Investment Report - Fundamental Analysis/ Ratio Analysis

Comparative Approach between two FTSE 100 corporations Vodafone plc and British Telecom Group


Scientific Study, 2010
17 Pages, Grade: 71%

Excerpt

Investor Description

The purpose of our analysis is to advise a potential investor who is considering the entrance in the telecommunication sector in the UK. Our investor is a Pension Fund which is looking for constant long-term performance and steady/stable streams of cash in order to carry out its short-term liabilities with its depositors.

We classify our investor as a low risk profile investor, whose preference is high dividend income rather than capital gain. Under this perspective, our report will analyze Vodafone Group (Vodafone) and BT Group plc (BT), the largest telecommunication companies in the UK. Our aim is to compare and critically analyze both companies to reach an investment decision, considering our investor needs.

Introduction

For our analysis we use the most topical information provided by Bloomberg, DataStream and companies latest annual reports. Mainly, to analyze the financial performance of BT and Vodafone we are looking back into a 2 years period (2009­2010). Even though, for some figures we have to conclude a longer period to get a diluted view before and after the financial crisis and its effects in the financial markets. However, our final decision will be done according to the future expectations and the expected share price performance because we assume that our investor will invest from now in the future of the recommended company. The analysis is based on the shareholders approach; this means that we try to provide the best possible basis for our potential investor and his wealth growth maximization. This results that the most important figure for us are the dividend payments and the share price performance, which should reflect the company’s operating business performance, and the data which could influence these performance.

Telecommunication Industry overview and Outlook

The Telecommunication industry is approximately weighted 7% of the whole FTSE 100 of which only 0.9% (approx) consist of fixed line telecommunication whereas the rest 6.1% (approx) is mobile telecommunication. BT is more active in the fixed line telecom market and Vodafone and Inmarsat plc are mobile telecommunication based companies. The FTSE 100 has a performance growth of 24.53% over the last two years (-8.98% over the last four years) (-0.6% over the last five years). The performance growth of the telecommunication sector (3 companies’ basket) is 27.30% for the last two years (-16.61% for the last three years) (-7.94% for the last four years). Particularly, the European telecommunication companies pay high attention at developing markets at Far East Asia like India and China. These are huge markets with high population, huge growth and high potential of development.

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Text Box: Telecom mobile market growth in India 2003 - 2013

In addition, Telecommunication plays chief part because there is no possibility for a developing country to keep that kind of huge economical growth (8% - 9%) without development in the telecommunication area. The market in these countries is mainly developing in the area of mobile telecommunication because building an infrastructure for land and fixed lines is time-consuming and expensive. Therefore, telecommunication companies emphasize to provide revenue generating services, like telephoning and internet, via mobile phones rather than via home land lines. On the contrary the telecommunication market in Europe and North America is saturated, so market shares are hard to increase for the individual telecommunication company. Additionally, the prices are declining and the customers became more ambitious.

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Telecom mobile market growth incl. 3G users in China 2008 - 2013

Nowadays, we also take into account that we are in a low-interest period worldwide. This means it must be paid special attention to the interest expenses and the WACC of the companies because it is expected that these costs will rise the next years, if the national banks and the treasures increase the interest rates for the markets.

Summary critical appraisal of Vodafone Group

According to Vodafone’s annual report for the year ended 31 March 2010, the operating profit has increased by more than 61% over the period. However, as correctly stated by the chairman, Sir John Bond, the adjusted operating profit has declined by 2.5%.

This adjustment consist in ignoring impairment losses, nevertheless to evaluate merely the activity performance of the company we could ignore “share of results in associates” as well, on which Vodafone does not have total control. This leads to findings that the operating profit has fallen by 11 % (operating margin from 19% to 15.5%), this proves that a growing contribution from Verizon Wireless (American associate) and foreign exchange benefits offset the weaker performance in Europe, as the chief executive reported.

Revenue increased by 8.4% over the period, while cost of sales went up by 13.9%, this means that costs grew more than proportional to revenues leading to a drop of gross profit margin from 37% in 2009 to 34% in 2010. Reductions in profit margins (using EBITDA) are general in every geographical segment, showing a general trend. This is the result of the combination of market saturation and economic slowdown which has lead to global declines in prices within the sector.

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Revenue and EBITDA divided by segments

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For further analysis we have to consider the following information:

Liquidity

There has been an improvement in liquidity ratios; both current ratio and quick ratio have risen in similar proportion. There is little difference between both ratios which indicates that the proportion of stocks is very low in relation to current assets, it means that short term assets have a high liquidity, this is common in the telecommunication sector as it is a service sector where stocks are low (no raw materials, no work in process).

Liquidity ratios are not expected to be high in the sector since most of the incomes are not subjected to long credits (contract mobile phone bills are paid monthly) and some services are prepaid and most of the expenses come from licenses which are not paid in short-term.

It is remarkable a 15% increment in short term borrowings, especially 387% rise in short-term bank loans over the period, this may be seen as a management concern about its liquidity. It may also be a mere shift from long-term bank loans due to their maturity, which is more likely the reason that rise did not have impact on current assets and on the other hand, long-term borrowings decreased in similar amount.

Although it is normal for this sector that liquidity ratios are lower than one. Vodafone ratios are below the average for the industry, so further improvement would be desirable. A 26.5% increment of free cash flow reported by the chairman and later, the disposal of China Mobile, Softbank (announced in the Interim Results & Strategy update for the six months ended 30 September 2010) should mean a release of liquidity.

Activity

Stock holding and debtors collection periods dropped slightly, which is a sign of good working capital control. On the other hand, creditors payment period decreased as well from 44.6 to 40.3 days, and much more than proportionate to stock holding and debtor collection period. As a result of that, the working capital cycle has been tightened while in 2009 the company paid creditors 4.9 days after selling its stock and getting paid from its debtors, in 2010 that period was reduced to1.5 days.

This change reduces the capacity to manage working capital and put more pressure on liquidity ratios, thus it may be the reason of their increment.

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This means that, while in 2009 the company paid creditors 4.9 days after selling its stock and getting paid from its debtors, in 2010 that period was reduced to 1.5 days.

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Excerpt out of 17 pages

Details

Title
Investment Report - Fundamental Analysis/ Ratio Analysis
Subtitle
Comparative Approach between two FTSE 100 corporations Vodafone plc and British Telecom Group
College
University of Westminster  (Westminster Business School)
Course
MSc Finance and Accounting
Grade
71%
Author
Year
2010
Pages
17
Catalog Number
V170219
ISBN (eBook)
9783640890002
File size
3139 KB
Language
English
Tags
Investment Report, Fundamental Analysis, Ratio Analysis, Management Accounting, Managerial Accounting, Vodafone plc, British Telecom Group, FTSE 100, BT Group, Investment Decision, Telecommunication Sector, Liquidity, Activity, Profitability, Dividend ratios, Gearing
Quote paper
Panagiotis Papadopoulos (Author), 2010, Investment Report - Fundamental Analysis/ Ratio Analysis, Munich, GRIN Verlag, https://www.grin.com/document/170219

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