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Brokers: Jefferies bearish on telecom firms

two BT Openreach vans
Jefferies is downbeat about the prospects of UK telecom companies such as BT

Jefferies International has seemingly lost faith in communications groups, as it downgraded its target prices for Sky PLC (LON:SKY), Talktalk Telecom Group PLC (LON:TALK), BT Group PLC (LON:BT) and Vodafone Group PLC (LON:VOD).

The global investment group said that its recent “survey revealed…BT exhibiting much lower brand advocacy than 02/ 3/ Sky/ Virgin”, and also cited “structural pressures” as to why it has cut BT’s price target to 400p from 475p.

Jefferies wasn’t quite so harsh on Sky, reiterating its hold target and reducing its target to 895p from 915p, explaining that it sees “credible growth initiatives (mobile, Sky Q) but believe[s] they will be capital (and margin) intensive to execute.”

TalkTalk saw its ‘underperform’ rating reiterated by Jefferies, and share price target lowered slightly from 150p to 140p.

If the rating and share price downgrade seemed soft, the broker was less so in its notes, blasting its “consistently weak” earnings momentum.

Jefferies added that TalkTalk was “in need of identity” and needs to cut prices if it wants to retain its ‘challenger’ image.

Vodafone capped off Jefferies’ series of target cuts, with the broker lowering its share price guidance to 245p from its previous target of 265p.

Despite this, the phone operator “remains [Jefferies’] preferred UK telecom”, thanks to “supportive macro/ pricing and improving margin trends.”

Elsewhere, Circassia Pharmaceuticals PLC (LON:CIR) suffered at the hands of brokers following Monday’s disappointing phase III trial results.

Two thirds of the company’s value was wiped off yesterday following the announcement that its cat allergy treatment – the most advanced of all of its allergy treatments – had failed a late-stage trial because it only had the same effect as a placebo.

As a result, RBC Capital Markets moved it from ‘top pick’ to sector perform, downgrading its share price target to 105p, while Stifel downgraded its recommendation to ‘hold’ from ‘buy’.

Peel Hunt also downgraded the stock from ‘buy’ to ‘add’, although it was slightly more optimistic than RBC with its price target of 160p, down from a previous target of 460p.

Despite this, the broker says it can see more than a 70% upside to the revised price, with the stock offering good value following the “sentiment driven sell-off”.

Peel Hunt does however acknowledge “the uncertainty overhang medium-term unless a strategic bid emerges”.

In other broker updates, Liberum has upgraded transport company Go Ahead Group PLC (LON:GOG) to a ‘buy’ recommendation from ‘hold’, although it did cut its target price to 2740p from 2860p.

FTSE 250-listed Go Ahead put out a disappointing recent trading update, although Liberum is convinced that the market “overreacted” to this update.

“The share price reaction exceeded any reasonable assessment of value reduction,” the broker noted.

“The disappointment on GTR (Govia Thameslink Railway) margins and a more cautious bus outlook do not change Go-Ahead’s market positions, robust balance sheet or strong cash position.”

UK retailer WH Smith PLC (LON:SMWH) was also upgraded to a ‘buy’ recommendation from ‘hold’, although this time by Stifel.

The US-based financial services company says that the recent drop off in WH Smith's share price represents a “useful buying opportunity for longer term, income-focused investors.”

Stifel added that the firm is well placed whichever way the UK votes on Thursday and has set a price target of 1920p.

In the world of the small caps, RFC Ambrian has repeated its ‘buy’ recommendation for Hummingbird Resources Ltd (LON:HUM) and has also maintained its target price of 38p.

In its note today, the broker speaks glowingly about Hummingbirds “flagship high-return Yanfolila project”, noting the “attractive 60% IRR”, as well as the fact that the “calculated capital intensity of US$103/oz of gold recovered is among the lowest in the West African peer group”.

RFC Ambrian estimates construction to take around 12 months to complete, and so believes the firm is on track for first production before the end of 2017.

“Operationally, we see value upsides as including the establishment of JORC-compliant resources/ reserves for near-mine satellites, specifically the high-grade Gonka deposit, and their inclusion in the mining inventory,” the note added.

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