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Vodafone is expected to say next week that its core profit margin will continue to fall in the current financial year, as the world’s largest mobile phone group by revenue fights fierce competition in its European markets.
At Vodafone’s 2006-2007 results presentation on Tuesday, leading industry analysts said the group was likely to indicate that its margin would deteriorate further in the year to March 31 2008. Vodafone on Friday declined to comment.
Terence Sinclair, analyst at Citigroup, also forecast that Vodafone would persist with its strategy of doing deals in emerging markets and said it could buy the 50 per cent of its South African joint venture that it does not own for £5.2bn.
Vodafone warned in May last year that its margin on organic adjusted earnings before interest, tax, depreciation and amortisation should decline by one percentage point in 2006-2007, continuing a trend that began in 2005-2006.
The deteriorating margin position highlighted at Vodafone’s half-year results in November 2005 put pressure on Arun Sarin, the group’s chief executive, although his relations with investors have since recovered.
Vodafone’s shares closed at 151.6p last night, down 0.3 per cent. They have risen more than 30 per cent since last September.
Analysts said the most important issue for Mr Sarin at Tuesday’s results was the financial guidance for 2007-2008, and establishing how hard Vodafone would be hit by competition in Europe.
Nick Delfas, Morgan Stanley analyst, said the 2006-2007 results should meet market expectations, but predicted 2007-2008 would look “less good”. In a research note, he estimated revenue of £31.2bn for 2006-2007, up 6.5 per cent, and ebitda of £12bn, up 1.8 per cent, delivering a margin of 38.3 per cent. But Mr Delfas, who has a “buy” rating on Vodafone, calculated the margin would fall to 37.5 per cent in 2007-2008.
Mr Sinclair, who has a “hold” rating on Vodafone, estimated the margin would be 36.4 per cent in 2007-2008, partly because of spending on new customers.
Vodafone is moving to profitability guidance for 2007-2008 based on adjusted operating profit rather than ebitda.
The group is grappling with intense competition in its core European markets, which generate about 80 per cent of revenue and ebitda, as well as pressure from regulators for cuts in prices.
“We think the biggest risk [for Vodafone] is old-fashioned …competition in Europe,” said Mr Sinclair in a research note.
Vodafone is seeking to expand into emerging markets, and last month bought Hutchison Essar, India’s fourth largest mobile operator.
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