Vodafone Group Plc Financial Analysis Report

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Introduction

This report will contain financial analysis of Vodafone with their competitor BT, to evaluate their success and failures.

Vodafone is a British multinational, listed company and among the FTSE top 100 companies with the headquarters located in London. Currently, operates in more than 40 countries, having a strong presence in the Europe, UK, Africa, United States and Asia. Vodafone continues to be differentiating from their competitors, by investing in network infrastructure, to enable them to continue to offer services like Mobile, Fixed and TV (Vodafone annual report 2018). The sustainable business focused on their commercial objectives enabling them to meet their customers need and build a sustainable future.

BT is also a British multinational company with their headquarters located in London. BT are one of the competitor of Vodafone. BT provides services worldwide, this includes providing range of services such as TV sports broadband, mobile communications, Web hosting, IT Support and Fix-Line broadband in more than 180 countries (BT annual report 2018). BT’s major assets and operations held in United Kingdom.

(Vodafone annual report, 2018)

Financial Performance Analysis

Vodafone Plc Gross Margin

Vodafone, gross margin declined by 2.2% between 2016/17 to 2017/18. This is due, to the change in accounting policy from IAS 8 to IFRS 15 on 1st April 2018 and impact of foreign exchange saw European revenue decline by 1.3%. While BT revenue declined only by 1%, but remain steady. Vodafone deconsolidation of Netherlands Vodafone and creation of joint venture of subsidiary Vodafone Ziggo saw revenues decline 4.1 %( Vodafone annual report 2018). Although BT decrease in revenue by 2% and enterprise businesses down 5% saw BT gross margin slide slight (BT annual report 2018). According to the research, Vodafone and BT hit hard by price competition forcing to cut down on prices (Independent 2018).

Reuters (2018) predicts Vodafone Plc revenue will be record high in 2019, estimated to be £48,399. While BT revenue will also go towards the same direction. This supported by Statista, (2018) the telecommunication industry expects to achieve record high revenues of € 1.2 trillion by 2019, because of high demands in technology.

(Statista, 2018)

Operating Profit Margin

Vodafone operating profits between 2016/17 to 2017/18 increased from £3,725m to £4,299m up 5.4%. While, BT Plc operating profits fall from £4,135 2017 to £3,991. Vodafone sustained operating profits driven by improved EBIT up by 21.6% and reduction of €0.2 billion maintenance costs. This also resulted in dividend paid up by 2%, indication of growth in future profits (Vodafone annual report 2018). In addition, Market screener (2018) supports that Vodafone profits will increase to £5833m by 2021. However, Vodafone half-year results reported a loss in operating profits followed by 3.5m impairment loss and increase in costs by 0.3m (vodafone.com 2018). Decrease in BT operating profits reflects, higher labour and pensions costs up by 3% accordance with higher inflation, as well as one-off investment charge of £763m, saw operating profits slide down, which do not reflects the actual true picture of the company if looking at the profitability overall. (BT Plc annual report 2018). This supported by the fact gross profit margin on decline by 1%. However, BT operating profits look set to increase, following the half-year results reported adjusted profits up 2% (BT.com 2018).

ROCE

Vodafone ROCE between 2016/17 to 2017/18 improved slightly from 10.04% to 10.23%.while BT ROCE between 2016/17 to 2017/18 moved from 13.79% to 14.82%. Vodafone ROCE largely driven, by the growth in organic EBITDA, and lower capital add-ons (down 4.6% reflecting 15.7% of total revenues). Furthermore, the level of debt in India during 2017/18 stood at €7.7 billion down from €8.7 billion, this shows a decrease in debt finance (Vodafone Plc annual report 2018).BT ROCE improved was due to the sale of outdated non-current and current assets worth £3,022m, improving efficiency and utilisations of assets(BT annual report 2018). Vodafone ROCE will decline in future, as second quarter results reported a fall in revenue of £5.5m and a loss on disposal of £6.8 billion, as well as 3.5m impairment, this indicates increase in investment in future (BBC News). On the other hand, BT net debt increased by £1,600m in the second quarter in 2018, due to poor credit rating, making it harder to arrange loans at lower interest rates, this will cause gearing to go up in future because of more borrowings at higher interest rates (Williams, 2017).   (ASK teacher to have look)

Vodafone Plc 5 Years trend

(BBC News, 2018)

Cash Flows

Vodafone cash and cash equivalent from operating activities, shrunk from €14,223 to €13,600.This decrease, is due to tax payable liability increased from €761 million to €1,118 million, with ongoing legal cases amounted to €2.4 billion plus interest(Vodafone annual report 2018). This is supported by Abbas, (2018) that, Vodafone revenue dropped by 29% in the last quarter of 2017/18 as a result of ongoing legal cases India and foreign exchange impact. Similarly, BT cash and cash equivalent from operating activities fell from £6,174 million to £4,927 million between 2016/17 to 2017/18. Due to deferred tax liability of £92 and £1.8 billion in respect to the agreement with shareholders in Kabel Deutchland AG(BT annual report 2018). Vodafone operating activates look set to remain low, as the new CEO announces future growth cuts (CNBC 2018). However, BT operating activates look set to increase as results of half-year shows operating activities decreased, because of £2bn contribution BTPS (BT.com 2018).

