CHL China Mobile Limited

Vodafone (VOD) has announced results for the half year fiscal 2012 (ended September 30, 2011). Adjusted earnings of £0.0775 per share (or earnings per ADS of $1.26) declined 11.5% from £0.0876 in the year-ago period.

Adjusted earnings excluded the profit from a 44% stake in SFR, a French mobile-phone operator, and impairment losses of £450 million from Greece operations resulting from lower cash flows and higher discount rates.

On a GAAP basis, net profit increased 72.6% year over year to £9 billion ($12.4 billion) attributable to the gain on disposal of the group’s interest in SFR and lower impairment losses compared to the year-ago period. Adjusted operating profit was up 4.4% at £6 billion ($9.7 billion) driven by solid growth in EBITDA and Verizon Wireless, a division of Verizon Communications (VZ).

Consolidated revenue increased 4.1% year over year to £23.5 billion ($38.1 billion) driven by increased data services and market penetration of voice services in emerging markets. The growth was partially offset by regulatory issues and lowered voice prices due to increased competition.

Approximately half of the revenue growth was organic (up 2.2%) and came largely from emerging markets. Group service revenue (93.1% of total revenue) grew 3.1% (1.4% on an organic basis) year over year to £22 billion ($35.7 billion).

On a half-yearly basis, consolidated data revenue climbed 23.8% to £3.1 billion ($5.0 billion). Messaging and fixed-line revenue increased 7.7% and 9.5% to £2.7 billion ($4.4 billion) and £1.8 billion ($2.9 billion), respectively. However, voice revenue dipped 3.1% to £13.4 billion ($21.7 billion).

Results by Segment

Europe: Revenues for the European segment increased 2.8% year over year (down 0.2% on organic basis) to £16.3 billion ($26.4 billion) on unfavorable foreign exchange rate fluctuation. Organic Service revenue in Europe slipped 1.3% due to interconnection rate cuts, discounted pricing and economic slowdown that affected voice revenue, compensated by strong performance by data services.

Africa, & Asia Pacific & Middle East: This segment posted revenues of £6.9 billion ($11.2 billion), up 7.2% year over year on favorable exchange rates and the full consolidation of Vodacom. Organically, service revenue grew 8.4% despite negative impacts from reduced interconnection rates and economic upheavals.

Growth was primarily powered by strong results in India, Qatar and Ghana on an expanded mobile customer base and pricing gains, continued growth from Vodacom, gradual growth in Egypt where results were deeply affected by the socio-political unrest during the end of last fiscal year.

Subscriber Trends

During the first half, Vodafone registered roughly 9.4 million net new mobile connections across its operations, bringing the total subscriber base to 391.4 million (79.3% represented by prepaid). India continued to be a key driver of subscriber growth with net addition of 3.5 million customers in the reported period, contributing 61% of total net addition in the Asia Pacific & Middle East segment.

In Europe, the company registered a net addition of 1.4 million subscribers, bringing the region’s total customer base to 148.9 million at the end of September 2011. Africa, Middle East & Asia Pacific added 8 million customers, taking the total fiscal subscription to 239.1 million.

Liquidity

Vodafone’s net debt fell 13.8% year over year to £26.2 billion ($42.5 billion) at the end of September 2011. The company generated free cash flow of £2.6 billion ($4.2 billion), down 25% year over year.

Capital expenditure upped 7.5% year over year to £2.6 billion ($4.2 billion) due to increased investments in India and Vodacom.

Dividend

The company will pay an interim dividend of £0.0305 on February 3, 2012 to shareholders of record as of November 16, 2011. The dividend represents a 7.0% increment year over year, marking the company’s target of minimum 7% dividend growth per annum by March 2013. Further, Vodafone will also pay a special dividend of £0.04 per share with a similar timeline, reflecting dividend receipts from Verizon Wireless.

Guidance

For fiscal 2012, adjusted operating profit is expected in the range of £11.4 billion to £11.8 billion, up from previous target range of £11.0 billion to £11.8 billion.

The free cash flow estimate was reiterated at the £6.0 billion to £6.5 billion range, assuming continued strong cash generation, to be offset by £0.3 billion reduction in dividends from SFR and China Mobile (CHL) in fiscal 2012, and more limited working capital improvements going forward.

The company also maintained its foreign exchange rates forecast of £1:€1.15 and £1: $1.60.

Outlook

We believe Vodafone’s new growth strategy and exiting minority holdings will strengthen its position relative to its peers. Despite growing share gains from emerging markets, Vodafone’s profitability remains under pressure due to persistent revenue erosion in Southern European and challenging Indian operations.

Further, lower expected margins from the sale of minority stakes, regulatory and competitive pressure, and reduced interconnection charges reflect a negative outlook on the stock.

Thus, we are currently maintaining our long-term Underperform rating on the stock, supported by a Zacks #5 Rank (Strong Sell).

 
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