Broker tips: HSBC, Cineworld, IAG, Wizz Air, Ryanair, EasyJet

RBC Capital Markets downgraded HSBC to 'underperform' from 'sector perform' and slashed the price target to 560p from 730p as it highlighted elevated risk from China and a stretched valuation.

"HSBC's share price has historically been 72% correlated to the GDP growth of the countries in which it operates, it is therefore vulnerable to a fall in GDP in one of its significant geographies."

The bank pointed out that HSBC's direct exposure to China is 11% of profits, but this rises to 59% if we include indirect exposure from Hong Kong and Singapore, whose own economies are strongly correlated to Chinese growth, at 77% and 86%, respectively.

It noted the fact that the US has imposed $250bn of tariffs on China this year, with the current levy of 10% expected to increase to 25% from the start of 2019 and the potential for an additional $267bn of goods to be subject to the tariff.

"We expect that this will act as a drag on Chinese GDP in the next couple of years," it said.

"We expect this slowdown to impact HSBC's Asian loan growth and wealth management revenues and see downside risk to the shares as consensus is already close to management guidance for 2020 return on tangible equity," RBC said, adding that the bank's implied cost of equity is elevated.

In addition, RBC argued that the stock's valuation is stretched, with its two-year forward currently trading at a price-to-earnings of 2x higher than the average of the other universal banks.

Cineworld was under the cosh on Wednesday as Barclays cut its stance on the stock to 'equalweight' from 'overweight' and trimmed the target price to 305p from 310p as it highlighted rising US interest rates.

The bank said Cineworld investors are facing a dilemma.

"Trading is currently very strong in the US and there may be upside to Regal synergies of $100m. However, US interest rates are rising, all of Cineworld’s debt is at floating rates (circa 80% is US based), and leverage is relatively high (FY19 net debt/EBITDA is 3.2x," it said.

It noted that Cineworld is a consensual 'buy' among sell-side analysts but said that consensus forecasts don't reflect the risk of rising rates.

"A clear upside risk is that the company trades more strongly than we expect, but we believe that the investment debate is more balanced now, and stronger trading could be offset by higher interest costs," Barclays said.

The bank's economics team assumes that US interest rates will rise to 3-3.25% by the third quarter of next year versus the current Fed Funds rate of 2-2.25%.

Despite the downgrade, Barclays said it is "very confident" in the trading outlook for the business and pointed out that Boxofficemojo data reveals that US box office revenues are currently up 11% as at 21 October versus +10% in the first half.

"Comps toughen in November and especially December, but this still suggests that FY18 results should be strong," it said.

Deutsche Bank upgraded the European airlines sector, including easyJet and British Airways owner IAG, to 'overweight' from 'underweight'.

The sector has been the worst performing European sector in 2018, underperforming the market by 22% on a combination of weak euro area growth momentum and oil prices rising 16%.

Analysts project euro area PMI momentum to improve by early next year, helped by the reduced drag from euro strength and a favourable swing in the inventory cycle, with Brent crude oil to remain around $80 per barrel by end of the first quarter next year.

"Taken together, our base case projections for the PMI and for oil imply around 30% upside for airlines’ price relative from current levels by March."

Analysts are positive on the sector, given "attractive" valuations, paired with the scope for capacity growth, revenue improvements and cost savings, with the sector trading on a 50% P/E discount to the market, more than one standard deviation below the long-run average.

As far as London-listed stocks went, the German broker said IAG was its key pick in the sector. It also hit Wizz Air with a 'buy' rating, while easyJet and Ryanair were on 'hold'.