Broker tips: EasyJet, Premier Farnell, Schroders

It was bad day for airlines, with corporate releases from Deutsche Lufthansa and EasyJet giving investors little to get excited about.

EasyJet posted a drop in revenue per seat and total revenue for the third quarter amid difficult trading that was hit by the terror attack in Brussels and the Egyptair tragedy and said the outlook was uncertain. Meanwhile, Lufthansa downgraded its profit forecast for this year as terror attacks hit bookings.

And the bad news kept coming as Credit Suisse downgraded EasyJet and International Consolidated Airlines.

The bank cut EasyJet to ‘neutral’ from ‘outperform’, slashing the price target to 1,130p from 1,491p after the update, as it slashed its full-year 2016 pre-tax profit estimate by 24% to £528m.

“EZJ is a structural winner, well positioned to ultimately benefit from UK market turmoil as weak demand pressures weaker competitors lacking EZJ's cost structure and balance sheet. Yet earnings estimates clearly need to come down across the market and distinct uncertainty around 2017E, where we model a 2% profit before tax decline versus 5.5% growth per Reuters, prompts us to downgrade.”

CS also cut its stance on International Consolidated Airlines Group to ‘neutral’ from ‘outperform’ and trimmed the price target to 439p from 529p, saying Lufthansa’s profit warning highlights deteriorating pricing trends.

Following Lufthansa's warning, Credit Suisse cut its second-half unit revenue forecasts for IAG from a 4% decline to a 7% decline at constant currency, which compares to Lufthansa’s 8-9% guidance driven by weaker demand on long haul routes.

This drives down the bank’s 2016 EBIT estimate by 11% to €2.5bn and its 2017 EBIT forecast by 17% to €2.1bn.

“We continue to view IAG as a compelling medium term self-help story. However escalating revenue risk is likely to drive material downgrades for 2016E-2017E over the coming months.”

HSBC downgraded Premier Farnell to ‘hold’ from ‘buy’ as it lifted the price target from 145p to 165p, which is the price Swiss conglomerate Daetwyler is paying per share to buy the technology company.

With the new target price now implying 0.3% upside, the bank has decided to downgrade its recommendation.

It said that while a competing bid cannot be ruled out, it’s unlikely as trading conditions for Premier Farnell remain challenging and the offer price represented a premium of 51% to its previous closing price.

HSBC said the offer values the entire share capital of Premier at around £615m, with an enterprise value of £792m.

“On this basis, the offer puts PFL on a FY 2016a (last reported) valuation of 15x on price-to-earnings, 0.8x EV/sales and 11x EV/EBITA.

“Given that PFL had been affected by challenging trading conditions and increased competition, mainly in North America and the UK, the combination with Daetwyler group would be a good strategic choice, in our opinion.”

Goldman Sachs downgraded Schroders to a ‘neutral’ rating from ‘buy’ on Thursday but raised its target price to 2930p from 2800p.

The bank said the Schroders rating downgrade reflects the challenges facing the asset management industry as yields fall and growth expectations are reduced.

“We expect three factors to drive a challenging environment for asset managers over the next few years: (1) expected anaemic economic growth is likely to slow wealth creation and flows (especially in the UK), while the low-return environment (2) makes it hard for managers to structure compelling products and (3) means asset managers receive a weaker AUM tailwind from market appreciation,” Goldman analysts said in a broker note.

“While we view Schroders as one of the best structurally positioned fund managers globally, we believe its breadth and scale make it very difficult to avoid these macro headwinds entirely.”

Goldman expects second quarter assets under management to grow 5%, driven by quarter-end foreign exchange moves. The bank also sees a risk that the pre-Brexit uncertainty led to a slowdown in second quarter gross sales.

The earnings per share (EPS) forecast for fiscal years 2016-2020 was raised 1.3%-2.6% by Goldman due to foreign exchange and market moves in the last few days of the quarter.

“Our 12m price target rises to 2930p (from 2800p) as a result, based on a target price to earnings ratio of 14.5x 2017E EPS, plus 350p in balance sheet value; this implies 14% upside.”