Vodafone refocus on cash flow reassures

Vodafone’s 2016/17 earnings, as widely forecast, show the ravages of a year of putting out fires at home and abroad.

The €6.1bn loss whilst eye-watering had been flagged, following the group’s expectation of a large tax impairment related to India. Tuesday morning’s share price reaction still looked forgiving, though a 4% advance at the time of writing also had an eye to Vodafone sticking to plan with a 2% rise in the final dividend at €10.03. There had been concerns that downgraded earnings guidance in February might presage a chill on shareholder pay outs, a further means of preserving cash after the sudden upsurge of price competition in India.

In the event, despite aggressive price cuts by Indian rival Jio, a major driver of Vodafone’s merger of its unit there with Idea, the UK group slightly exceeded organic core earnings growth expectations with a 5.8% rise to €14.1bn. Margins were steady too, up 1.3 percentage points. Costs measures may also be showing promising traction via Vodafone’s main gauge of medium-term health, organic service revenue. Growth of that kept pace with the longstanding run rate in the final quarter of 2016, rising 1.5%. Vodafone may be about shuffle assets more broadly, which will also help profits and cash at the margin. It announced on Monday that it would transfer its 35% stake in Kenya's Safaricom to majority-owned Vodacom.

Performance of the group’s developed regions also showed qualified strength. Whilst contract losses in the UK hit the headlines, Germany, Vodafone’s most important developed market, grew by a robust 6% vs. 3% in the first half. Investors hope that growth will help stabilise European operating profits after a €10.4m H2 loss for Europe as a whole.

These initiatives give credibility to robust free cash flow guidance—another key reason for the market’s forgiving mood, despite Vodafone’s biggest ever loss. The group is expecting to put away €5bn in the current year, a surprising 36% above forecasts of around £3.6bn. More cash on hand than expected means more firepower for the world’s No.2 mobile phone company to deploy in India and other crucial growth markets, where the battle for market share will intensify this year. A refocus on cash flow growth sets Vodafone on the right track.

• Technical-chart wise, the stand-out point to make about the reaction of Vodafone shares to its earnings is the breach on a third attempt of a significant resistance that has been in place since November 2016
• The level, call it 220p, signifies differing investor opinion over whether VOD has done enough to offset the threat to market share overseas. Correct or not, the bulls appear to have won
• That said the breakout does not appear to be definitive. That is not necessarily taking a pessimistic view; rather, the point has an eye on momentum which is calling time on the up move. (See blue ellipse encircling slow stochastic oscillator in overbought territory)
• Even if  consolidation ensues from here though, prior breakout motifs—triangulation, higher highs, lower lows—keep the bull case intact for now
• Investors could be forgiven a touch of déjà vu, given that the stock appeared to offer at least two clear prior triangle patterns between August 2015 and June 2016, and August-October 2016
• The difference is that on those occasions, the stock was making lower highs, despite also marking lower lows
• Since the swing down to 188p at the end of November, and certainly after the two-year low at 186p early this year, VOD has broken above early November 2016’s 218.55p peak, having etched progressively better highs along the way
• Should any consolidation in the near future show signs of overshooting on the downside—for instance surpassing the 200-day moving average, or breaking back beneath the just-breached descending trend line—buyers might have to conclude that the stock’s revival from a two-year decline has further to run