Above-market yield with Vodafone

Feb 22 2010 by Andrew Miller, The Journal

VODAFONE - We upgraded our recommendation on Vodafone to Outperform from Neutral, with a revised fair value of 175p, based on a DCF valuation.

Despite offering good long-term value we downgraded to Neutral last year due to a lack of catalysts, as Vodafone came under pressure in a number of its key markets and also as defensive stocks fell out of favour with the market.

This year has seen the start of an improved trend, with European operations looking to have reached a base rather than continuing to decline. The exposure to emerging markets should still also provide long-term growth opportunities.

Corporate activity in the mature European markets is back in focus and the possibility of a dividend payment from Verizon Wireless has increased. Vodafone is also a good investment for investors seeking income, with an above-market yield.

SABMiller – We have upgraded our recommendation on SABMiller to Outperform. Following on from some slightly weaker than expected results, there was also news of a rise in Columbian VAT on beer from 3% to 14%. These combined to pressure the shares lower and provide a compelling buying opportunity.

SABMiller is still a high-quality emerging market play, able to generate sector-leading earnings growth and with a strong balance sheet relative to the peer group.

The recent results certainly raised concerns over the health of the European business, (propped up by a 34% rise in Russian volumes, as wholesalers built up stock ahead of January 1, 2010 excise duty increase) and the rise in Columbian VAT has reduced our full year forecasts by 2%.

However, we still expect 2010 to be a very good year for SABMiller. Our 1850p fair value is based on the shares deserving to trade at 14x calenderised 2010 forecasts, in line with its historical FY1 average.

Rolls Royce – We currently rate Rolls-Royce as a Buy. We are favourably inclined towards Aerospace and Defence worldwide, believing a recovering global economy will result in growing air traffic, improving yields and rising aftermarket sales.

In defence, although we see weakening defence budgets in Western economies, we see continued demand in emerging markets, and the potential for selective, company- specific investments. We consider Rolls Royce as one such investment, and are more optimistic than consensus in our forecasts. The shares performed well in 2009, but we think there is more to go, and our fair value of 600p offers c.20% upside.

Andrew Miller is regional office head of Barclays Wealth