Broker tips: Vodafone, ITV, Rathbone Brothers

Vodafone was under the cosh on Tuesday after Citi downgraded the stock to ‘neutral’ from ‘buy’ but raised the target price to 245p from 240p.

Citi said it does not expect a “significant positive catalyst” for another two quarters following the company’s full year results in May, as its joint venture with the Netherlands is likely to take until the end of the year to close.

Vodafone and Liberty Global are merging their operations in the Netherlands. They will create a 50-50 joint venture, combing Liberty’s Ziggo cable operator and Vodafone’s mobile operations.

Vodafone in May posted its first quarter of revenue growth in Europe since the end of 2010. Europe revenue grew 0.5% in the fourth quarter as two of Vodafone’s biggest markets, Germany and Italy, returned to growth.

For the full year, the company reported a 2.7% gain in ear earnings before interest, tax, depreciation and amortisation on a 2.3% increase in total revenue.

“We downgrade Vodafone to 'neutral' from 'buy' as the stock looks up with events after a decent performance,” said Citi analyst Simon Weeden.

“Vodafone has so far ridden out the general political risk in Europe, outperforming UK stable-mate BT by 27% year-to-date (YTD) (only partly due to £/€ -13% YTD), but the October constitutional referendum in Italy could challenge this, among other election risk

“In Italy we also see potential for greater competitive pressure with Iliad positioning to enter the market. We update our forecasts and transfer to Euros from sterling, lowering growth in the UK (near term) and Italy (longer term).”

UBS upgraded broadcaster ITV to ‘neutral’ from ‘sell’ following an 18% share price fall, despite macroeconomic uncertainty and operational headwinds, noting that fundamental downside was limited.

The bank said its economists have cut their 2016 UK GDP growth forecast to 1.3% and to 0.5% for 2017.

“We would expect political and economic uncertainty to weigh on TV ad spend from the third quarter of 2016; although the magnitude of this is difficult to predict and will depend on media mix, deflation, ad loads and sector weights.”

UBS’s new forecasts see ITV's TV net advertising revenue fall 1.5% in full-year 2016 from +1%, -5% in FY17 from +1%, before recovering +5% in FY18 and FY19.

The bank cut its FY16-18 earnings per share estimates by 6-19%. Its adjusted earnings per share estimate for FY17 is 13.9p versus consensus of 18.4p before the UK referendum. UBS cut its price target on ITV to 170p from 195p.

Rathbone Brothers shares surged on Tuesday as Numis upgraded its stance on the stock to ‘buy’ from ‘add’, with a 2,350p price target.

The brokerage said that with the stock trading at a discount of around 20% to its 10-year average price-to-earnings of 15x, it was an ideal time to invest in the quality play.

“During its 275 year history, Rathbone has successfully navigated its way through a number of storms. So whilst uncertainty surrounding Brexit may indeed impact near-term fund under management flows, we believe Rathbones’ conservative operating model combined with the long-term industry growth drivers should continue to support average earnings growth of around 10% per annum over the medium-term.”

Numis said wealth management was a structural long-term growth industry due to the rapidly-evolving defined contribution pension market, an ageing and wealthier population, historical under saving by the UK market and favourable regulatory changes.

“We believe Rathbone’s reputable brand, steady investment performance and established network have helped it become one of the more reliable private wealth managers in terms of organic FUM growth,” Numis said.

It said that this, along with strategic team hires, bolt-on acquisitions and stable margins, has helped to generate consistent double digit annual earnings per share growth over the last six years.

Numis added that the stock’s premium rating relative to peers was justified.