Broker tips: SSE, Smiths Group, Vodafone

Deutsche Bank upgraded SSE to 'buy' from 'sell' on Wednesday, lifting the price target to 1,250p from 1,200p after shares tanked last week on the back of a profit warning

DB said the reaction to the profit warning was a buying opportunity.

"SSE's shares have been marked down following last week's profit warning yet we think underlying value has gone up since May. The impact of Ofgem's retail price cap now looks priced in while rising gas prices should increase long-term generation value despite causing short-term trading losses."

Deutsche also argued that SSE's networks and renewable generation are fundamentally good businesses.

SSE cautioned last week that first-half profits were likely to have halved compared to last year due to higher costs and lower volumes of energy being consumed, but promised that the dividend would be unaffected.

"Lower than expected output of renewable energy and higher than expected gas prices mean that SSE's financial performance in the first five months has been disappointing and regrettable," said chief executive Alistair Phillips-Davies.

"The underlying quality of SSE's businesses remains strong, with regulated networks and renewables providing the core of what will be an infrastructure-focused SSE group in the years ahead.

Citi started coverage of engineer Smiths Group at 'buy' on Wednesday with a 1,850p price target.

The bank said Smiths Medical offers defensive growth, John Crane is leveraged to rising late-cycle oil & gas process capex and Smiths Detection is benefitting as airports invest to meet regulatory standards.

Cit said that even though talks about combining Smiths' medical business with US-based ICU medical have ended, they highlight the fact that Medical is again "in play" and the potential to unlock value trapped within the conglomerate structure.

"We see Medical's defensive attributes as an intrinsic advantage given the macro risks worrying cyclicals’ investors at present," Citi said.

Smiths said last week that it had abandoned talks with ICU Medical after the two failed to agree on terms.

The company, which confirmed back in May that it was in early talks with ICU Medical, said the board recognised the complementary strengths of the business but that it was important that any combination did not undervalue Smiths Medical and its prospects.

Chief executive Andy Reynolds Smith said at the time: "We have ended discussions with ICU today after careful consideration and in the interests of our shareholders. Smiths Medical will continue to capitalise on the increased investment that it is making in new product development. We remain confident that our strategy for Smiths Medical will drive market outperformance and world-class competitiveness.

"Alongside continued active portfolio management across all our businesses, this will deliver long-term sustainable growth and attractive returns for our shareholders."

Vodafone is "very cheap", Berenberg said on Wednesday, but in a sector where investors are not keen to take risks and are being put off by "too much noise" about currency weakness in emerging markets.

As far as Berenberg was concerned, Vodafone is "fundamentally mispriced" but after adding to "unpredictability" in Spain when Vodafone changed its football rights strategy, plus the ongoing worries around India and recent high leverage following the completion of its deal with Liberty Global, meant that its shares needed to see some earnings momentum in order to "drown this noise out".

"This has, however, been scuppered for a few more quarters," said Berenberg.

Analysts at the bank said Vodafone had "better momentum" in harvesting cost and service differentiation opportunities from network virtualisation compared to the likes of Orange and Deutsche Telekom, although it "needs to do more" if it wants to catch up to Telefónica.

Berenberg revised down its EBITDA estimates by 4-5% to reflect increased competitive intensity in the Spanish market, currency weakness in South Africa and Turkey, and lower international carrier revenues, resulting in a trimming of its target price on the shares from 250p to 243p

But with the share price having last closed just under 167p, the valuation "looks attractive", trading on a big discount to its peers on a 2019 normalised free cash flow yield of 8.8% and a dividend yield of 8.1%.