Vodafone net cash and cash equivalents, from investing activates between 2016/17 to 2017/18 up from €8423 to € 9,841, driven by current securities up from £6,120 million to £8,795 million held for trading, to meet the regulatory requirements (Vodafone plc annual report 2018). Whereas, BT net cash from investing activates also improved from £1,658 to £4,833 between 2016/17 to 2017/18.  Vodafone investing activates look to slow down, because of 7.8 billion euro loss in the first half of 2018, despite heavy investments in the last 5 year of £81b (Telecom, 2018). while, BT Plc cash investing activities look set to increase to achieve BBB+ credit rating and launching of 5G, even though operating activities fell last year(BT Annual report, 2018).

Vodafone plc, net cash and cash equivalents from financing activities between 2016/17 to 2017/18 fall from €9,096 to €7,234. Mainly, driven by drop in long-term borrowings from €7,326 to €4,440 and increase in tax liability from €1,264 to €991(Vodafone annual report 2018). However, BT net cash and equivalents from financing activities changed significantly, from £4,502 million to £75 million because of issuing bonds totalling £3,753 million. Vodafone financing activities look set to remain low will rise in 2020 as they prepare to launch 5G (BBC News 2018). on the other hand, BT also set for a quite year, due to 14 billion pension deficit  and decline in revenue by 2% in half- year results in 2018 (Kaveh, 2018).

Investor’s Information

Gearing

Vodafone gearing between 2016/17 to 2017/18 increased from 52.27% to 57.04%.This level is higher than the satisfactory level. This shows the majority of capital employed is debt finance (long-term borrowings) of £34,523 million. During, 2016/17 debt finance (long-term borrowings) dropped slightly, to £32,908 but gearing still grew (Vodafone annual report 2018). Similarly, BT gearing ratio between 2016/2017 to 2017/18 fell slightly from 76.45% to 74.67%, but remain very high. This is due to take over of EE of £12.5bn and increase in long-term borrowings £from £10,081 to £11,994(BT annual report 2018). Once Vodafone buys part of liberty global, debts are set to increase, but Vodafone will sell 50,000 masts to reduce debt (Simon Duke, T 2018). BT gearing also set to remain high, as half-year results reflects issue of £2bn bonds offset by free cash flows and expenditure up by 2%, mainly driven by non-network infrastructure (BT.com 2018).

VODAFONE                                                   BT

(Macrotrends.net 2018)

P/E Ratio

Vodafpne P/E Ratio between 2016/17 to 2017/18 declined by 15.82 to 13.95. This reflects lower financing costs between 2016/17 to 2017/18 falling from £1,406 milliion to £1,074 million (Vodafone, 2018).This means, investors are lossing confidence and willing to pay less to buy £1 of current earnings. P/E ratio between 30 march 2018 to 30 Novemeber 2018  improved from 13.95 to 19.42, with £18 billion investment in germany in improving networks (The Motley Fool UK, 2018). BT P/E ratio between 2016/17 to 2017/2018 jumped from 12.99 to 14.54, primlarly driven by 1.2 bn TV rights investment, and as a result share price went up (Gill, 2018). Vodafone growth in organic revenues and ROCE is a result of investments made over the last five years and sooner the the compnay will also deliver a higher P/E ratio. Where as, BT slashing 9% in investment on restrcuting plans, job cuts and frezzing dividends, thus share price fell to 12.39 , will see a decline in P/E ratio (BBC News, 2018).

Dividend Yields (Returns)

Vodafone dividend yield between 2016/17 to 2017/18 moved from 14.77 to to 15.07 repersenting 2% increase. This is largely driven, by positive organic revneue and operating profits. Vodafone dividend yeild increasing year-on-year, this reflects high demands of shareholders in a very competitive market (Investomania, 2018). On the other hand, at half-year results in 2018, shows organic revenues grew by 0.8% and cash flows laso went up 3%. This inidcates dividiend yield will continue to rise (Vodafone.com , 2018). Equally, BT dividend yeild between 2016/17 to 2017/18 remain steady at 10.55. This is due to ‘transformation programme‘ to try to impove overall performance in a competitive market and the Dividend yield will also remain unchanged with the launching  of 5G partnered with Huawei over the next two years (BT Plc, 2018).This will result in a furthure decline in revenues offset by higher costs, as half-year results evidenced that revenue decline by 2%. In addition, inflation currentley at 3%  could cause the demand for the stock to increase.

