It’s a miniature telecoms crash on Tuesday.
Sweden’s Ericsson has reported a 70 per cent fall in Q2 profit - with declining revenues in its Sony joint venture as the main culprit.
The big story though - and the one dominating the London market this morning - is Vodafone. Premarket indicates the world’s biggest mobile phone company will open anywhere between 5 and 10 per cent lower. The trigger being a warning from the company that 2008/9 revenue will likely come in at the lower end of the guidance range - around £39.8bn.
*Update 8:06am- VOD opens 10 per cent lower, currently off 12.9 per cent*
Broadly speaking, the Vodafone results are perhaps the first big indication that the credit crunch is going to hit corporates hard. The company cites recessionary factors and consumer downturns in several markets.
The biggest miss is in Spain, wherte instead of a projected revenue growth of 3 per cent, revenue shrunk by 2.1 per cent between March and June. The below table composed by Goldman Sachs in a note to clients this morning:
Says Goldman:
We expect the market to take a fairly dim view of the miss to revenue and revision of guidance, evidence of economic sensitivity in Spain and reference to early signs of “recessionary impact” in the UK. As guidance was set at the end of May, trading may, in our view, have deteriorated in
Spain only late in the quarter. We nonetheless believe that the company has room to manoeuvre on margins, due partly to relatively high acquisition and retention spending during 2007/8, and underlying drivers are respectable; data growth held up well outside Spain, volume growth was solid, and churn under control.
And Cazenove:
Our recommendation remains OUTPERFORM, although this is very much a consensual view.
The shares have recovered against the broader market since 30 June, staying broadly flat against a 4% decline for the All-Share. This strong performance is comparable to the European sector and reflects, at least in part, the sector’s defensive characteristics.
To 2008/09E, Vodafone trades on 4.8x EBITDA, only in line with the sector (BT at 4.3x) despite arguably a more attractive profile in terms of exposure to mobile data growth and emerging markets. Its adjusted equity free cash flow yield of 10.3% compares with the sector on 10.7% (and BT at 9.2%). Its PE ex amortisation is 8.8x (10.9x including both licence fee and acquired intangible amortisation) compared with the sector on 9.7x and BT at 8.4x (9.3x adjusting for pensions income) with a dividend yield of 5.5% (sector 6.2%, BT at 7.9%).
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