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I had written off VOD as a complete basket case after reading this in the Nov results:
"Free cash flow was an outflow of €3.2 billion (FY22 H1: outflow of €1.0 billion) reflecting lower Adjusted EBITDAaL and
higher licence and spectrum payments in the period"
and then this.....
"Net debt increased by €3.9 billion to €45.5 billion (€41.6 billion as at 31 March 2022). This was driven by the free cash
outflow of €3.2 billion, equity dividends of €1.3 billion, and share buybacks of €1.0 billion used to offset dilution
linked to mandatory convertible bonds"
It makes it sound like VOD have a big black hole in their accounts from falling profits/rising costs/paying dividends that needed to be filled with debt so I stayed well clear, but after the recent big drop I thought it was worth a deeper dive into results/accounts to see what’s going on.
The real reason net debt increased is because there was a big jump in the collateral required for open derivative positions. That increased collateral is counted in the net debt calculation. The value of those derivative positions has increased, however that profit is not included in the net debt calculation. The value of the USD bonds are in the accounts at par value, which is higher due to the drop in EUR/USD at the time the accounts were prepared, but they are all hedged, but the value of that hedge is not in the debt calculation. You need to read the full set of results to see this, but the easiest place to look is shareholder equity which actually increased by 0.8bn over the last period. If the net debt was increased to cover a drop in profits/increase in costs/payment of dividends then that money would have disappeared and shareholder equity would have decreased, not increased.
The results are complex and the accompanying statements are somewhat misleading, so it’s hardly a surprise there’s been a panic since they were released and Read was sacked. Tbh I would have sacked him just for presenting those results the way he did, never mind all the opportunities he failed to capitalise on this year.
Don’t get me wrong, I don’t think VOD is in an excellent position and I can’t see meteoric growth any time soon, but the financials aren’t much worse than they were this time last year when the SP was much higher. On a fundamental basis the drop already looks overdone to me and at some point there’s going to be a rebound. Not catching this falling knife now though as I think a drop down to 78/80 is on the cards. I’ll have a little nibble around there I think, although fear could push this much lower if that level breaks. If I miss the boat before it gets there then so be it as the risk/reward needs to be right for me, and fundamentals could deteriorate which would warrant a lower price.
Welcome back to the vod board Compound, nice to get your valued opinions here again
And my target from three months ago hit to the penny. God I’m good. Remember all the flak and abuse I got from you penniless idiot dreamers ( probably brexit morons ) on here haha. Dividend will be suspended and an equity raise, expect .50p in the next couple of years. Like everything listed on ftse it’s terminal, Jurassic park stocks.
Good analysis Compound. VOD broadly unchanged but facing macro headwinds like everyone else.
Kitchen sink comes to mind for the next incumbent.
Well Porsche I had stated a fear of 91p way way back but it's gone through that. I too received a lot negative comments when people were predicting 150 and the idiot brokers anything up towards 200.
I now fear 71p may be breached.
Thanks Robleo and Android. Tbh when I started my analysis I was convinced VOD were stuffed and was expecting to work out a price target for entry much lower than current levels, but I surprised myself looking at the numbers in more detail. Don't get me wrong, this could plummet from here as fear has set in and it could go into an unwarranted death spiral like lots of other shares have in the past and later rebounded. Everyone seems to be pooing their pants about net debt rising and profits falling, but when you dig deeper at the moment it's not that bad.
I was convinced that they'd slash or stop the dividend, and whilst this still could be on the cards, I'm leaning towards it not happening. This is an income share, and if the div gets cut the SP will probably plummet. VOD financing arrangements are complex, and in part rely on the dividend and SP for things like the MCBs. Another slash in dividend and SP could really cause them problems with future financing. Short term they aren't anywhere near a liquidity crisis and can service their debt without cutting the dividend.
Similarly there's no way they are going to do a rights issue/placing/debt for equity swap based on the current financials and outlook. Only companies with severe cashflow issues do that, and VOD are very good at managing their liquidity.
Yes there are macro headwinds which could make things worse, but I think that fear is getting overdone at the moment. Much to my surprise the EU sorted out their potential energy deficit this winter which could have been catastrophic, and energy prices are tumbling. That could bring down headline inflation figures pretty swiftly in the next few months, and interest rate expectations are already slowing down.
VOD had quite a few exceptional costs and drags on cashflow in the last results, but underlying operating profit was actually higher. The spectrum payment of 1.7bn was a big hit on results that won't repeated in the next 6 months and those costs are set to taper off in the next year or two. If EUR/USD remains at current levels or higher, then there will also be a reduction in net debt in the next set of results due to the hedging/derivative positions. Results will probably going to be around the same steady eddy levels they've been at for a while, and not the slide into oblivion that's currently being priced in.
Anyway, I'd better get on with my proper work now. Was slightly trigger happy this morning and have a little bit of skin in the game now but a bigger order at 80p. GLA.
"The results are complex and the accompanying statements are somewhat misleading, so it’s hardly a surprise there’s been a panic since they were released and Read was sacked. Tbh I would have sacked him just for presenting those results the way he did, never mind all the opportunities he failed to capitalise on this year."
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Which part is misleading? I stated the margins here on the collateral on the day of the release. The issue is that the market wants to hear what it wants to hear. Vod is no more leveraged than its peers. Happy to be proven wrong.
Read is an accountant and accountants typically don't make good CEO's and they are certainly no technical visionaries. Just look to Apple and Tim Cook. He is still thriving off the back of the great Jobs.
Sorry to say, but if an "investor" doesn't see value at these levels, then one is rather risk averse and there is nothing to explored here. Best to look into bonds.
By any fundamental measure, this company is a steal at the current price. IMO this will become quite obvious soon.
I have stated this multiple times in the past. UK is suffering from an extremely weak shareholder culture and the stocks are being punished for it. Both Orange and DT are partially owned by their respective governments and they will bring down vultures trying to spread rumours or to push weak hands out.
Had vod been an American company with similar fundamentals, it would have been trading at 2x the SP.