Broker tips: KAZ Minerals, Vodafone, Whitbread

KAZ Minerals’ shares gained on Monday after Canaccord Genuity upgraded the stock to ‘buy’ from ‘hold’ and lifted the target price to 475p from 155p.

Canaccord said it expects miner to see continued production growth through 2018 after the company’s third quarter result showed increased output levels as the Bozshakol mine continued its commissioning.

In late October Kaz said third quarter production rose to 44,500 tonnes of copper cathode equivalent compared to 31,100 tonnes in the second quarter as Bozshakol and Aktogay oxide ramp up.

The group reiterated its 2016 guidance for 135,000-145,000 tonnes of copper cathode equivalent following 81,000 tonnes in 2015.

In December, KAZ also announced the commissioning of Aktogay, which Canaccord said came three to six months ahead of its forecasts.

“Despite our forecast for a strong year-on-year earnings before interest, tax, depreciation and amortisation (EBITDA) recovery in 2016, we are forecasting continued strength in 2017, when we forecast EBITDA to double year-on-year,” according to Canaccord analysts.

“With our stronger copper price forecasts and also our continued production growth, we see 2017 as the second year where KAZ leads in EBITDA growth of all the copper companies we cover from London, but unlike 2016 we believe 2017 should include lower balance sheet risk.”

The analysts also see 2018 as the first year of positive free cash flow and the first year of net debt reduction after completion of the Bozshakol and Aktogay projects in 2017. Canaccord believes free cash will further improve from 2019 as project capital expenditure beings to fall away after 2018.

The broker concluded that it has increased its target price on KAZ to reflect stronger production growth from Bozshakol and potentially Aktogay, higher copper prices and an improved cash generation profile.

“With over 20% potential upside to our target we upgrade to a ‘buy’ rating. While this upside is much more muted than KAZ equity gains in the past year, we still expect KAZ's growth story to continue into 2018.”

Goldman Sachs upgraded Vodafone to ‘buy’ from ‘neutral’ and lifted the price target to 260p from 275p saying self-help raises confidence in the company’s growth outlook.

The bank said that following 10% underperformance versus the sector in the last three months, the stock’s valuation is compelling at around 9% calendar year 2018 free cash flow yield.

GS said the stock also looks attractively valued if it compares its view of the structural growth outlook of each stock versus its valuation.

“We believe the valuation case for Vodafone is even more compelling given the ‘free’ upside it has from the potential for European cable M&A (worth 10-40p per share) and Indian in-market consolidation.”

It pointed out that Vodafone offers above-average growth relative to the sector, with revenue/earnings before interest, taxes, depreciation and amortisation compound annual growth rates of around 2%/5% in FY17-20, benefiting from recent fixed-line investments improving its structural growth outlook.

In addition, GS argued that Vodafone has also started to show clear evidence of its ability to self-help, lowering underlying opex over the last year, which it expects to drive margin expansion and operational gearing going forward.

Whitbread got a boost on Tuesday as Credit Suisse upgraded the stock to ‘outperform’ from ‘neutral’ and lifted the price target to 4,550p from 4,030p as it took a look at European hotels.

The bank said it sees a return to positive hotel trading momentum and that the company’s £150m cost-saving plan mitigates the risk from National Living Wage increases.

In addition, CS pointed out that the stock’s valuation has rarely been this cheap.

“Although the outlook for the UK remains uncertain, we believe the benefits of sterling weakness could be meaningful. This is having a positive impact on UK lead indicators already and hence our revenue per available room model is the most positive since late 2014.

“We would also expect a benefit from increased net inbound travel via improved demand for London and more domestic demand across the Premier Inn estate.”

As a result, CS upped its February 2018 RevPAR estimate to 3% from 1%.

The bank said the next catalyst will be the company’s third-quarter trading update on 26 January, adding that key risks to its ‘outperform’ rating centre on the UK consumer outlook, linked to both potential Brexit negotiation uncertainty and higher inflation impacting real wages.