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Baffling how people disregard hyper inflationary's impact on debt. I was expecting that least the average user here understood that in an inflationary environment, those who borrow to acquire assets at a fixed rate are the winners - cash is trash.
Based on the current market environment, you can bet your house that VODs revenues will be increasing in line and above the inflation rate of ca 8% whenever they reprice contacts etc. So rather naive to imply that debt levels are hurting the business, which it clearly isn't. Its the business model of the telcos. Heavy capex is part of the game.
Another fair point but you also need to consider the significant rise in interest rates that are coming down the line and as existing debts and bonds mature, VOD will incur much higher interest rates which will at least offset the benefits to debt from inflation. As I said previously VOD’s biggest problem is it’s debt.
comsman, I tend to disagree simply because of VODs unique global coverage and diverse business model relative to other telcos.
Also, with increasing prices, debt will reduce accordingly. Should really have they dispose of Italy and Spain at any time and get 20billion+ for it. You need to look at the business as whole and not staring blindly at the liabilities. There is an asset side to the balance sheet;-)
With your viewpoint 90%+ of all mortgage holders are doomed as they are employees and they can lose their jobs at anytime. Yet, Vod is a lot safer than that analogy given their utility status.
Thankfully yes VOD does have a near global presence and it’s African assets are now delivering the sort of growth rates it used to enjoy in Europe and the US before its sale of the Verizon stake by Collao. However, Europe is now a highly competitive and regulated mature market so increasing prices might be thwarted by governments, now we have a cost of living crisis, and mergers might still be blocked on competition grounds, particularly by the EU although hopefully the UK government will let a merger with ‘3G’ proceed. Like you I would like to see VOD dispose of its Spanish and Italian businesses but suspect they won’t get a great price for these due their mature status and low potential for growth? (We’ve already seen an approach for Vantage Towers which has a much higher potential for growth from the capital investment community and I wouldn’t be surprised to see Etisalat-e& for for VOD’s high growth African assets once they’ve ‘got their feet under the table. After all, Vodacom is in Etisalat’s ‘backyard’ and they’ve got the UAE government funding them.)
if....high interest rates are coming and debt will be more expensive ....why would anyone want to pay top Dollar for Spain and/or Italy assets with higher debt costs and added economic uncertainty ? ...
They didn't sell Italy or Spain because they aren't being offered a good enough price for them ...risk related
VOD generally tracks 'global' GDP and growth is slowing. Consumers are cutting back on media spend and subscriptions.
UK network overhead and 3UK network overhead have duplicated debt which must squeeze the cost cost somewhere else, but not vantage or germany! Africa is more about light touch partnerships and branded access, and presumably what etisalat want (or influence) ie the vodafone brand.
the current argument for regulation and competition is being called out as a race to the bottom. Read wont survive that imo
Mesh - you are of course correct that in an inflationary environment you can expect gross revenue to increase, but business asset prices aren't usually valued on gross revenue, but rather on net revenue. VOD are already increasing prices to existing customers of CPI+3.9%, but in their own forecasts, this increase in gross revenue will eaten up by increasing costs, as their forecast EBITDAaL is flat. That figure also doesn't take into account the increasing debt repayment costs, so net revenue from assets is set to decline in nominal terms, which isn't great at the best of times, but is even worse in an inflationary environment.
VOD aren't going out of business any time soon, but I'd question how much of a possible upside there is in the current inflationary environment when forecasts for profit and dividends are flat, and FCF is down a bit.
They've got to work hard to increase gross revenues just to maintain current profitability and dividends, never mind growth in either. When you strip out any potential for growth, all you are left with is a dividend which at current prices is around a 6.30% yield. That's not too shabby, as current UK corporate bond yields are around 3.28%, so investors are getting around a 3% risk premium which is about right. VOD may be around fair value at the moment, but if bond yields rise further, the SP will need to drop to maintain the same risk premium. Bond yields have increased by around 1.4% since December, and if they rise another 1.4% over the next 6 months, then the VOD SP would need to drop to 98p to maintain the current risk premium.
As for the long term mega profits for VOD with IOT that Fleccy and others think are bound to happen - I'm still not convinced based on their current product offerings. IOT will become an integral part of our lives, as will the connectivity to run it, but we'll probably just take that connectivity for granted and end up paying the same or less for it. We already pay less now for 5G than we did for 3G 10-15 years ago, despite the massive infrastructure spend to deliver it. The big winners will be true tech companies offering new products/subscriptions. The bulk of VOD revenue is still from mobile/broadband packages and that doesn’t look it’s going to change considerably. Even when the spending is 'completed', Telecoms companies won’t be raking in profits if the sector continues with it’s perennial race to the bottom on pricing. If that trend continues, cost savings will just lead to lower prices rather than massive profits.
The results were ok but not great. Price is currently around the half way point between the highs and lows of the last couple of years. If it hits the lows again in the next few weeks/months I’d probably buy a chunk as I can see this being range bound between around 100-140 for the foreseeable future.
Funny how it manages to bounce back quickly after being batted down. Some manipulation obviously going on.
