Broker tips: Next, Vodafone, Air Partner

Next’s second quarter trading update is likely to be fairly strong and an upgrade to the company’s guidance looks likely but the fashion chain is fairly valued, Jefferies analysts said ahead of a trading update next week.

The FTSE 100 company will have benefited from demand for summer clothes during the heatwave, Jefferies said a week ahead of the 1 August update.

Jefferies analysts increased their annual pre-tax profit estimate for Next by 1% to £731m. The team increased its target price on Next shares to £61 from £52 but stuck with its ‘hold’ recommendation.

Jefferies expects full-price brand sales growth to slow to 1.7% in the second quarter from 4.5% in the first quarter as the effect of botched buying a year earlier fades.

If Next’s update on prospects for annual profit is positive it will be received well by investors but the prospects for medium-term profit growth are unchanged, the analysts said.

“We believe that Next still attributes much of this year's strengthening market share performance to the recovery of 17/18 self-induced ranging mistakes,” the analysts wrote. “We believe a more sustainable build in the valuation context is unlikely to materialise if (as?) trading momentum slows in the latter stages of 2018.”

At first glance, Vodafone's first-quarter results look fine, but analysts at Societe Generale said scratching the surface showed "a tangible deterioration in year-on-year growth trends with more to come".

The FTSE 100 telco's management, including outgoing chief executive Vittorio Colao, reiterated full-year guidance as they reported emerging markets offsetting weakness in Italy and Spain, with some growth under newly adopted IFRS 15 accounting rules, which do not include the drag from UK handset financing

Service revenues of €9.85bn were 0.6% below consensus and SocGen noted that no details were given for EBITDA, free cash flow or net debt.

However, SocGen pointed out that group service revenue grew 0.3% excluding forex swings, a 120 basis point reduction from last quarter, when year-on-year growth came in at 1.5%.

"The main driver was a significant deterioration in Italy", the analysts said, where revenue fell 6.5% compared to the 0.7% growth the preceding quarter.

"Importantly, Spain and the UK also recorded a tangible deterioration in growth trends," they added, as Spanish growth swung from 1.0% to -2.2% and the UK from -3.4% to -4.9%.

Vodafone’s organic growth is supported by inflation in emerging markets, SocGen pointed out, with Turkey growing 14% to help mitigate the rising pressure in European revenues. "However, in euro terms, Turkey recorded a 14.1% year-on-year fall in revenues, as a high level of inflation (which helps revenues denominated in local currency) leads to currency depreciation.

"This (partly) explains why VOD’s yoy statutory growth in service revenues came in a -4.2% vs the +0.3% recorded by VOD in organic service revenue."

As far as Liberum is concerned, Air Partner's strategy and fundamentals have remained "intact and attractive".

Air Partner's continued broking development, supported by selective recruitment and complemented by the addition of new more stable income streams in consulting and training led the broker to resume coverage on its client with a 'buy' recommendation and a 155p target price.

On 3 April, the global aviation services group revealed that it had discovered a "historic accounting issue" during its year-end process, leading management to immediately order a thorough independent investigation. The outcome of which was the identification of a £4.4m cumulative overstatement of profits since 2010/11.

Analyst Gerald Khoo said that while Air Partner's recent "accounting issue" was "disappointing", and required him to rebase his forecast, he felt it had not impacted growth or cash generation.

Liberum, which is house broker of the AIM-listed company, cut its earnings per share forecasts by 6% for 2019 and 5% for 2020 to reflect the lower starting point after adjusting for the overstatement of profits but, in underlying terms, its estimates were little changed.

"We consider Air Partner's valuation to be attractive given its growth outlook and the potential for the group to continue to reposition itself towards aviation safety consulting and training, and higher quality earnings. Cash generation remains strong, supporting ongoing investment in the business and an attractive and growing dividend stream, while still providing headroom for further acquisitions," said Khoo.