The elephant that is Vodafone with its €44bn of net debt and £31bn market capitalisation is a beast to behold. But it was the mouse-sized things that mattered for the group on Monday. Half-year revenues fell a fraction over 2 per cent in the first half and the shares opened 3 per cent higher, before rising throughout the day.
Those small moves indicate things may be shifting in the right direction for Vodafone for the first time in a while, even in Spain where it has struggled to maintain market share.
A decade ago, before regulators wised up, returns on capital across the telecoms industry were about 40 per cent. Watchdog intervention, alongside competition from rival tuskers, has since driven them to sub-10 per cent today. Vodafone’s shares have halved in the past five years. Its return on capital at the end of September was 5 per cent.
However the group trumpeted on Monday that revenues were up 1.5 per cent in the second quarter to September, excluding the impact of Covid-19, which halted international travel and reduced roaming charges. That was better than expected by analysts.
Vodafone has held down operating costs which has helped to pump up ebitda margins to above 32 per cent. Post depreciation charges, operating margins are about 9 per cent, according to New Street Research. Analysts are now pencilling in flattish growth and ebitda of about €14.5bn for the full year.
More importantly, net debt is a manageable three times earnings before nasties. The partial sale through floating Vantage, Vodafone’s European mobile towers business, in Frankfurt next year will bring debt down again by perhaps €4bn (more details expected this week). Once leverage reaches the group’s target of about 2.5 times ebitda, investors can hold their hands out for a special payout.
In the meantime, Vodafone says free cash flow for the full year will be about €5bn. The group may not be growing. Still, as long as revenues do not fall, the cash coming in should comfortably cover the necessary capital spending and maintain its dividend payouts.
That should draw investors’ eyes back to the main prize: having sliced the dividend nearly in two last year, lack of cover is no longer the dumbo in the room. Vodafone’s shares are now yielding a sustainable 7 per cent. That makes it the FTSE 100’s eighth-highest yielding stock in the index and a jumbo in today’s investment markets.
G4S: more circular defence than defence circular
It smacks of desperation when, in an effort to repulse a hostile bidder, a target talks up its cash management business. And desperate security company G4S is. The UK-listed company was a sitting target when GardaWorld came along with a £3bn takeover bid in September. Shares, pre-rumours, were half the 2017 peak and organic sales had slipped; it had pension liabilities of £2.7bn last year and a funding hole of almost £300m.
The tilt towards techy cash management — that’s sorting out big box retailers’ tills using software rather than decanting metal vaults of banknotes from shops to armoured vans — began seven years ago under boss Ashley Almanza. But neither version makes a huge contribution to a group that still derives 93 per cent of revenues from security services.
G4S sold off its conventional cash-in-vans business this year. US-focused retail cash solutions, essentially cash management software, was launched in 2015 and last year turned in profit before interest, tax and amortisation of $30m on the back of $170m revenues. (G4S spurns the conventional ebit and ebitda metrics while saying its chosen acronym means just the same.)
Projections released today as part of its defence pencil in an annual growth rate of 25 per cent, giving revenues of $600m by 2025. Assuming it succeeds in reaping the envisaged 15 per cent to 20 per cent margin, that implies PBITA of $90m to $120m.
The business certainly has benefits. It is asset lite and, at least on first half numbers, more profitable than the transit vans method of moving cash around. G4S reckons it should trade on the ebit multiple of 20 times enjoyed by selected financial technology and software services businesses.
Still, those 2025 projections hardly look gung ho when you recall that the conventional business sold earlier this year generated PBITA of £82m ($106m) on revenues of £625m in 2019.
G4S insists the degree of complexity and embeddedness with customers makes for high barriers to entry. But the business also pits it against a whole new set of competitors: specifically in payments software and, the flipside of what G4S lauds as a $13bn “total addressable market”, any other SaaS (software as a service) provider.
As a security company manning plenty of hostile territory — think prisons and nuclear plants — G4S might have been expected to mount a decent defence. Of course, it may yet do so. Sadly this is not it.
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