Broker tips: Wizz Air, TalkTalk, Reckitt Benckiser

UBS initiated coverage of Wizz Air shares at ‘buy’ with a 2,200 price target, noting that the company has a strong track record of growing traffic and profits.

The bank said Wizz's market focus on Central and Eastern Europe offers structural growth. The broker´s analysts highlighted the attraction of continued cost control, an interesting mix of ancillary and seat revenues, strong cash flow generation and free cash flow yield, as well as an attractive valuation versus peers.

It said that despite Ryanair being a strong competitor in a number of CEE markets, Wizz has grown profitability and is now the largest CEE airline with a 39% market share. In addition, it said Wizz is only second to Ryanair in terms of cost of production with a number of initiatives to drive costs down.

“We believe Wizz can maintain a low production cost given cost initiatives, further operating leverage from traffic growth and falling fuel price coupled with increased fleet efficiency ."

UBS noted that since listing in the first quarter, the shares have risen over 50% despite a challenging share market.

TalkTalk pushed higher after Exane BNP Paribas upgraded the stock to ‘neutral’ from ‘underperform’ and lifted its price target to 260p from 210p to reflect the potential for improved news flow through the second quarter after the recent sharp de-rating.

The bank said that while it continues to believe TalkTalk’s business is fundamentally challenged, the sharp underperformance in recent weeks has partially reduced the valuation anomaly. It added that news flow over the next six months is likely to be far more supportive.

It said greater regulatory intervention at Openreach would be taken positively, while progress on the York FTTH trial – specifically news of early customer adoption – could reignite interest in the potential of the CityFibre joint venture.

It said that where Ofcom’s review of BT is concerned, the likely outcome would be a compromise involving more hands-on regulation of an integrated BT.

“That said the risk that Ofcom decides to pursue a breakup of BT is greater than many believe. We see clear scope for a regulatory shock in this respect,” said Exane, adding: “What’s bad for BT is generally good for its competitors.”

JPMorgan Cazenove upgraded Reckitt Benckiser to ‘overweight’ from ‘neutral’ and raised its price target to 6,300p from 6,025p.

The bank said accelerating margin and sector-best top-line growth mean it expects the company to deliver the sector’s strongest organic earnings before interest and tax in the full-year 2015-2016.

It said that at 22x 2016 price-to-earnings, Reckitt shares do not come cheap, but they trade only marginally above peers despite stronger earnings per share growth and optionality for higher cash returns. It also highlighted the fact management is still on the lookout for M&A.

JPM said Reckitt has entered a new phase of margin acceleration, driven by project Supercharge and by a better performance from its premium portfolio driving higher gross margin.

The bank expects the pace of expansion to remain high in 2015, widening the performance gap with the rest of the European health and personal care sector.