Vodafone results highlight valuation appeal but Germany remains the drag

Vodafone delivered a broadly solid set of results, with Q4 service revenue growth of 5.1% coming in ahead of expectations and free cash flow modestly beating forecasts in the second half. That said, the picture on profitability was weaker, with underlying operating profits before depreciation up just 2% year on year and falling short of consensus, reflecting continued pressure in Europe.

Germany remains the key drag. Accounting for around 40% of group underlying operating profits before depreciation, the market saw profits fall 3.3% over the year as slight revenue declines were compounded by higher investment and elevated business digital services costs. Both broadband and mobile net adds were negative for the year and deteriorated further in Q4, underlining the challenge of stabilising Vodafone’s largest market. The UK continues to perform more robustly, with underlying operating profits before depreciation, up 4.5% supported by margin improvement and ongoing broadband customer growth, while cost synergies from the Vodafone–Three merger are expected to start coming through from FY27.

Looking ahead, guidance for FY27 points to underlying operating profits of €11.9–12.2bn, implying around 4% growth at the midpoint and broadly in line with market expectations. However, the outlook for Europe is weaker than hoped and sits below consensus, reflecting the likelihood that Germany continues to weigh on performance in the near term. The more positive signal comes from cash generation, with free cash flow guidance around 4% ahead of expectations and growth of roughly 3% anticipated.

Vodafone is valued at just under six times expected 2027 underlying operating profits, a discount to both its own history and the wider sector. While management has made clear progress on simplification and balance sheet discipline, the investment case still hinges on whether performance in Germany can be stabilised. Until there is clearer evidence of that turning point, valuation support alone is unlikely to drive a sustained re‑rating.