Broker spotlight including Vodafone, Gulf Keystone, Sports Direct, Debenhams, Severn Trent and Pennon


It doesn’t really work over here in the UK where telephone keypads are numeric rather than alpha-numeric, but I’ll chance my arm anyway to tell you that Vodafone (LON:VOD) this morning dialled ‘U’ for upgrade.

Yeah, see didn’t really work. So I won’t labour the point too much more and tell you that Goldman Sachs decided to raise its rating on the mobile comms giant to ‘buy’ from ‘neutral’.

And when the Wall Street heavyweight makes a big call on a stock that stock invariably moves.

In the case of Voda the upgrade boosted the share price by 2.4%. That might not seem a lot, but when I tell you that it added £1.4bn to the company’s market capitalisation, you’ll see what sort of power golden Goldman wields.

Divining the reason for the change was a different matter, however, as the explanation that was about as penetrable to the lay reader as ancient Sanskrit.

“Recent news flow increases our belief that consolidation can reduce the deflationary risks posed by fixed-mobile convergence, enabling accelerating mobile data demand to become a sustainable growth tailwind,” it told investors. 

“We expect Vodafone to benefit as both an active and passive M&A participant, and note that its sector-low operating and FCF margins mean that it has among the greatest leverage to a mobile revenue rebound.”

The gist seems to be that Vodafone may buy something or be bought – either way there seems to be some upside, according to Goldman, which values the stock at 320p.

The bank also noted the very chunky 5% dividend yield – which is significantly more than you’d get from a savings account – but counter-balanced this by saying the stock current trades at a 20% premium to its peers. 

The big City investors seemed to know what Goldman was talking about with the stock up almost 2% in early trade at 227.45p. 

Elsewhere, punters favourite Gulf Keystone Petroleum (LON:GKP) has been downgraded by the influential oil team at Deutsche Bank.

It has gone to ‘hold’ from ‘buy’ on valuation grounds with the stock up 75% since mid-October.

The dynamo for this strong performance has been the improving political backdrop in the Kurdistan region of Northern Iraq, home to the company’s flagship Shaikan Field and all its other assets.

“Our positive stance on the Kurdistan region is unchanged,” Deutsche said in a note to clients.

“In our view, the recent release of export payments by the regional government and reconciliation between Baghdad and Erbil increases confidence in cash generation, reduces political risk and may accelerate regional consolidation.

“However, despite our analysis suggesting Gulf Keystone could be self-financing next year if export payments continue to be honoured, liquidity risk is not immaterial and valuation appears more demanding relative to peer.”

Deutsche values the stock at 85p, which is 15.5p ahead of last night’s close.

With 19 shopping days to Christmas, Barclays has made the brave call of upgrading Debenhams (LON:DEB), one of the sector’s laggards.

Dedicated followers of fashion will know the next fortnight and a bit is crucial to our high street stalwarts.

A couple of days of snow, or a sustained period of unseasonably warm winter weather in the run up to the festive period can be the difference between hitting earnings targets and missing them.

However Barclays is looking further out that the immediate stampede and reckons Debs’ earnings could start drifting back up to historic levels after a 30% decline in the last financial year, with the emphasis on tight cost control.

It also believes setting up concessions run by Mike Ashley’s Sports Direct (LON:SPD) will have a knock on impact on department stores group’s own top and bottom lines.

As a result raised its 2015 EPS estimates, which now sit around 10% above the City consensus.

Following on from that, it has moved the stock to ‘overweight’ from ‘equal weight’ and the price target to 90p a share from 70p.

Debenhams’ valuation gap should narrow in the mid-term especially if earnings momentum turns positive,” the bank told investors.

At 10.50am, the shares were up 2% at 72.35p.

The crash test dummies group Intertek (LON:ITRK) received a double dose of good news from two of the City’s leading brokers.

Both UBS and Deutsche Bank said the recent share price weakness was overdone as they each moved to ‘buy’ on the stock.

The former values the stock at £26.56, while the latter is a little more upbeat on prospects and sees it getting to £29 in the next 12 months.

UBS said: “The shares have fallen by 30% in the year to date and we believe the current valuation offers an attractive entry point where we still admire the long-term fundamentals.”

The shares closed at £22.66, valuing the business at just under £3.6bn.

JP Morgan, meanwhile, has taken a closer look at the quoted water firms ahead of the final price determination by the regulator next week.

The investment bank believes the watchdog Ofwat will agree an “attractive” retail price inflation price link that “provides the opportunity for both financing and operational outperformance”.

At the same time JPM is suggesting the removal of regulatory uncertainty may herald takeovers and mergers in the sector.

“We include a 60% probability of M&A in our price targets,” it said in a note to clients.

The house reinstated coverage of United Utilities (LON:UU.) and Severn Tent (LON:SVT) with ‘overweight’ recommendations, while Pennon (LON:PNN) is rated ‘neutral’.

Rounding up the other notable moves, Barclays went to ‘equal weight’ from ‘overweight’ on dealing room terminals group Fidessa (LON:FDSA), N+1 Singer repeated its ‘sell’ on Irn Bru maker AG Barr, but dropped its target price to 510p, while the paving stones specialist Marshalls (LON:MSL) is now on a ‘neutral’ recommendation at Citi after being cut from ‘overweight’.

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