(Dividend data, 2018)

Share Prices

Vodafone share prices between 2016/17 to 2017/18 dropped dramatically from 2.90 to 1.94. This decrease resulted by the takeover of Liberty Global’s for £18 billion and new appointment of new CEO, meaning new strategies for the company. Both investors and shareholders reaction towards these two major events saw share prices fell (Magazine, 2018). Share prices look set to fall next year, due to negative fall in Vodafone investment value by 30% reported on 30 October 2018(The Motley Fool UK, 2018). On November 2018, Vodafone share prices fell further by 15.5%, making Vodafone shares ‘one of the cheapest’ in the market, and experts forecasted a decline in P/E ratio of 4.5% by 2020(The Motley Fool UK, 2018). However, BT decided to hold dividends prices in the next two years, which saw shares between 2016/17 to 2017/18 fall from 3.18 to 2.56 and investors panicked. This decision was driven by pension deficit of £14 billion and financial fraud of £530 million saw shares fall 20 %( Ft.com, 2018). BT plan to cut down on 13,000 jobs to save costs and push up share prices by investing activities (BBC News, 2018).

(Financial times, 2018)

Sustainability

United nations are on a mission to build a sustainability future, which they have categorised into three areas, environmental, social and economic ((WCED, 1987). All business can choose in what they believe is the most important and this will provide information on how company is making the effort to sustainability (Azapagic and Perdan, 2000).

Vodafone sustainability driven by three key areas:

Vodafone aim to connect; additional 50 million women’s with mobile to promote gender equality by 2025(Vodafone annual report 2018).Vodafone contribution towards development goals will help sustainable strategy and will lead to increase in customers base. This is evidenced as the female customers rise between 2016/17 to 2017/18 from 109.7m to 113.7m (Vodafone annual report 2018). Secondly, Vodafone targeting a 40% reduction in greenhouse gases to protect the environment (Vodafone annual report 2018). This indicates Vodafone ethically mind towards the environment, despite the greens house emission increased by 1%, the company will look to invest in 100% electrical resources to bring down the greenhouse gases emissions (Vodafone annual report 2018). Thirdly youth skills and providing jobs also remain in the heart of Vodafone strategy. Survey clarifies that 42% of the workforce now wants to work for ethically minded business that has a greater positive impact on people and environment (Jenkin 2018). Vodafone evidenced, thorough supporting 10 million people access future employments opportunities through technology.

On the other hand, BT who is also ethically minded business focuses on:

BT focused on connecting society through technology just like Vodafone. BT goal is driven by superfast broadband, making services available to 98% of UK population. This goal plays a big role in shaping the future, where BT reached to 57,000 teachers and through them, BT extended learning to 1.6 million school students (BT.com 2018). Secondly, environment are also on track like Vodafone to use 100% electrical resources and reduce CO2 emissions by 87%, with both companies aiming to achieve 2*C global warming target. BT also supported charities with £100m donation and continues the efforts to updates their code of ethics, to contribute towards the principles of behaving responsibly.

Conclusion

This year has been tough for Vodafone Plc, and BT Plc. Vodafone Plc suffered a loss of 6.1 billion and fall in revenue, a very negative outcome, despite investing billions in over the last few years. On the hand BT plc financial struggles led to cutting down of 13,000 jobs.

However, it does not mean that Vodafone and BT plc failed meet expectations; in fact, they have made some progress. For instance, Vodafone Plc organic revenue grew by 1.4%.Also current borrowings went down from £154,684 to 145,611 between 2016/17 to 2017/18 to improve gearing. Similarly, stated in BT plc annual report, investment increased between 2016/17 to 2017/18 from £1,520 to £3,022 to improve company’s overall performance and continue to invest heavily in innovations. Vodafone has gone through a transformation period; therefore, the company will see benefits of investments in the next few years

Looking at Vodafone Plc gross profit margin decline, by 2.2%, while operating profits increased this shows on-going price competition. Vodafone plc suffering mainly in India, as a result impairments and price competition losses amounted to £7.8 billion; this indicates the vision of the company is not a key issue.

In such difficult circumstances, shareholders and potential investors will remain uncertain over the future of Vodafone plc and BT Plc. This could force a change in their investment strategy and change business model to achieve stability.

Overall, Vodafone plc and BT Plc may have not achieved all their goals, but they have achieved some.

References

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