Berenberg backs easyJet on more realistic valuation
Berenberg has upgraded its rating on easyJet, just a day after the budget carrier warned that the uncertainty surrounding Brexit and the economy was hurting demand.
Updating investors on trading, easyJet said on Monday that it was more cautious about the outlook for the second half. Demand had weakened, it said, causing “softness” in fares per passenger per mile in the UK and Europe.
The update weighed on the shares, but on Tuesday Berenberg upped its rating to ‘hold’ from ‘sell’, with an unchanged price target of 1,040p.
Adrian Yanoshik, analyst, said: “Management’s lowered unit revenue outlook for the second half appears more realistic compared to its prior bullish commentary. The revised outlook aligns with our expectations for short-haul pricing weakness driven by stubbornly high capacity growth and slowing demand.
“EasyJet’s lower yield expectations, however, now make material earnings downgrades less likely, in our view.”
The valuation was also now more realistic, Yanoshik argued: “EasyJet’s 11.3x forward P/E and around 5.5% dividend yield, albeit on negative free cash flow, now appropriately discounts earnings risks in our view.”
Yanoshik also noted that easyJet was likely to find it difficult to improve unit costs, but it was “the only low-cost carrier airline in our coverage that has said that it forward-purchased its carbon liability, effectively hedging against price spikes in the second half”.
The blue chip expects to post a headline pre-tax loss of £275m for the six months to the end of March, when airlines traditionally report losses, as revenue rise 7.3% to around £2.34bn.
Shares in easyJet were broadly flat at 1,004.6p by 1145 BST.