Broker tips: Melrose, Cairn Energy, Vodafone

Numis upgraded Melrose Industries to ‘add’ from ‘hold’, keeping the target price at 290p saying upside should come from the next meaningful acquisition.

“We estimate that a major purchase could add over 10% to earnings, leaving the shares trading at a discount to peers, with potential for sum-of-the-parts upgrades as markets factor in the margin improvements which Melrose management have historically delivered,” said Numis in a research report e-mailed to clients.

The broker added that while the timing of any deal is uncertain, the prospects have increased and the current discount to Numis’ SOTP valuation provides a sensible entry point.

Numis said given that it is now three years since the Elster deal and management first started commenting on the ‘next purchase’ eighteen months ago, management appetite is no doubt as acute as investors’.

Cairn Energy got a boost on Friday after Societe Generale upgraded the stock to ‘hold’ from ‘sell’ and raised the price target to 180p from 165p, saying the risk/reward has improved.

The bank said it was taking a more neutral view based on Senegal exposure.

In a world of lower commodity prices and capex cuts, investors should reassess whether to attach tangible value to pre-development assets within E&P portfolios, the bank said.

It added that this is especially true at a time when both industry and investor enthusiasm for exploration opportunities are at their lowest ebb in the E&P cycle.

“For Cairn, this meant revisiting our previous negative view on its prospective acreage in Senegal ahead of this year’s appraisal drilling programme,” said SocGen.

It said the market remains wary of de-risking a commercial find on the Senegal discovery well too early following Tullow's Zaedyus discovery well in 2011, which was later deemed to be sub-commercial.

“As such, we expect investors to maintain a healthy degree of scepticism ahead of a two well appraisal drilling programmes commencing in the fourth-quarter on the SNE-1 shelf discovery in Senegal.”

SocGen said the main upside to the Cairn Energy story remains the resolution of its Indian tax issue, but the bank noted that it has long taken a more cautious approach than the consensus on the timeline for any resolution.

Vodafone’s first-quarter performance was “solid”, Nomura said, with organic revenue growth of 0.8% modestly above consensus of 0.5% and the bank’s forecast of 0.7%.

It said competitive conditions appear relatively stable and the prospects for further recovery in the second half of the year look reasonable.

On the downside, Nomura noted that contract additions are still modest, overall customer numbers are still under pressure in the core markets and churn is seasonally lower in the June quarter.

It also pointed out that Vodafone highlighted 50 basis points of headwinds for growth in the second quarter.

It added that in terms of growth, the main negative variance for the group was India, as a result of slightly weaker customer growth and tough voice pricing.

Nomura has a ‘buy’ rating on the stock and said: “We strongly believe Vodafone has an opportunity to strike a deal with Liberty Global which can set up the premier convergence operator in Europe and be mutually advantageous for both companies.”