Broker tips: Vodafone, Centrica, National Grid

There is "light at the end of the tunnel" for Vodafone, said Bank of America Merrill Lynch on Wednesday, upgrading the mobile telecoms group to a 'buy' rating.

After a "torrid" 12 months of Southern European competition trouble, high spectrum costs and Indian funding issues, these headwinds "are now passing and increasingly baked into forecasts", Merrill analysts said.

This year and next, Vodafone is expected to return to " marginal" top-line growth but with around 3% EBITDA growth as all core regions contribute positively.

A dividend cut is already priced in, the analysts believe, addressing one "sore point" and "there is potential to revisit" as the pending Liberty deal "would add leverage and a possible credit downgrade, but also double-digit earnings and cash flow per share increases".

Possible disposals and network sharing deals could be further potentially positive catalysts.

The upgrade came with a share price target of 200p.

RBC Capital Markets has slashed its recommendation on Centrica on growing expectations of a dividend cut, but upped its rating on rival utility National Grid.

The bank has downgraded the British Gas-owner to ‘underperform’ from ‘outperform’, and reduced its price target from 185p to 130p, arguing that a dividend cut was now “inevitable”.

“The harsher commodity environment, coupled with continued competitive and regulatory pressures in the consumer segments, and a general lack of growth across the business, means that we do not believe that Centrica can hit the pre-requisites on adjusted operating cash flow generation to maintain the 12p per share dividend,” it argued.

“We see most pressure on 2019, and while Centrica may, therefore, maintain the dividend for 2018, we believe the dividend will have to be reduced in due course.”

RBC is pencilling an 8p per share dividend for 2019, “with a 75% pay-out ratio thereafter, whilst also removing the dilutive scrip dividend option”.

The bank’s other concerns include a “lack of visible growth” for the FTSE 100 business. “We remain unconvinced that areas such as Connected Home or Distributed Energy and Power will ever be significant earners for the group.”

RBC was more upbeat about National Grid, however, which it sees as a value play. It increased the target price to 950p from 900p and upped its recommendation to ‘outperform’ from ‘sector perform’.

“The ability of National Grid to maintain dividends is the key question from investors, following the potential cut in headline returns proposed by [regulator] Ofgem,” it said.

“In our view, National Grid has levers to pull to maintain dividends within the confines of keeping the balance sheet above the 9% threshold of revolving credit facility/net debt.”

RBC added that strong growth in National Grid’s regulated US activities would help offset earnings pressure elsewhere and that the company was currently the only UK network trading at a discount to regulatory capital value.