Broker tips: Vodafone, Admiral, Henderson

Ahead of Vodafone’s first quarter interims on Friday, Deutsche Bank said the company continues on an “improving growth path” in Europe with both volume and price trends encouraging.

The bank expects organic service revenue of 1.9% in the first quarter, which would mark a slowdown on the fourth quarter’s 2.5%. The last quarter benefitted from accounting changes and the leap year.

“These benefits no longer accrue in the first quarter, which further suffers due to roaming rate reductions,” Deutsche Bank analysts said.

“Whilst individual markets may move backwards near-term (e.g. UK) we view the broad trend for further top-line recovery in fiscal year 2017 alongside a healthy yield, as likely to boost Vodafone's rating.”

Deutsche Bank noted that Europe’s mobile traffic growth accelerated in the fourth quarter by 0.3 percentage points (pp) to 49.0% year-on-year while unit revenue trends improved by 0.5pp to a drop of 33.6% year-on-year.

It marked the fourth consecutive quarter of improvement in unit revenues, which the bank said is “supportive for further growth with Vodafone’s top line highly sensitive to small, even offsetting, changes in the price-volume mix”.

Europe’s mobile service revenue growth was still negative with a 1.1% decline in the fourth quarter but a 1pp improvement on the previous period. “We expect a return to mobile growth during fiscal year 2017, though the UK’s contribution will deteriorate in the first half.”

The bank’s GBP estimates for the full year 2017 have risen by 5% for earnings before interest, tax, depreciation and amortisation, 10% for earnings per share and 6% for dividends per share. However, estimates traded in euro terms are slightly lower. Chief risks are foreign exchange movements and any increase in competition, Deutsche Bank said.

Admiral Group shares gained on Wednesday as UBS upgraded the stock to ‘buy’ from ‘neutral’ and raised the target price to 2,339p from 1,840p.

UBS said it believes the motor insurance company’s major growth drivers - International and Home businesses - are currently undervalued. The bank said International and Home could add 12-33% to 2020 group net income.

“We estimate £50m-£139m of earnings potential based on conservative bottom up assumptions,” said UBS analyst James Shuck.

“This has the potential to boost core earnings growth in UK motor from 3% to 7-12% with a broadly equal contribution from Home, International Insurance and International price comparison.”

The two businesses are expected to begin delivering from as early as the second quarter, according to UBS, with Home in particular benefiting from a new policy system and rapid growth in price comparison websites.

UK car insurers have been the best performing sub-sector in 2016, UBS said, adding that its re-rating is due to defensive characteristics, yield attractions and a rising rate environment.

“We now expect greater appreciation of the growth opportunity, ultimately driving near term earnings surprises and further multiple expansion.”

Henderson Group’s shares fell on Wednesday as RBC Capital downgraded its rating on the stock to ‘underperform’ from ‘sector perform’ and lowered its target price to 210p from 270p.

RBC said while it believes the investment management company remains a well-managed business, its current valuation premium to peers is “too wide” given a weak flow outlook for the rest of 2016 and material earnings downgrades on poor performance fee generation.

The broker expects a earnings per share compound annual growth rate decline of 5.7% in calendar years 2015-2017, which lags the peer average for a 2.9% fall.

“Further, due to the reductions to our forecasts, we now expect it to take until 2018 for Henderson’s EPS to recover to the 2015 level,” RBC said.

RBC forecasts weak retail flows through the rest of 2016 on uncertainty following Britain’s vote to leave the European Union on 24 June and due to high redemptions from the Henderson Global Investors UK Property fund.

Institutional flows are also expected to remain subdued, since uncertainty on the macro outlook is likely to continue to delay investment decisions, RBC said.

“Overall, we now expect 2016 to be the first full year of net outflows since 2012, at -£2.4B. We expect a flow recovery thereafter, and if this does not occur our forecasts and price target would be at risk.”

RBC reduced its underlying pre-tax profit forecasts by 12%, 16% and 18% in 2016, 2017 and 2018, respectively.

Based on analysis of Henderson’s performance fee generating funds, RBC also cut its 2016 performance fee forecast by over 50%, to the lowest level since 2012.

“Our revised forecasts are 6%-9% below consensus through our forecast horizon. We believe current consensus is too optimistic, and we expect downward revisions should occur heading into results and immediately thereafter.”