Broker tips: BHP, Vodafone

Deutsche Bank noted that BHP has now completed its third phase of simplification, following the S32 spin out in 2015 and US Onshore disposal in 2018, leading it to now closely compare the stock to rival Rio Tinto.

"BHP has materially outperformed since 2020 and, with the collapse of the DLC structure in January, trades at a significant premium to RIO Plc despite being of similar size and commodity exposure," said DB.

"This is partly technical (RIO Ltd trades at a >10% premium to Plc), but also due to solid operational performance, pricing momentum (coking coal), and potential for a record dividend in August."

In contrast, the German bank said Rio Tinto had been impacted by challenges within its iron ore business and senior management turnover following the Juukaan Gorge incident in 2020.

However, DB still believes BHP's valuation to be "relatively full" and reiterated its 'hold' rating on the stock.

"Under our 2023 base case, BHP is trading on a ~7.5% FCFy and 6.2x EV/EBITDA, more than a 20% premium to RIO on ~10% and 4.3x. Spot multiples are closer due to high coking coal prices," said the analysts.

Analysts at Berenberg took a fresh look at telecommunications giant Vodafone following the group's full-year results last Friday but made no changes to its 'hold' rating and £1.45 target price on the stock.

Berenberg said Vodafone's goodwill accounting made "for interesting reading" but stated it would be wrong to assume that impairment testing assumptions were necessarily the same as the group's budgets.

Berenberg also noted that Vodafone's three-year adjusted free cash flow targets had not yet been agreed, with details of the final range to be disclosed in the relevant market announcement at the time of grant and published in Vodafone's 2023 directors' remuneration report. However, it said there were "no big surprises" in the rest of executive pay, with the remuneration framework remaining the same as 2021 and "broadly appropriate".

The bank said that the report's risk section evolution highlighted Vodafone's key challenges, with Vodafone continuing to outline ten risks, the same number as in last year's report, but with that in mind, Berenberg did note that the balance and weighting of the risks had evolved.

"Interestingly, Vodafone now suggests that the risk of 'disintermediation' is increasing if Vodafone fails to effectively respond to threats from emerging technology or disruptive business models. Last year, this risk was said to be stable. 'Supply-chain disruption' is new, albeit replacing the similar 'geopolitical risk in supply chain' in last year's report. Similarly, 'technology resilience and future readiness' is new, albeit similar to 'technology failures' and 'IT transformation' from last year," said Berenberg.

"'Infrastructure competitiveness' and 'portfolio transformation' are both new. We think that the latter is particularly relevant, given investor frustration at Vodafone's lack of progress after its overt messaging regarding M&A at the H1 results in November. Vodafone describes the risk as being 'failure to effectively execute on plans to transform and shape the portfolio could result in failure to deliver growth in revenue and improved returns' and identifies emerging threats that the 'regulatory approach to in-market consolidation may not change in the direction expected, limiting opportunities for value accretive in-market consolidation'."

Reporting by Iain Gilbert at Sharecast.com