Broker tips: FirstGroup, Vodafone, Standard Chartered

Investec has retained its ‘buy’ rating and target price of 125p on FirstGroup after the transport operator said overall trading is in line with management’s expectations.

In a trading update for the six months to the end of September, FirstGroup said its transformation plans continue to progress, despite a more challenging trading environment in some of the group’s markets.

The UK Rail business delivered further strong passenger volume growth, underpinning expected like-for-like passenger revenue growth of approximately 7%. Overall financial performance was toward the top of its range of expectations.

For its UK Bus division, the group’s transformation plan continued to deliver growth in commercial passenger revenues of more than 2% in the first half. However, this was partially offset by the ongoing weakness in concessionary revenues being seen across the industry. Overall like-for-like revenue growth for the division is expected to be 1.3% in the first half, it said.

“On the positive side, five bus depots have been cut which should mean bus margins are stronger sooner and rail revenues were better than we anticipated, boosted by passengers travelling West to visit Dismaland,” Investec analysts said.

“On the negative side, concessionary bus revenues were slightly worse than we expected and in North America, Greyhound and Transit have deteriorated.”

However, Investec changed its forecast for full-year 2016 operating profit to fall 0.2%, as strong retail offsets weaker Greyhound and First Transit.

Organic service revenue growth at Vodafone grew by a “solid” 0.7% over the three months to June and will accelerate to a 1.3% pace in the third quarter, UBS said.

Despite a negative half percentage point impact from “phasing issues” in the second quarter, such as lapping price rises in Italy, one-off benefits at Vodacom in the second quarter and regulatory cuts in India, sales will accelerate as Germany improves, the broker said in a research note sent to clients.

“We see scope for an upside surprise on operating profits in EBITDA terms thanks to the company´s 'operational gearing' as revenues grow.

“Lower churn should lead to lower SAC/customer costs and additional cost saving measures should be forthcoming,” analyst Polo Tang wrote.

Investments linked to the company´s Project Spring and working capital requirements will push free cash flow lower.

Nonetheless, Tang “remained relaxed” that Vodafone would achieve its fiscal year guidance for between 11.5bn and 12.0bn pounds in EBITDA.

So, while recent operating trends have been “mixed” UBS expected a sequence of solid/improving quarterly trends to help drive a re-rating of the share price.

“We would also note the CEO/CFO recently purchased 260,000/180,000 shares respectively. At current levels we think there is little priced in for growth/M&A and press reports have suggested there is scope for VOD/LBTY to re-visit talks.”

UBS kept its 'buy' recommendation and 280p target price unchanged.

New sanctions penalties and potentially higher-than-expected losses from commodity finance will lead StanChart to go cap in hand to investors for fresh funds, but the shares are still too underappreciated, broker KimEng said.

At just 0.6 on a price-to-book basis, the valuation for StanChart´s Hong Kong-listed shares (2888HK) has become “undemanding” even under a worst case scenario.

According to media outlets cited by analyst Steven Chan, SCB may still keep the accounts of some Iranian entities, including Bank Saderat, and has generated revenue from the overseas companies of some Iran-connected entities, such as IFIC Holding and Mapna International.

Hence, SCB may face another US sanctions fine to the tune of $1bn in 2015, Chan explained.

Regarding commodity finance, SCB has lowered that to $48.8bn as of June 2015 (17.3% of loans) from $61.8bn a year before.

Of that amount, $25.6bn was to the “less risky” oil and gas related sectors. As well, about 58% of commodity finance was to investment grade clients and 72% had a maturity of under one year.

Due to market concerns over Glencore, KimEng took the “conservative” choice of raising its 'credit cost' forecast for non-oil and gas commodity finance to 10-11% in 2016-16 from 5-6% in the year before.

As a result, its CET1 capital cushion will drop to 11% by the end of December 2016. To bring it back to 12% SCB wil need to replenish $1.2bn of equity capital (at a theoretical issue price of HKD 51.50).

Tang lowered his target price on the stock to HKD88.60 from HKD120.