Broker tips: Reckitt Benckiser, QinetiQ, EasyJet

JP Morgan has upgraded its view on shares of Reckitt Benckiser, with its analysts pointing to potential upside in the firm's earnings per share in fiscal year 2020 and the potential for shifts in the company's portfolio of assets to unlock value.

After running various scenario analyses, JP Morgan concluded that the shares' valuation could range between 6400p and 9000p.

Yet in any case, the 6% reduction in the analyst consensus for Reckitt's EPS in 2018 over the past six months meant there was now scope for "short-term relief" to 7500p.

Indeed, that was now the broker's new target price, versus 6,900p previously.

In parallel, JP Morgan upgraded its recommendation on the shares from 'neutral' to 'overweight'.

Regarding the outlook for earnings, JP Morgan believed Reckitt could return to like-for-like growth of roughly 3% - in-line with its peers - from the fourth quarter of 2017.

However, the analysts conceded there was some uncertainty surrounding the 'timing' of savings from the acquisition of Mead and potential additional costs in the Home/Hygiene division. That might weigh on the company's EPS in fiscal year 2018.

On the other hand, JP Morgan said it saw upside of between 5% and 8% when looking out to fiscal year 2020.

QinetiQ shares have been "disproportionately" affected by wider bearishness on the sector after the profit warning from peer Ultra Electronics, said Berenberg, upgrading to 'buy' from 'hold'.

Berenberg, which cut its target price to 235p from 310p, said it believes UK aerospace and defence stocks "are experiencing wide-ranging short activity, creating real opportunity".

QinetiQ now looks attractive within the sector and in a wider market context on the basis of a valuation of 12 times 2020 expected earnings, good cash flow visibility and net cash of £200m that is around 20% of its market cap.

Occupying a niche research & development space in the UK defence market with multi-year contracts on a £2bn funded backlog, QinetiQ's offerings are largely shielded from the pressures in the UK defence market that have sent investors packing from the sector, said analyst Charlotte Keyworth, suggesting it is shorter-cycle products that under the most acute near-term demand pressure.

The 3% organic growth at Qinetiq's interims was "encouraging" in an environment where peers such as Ultra Electronics, BAE Systems and Cobham are struggling to grow.

As a normally highly cash-generative business, Keyworth looks beyond peak capex of £90m next year and sees normalised levels returning in the 2020 fiscal year, where the company will generate a 7.3% free cash flow yield, "which looks appealing".

Analysts at Investec lifted their target price on shares of EasyJet, despite the company's "disappointing" (albeit in-line with guidance) results the day before in comparison to those from its peer group.

Foremost, they highlighted the company's "encouraging" guidance and potential purchase of fallen rival Air Berlin - which would give the carrier another market leading position.

Meanwhile, the cessation of flights from other rivals who had fallen into insolvency was a tailwind, analyst Alex Patterson said.

So too were the flight cancellations by RyanAir.

On top of that, further consolidation and restructuring were likely, Investec said.

Regarding the outlook for the airline's profits in fiscal year 2018, Patterson raised his estimate for EasyJet's profits before tax (pre Air Berlin) to £507m.