Vodafone is among the main fallers in a rising market, following a downgrade from Morgan Stanley.
The bank has moved its recommendation from overweight to underweight and cut its target price from 180p to 160p. In the market Vodafone is down 2.1p at 146.8p. Morgan Stanley's argument is as follows:
Unlike consensus, we don't think Vodafone Europe can return to growth given it has the greatest exposure to falling returns in mobile versus other operators with a mix of fixed and challenger mobile operations. We forecast high 29% return on capital employed in 2010, but think that such high returns should fall due to competition/new entrants. We would be more positive on Vodafone below 130p, but currently prefer BT, KPN and Telenet. Where could we be wrong? Returns can be stable for long periods, and new entry remains a scale and execution challenge.
Heading in the opposite direction after broker comment was Drax. The power station group is up 22.8p at 378.4 following a buy note from Royal Bank of Scotland, which said there could be 275p a share of hidden value in the company. It said:
UK gas prices look likely to be subdued at around 40p a therm for the next few years, due to weak global demand and strong supply, adversely affecting Drax's coal-fired economics. But we estimate Drax's share price barely covers the value of its tax losses, carbon and coal stocks, and trading book, making it a buy.
[The hidden value] arises from Draxís coal stocks (46p a share); the carbon credits it will receive under the UKís National Allocation Plan (74p a share); its historical tax losses (64p a share) and the value of its trading book, assembled when prices and spreads were significantly higher than today, (107p a share). Subtracting debt, we estimate this totals around 275p a share. This implies that the physical assets of Drax (the largest coal-fired power station in Western Europe, fully equipped with flue gas desulphurisation) are only being valued at £330m - around 10% of replacement cost, or 75% of the last three years' capex.
