The announcement of plans by the UK telecoms regulator to cut mobile termination rates drove down Vodafone's share price nearly 1.5 per cent. The London financial community took the view that the group was facing an increasingly difficult regulatory environment which would likely weigh heavily on the group's cash flow and therefore its dividend.
Some might consider this a rather narrow, or very UK-centric, perspective given Vodafone's operations around the globe.
However, Collins Stewart analyst Morten Singleton believed that Vodafone would be hurt by more changes next year and beyond as the UK regulator demanded more improvements for customers such as investment in networks to fill coverage gaps.
"This issue will add to the pressures from the mobile data tsunami; the requirement to invest in extra capacity across the networks to cope with growing consumer demand for cheap (and largely unprofitable) data services," said Singleton
Another industry watcher from FinnCap suggested that Vodafone shares were a hold "but for no reason other than its supportive dividend policy, therefore yield. Threats to cash flow were therefore the worst kind of threats to the stock."
Not altogether a very uplifting scenario.
But compare this to a recent review prepared by Bernstein Research of the last quarter results of Vodafone. It claimed that the company had gone from having the worst price perception, no devices, internally focused country managers and cost rather than network focused consumers to best in class price perception, competitive devices, country managers now compensated on a more commercial basis, and consumers increasingly focused on network quality where Vodafone could excel.
The study highlighted:
- In the next 2-3 years--and particularly in Europe--momentum is on Vodafone's side. With a wave of data usage supporting revenue growth, favouring full service operators and not yet forcing Capex up, Vodafone's core operations should provide a positive return during this period.
- Management recently revealed to Bernstein that the compensation of country managers had been changed to be more outward and commercial looking than inward looking.
- To move the share price beyond £1.50 Vodafone needs to lay out a clearer portfolio strategy and slim down. Vodafone should change capital allocation to the different categories of assets, focusing on the core; squeezing and/or disposing of the periphery; selectively investing in emerging markets, and monetising the miscellany.
- Slimming the portfolio would increase shareholder remuneration and take the focus off the minority assets - the timeline of which is largely out of Vodafone's control. Better portfolio management should convince shareholders to wait for that value realisation by proving that they are willing and interested in being smaller, better and more valuable to its owners.
Overall, Bernstein believes that Vodafone should be buoyed throughout 2010 by consolidating mobile markets, fading price headwinds and improving volume trends driven by some enterprise volume recovery and the end of iPhone exclusivity.
In addition to this Vodafone will likely continue with cost cutting programmes, and benefit from a stable Capex while other companies scramble to catch up on their under-spend during the lean years.
The research concluded by rating Vodafone shares to outperform the market, and suggested that a change to the current unsatisfactory relationship with Verizon Communications could be in the offing, which is not priced into the shares.
While I might question some of Bernstein's assessments, it does seem to take a more rational and mid-term view of where Vodafone might be heading--as against the day-to-day knee-jerk reaction as often seen from City of London professionals.-Paul