Broker tips: Berkeley, Britvic EasyJet

Berkeley Group’s shares rose as Numis raised its rating on the property developer to ‘buy’ from ‘add’ and reiterated a target price of 3,844p following better-than-expected first half results.

In the six months ended 31 October, pre-tax profit gained 33.9% to £392m compared to the same period a year earlier, exceeding estimates of about £351.7m. Revenue rose 24.1% to £1.41bn, beating expectations of £1.31bn and driven by sales of new homes in London and the South East of England.

Berkeley added that cash due of forward sales of £2.9bn, an estimated land bank gross margin of £5.9bn and net cash of £208m, meant the group is on target to deliver a new five-year target of at least £3bn pre-tax profit beginning 1 May 2016. It has previously indicated a three-year target for pre-tax profit of £2bn from 1 May 2015.

However, Berkeley said Brexit, the US election and an increase in stamp duty in April had hurt transaction levels throughout 2016. Excluding a hiatus around Brexit, reservations for the period remain 20% down on the same period last year.

Numis welcomed the group’s new pre-tax profit target. The broker said it is on track for more than £750m of pre-tax profit in 2017 and 2018 and at least £1.5bn in the three years to April 2021, or £500m per year.

"Overall we think this is a decent update and the longer term guidance over PBT (being at least £500m per annum) should give comfort there is not a cliff edge in profits after the following two years," Numis analysts said.

"Furthermore, the reservation number is consistent with what was previously announced and therefore this should also provide some comfort."

Goldman Sachs downgraded drinks maker Britvic to ‘neutral’ from ‘buy’ and slashed the price target to 600p from 810p, removing the stock from its ‘conviction list’ following the full-year results earlier this week.

It said that while the numbers were better than it had expected, it is concerned about the outlook going into full-year 2017, given rising input cost pressures.

GS noted that since being added to the buy list on 4 December 2014, the shares are down 15.7% versus the FTSE World Europe up 5.5%. Since being added to the ‘conviction list’ on 29 January 2015, the stock is down 21% versus the FTSE World Europe up 3.7%.

Goldman reckons this underperformance was driven by difficult trading conditions in GB, and health concerns around sugar.

The bank cut its FY2017-19 earnings per share estimates by 4%, 8% and 8% to 46.67p, 47.91p and 50.97p, respectively.

“We believe Britvic faces downside risks from input cost inflation in the UK, as well as the UK regulation on soft drinks with added sugar; this was indicated by the FY17 guidance, which implies flat performance versus the 52-week adjusted EBITA reported in FY16, although we still see upside from the US and Brazil businesses.”

EasyJet flew lower as RBC Capital Markets cut its stance on the stock to ‘underperform’ from ‘sector perform’.

The bank argued that without material and significant improvement in the fare/pricing outlook in the next three years, EasyJet shares might only deliver 1-2% total return compound annual growth rate.

“If pricing stays weak for longer, we estimate that over five years the shares could see total return downside by 2020,” it said.

RBC said that in order for it to work, EasyJet’s strategy needs fares to recover quicker than the rate of balance sheet deterioration. But if the group has misjudged its timing then equity shareholders risk being squeezed out of the embedded value before the pricing cycle recovers.

“We this risk growing,” the bank said.

It pointed out that EasyJet has a lower return on equity than peers Ryanair and Wizz Air, at a higher price-to-earnings ratio. In addition, it highlighted high exposure to the UK, with around 49% of its revenue derived from there, shrinking profits, negative equity free cash flow and rising debt/lease liabilities.

RBC has a 900p price target on the stock.