Broker tips: EasyJet, TUI
Berenberg raised its price target on shares of budget airline EasyJet to 1,260p from 1,150p on Tuesday, saying the collapse of Thomas Cook added confidence to its view that the group would achieve margin outperformance over the coming year.
Berenberg said Thomas Cook, which went into administration on Monday, was set to represent over 2.5% of European short-haul capacity in 2020. Its demise could remove as much as 5% of competing seats from EasyJet's network in peak quarters, the bank said.
Standing by its 'buy' rating, Berenberg said that even if demand slows, pricing should continue to benefit from incremental capacity deceleration from both easyJet and the industry overall.
"We expect recent airline distress to support pricing that disproportionately benefits easyJet," said Berenberg which also noted ongoing liquidity issues at Aigle Azur, XL Airways and Slovenia's Adria Airways.
"We also think there is continued evidence of supply restraint by the industry in part due to 737 MAX and A321neo delivery delays."
The bank lifted its pre-tax estimates for EasyJet by 3% - marking to market fuel, currency and unit revenue slightly higher on competitor distress.
"We now expect EasyJet's H1 2020 revenue per seat to be up 3.2% year-on-year (excluding-currency), circa 50bp higher than previously," it said.
There could be further upside if more airlines in EasyJet's markets fail and in the case of prolonged 737 MAX delays, it added.
UBS upped its stance on shares of travel company TUI to 'neutral' from 'sell' on Tuesday, as it said the demise of Thomas Cook "brings relief to overcapacity".
The bank, which hiked its price target on the stock to 900p from 740p, said the upgrade reflects its expectations of an improvement in short-term profitability and free cash flow following the collapse of industry rival Thomas Cook.
UBS raised its earnings per share estimates by 7%/23% in FY19/20. "However, after the circa 7% price increase yesterday we think the share price seems to reflect a good part of these positive effects," it said.
"Furthermore, we are less convinced about the mid-term benefits of the market consolidation. We expect in the context of low entry barriers incremental capacity to come to the market over the next 12-24 months."
As a result, the bank assumes the recovery in profitability will be short-lived before pressure on tour operator margins re-emerges.
TUI reiterated its forecast of a fall in full year profits earlier in the day and warned Brexit worries, Boeing 737 Max groundings and airline overcapacity would continue to pose challenges in the new fiscal year.