Broker tips: Vodafone, Hays, BT Group

UBS reiterated a ‘buy’ rating on Vodafone and left its target price unchanged at 310p on Friday.

Vodafone and Liberty Group have received conditional clearance from the European Commission for the merger of their Dutch assets. UBS said it believes investor focus is now switching back to the prospect of the two companies revisiting a broader deal.

“Strategically a deal would create a leading converged fixed/mobile operator across Europe,” UBS said.

“We estimate cost synergies from a broader deal could have an net present value of €15.6-23.4bn for 100% with a further €6.4bn of potential upside from tax synergies. Assuming a 50% share for Vodafone, we believe this would be worth up to 47p per share for Vodafone.”

UBS thinks an acquisition of Liberty Global by Vodafone could be more than 10% accretive to Vodafone's equity free cash flow (EFCF) longer-term.

“ Looking at incentives for Liberty Global management, according to company filings they are incentivised to either accelerate EBITDA (OCF) growth to >6% pa over the next three years (H1-16 was +2%) or undertake a deal that would result in a change of control (either from an acquisition or merger).

“Vodafone management incentives are geared towards significantly growing EFCF over the coming years.”

UBS said its estimates for Vodafone are broadly unchanged after the company switched to reporting in euros from pounds. The financial services company expects a 4% increase in underlying EBITDA for fiscal year 2017, rising to 6-7% per year thereafter as core European business benefits from growing mobile data usage and price changes.

“Vodafone offers a 7% EFCF yield and >5% dividend yield on a calendarised basis for 2017E. We think recovery and operational gearing in Europe have been underestimated and that the current share price factors in little for M&A upside potential.”

Credit Suisse upgraded recruiter Hays to ‘neutral’ from ‘underperform’ and lifted the price target to 125p from 100p.

“We expect that the UK market will be challenging through FY17E but this should be offset by FX tailwinds and like for like profit growth in its other operations.”

CS said the outlook for Hays into full-year 2017 is mixed.

On the upside, its underlying markets and competitive position in Europe and Australia remain supportive and the company’s balance sheet is now net cash, which provides opportunities for special dividends if growth remains solid through FY17E.

In addition, Credit Suisse said Hays’ UK business has an experienced and highly capable management team and its IT platform is market leading.

On the downside, it pointed to weak and uncertain markets in the UK, the potential for some contagion into Europe as the UK weakens and rising tax rates as the mix of profitability shifts away from the UK.

“We think that, as conditions in the UK have become more stable and growth in Europe has proved more robust, the risk reward profile is now more evenly balanced.”

JP Morgan cut its recommendation and target price on shares of telecommunications services provider BT Group due to the large number of material 'headwinds' which the company was facing.

The company was expected to run into a large number of headwinds over the coming 12 to 18 months, including in terms of the number, complexity and potential negative impact on investor sentiment.

That, analysts at the broker said, would keep investors´ appettite 'subdued' over the next 12 to 18 months.

"Ongoing efforts to realise operating efficiencies, synergies from the integration of EE and trading momentum provide comfort in the outlook for earnings, analyst Matthew Bloxham said in a research note sent to clients.

JP Morgan downgraded its view on Segro´s stock to neutral, while paring its target price from 490p to 440p.