Investors cautious amid concerns about Middle East, Greece and US interest ratesInvestors remain cautious given the worries about the global economy, Greece and the tensions in the Middle East.But with oil prices dropped back after Thursday’s surge - which was fuelled by Saudi Arabia taking military action in Yemen - and a couple of positive broker notes, airlines are recovering from recent losses.We see a rising prospect that easyJet can report stable (not falling) pre-foreign exchange revenue per seat for summer 2015 and thus lift our diluted earnings per share forecast to 140p. Within Europe, we see the prospect of a balanced supply/demand outlook enabling fuel gains to be retained (we do not see this for long haul) and thus lift our rating.2015 operating profit [is] guided higher as BA and Iberia progress well. We see re-rating potential as financial metrics converge with low-cost carriers.After 19 days, and 115 rounds of bidding, the Indian spectrum auction has concluded. Interestingly the results seem much more favourable than feared. Notably: (1) The big three operators, Bharti, Vodafone and Idea, have retained almost all their valuable 900MHz spectrum, (2) Vodafone has secured a sizeable 30MHz of additional 2.1GHz spectrum, (3) Vodafone has increased its 3G coverage from 9 to 16 circles, which represents 88% of its service revenue footprint, (4) Despite these incremental “wins”, Vodafone’s total spend at $4.2bn is only in-line with our expectation, and lower than the $5.5bn Bloomberg feared.With the auction overhang removed, and foreign exchange pressures easing, we believe it is time to focus back onto the re-rating potential offered by Vodafone’s improving European outlook, and our anticipated return to revenue growth. We think the auction outcome could lead to Indian operators increasing pricing in order to reduce balance sheet pressures and this would be a positive outcome for Vodafone. We believe Vodafone could look to IPO its Indian business from the end of 2016 onwards and India represents around 10% of Vodafone EBITDA.With the overhang from Indian spectrum auctions now cleared and the euro recovering (around 50% of EBITDA is euro denominated), we think investor focus for Vodafone can switch back to improving organic service revenue growth trends. We see a dividend yield of 5% as attractive and see upside to estimates from market repair/mobile data and do not believe Vodafone will undertake any transformational M&A near-term. Continue reading...
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