Hopefully will get a little rise leading up to ex-Div date.
compound
a reasoned opinion and good comment
IoT - " Customers tell us that no-one is doing more in this area, whether it’s redefining quality of service, pioneering the use of SIM as a Platform, driving the use of video analytics and visual IoT, looking at 5G for IoT, or coming up with fresh commercial models for IoT customers."
https://www.vodafone.com/business/news-and-insights/analyst-views/vodafone-named-a-leader-in-2022-gartner-magic-quadrant-for-managed-iot-connectivity-services
Spot on mesh .
Inflation eats away debt.
Why do people not understand this?
Cash is trash.
Looks like sp is on a run now sellers have been cleared. What is there not to like?
Divi coming in 10 weeks, new big shareholder paid £1.30 per share. Results keep confirming divi going forwards, 5G set to boost earnings as well as inflation. It’s a big buy and hold.
I recon we will see £1.40 before ex-divi
"IOT will become an integral part of our lives, as will the connectivity to run it, but we'll probably just take that connectivity for granted and end up paying the same or less for it. We already pay less now for 5G than we did for 3G 10-15 years ago, despite the massive infrastructure spend to deliver it. The big winners will be true tech companies offering new products/subscriptions."
Compound, IOT isn't really about people like you and me. The home user already utilises IOT, via broadband, with products like Hive. The big money in IOT will be commercial Macro area applications, like Monitoring, Surveilance, and Control. I expect the new Income will come from Councils, Government, and Corporate. As far as IOT and Cloud, many of the new applications will be latency sensitive, so the cloud servers will need to be geographically close to the IOT equipment. Whole new applications around traffic management, driverless cars, etc, etc, etc will become viable, opening up brand new revenue streams for Telecom companies.
Fleccy - I understand those concepts and yes I can see massive revenue opportunities for the likes of chip manufacturers and other hardware suppliers as previously 'dumb' equipment is replaced by IOT hardware, and data centres shift from centralised to localised and lots of new servers need to be bought/installed. I can also see massive opportunities for software companies who can supply end to end software solutions for a variety of applications. The growth in those areas is going to be huge. As an example, once driverless technology is refined and approved, at the push of a button Telsa could make all of it's cars driverless and charge £10k ++ pa to every customer who wants it.
Other tech companies like Amazon, Apple and Microsoft are already cashing in big time on the move to the cloud, as they have developed new products/subscriptions that people are paying for. 10 years ago when you bought an iPhone that was pretty much it for Apple, now most people pay for iCloud storage on top of that and they also have other subscriptions like Apple TV, News, Music etc. 10 years ago you would have paid around £100 for a local copy of Microsoft Office that you might only have updated every few years, now you pay £60 a year for Office 365. Amazon Web Services is also by far the largest growth sector for Amazon.
Big tech are raking in the money from the move to the cloud, not the telecoms companies, even though all of the tech companies products are 100% reliant on broadband / mobile connectivity.
Meanwhile, 10 years ago you were probably paying the same or a bit more for a much slower broadband / mobile connection than you are now. Telecom providers have spent huge amounts of money upgrading infrastructure for both mobile and broadband, but aren't charging end users any more for it. They haven't benefitted at all from the move to the cloud, so it's not a given that they will benefit hugely from the next shift to IOT.
Reliance on connectivity doesn't necessarily lead to an increase in price or profits for those supplying it.
"They haven't benefitted at all from the move to the cloud, so it's not a given that they will benefit hugely from the next shift to IOT."
I wouldn't be too sure about that, IOT cloud requires connectivity, and the cloud providers need the Telecoms companies to provide that connectivity. Many of the new IOT applications will require servers geographically close to the user equipment. BT are testing products like hollow core Fibre, to reduce latency from the Cell to the Head End, and the Telecoms companies will likely house many of the Edge servers required to reduce latency to a minimum. It's highly unlikely that server farms will be financially viable nationwide, just to support IOT cloud. I expect companies like Google, Amazon, etc will need to partner/utilise Telecom company infrastructure, and that will generate revenue. Theoretically Telecom companies could undercut the current cloud players, just because of their geographic advantage. Going off recent articles I expect the partnership route is most likely, rather than Telecoms companies trying to compete on IOT cloud, but the options are there.
Just to add, it's wrong to suggest that Telecoms companies haven't benefited from the move to Cloud, businesses need connectivity between the corporate locations and server farms, and that isn't free. Telecom companies are also looking at massive reductions in operating costs, due to the move toward fully converged IP networks, and the retirement of PSTN, etc. Also bear in mind that Telecom companies are canvassing regulators to restrict Net Neutrality, and transfer more costs from Network providers onto the Cloud providers. The reason the likes of Amazon and Google have managed to compete so well in cloud, is because their business model is subsidised by the Network builders, but that's about to change. Telecom companies will print money in the not too distant future, it's inevitable.
Fleccy - adoption of IOT is globally is inevitable, but who profits from it isn't. Some of the scenarios you imagine may come to pass, but they may not.
