Broker tips: On the Beach, Vodafone, National Express

Analysts at Jefferies initiated coverage on British travel retailer On the Beach on Monday, hitting the group with 500p target price on 'buy' rating straight out of the gate.

Jefferies' analysis of the group led it to believe that On the Beach's robust growth in its core business looked set to be supplemented by its 2019 entry into the offline market and its push into the long-haul travel sector.

"In a challenging environment, a disruptive business model with a robust balance sheet and surplus cash generation warrants a premium versus peers," said the investment bank.

Jefferies feels that OTB recent acquisition of Classic Collection will give it quality access to the "ripe for disruption" offline market given tension between large tour operators and independents and regulations which have squeezed independent's margins.

Regarding OTB's entrance into the long-haul market, Jefferies thinks declining fares, capacity growth and a focus on "experience" travel will unlock opportunities for the group by converting current long haul traffic, developing hotel relationships and getting margins back into check in the airline segment of the package.

On the other hand, Jefferies did note that longer-term risks do still remain within OTB business model.

"We deep dive online competition, where we think competitor LoveHolidays is making material progress. We also identify the flight component as a key margin risk."

"However, we think that OTB's continued investment in technology, as well as growth into new products and distribution streams, will mitigate these risks over the short/medium term."

Kepler Cheuvreux analysts were seeing the merits of Vodafone on Monday, upgrading its rating despite a potential dividend cut.

"The key reason for investors to hold this stock is the dividend," said Kepler, having seen risks that the payout, in the event of a deal with Liberty, would not be sustainable and previously slapping a 'reduce' rating on the shares.

It has not been alone in this worry, with Vodafone's shares having fallen around 40% over the past 12 months.

The Kepler analysts still estimate that the Liberty deal would stretch net debt to greater than three times EBITDA, potentially jeopardising the credit rating, and so foresee a cut to Vodafone's dividend from €0.15 to "a more sustainable level of €0.11 per share".

But with the selloff in the shares having pushed Vodafone’s dividend yield to almost 10%, "signalling market belief in an imminent dividend cut", Kepler's view is that the reaction to a potential dividend cut is "too extreme".

Assuming a cut, the yield is "still appealing enough" and buying the shares now would leave the "opportunity to lock in great yield", so upgrading its rating to 'buy'.

Liberum upgraded National Express to 'buy' from 'hold' on Monday, lifting the price target to 470p from 410p as it said the company's consistent execution of a controlled risk strategy, which is delivering steady compounding growth, is not fully reflected in the rating.

It said the group's diversified exposure to multiple geographies, transport modes and regulatory regimes means National Express is not reliant on any one source for current earnings or future growth and noted that the transport operator has been able to deliver consistently over the past four years.

"It has pursued and realised steady growth opportunities across multiple areas, with a balance between organic growth, contract wins and acquisitions. The effectiveness of this controlled risk strategy is evident in how the group has overcome challenges," Liberum said.

It argued that the group's exit from the UK rail industry was well-timed, doubly so with the benefit of hindsight.

"Although it continues to have a material presence in the UK, the majority of earnings and value are derived overseas," it said, adding that even within the UK, National Express faces below-average political risk, with its local bus operations in the West Midlands benefitting from a supportive local transport authority with little or no interest in imposing regulated contracts and the long-distance coach services attracting little political interest.

"Its value-for-money proposition should also position it well in any period of greater economic uncertainty," the brokerage said.

As part of its note on UK public transport, Liberum said investor sentiment towards bus and rail operators was at an all-time low.