Broker tips: Vodafone, BHP, Auto Trader
Vodafone shares fell again on Wednesday as Macquarie warned the telecoms group is "structurally challenged" with long-term risks to cash flow forecasts.
Once it has completed the acquisition from Liberty Global, the FTSE 100 group will have 31% of operating income before depreciation and amortisation in Germany, where Macquarie sees it being "particularly exposed".
The analysts see Vodafone as "structurally challenged in its battles with incumbents due to its lack of scale and significant capex burden", predicting particular operational pressures in Italy and Spain, with a slowdown in South Africa.
Spectrum auctions to come in Germany this quarter and UK in 2020, cash flow pressures "will mount".
Macquarie reiterated its prediction of a dividend cut to €0.08 and its 125p target price on Wednesday, the same as RBC downgraded to a day earlier.
Deutsche Bank downgraded BHP to 'sell' from 'hold' on Wednesday and slashed the price target to 1,550p from 1,820p as it now sees a more challenging outlook this year.
The bank noted that after outperforming in 2018 on the back of the successful sale of the US onshore business and improved operational performance in the second half, the major re-rating catalysts are behind us.
DB pointed to weakening earnings and cash flows. It said near-term earnings are supported by robust iron ore and coking coal prices, masking a sharp fall in oil and muted copper prices. It expects steel raw material prices to fade through 2019 as China steel demand decelerates from more than 5% in 2018 to 1-2% this year.
In addition, it noted lagging growth and upside risk to medium term capex. "As sector earnings and cash flows fade in 2019/20 we expect investors to increasingly focus on growth and capital allocation in the years ahead. BHP screens poorly on growth over the next 3-5 years and we expect FY21+ capex to lift above the company's current ceiling of $8bn per annum for FY19/20."
Finally, Deutsche said that while the stock's valuation is not expensive in historical terms, BHP has re-rated versus peers.
"The company is in the process of returning $10.4bn to shareholders but post this return we see stronger cash flow and cash return stories at Rio and Glencore," it said.
Analysts at Jefferies initiated coverage on classified advertising business Auto Trader at 'hold' on Wednesday, noting that its digital rebirth had been so well executed that it had seen the firm be anointed the UK's "automotive Kingmaker", a moniker the broker said came with many enviable traits.
Jefferies said Auto Trader's reinvention as a digital business, which saw it harness its 40-year roots in used cars to "erode the information asymmetry car retailers used to habitually exploit", had made its pre-eminence "inimitable and therefore, probably impassable".
Looking forward, the broker said Auto Trader's Horizon 1 project would be "a solid source" of high-single digit earnings per growth, while its Horizon 2 activities would likely be a source of upside pressure from 2021 onwards.
However, with neutral near-term earnings risk and a top quartile price/earnings multiple, Jefferies opted to initiate its coverage on Auto Trader at 'hold' with a target price of 450p.
"While Auto Trader has many enviable traits (growth, margin expansion, exceptional cash flow generation, low leverage), our DCF-based PT of 450p puts us at a 'hold'.