Broker tips: Restaurant Group, easyJet

Restaurant Group was under pressure on Tuesday as UBS downgraded the stock to 'sell' from 'neutral' and cut the price target to 275p from 310p following a strong run in the shares recently and pointing to the turnaround plans for Frankie & Benny's.

UBS said it has analysed the new F&B proposition following the recent menu launch, along with 20 key competitors, and found that although prices have fallen, there is a value gap versus the branded pub chains which are around 22% cheaper.

"Given these brands also focus on the family value orientated market, we see risk that the F&B price cuts will not drive the required footfall increase from the core family value orientated customer F&B is looking to attract to offset price reductions."

The bank cut its earnings per share estimates for 2017 and 2018 to 20.3p from 21.2p and to 19.1p from 23.0p, respectively, given less confidence in the turnaround. While UBS reckons the strategy is moving in the right direction, it sees greater risk that, with the F&B value positioning still ahead of core competitors, price cuts will not drive the required footfall increase to offset the like-for-like pressure from falling prices.

Budget airline easyJet flew higher on Tuesday as RBC Capital Markets upped its stance on the stock to 'sector perform' from 'underperform' and hiked the price target to 1,325p from 875p, saying it's likely the company has reached its profit nadir.

The bank said it was lifting the stock on the growing chance the EBITDAR margin has troughed. It also said the demand outlook has firmed and the balance sheet outlook has improved. "Our sector perform reflects a 70-75% chance this is already priced into the shares."

RBC argued the case for a better outlook, pointing to an improvement in the supply/demand balance and an expanding gap of strong customer rankings versus competitors.

"Our recent research suggests easyJet ranks strongly with its customers and staff - which we see as crucial advantages in building long-term revenues and profits (and a disadvantage to very poorly ranked competitors Air Berlin, British Airways and Vueling).

"The wide and widening gap between easyJet and its competitors suggests there might be a growing chance easyJet’s pricing (in future) outperforms the industry - reflecting its well-placed (relative) quality metrics, as viewed by its customers and staff."