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Will Vodafone shares skyrocket on the back of soaring revenue?



The Vodafone share price has risen 6% today, as rising revenue has resulted in increased optimism for the growth of its European and African businesses. Will the telecoms giant see a revival in its fortunes?

Source: Bloomberg

The Vodafone (LON:VOD) share price has put on a poor performance for long-term investors. It was 205p five years ago and hit its five-year high of 237p on 5 January 2018.

The FTSE 100 stock’s price then started demonstrating the volatility of a yo-yo. By 24 May 2019, it had fallen to 126p. On 21 February 2020, it had risen back to 155p. The pandemic mini-crash saw it collapse to 105p on 13 March, before recovering to 139p by 5 June. Then it fell to a five-year low of 102p on 2 October 2020.

By 7 May 2021, the Vodafone share price recovered to 142p but had again fallen to 108p by the end of October. However, it’s been rising in November. And today’s H1 FY22 results have seen it leap 6% to 120p. Could this be the landing stage for Vodafone shares to finally take off?

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Vodafone share price: H1 FY22 results

CEO Nick Read commented that H1 results show that Vodafone has ‘demonstrated good sustainable growth and solid commercial momentum.’ In particular, he highlighted that the ‘strengthened performance in Africa and Europe puts us on track to be at the top end of our guidance for this year.’ And the numbers back him up. The full-year adjusted earnings forecast is now €15.2 billion to €15.4 billion. Revenue increased 5% from €21.4 billion to €22.5 billion, driven by ‘growth in Europe and Africa and a recovery in handset sales.’

Operating profit fell by 21.9% from €3.4 billion to €2.6 billion. However, in H1 FY21, Vodafone made a one-off €1 billion profit from the merger of Vodafone Hutchison Australia and TPG Telecom Limited. Stripping this out sees an operating profit increase of around €200 million. And encouragingly, cash flow increased 7.4% to €6.5 billion.

However, net debt increased over the past six months by €3.8 billion to €44.3 billion. The company put most of this down to free cash outflow of €1.0 billion, equity dividends of €1.3 billion, and money spent on share buybacks. While increasing debt can be a good sign for long-term growth, it also leaves Vodafone potentially exposed to any upcoming economic shocks.

Source: Bloomberg

Time to skyrocket?

It’s no secret that the telecoms industry has struggled for growth over the past few years. But Read commented in an interview with the Evening Standard that Vodafone was now seeing ‘a sustained growth engine’ when growth had ‘historically been flat to negative.’ He continued that ‘the pandemic slowed down commercial momentum, now we’re seeing that coming back.’

Already, revenue is increasing from roaming charges as travel bounces back, and mobile consumers begin to switch to more profitable 5G contracts. And once Vodafone has direct access to some of the EU’s €750 billion pandemic Recovery Fund, Read wants to increase the company’s presence in its largest market, Germany, as well as improve its performance in Spain.

Moreover, as €150 billion of the fund has been set aside for helping businesses to digitise, Vodafone should also profit indirectly from companies seeking its help for a future digital transformation. It’s already demonstrating potential in this area with its healthcare digitisation partnership with Deloitte.

Meanwhile M-PESA, Vodafone's FinTech venture in Africa, is rapidly growing, and now serves over 49 million customers. With the continent highlighted as key for ‘commercial momentum,’ the opportunity for future expansion is immense.

With masses of public money available, and increasing growth across the two continents, the Vodafone share price may soon skyrocket. After positive results today, some investors will also be tempted by its 6% dividend yield. But high debt and an unstable share price might see some fingers getting burnt.

Charles Archer | Financial Writer, London
17 November 2021


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