Berenberg upgrades easyJet, downgrades IAG
Berenberg changed its ratings on a number of airline stocks on Tuesday, upgrading budget carrier easyJet but downgrading IAG, as it refreshed its bottom-up capacity model for the European airline market.
The bank said it now estimates shorthaul capacity at 85% of 2019 levels in 2022, "setting the scene for attractive pricing".
"The significant downsizing by Alitalia and Norwegian should benefit the competitive environment and pricing on both Ryanair and easyJet’s network in 2022, according to our analysis.
"Although not in our base case, airline failures leave potential for further supply cuts in 2022 and potential upside to pricing and improved market consolidation."
Berenberg upped easyJet to ‘buy’ from ‘hold’ and lifted the price target to 800p from 720p. It said the airline’s balance sheet is now fit to comfortably weather a weak winter period, while a potential dilutive equity raise no longer hangs over the shares.
"Looking beyond the next six months, the company is well placed to capitalise on improving industry pricing, with ancillary initiatives such as bag fees bolstering its unit revenue outlook," it said.
In addition, the bank said easyJet’s relatively high cost base and attractive market exposure make it a takeout candidate, opening the door to the next phase of market consolidation and limiting downside risk.
The bank downgraded British Airways and Iberia parent IAG to ‘hold’ from ‘buy’ and cut the price target to 200p from 230p as it argued that the Atlantic reopening was priced in. Berenberg said IAG’s shares have benefited from positive sentiment over the past month as governments continue to ease restrictions and near-term equity dilution risk dissipates.
"Despite this, booking data is yet to confirm a strong recovery in the all-important corporate segment, while we think equity may still need to be raised next year," it said.
"IAG’s enterprise value is now 37% larger than in 2019 (it has taken on circa EUR7bn of debt since then), despite the less certain earnings outlook now."
The bank downgraded Wizz Air to ‘hold’ from ‘buy’ and slashed the price target to 5,200p from 5,500p, saying it’s facing some near-term risks.
"Although we still like Wizz for its 20% medium-term profitable growth outlook, its valuation leaves little room for error," Berenberg said.
"At the same time, rising competition on its network in recent months and an unhedged carbon deficit for FY 2023E leave risks more balanced for now."
It noted that Wizz is now trading at a premium of around 40% to Ryanair on a price-to-earnings basis for FY 2023E, compared to an 8% median for 2017-2019.