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Broker tips: Vodafone, Metro Bank

By Iain Gilbert

Date: Wednesday 15 May 2019

Broker tips: Vodafone, Metro Bank

(Sharecast News) - The outlook for revenue growth is the main question hanging over Vodafone after the company cut its dividend, Credit Suisse analysts said as they lowered their price target.
Vodafone's 40% dividend cut was expected and makes the balance sheet less risky, the analysts said, as they kept their 'outperform' rating on Vodafone shares but cut their price target by roughly 10% to 190p.

The company's prospects for revenue revival are fragile with the UK and Spain uncertain. It also benefits from easier numbers a year earlier, Credit Suisse said.

"The equity story from here hinges on the extent to which revenue growth can rebound and margin expansion accelerate. We are comfortable on the cost side, but the revenue outlook remains the main challenge for Vodafone," the Credit Suisse analysts said in a note to investors.

The analysts said Vodafone has been undervalued for some time. Triggers for an upgrade to its valuation include closing its takeover of Liberty Global's German and Eastern Europe business, completing the German spectrum auction and better performance on margins or revenue.

"On balance we believe the next catalysts for the stock are likely to be positive," the analysts said. "But with an uncertain revenue outlook, the inflexion looks less solid than we would have hoped for at this point."

Elsewhere, analysts at Berenberg cut their target price on challenger bank Metro Bank in half on Wednesday, stating the outfit was suffering from "acute uncertainty" pending completion of its £350m planned capital raise.

Berenberg said that while Metro's plan to moderate growth should enable "a more stable path for returns", alongside still-meaningful growth, it believes the bank will continue to rely on "inorganic capital actions" and, considering this and near-term headwinds to revenues, its analysts came to the conclusion that risks to the firm's share price were broadly balanced.

However, the German bank, which reiterated its 'hold' rating but slashed its target for Metro Bank from 1,200p down to 600p, did state that while Metro's decision to moderate its growth aspirations was reactive, it was, nevertheless, beneficial.

Berenberg said Metro's new moderately paced strategy reduced its reliance on external capital, enabled it to demonstrate that its model can deliver acceptable returns, which, in time, should provide a "more stable mandate to take advantage of future growth", and lastly, forced it to avoid excess growth during a "particularly competitive part of the credit cycle".

However, Berenberg's revised figures, which now include Metro's £350m planned rights issue, brought about a roughly 35% fall in the bank's EPS estimates, which it assumed would see £150m raised at around 1,200p per share.

But each 10% fall in Metro's share price led to a 3% fall in Berenberg's EPS estimates, which were then further impacted by Metro's plan to grow "less rapidly", but were partly offset by lower costs.

Berenberg said: "The reduction to our price target partly reflects greater-than-expected dilution from Metro's planned equity raise as well as the impact of slower growth.

"We continue to assume an 11% cost of equity. While our price target provides circa 20% upside, we think risks to Metro's share price are balanced considering the scope for further dilution."


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