Broker tips: SSE, Vodafone, Bank of Georgia
HSBC upgraded energy company SSE to ‘buy’ from ‘hold’ and raised its price target to 1,740p from 1,660p due to good visibility on earnings.
Earnings visibility from regulated networks indexed to higher retail price index (RPI) and capacity payments indicated "favourable weather" for the company.
The group’s diverse generation portfolio has an increasing portion of regulated support. Electricity transmission and distribution investment underpinned by a regulated price control is linked to growing RPI.
The bank does however feel the company’s 100 base point yield premium to the sector is "unjustified".
Investors are cautious about the presentation of earnings and the use of hybrid debt and scrip dividends which dilute earnings and overstate dividend cover, according to analysts.
The most significant event last year for HSBC was Moody’s decision to affirm a Baa1/Stable outlook in October.
A "key threat" to the company is that it has the highest number of retail customers remaining on the Standard and Variable Tariff of any supply company at 91%, making it more vulnerable to further customer losses.
The bank has assigned a 50% weight to yield and 25% each to discounted cash flow (DCF) and sum-of-the-parts (SOTP)/peer group to arrive at its new rounded target price of 1,740p.
It has made more “aggressive assumptions” on the DCF valuation which has increased the cost of capital valuations to 4.5% to 4.2%. These are offset by the analyst’s increase in yield valuation due to a reduction in dividend yield valuation to 5.25% from 6%.
Bank of America Merrill Lynch downgraded Vodafone to a 'neutral' rating from 'buy' as the telecoms giant's multiple headwinds in recent months are "unlikely to abate in the near-term", with the 2 February trading update predicted to be cautious.
Merrill felt a recovery in revenues, for so long the bull case at Vodafone, "may fade away" as soon as the year end and "looks unlikely to recover" until late in the March 2018 fiscal year.
"Our view is structural change is needed, based on analysis of VOD’s return on asset profile that looks unsustainably low, Merrill said, re-examining the media speculation of a possible asset swap with Liberty Global and M&A in India as potential solutions that could offer "some respite" but remain difficult to execute.
Analysts, while cutting the price target to 236p from a prior 280p, said structural change looked "increasingly necessary".
A hypothetical asset swap with Liberty, whereby Vodafone divests the UK and boosts Germany, suggested potential synergies of 20p per share and low cost of debt, allowing the FTSE 100 group to accept a discounted mobile valuation and still achieve double digit cash flow accretion.
A mooted Indian merger with Idea "could provide scale" to offset price pressure from Jio, but no moves are envisage in the short term.
Growth is seen as "in decline", with third-quarter guidance for lower Indian price disruption alongside currency devaluation in Turkey and Egypt, so Merrill has reduced its forecasts for like-for-like EBITDA by 3.9% and reported EBITDA by 7.7%, EPS by 34%, and free cash flow 14%, which puts it at the very low end of company guidance.
Shares in Bank of Georgia (BGEO) rose on Wednesday as Peel Hunt upgraded the lender to ‘buy’ from ‘add’ and issued a target price of 3,450p after being under review previously.
Peel Hunt said the Georgian bank’s decision to sell down its stake in non-core business Georgia Healthcare, which represents 28% of its market value, gives shareholders increasing visibility on future capital returns.
“We update our model to incorporate the strong growth expected in Georgia Healthcare's profitability,” the broker said.
“Given the attraction of potential gains from non-core investments and the attractive earnings multiple, we move the shares to
'buy' from 'add'."
BGEO is targeting at least three special dividend payments by 2019, driven by planned divestments. The total represents at least 50% of the 2015-2019 cumulative regular dividends. Peel Hunt expects special dividends will equate to 257p or £99m over the next three years.
“This is achievable given the capital return opportunity available following the sell-down of the stake in Georgia Healthcare and the potential gain from realising value in the emerging utilities business (Georgian Global Utilities Limited),” the broker said.
“In addition, we continue to expect BGEO to benefit from underlying Georgian economic growth, supporting the core Banking division.”
Peel Hunt raised its estimate for statutory earnings per share by 12% but lowered its guidance on underlying EPS by 7%, reflecting “exceptional gains and an increase in our expectation for cost of risk”. It also upgraded its 2017 forecasts for EPS by 13% and 2018 EPS by 24%, due to increased contributions from investments.