What is certain though is that telecoms companies most certainly have not benefitted in the last few years from the multiple changes in technology and end user needs and behaviour. Just look at the substantially lower profits and ROC of the companies in the sector. The share prices of VOD, BT, AT&T etc are all roughly half what they were 10 years ago, before businesses and consumers start adopting cloud based solutions en masse. At the end of the day we are all investors, and the total returns on our capital is the only thing that matters - not whether 'the market' is right or wrong.
I know you and some other bullish analysts are convinced that the massive reduction in capex once 5G rollout is complete will automatically lead to massive increases in profitability, but in assuming that you are ignoring that the sector is heavily regulated, and that the regulators won't step in to prevent such profits being made. They may not need to though if the telecoms sector keeps shooting itself in the foot by continually fighting on price. Regulators love fiercely competitive markets where companies are at each others throats and driving prices down, but they tend to step in if they see companies collectively maintaining or increasing prices to massively increase profits.
Telecoms companies are absolute minnows compared the sharks on Wall Street. Microsoft, Apple, Google, Amazon - any of them have enough cash reserves to buy VOD outright. VOD won't be able to compete with companies like that even if they wanted to - VOD will get the crumbs off the table. Even if the regulators do shift more costs to the Cloud providers, they'll just up their prices to maintain profits. It's not so easy to switch software suppliers as it is to switch connectivity providers so they've got far more pricing power than the telecoms companies could ever dream of.
What actually happens over the next 10 years to the telecoms industry and VOD could be closer to your scenario, my scenario, or something completely different that neither of us have thought of! The only thing I'm certain of is that nothing is certain, so I will position myself accordingly so I can make money no matter what happens, rather than letting all ride on one scenario that may or may not come to pass.
compound
reduction in CAPEX doesnt mean you need to increase prices to achieve big profits.....just suggests you will hang on to more of your revenue ..and achieve better cash flow ...helps a credit rating
A lot of CAPEX is written down anyway as non-cash depreciation and amortization in order to achieve tax benefits
Less CAPEX will probably mean paying more tax and regulators and Govt will approve of that
The streamers dont actually stream anything ...as such... Apple,Amazon,Netflix, Disney etc merely provide a catalogue from which we the customer borrow content and do the streaming ... we are the ones using the data .... they merely gives us access to the catalogue for a monthly fee ..and their job is to provide the content....but we use it and we should pay for that
The continued answer is to stream data in smaller and smaller pieces through the use of advanced tech which shrinks the data using Codecs during the stream process....
"Telecoms companies are absolute minnows compared the sharks on Wall Street. Microsoft, Apple, Google, Amazon - any of them have enough cash reserves to buy VOD outright. "
I couldn't agree more, and since the FAANGS whole business model relies on Telecom infrastructure, the Networks are valuable assets. The EU are heavily scrutinising the Tech Giants, and it's only a matter of time until the regulators show their Fangs, and look into creaming off the Tech Giants profits. Why would you allow an American company to contnually export profits, while at the same time damaging your local economy? One way, or another, the Tech Giants are going to get their wings clipped, with OFCOM and EU regulators looking at every aspect of their businesses. Facebook have just fought a court case through the CAT, against the Competition Markets Authority, to fight the order to sell Gyphy, with the result pending. What we're seeing now, is the initial attacks on the US Tech Giants, I expect them to ramp up in the coming years, and from all directions. Like OFCOM went after BT, expect regulators Worldwide to go after the Tech Giants. If Facebook loses against the CMA, then the repercusions for Facebook will be Worldwide, even though the CMA is a UK regulator.
https://www.gov.uk/cma-cases/facebook-inc-giphy-inc-merger-inquiry
https://www.catribunal.org.uk/cases/142941221-meta-platforms-inc
Poker chips - amortisation is an accounting measure and has nothing to do with tax. It’s actually one of the first things you strip out of a set of accounts when doing the CT return and replace it with capital allowances, and once the AIA has been used, the remaining costs get spread over a number of years in way that’s slightly different to amortisation. Yes in certain circumstances you can write down assets to create a loss for tax purposes.
Therefore when you significantly reduce capex you don’t get a massive surge in either accounting profits (due to the amortisation of previous capex) or a massive increase in your tax bill (due to capital allowances) but you will either see a massive increase in FCF which in this case should lead to a reduction in net debt.
To a certain extent I’m playing Devils Advocate with you and Fleccy, as I don’t know for certain what will happen, however I do know it won’t be as clear cut as when capex significantly reduces post 5G rollout and there is global adoption of IoT that the telecoms companies are guaranteed to be major cash machines. There are lots of other factors at play that we can see now, and lots more than we either don’t know or haven’t happened yet.
I agree about Big Tech - it’s scary stuff. I can remember watching sci fi films where the big corporations rules the world / galaxy. It seemed like fantasy at the time, but it looks like we’re on that path! Even space exploration is now starting to be done more by the private sector which would have been unthinkable 20 years ago. The legal departments of all the FAANGS are always kept busy with numerous regulators / court cases, but the speed of development is much faster than the speed of legislation at the moment so we’ll see how that pans out.
Anyway, brace yourself for the yanks to really start wetting the bed again when they properly digest what Powell actually said last night …