Broker tips: Rolls-Royce, SSP, easyJet

Rolls-Royce got a boost on Monday after JPMorgan Cazenove upgraded its price target on the stock to 890p from 835p as it took a look at the UK aerospace and defence sector.

The bank said it was updating its earnings per share estimates, mostly for the recent strengthening of the dollar versus the pound from $1.30/£1 to $1.25/£1.

It said BAE Systems and Ultra Electronics remain its top picks in defence, while Rolls-Royce is the big FX winner.

“In terms of FX transaction, every 1 US cent move versus sterling impacts RR’s civil aerospace earnings before interest, tax and amortisation by around £20m today, although the impact increases over time as RR's civil aerospace business grows,” JPM said.

The bank also lifted its price targets on BAE Systems and Ultra Electronics, to 655p from 625p and to 2,130p from 1,850p, respectively.

It reckons BAE can achieve average organic growth of around 3% a year from 2017-19. “If the $/£ stays at $1.25 this could add another 3-4% to group sales growth in 2017E,” it said.

It said that while investors are mostly worried about the increase in the pension deficit seen in the first half due to the collapse of UK bond yields, the next actuarial review will not be finalised until around November 2017 and it is impossible for investors to know what bond yields will be at that time.

As far as Ultra is concerned, it expects the company to achieve around 3% organic growth on average from 2017 to 2019, with FX adding about 3-4% more growth next year.

JPM rates BAE and Ultra at ‘overweight’ and RR at ‘neutral’.

Numis on Monday initiated its rating on SSP at ‘buy’ with a target price of 390p, saying it sees further upside in margins.

The broker expects the owner of food and beverage franchises at airports and train stations will achieve a 60 basis point (bp) increase in margins in fiscal year 2016 followed by a 30bp rise in 2017.

“SSP operates in a structurally growing market exposed to rising air and rail passenger traffic and increased food and beverage space in terminals given customer propensity to eat on the move,” Numis said.

Numis added that SSP is a market leader in a fragmented market where there are high barriers to entry in airports and stations.

The company’s historic growth in net new space of just 0.5% reflected a period of contract rationalisation and improved to 1.9% year-to-date, Numis said.

“We expect a larger contribution in the future as it has built a strong pipeline in North America, China etc. Fracturing of contracts by the North American market leader (HMS Host) presents a particular opportunity for market share gains.”

SSP benefits from the recent weakness in the pound as 62% of revenues are generated outside the UK. Numis said its forecasts for earnings per share (EPS) in fiscal years 2016 and 2017 are 7% above consensus and suggest “healthy EPS momentum ahead”.

“Similarly the group has a good track record of beating forecasts and we outline a bluesky EPS scenario of 24p (22% upside). “

EasyJet flew lower again on Monday as Societe Generale downgraded the stock to ‘sell’ from ‘hold’ and slashed the price target to 820p from 1,150p following the airline’s profit warning last week, pointing to a double whammy of a soft demand environment and FX headwinds.

The bank said it reckons the issues weighing on the company in full-year 2016 will persist or intensify. It noted the pound is now trading at a 30-year low versus the dollar, which will gradually inflate EZJ’s fuel bill, with hedging contracts expiring.

“EasyJet’s fuel bill is currently around £1bn, meaning that every 1% of GBP weakening versus the USD pushes the fuel bill up roughly £10m with a two-year delay. The current year is 74% hedged at a GBP/USD rate of 1.52, but with a two-year time lag we expect an effective rate close to 1.30.”

In addition, it highlighted the fact sterling has also dropped against the euro, making holidays on the continent more expensive and said political uncertainties and terror risks as unlikely to dissipate any time soon.

SocGen said it expects further earnings declines in full-year 2017 and 2018.

The bank said the market environment was deteriorating and while comps are likely to ease from November onwards, pricing will remain under pressure into next year.

Last week, the budget carrier warned that it would take a £90m hit from the weak pound, which pushes up the price of jet fuel.