Market Report: Vodafone builds on mobile internet hopes
Wednesday 10 March 2010
Hopes of increasing mobile internet use helped Vodafone to weather a weak session on the benchmark FTSE 100 index last night.
The telecoms group saw its shares firm up by 0.25p to 148.4p after Exane BNP Paribas, drawing on the conclusions of a report on the prospects for mobile internet use, said that even though voice revenues at European operators will continue to decline beyond the recession, the top line should improve. The main driver will be mobile internet access on smartphones, with the report, which was jointly produced by Exane and Arthur D Little, suggesting that usage will accelerate further in 2010 and 2011. Beyond the top line, the broker said investor fears regarding capital expenditure had been overdone, and were "largely exaggerated for the vast majority of European telcos", while, elsewhere, it forecasts most dividends "appear absolutely sustainable for the coming years".
In Vodafone's case, the European operations should see revenues improve both in absolute and relative terms as the macro picture brightens and the division's market share stabilises, the broker said. Moreover, investors may receive a boost from two Vodafone-specific catalysts. "First, the long-awaited return of a dividend from Verizon Wireless, which could add more than 50 per cent to reported FCF [free cash flow] and lead to a higher dividend," Exane explained, moving the stock to "outperform" from "underperform". "In our view this could happen by mid-2011. In the meantime, the sale of the SFR stake to Vivendi seems a real possibility," the broker added, revising its Vodafone target price to 178p.
Overall, the FTSE 100 touched a session low of 5563.14 before paring losses in the final hours of play to close at 5602.3, down 4.42 points. The mid-cap FTSE 250 index was also under pressure, easing by 11.71 points to 9774.68, as traders marked the anniversary of the lows stuck by world markets in 2009 by banking profits from recent gains. Dismal trade figures for the UK, coupled with concern about the country's credit ratings, weighed on sentiment, as did softening commodity prices, with gold and copper retreating in afternoon trading.
Fresnillo, down 8p at 840p, was among the weakest of the miners, while Randgold Resources lost 75p to 5005p. Antofagasta was among those that managed to rise, adding 11p to 1005p after issuing full-year results.
Volumes, which have been waning in recent sessions, continued to thin, with Anthony Grech, market strategist at IG, pinning the weakness on the strength over the last few weeks. "Blue chips in London have rallied by more than 10 per cent in the past month, so it should not be too surprising if some investors choose to adopt a wait-and-see approach to the market at current levels," he explained.
Royal Bank of Scotland, down 0.49p at 38.89p, and Lloyds, down 0.47p at 53.18p, were held back after Credit Suisse struck a decidedly cautious note on the sector's prospects, saying that "the most relevant question for us is not how quickly revenue will rise, but how painful the transition to a more stable liquidity, funding and capital structure will be". "While the precise timing of new liquidity requirements is unclear, we believe banks must improve balance sheet structures over the next 3 [to] 4 years. This will be difficult through term issuance alone, and we believe that balance sheet footings will have to shrink markedly to compensate," the broker explained, adding that, in relative terms, Barclays, up 0.8p at 345.8p, was its favourite of the UK banks.
Elsewhere, the inter-dealer broker Tullett Prebon, up 1.4p at 310.2p, was the focus of some feverish bid speculation, with market watchers citing rumours anticipating a 400p per share approach. GFI, which has been linked with the company before, was soon named as a likely suitor, though some also noted the possibility of interest from a mainstream bank. The chatter was supplemented by some words of support from Nomura, which, while reiterating its "buy" stance, raised its target price for the stock to 380p from 360p.
Back on the downside, Imperial Tobacco was 54p weaker at 2091p after UBS turned negative. "We believe the stock is fully valued and that market consensus for 2011 onwards is too high," the broker said, switching its stance to "sell" from "neutral", albeit with a revised 1990p target price, compared to 1860p previously. "We believe that post-2010 the rate of underlying EPS [earnings per share] growth will slow significantly as the bulk of the cost savings from the Altadis integration are completed and the group remains unable to repurchase stock or make meaningful acquisitions as it seeks to de-gear."
Further afield, UBS was more positive on Davis Service, the laundry and workwear group which added 0.8p to close at 409.7p after the broker, weighing on last month's annual results, upped its target price for the stock to 480p. "We continue to like the solid performance and market position, as well as the combination of [an] appealing valuation and [a] high dividend yield," UBS said, repeating its "buy" recommendation.
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