Broker tips: Spire, Ocado, EasyJet, IAG, Carnival

RBC Capital Markets downgraded its stance on shares of private hospital group Spire Healthcare to ‘sector perform’ from ‘outperform’ on Monday as it argued that near-term uncertainties remain.

The bank said that while pent-up demand has the potential to drive Spire's mix and operating margins, risk around patients' confidence and structural operating room efficiency, as well as recovery timing and any second wave, creates "substantial" uncertainty.

"While pent-up demand has increased, there could be some headwinds to a bounce-back, as confirmed by Smith & Nephew's Q1 commentary,” it said. "Smith & Nephew states that ‘multiple [UK] private hospital groups [are] aiming for late June to restart’ - this is in line with our expectations given that the 14-week NHS deal started 30 March."

RBC noted that NHS waiting lists were already at record highs entering the crisis, and a further three months of deferred procedures adds more demand. "We expect that insured and self-pay demand will also have increased, and the potential for Spire to drive improved mix across and within payor groups should help revenue growth and margins," it said.

However, the "new normal" is unclear, RBC added.

"Increased infection control is likely to reduce operating room efficiency, limiting revenue re-acceleration and operating leverage until new working schedules are introduced (longer hours and weekend opening).

"It is also unclear how quickly patients will have confidence to visit hospitals, how quickly Spire will be able to reschedule patients and whether they will need to be re-assessed in an outpatient setting before undergoing surgery."

Analysts at Berenberg hiked their target price on food retailer Ocado from 1,725p to 2,225p on Monday, citing substantial retail growth on the back of accelerated capacity installations.

Berenberg said Ocado's second-quarter retail growth of 40% was "substantially ahead of guidance", driven by accelerated capacity installation to meet the surge in online grocery demand in the wake of the Covid-19 pandemic.

The German bank noted that despite coronavirus-related cost headwinds, the group continues to expect operating leverage at its retail business, highlighting the benefits of automated online grocery solutions.

"While this has positive read-across to Ocado's UK retail business, the positive impact on its technology business, Ocado Solutions, is even greater," added the analysts.

Berenberg said the surge in online grocery demand globally would result in Ocado's international partners requiring installed capacity at their centralised fulfilment centres to be accelerated and require faster ramp-up to full capacity.

"This accelerates the revenue stream of each [customer fulfilment centre], increasing the valuation of each CFC deal," said Berenberg.

Berenberg, which reiterated the firm's shares as its top pick in the space, added that concerns about M&S's digital transition were "overdone" and that Ocado had "a far superior online proposition versus its peers". It also said Waitrose lacked the "financial flexibility" to invest online.

Budget airline easyJet could be forced to raise at least £700m to £1bn of capital via an equity issuance as a result of government plans to impose a 14-day quarantine on travellers arriving in the UK from June.

"Last night’s initiative by the government will have two significant consequences for the UK airline industry: 1. The sizeable monthly cash burn rates will persist through summer. 2. A number of customers and industry bodies will increase the volume on their demands for immediate cash refunds to consumers," Citi said.

The bank said the output from both of these points is that further sizeable capital raises will most likely ensue, with easyJet and British Airways parent IAG being the most likely candidates of the listed names affected.

It said that having not tapped the equity markets early in this crisis, the terms may now not be as favourable for an easyJet equity raising.

"And of course that crucial vote from Sir Stelios towards/against the management & board is looming at the end of the month," Citi added.

HSBC upgraded shares of cruise operator Carnival to ‘buy’ from ‘hold’ on Monday as it highlighted early positive booking trends.

The bank said that following the company’s debt and equity issuance, it now has enough liquidity to continue operating in the current environment until November 2020.

However, assuming operations restart from the end of August, the group will still need covenant waivers as it has to generate a minimum level of EBITDA every quarter.

"On our analysis, CCL may breach covenants in Q3-20,” it said. "However, given the recent positive peer data on booking trends (albeit early days and small numbers) and Carnival aiming for a phased return of service from August, we think these factors could improve their booking and customer deposit outlook.

"This should help them to obtain covenant waivers especially as we don’t think lenders would likely be willing to take control of underlying assets in the current environment."

HSBC, which slashed its price target on Carnival to 1,280p from 3,500p, said risks include a tougher environment to raise financing and further delays to operations restarting.