We have upgraded our recommendation for Vodafone (VOD) to Outperform based on the company’s healthy operating results in the last quarter and management’s upbeat guidance. Our assessment also reflects improving business trends in the carrier’s key European markets and opportunities for sustainable growth across the emerging markets.
Revenue growth in the most recent quarter was fuelled by the healthy contributions from the Asia-Pacific and Middle East operations. Moreover, subscriber growth was driven by continued healthy net additions in the company’s Indian operation.
Vodafone is the world’s largest revenue generating wireless carrier and is only behind China Mobile (CHL) in terms of overall subscriber count among the cellular operators. The carrier’s globally diversified operation is a natural hedge that offsets price competition and currency exchange translation risk that may arise in specific markets.
Vodafone continues to accelerate 3G wireless service deployments and expand network availability across Asia, Eastern Europe and Africa. The company is currently upgrading its existing HSDPA based 3G network to the HSPA+ standard, which will offer future throughput up to 42 megabits per second (Mbps) coupled with more efficient data transport management.
Leveraging its 3G network advancements in the UK, Vodafone launched Apple’s (AAPL) iPhone in January 2010 and sold a record 50,000 units on the first day. iPhone has placed the operator on a level playing field with its major rivals Telefonica (TEF), Deutsche Telekom (DT) and France Telecom (FTE).
We believe 3G services coupled with iPhone will foster revenue growth per subscriber in the UK as Vodafone deals with the challenges of stabilizing subscriber count in a highly competitive and matured market.
Vodafone is focused on improving shareholder returns through attractive dividend payouts, supported by healthy free cash flow generated through effective cost management. The operator is aggressively pursuing cost-cutting initiatives as it has raised its annual savings target to £2 billion (US$3.2 billion) by 2012 from £1 billion (US$1.6 billion) earlier.
While we consider the limitations of economic improvements in key European markets over the near term, we believe Vodafone’s financial prospects remain attractive relative to many other large-cap carriers. Moreover, management’s outlook for fiscal 2010 appears more favorable as operating results are expected to improve with continued growth across the incipient markets coupled with the ongoing cost-saving initiatives.
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