Broker tips: EasyJet, Restaurant Group, Tullow Oil

RBC Capital Markets upgraded EasyJet to ‘outperform’ from ‘underperform’ and lifted the price target to 1,500p from 1,450p.

It said the drop in the shares – which are down 16% versus the FTSE 100 year-to-date – is a good entry point.

“We now see a window opening in easyJet shares for more farsighted investors to exploit,” RBC said.

Following the share price decline, the bank now sees 12-13% total return potential. RBC upped the price target as it sees a growing probability the company will move to tackle its cost inflation problems.

In addition, RBC said balance sheet capital efficiency changes were also possible in future, but with easyJet’s marginal cost of debt there is modest short-term upside from these.

“As sell-side consensus estimates start to fall, we see recent price target cuts signaling the start of capitulation on the shares as enhancing the coming opportunity to buy, even if the short-term investors might need to stomach adverse EPS momentum and a risk to summer profit outlook.”

More broadly, RBC said that in the short term, its concerns about oversupply in the airline segment remain.

UBS downgraded Restaurant Group to ‘neutral’ from ‘buy’ and slashed the price target to 305p from 780p saying near-term uncertainty outweighs the long-term potential.

The bank said Restaurant Group's profit warning at the end of April highlighted a deteriorating like-for-like sales trend, with a 2.7% drop for the 17 weeks to 24 April indicating a LFL decline of 4.4% for the last seven weeks.

“Management appear yet to have a clear explanation for the weakness, let alone a solution. As a result, we are cautious on the near term potential for a LFL turnaround. Whilst there is some valuation support at these levels, we downgrade from buy to neutral to reflect the lack of visibility, pending details of the strategic review.”

UBS said the drop in LFL growth looks to be the result of a tougher consumer backdrop, increased competition driven by strong supply growth and brand positioning.

“The group have launched a strategic review of the business, however, we don't expect any detail until August, and see limited scope for solutions that will meaningfully change the underlying trends in 2016.”

The Swiss bank now expects 2016 pre-tax profit of £74.9m versus guidance of £74-80m.

BMO Capital Markets upgraded Tullow Oil to ‘outperform’ from ‘market perform’ and lifted the target price to 310p from 200p.

“The oil exploration and production industry is a risky asset class, however Tullow Oil has shown itself capable to adapt to the lower oil price environment, as well as adapting to a better understanding of the capital allocation and development risks presented by its exploration success in Africa.”

BMO said the recent share price performance has eroded some of the near-term upside.

It argued that by farming down exposure to both oil projects in East Africa, which are now being pursued as two independent ventures, Tullow can achieve carry to first oil and more than $500m of surplus cash that can be used to de-lever the balance sheet.

In addition, BMO said the delivery of first oil at the TEN project in Ghana, which is expected in July or August, may further unlock the company’s ability to return to value creative exploration over the next 12-18 months.

BMO said it has upped its core net asset vaue to 310p from 194p based on the increase of recoverable resources in Kenya to around 750mmbbl; near-term delivery of TEN; anticipated insurance protection of Jubilee cash flows; Uganda pipeline route progress and finally, the farm-down progress of East Africa.