core earnings for the year ending 31st March were also better than expected, rising 11.8% to €14.7bn, compared to €14.6bn expected.
Cash flow light
The stock price fall at the time of writing though also had an eye to guidance on ex-spectrum cost cash flow and perhaps core earnings. Any negative reaction related to the Ebitda growth forecast at least, may be overdone. An expected slowdown to 1%-5% in the 18/19 financial reflects well-trailed investments for Digital Vodafone and, to a lesser extent changed accounting practices that were also flagged. The underlying cash flow forecast on the other hand seems light. The group steers investors towards a flat-to-slightly lower €5.2bn in the current year, after €5.6bn in 17/18. Even so, dividend plans, as crystalized as they may be at the beginning of the year – to “grow dividends per share annually”— can scarcely be changed much by fractionally lower free cash flow. Historical coverage has been sound, albeit recently dented by the costly misadventure in India.
Room to shine
All told, Vodafone’s adjusted 2019 forecasts seem conservative rather than cautionary, with key risks in this financial year primarily around integration. By default or by design, forecasts do offer the incoming CEO the facility to beat expectations, if executing the multi-part Liberty deal goes well. Naturally, less demanding cash flow goals can absorb the impact of less sure-footed execution too.
With the group in its best health since 2015, amid firmer prospects for European quad-play and a potential ramp in long-term returns, this is not a particularly bad juncture for C-Suite changes. Once the sense of negative surprise passes, the stock, which was only 5% from March’s two-year low at last look, should finally find a base after a 21% fall since May 2015.
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