Broker tips: Vodafone, IAG, Ocado, Marks & Spencer, Experian
Vodafone management should voluntarily cut the dividend to support deleveraging efforts and restore confidence to the under-pressure shares, said JPMorgan Cazenove on Monday.
On the heels of a “tough” 2018, Cazenove analysts said the recent service revenue downgrades “haven’t helped” but the “real issue” is investor angst about the company’s capital structure and dividend sustainability.
The acquisition of Liberty Global’s central and eastern European assets will take net debt from 2.4 times to EBITDA to 3.2 times, with purchases of 5G spectrum and joint ventures will stretch this to 3.8 times, which is not covered by equity free cash flow.
On Cazenove’s forecasts, leverage “barely improves” in the mid-term, implying “very limited room” to manoeuvre.
While management believes a €1.2bn reduction of operational expenditure over the next three years, supported by cost-cutting and non-core asset sales, can support deleveraging, improve dividend cover, and restore investor confidence, the analysts felt this was “feasible” but “worry the dividend debate is beginning to prove too great of a distraction”.
With this in mind, a voluntary dividend cut “may not be a necessity” but is “a sensible option”, with a 30% cut leaving the dividend well covered by free cash flow, support additional deleveraging and still offer an attractive 7% yield.
JPM Cazenove kept its ‘buy’ rating and trimmed its target price to 227p.
Shares in British Airways and Iberia parent International Consolidated Airlines Group flew higher on Monday as Citi upped its recommendation to 'neutral' from 'sell' and lifted the price target to 560p from 508p following an "unprecedented fall from grace" in recent weeks.
The bank highlighted five reasons for the recent weakness, including concerns over communication by management at the full-year results, risks around wage inflation, the technicalities surrounding a recent index MSCI removal, a lack of clarity over how the group will approach foreign ownership restrictions and a broader fear of weakening consumer and business confidence, particularly ahead of the Brexit deadline.
"With this blinding and, in part, self-inflicted underperformance, we note that there are two upside risks on the horizon, which at the very least will likely halt the downward trajectory in the shares.
"Firstly, we are approaching a hefty cash distribution in the coming weeks. Secondly, it is apparent that the forward-looking commentary from the US airlines on the North Atlantic is getting better (almost) by the day."
Shares in the IAG tanked earlier this month as bosses at the airline issued a "clarification" and told investors cash flow would drop this year, after finance chief Enrique Dupuy de Lome said free cash flow would grow.
Meanwhile, in February the stock was hit by news that MSCI was removing it from its global indices due to a decision to cap foreign ownership of the shares.
RBC Capital Markets upped its price target for Ocado on Monday but cut its target for Marks & Spencer as it accounted for the joint venture announced last month.
Online delivery specialist Ocado announced in February that it had agreed to sell M&S a 50% share in its UK retail business for up to £750m. M&S said at the time that it was slashing its dividend by 40% and planning a rights issue to raise up to £600m to pay for the £562.5m upfront portion of the deal.
The JV will trade as Ocado.com but have access to M&S's brand, products and customer database from the switchover date of September 2020, as Ocado's current deal with Waitrose is being terminated. The M&S-branded food and beverage range will be combined with Ocado's existing range of Ocado own label and third-party branded products to offer more than 50,000 products.
RBC said the JV with M&S is "additional validation of Ocado's best-in-class solution". However, this is fairly reflected in the share price. In addition, the bank said it was remaining on the side lines with its 'sector perform' rating in light of execution risk and lack of visibility on future cash flow.
It lifted its price target on Ocado to 1,000p from 750p. The bank said it values the JV with M&S at 230p a share on a discounted cash flow basis. It values the company's solutions business at 220p a share, reflecting the current deals with Morrisons, Bon Preu, Casino, Sobeys, ICA and Kroger and the Ocado Retail JV.
Finally, RBC said it was incorporating likely future deals in its valuation worth 520p by assuming Ocado can reach 15% global market share through it partners.
The bank, which also has a 'sector perform' rating on M&S, cut that price target to 270p from 300p as it reduces its FY20-22 earnings per share forecasts by around 10%, having taken a detailed look at the JV with Ocado.
"While we see some strategic benefits, we think M&S has paid a high price for being late to the party in online food, and we question whether it can retain the £70m of targeted synergies given potential need for price realignment," it said.
Deutsche Bank downgraded shares of consumer credit reporting company Experian to 'sell' on Monday, citing a "less supportive" market.
Analysts at the broker said they felt it would be "very difficult" for Experian to replicate the growth it had seen over the last twelve months and dropped their estimate for organic growth over the year ending March 2020 from 8% to 5%.
"Once growth starts slowing for the cycle, it is likely to keep on slowing until we enter a recession, and, as such, we believe the stock should start to see a de-rating now," said Deutsche.
The German investment bank also said rising rates of delinquencies in the US and a likely deterioration in the outlook for employment also weighed on its outlook.
"We continue to see Experian as a high-quality company with high barriers to entry, but we regard the stock as overvalued for the changing growth outlook.
"We make some minor changes to our earnings forecasts, and our target price remains 1800p; however, due to the deteriorating US growth outlook, we reduce our recommendation to Sell from Hold, with 10% downside."
In terms of the upside risks to its negative stance, Deutsche highlighted more-supportive end-market growth than it was forecast, better pricing, greater benefits from the firm's own product development and potential benefits stemming from mergers and acquisitions.