Vedanta PLC (VED)
Vedanta, like BHP Billiton reviewed a week ago, benefited greatly during the mid-part of the decade on the back of fast-rising commodity prices. Shareholders who were wise, or lucky, enough to secure exposure to Vedanta stock when it was first publicly listed back in 2003, and still hold those shares, are looking at healthy paper profits. Any of those original shareholders who exited a year ago, at the top of the cycle, would have banked very impressive profits indeed. Since that 2008 peak commodity prices have slumped, along with Vedanta 2009 earnings.
The Vedanta business is primarily based in India, where the firm generates the highest revenues of any
non-ferrous metals and mining company based in the Subcontinent. Vedanta also has assets Zambia and Australia. Core products currently include copper, zinc, aluminium and iron ore whilst future earnings will be enhanced following substantial capital expenditure in commercial power generation assets.
Reviewing the firm’s financials, 2009 earnings per share fell very sharply from $3.05 dollars (2008) to $0.76 dollars. Revenues in the financial year ending March 2009 were $6.6bn (2008 $8.2bn). However, the 19.8% fall in revenue needs to be put into longer-term perspective. In the recent past, 2006, revenues were ‘only’ $3.7bn, so it would be fairer to say 2008 was an abnormal year of unusually high profits, and the long term smoothed trend of revenue growth remains intact, rather than the business being in some kind of structural decline. The 2009 dividend is $0.41 dollars per share, maintained at 2008 levels.
Clearly though the retreat of 2009 revenues relative to the year before, required a management review of operations. Costs and capital expenditure inevitably came under the most scrutiny. Management have acted appropriately and reduced capital expenditure by $5.3bn via savings and deferrals, to $3bn. The MALCO smelter has been moth-balled and BALCO output has been reduced. The balance sheet cash position remains strong at $4.9bn and modestly leveraged with only $0.2bn of net debt.
Management also took the opportunity to enhance shareholder value over the last financial year with a further $397m applied to share-buy backs or via increased stakes in subsidiaries at attractive prices. Like the sector leader BHP Billiton, Vedanta also reported record production across a number of commodities; including iron ore and zinc, and confirmed projects in development were on schedule and budget. The firm also continues to benefits from a lower cost base than most global commodity players due to the location of it core assets, India. Overall the firm remains financially robust and well positioned to grow again into the economic recovery and Vedanta is without doubt another FTSE 100 commodity success story.
Arguably though, if an investor is a long-term commodity bull then broad exposure to the sector, rather than stock picking, may be favoured. But for day traders looking to get magnified short-term exposure to the sector to ride its generally predictable price trends up or down, Vedanta is hard to beat.
Vodafone Group PLC (VOD)
Vodafone Group Plc is the self-proclaimed global leader in mobile telecommunications. Certainly, if Vodafone use the term ‘leader’ in reference to size alone then it’s up there with the best due to its index-moving market capitalisation of more than £60bn. It has a strong geographical presence too, with more than 290 million users spread across the globe. In the UK, Europe, Asia, Africa and the Middle East the Vodafone brand is used. Elsewhere, in the US, the local brand is Verizon and in a number of other markets the mobile proposition is dual-branded with regional strategic partners. The firm is also growing its influence in non-mobile sectors and has steadily increased investment in broadband services, wireless and other PC communication productivity tools. In Italy and Germany Vodafone has also invested in fixed-line operations going somewhat against the global trend which is seeing consumers forsake a fixed line product altogether in preference to a single in-and-out-of-home mobile solution. 15% of the firm’s revenue is now generated by non-mobile business units.
The future success of Vodafone is reliant on a large number of issues. Some markets, like the US and Europe, are very mature and the recession is discouraging Western consumers from upgrading to more technologically advanced phones which offer users wider functionality and Vodafone more revenue opportunities. Other markets, like the Middle East, are difficult to penetrate with local telecom players often enjoying a monopoly, or sharing a duopoly, offering Vodafone limited opportunities for market penetration. Technology is also fundamental, and Vodafone in this respect is often at the mercy of the product development calendars of mobile phone manufacturers. When a high-profile product is launched, like the UK version of the Apple phone, Vodafone remains vulnerable if a competitor secures the exclusive distribution rights, as O2 did with the iPhone. Other challenges to revenue growth include recent regulatory measures designed to reduce mobile roaming charges, long the grievance of consumers who made the mistake of using their UK mobiles abroad only to be greeted with a shocking bill a few weeks later back home. Ultimately, a telephone call is like a bag of sugar. It’s just a price sensitive commodity. As long as there are new players, like Tesco, who are willing to undercut existing sector ‘leaders’ on price, it’s going to be extremely tough for Vodafone to persuade consumers its proposition adds value to the communication process unless it exclusively offers original in-demand hand sets. Pass me my iPhone will you?
Preliminary results for the financial year ending 31st March 2009 are due imminently and prospective long-term investors would be wise to examine product development strategy with at least the same enthusiasm as the headline financial data.
Experian PLC (EXPN)
Ahead of the Experian preliminary results due 20th May it’s a useful exercise to reflect on the company’s strategic progress to date, in preparation for those all important financials. Experian can trace it corporate roots back to 1980 and has since grown to be a key partner to banks and other institutions, providing information, enabling their clients to certify the identity and credit worthiness of consumers. The firm employs some 15,500 staff, and sources revenue from 65 countries. Annual sales in the previous financial year were $4.1bn. The key stage in Experian’s development came with the technological advancements of the 1990’s which enabled Experian to give new entrants to the UK credit market, like Capital One, a total solution for targeting, credit-checking and marketing credit related products to UK consumers. The growth of Capital One is partly testament to the value added by Experian and the degree to which it can capture valuable information regarding consumer’s and SME’s (small & medium enterprise’s) every day transactions. Other Experian clients include Amex, Barclays, eBay, HBOS, HSBC, IBM, Morgan Stanley and Visa. The complete client list includes another 50 global brands.
Experian, due to the depth and breadth of its credit information ‘portfolio’, not surprisingly predicted the credit crunch earlier than most financial related firms and with credible vision invested in debt collection services, or as the firm rather mechanically puts it “counter cyclical” solutions. These services help creditors identify accounts that are more likely to default in the near future, as well as helping credit card and loan companies trace delinquent debtors. Experian is also increasingly offering more strategic services including advising retailers on the preferred locations of new stores.
In addition to organic growth Experian has also secured the requisite economies of scale so important to an information business via acquisitions and since 2002 has purchased more than 50 niche and regional competitors to compliment the core Experian proposition.
The information provider, in its most recent update, acknowledged the commercial environment remains fragile but has noted a degree of stabilisation has returned in recent months. The firm also noticeably “hoped” rather than predicted a return to improved consumer spending and borrowing, which remains the life blood of Experian future earnings growth.
