Broker tips: Ryanair, Tullow Oil, Berendsen

Bank of America Merrill Lynch upgraded Ryanair to 'neutral' from 'underperform' and lifted the price target to €15.30 from €12.50 as it took a look at the airlines sector.

"Given Ryanair is still being one of the most loved share prices and with recent traffic statistics persistently choosing volume growth over pricing power, we believe waiting for a pricing inflection to the upside makes sense."

The bank reiterated its 'neutral' stance on easyJet but upped the price target to 1,050p from 1,030p.

It said four profit warnings in eight months have made it hard to stimulate interest in the shares.

"easyJet is waiting for its ‘epiphany-moment’ so that shareholders that are nestling in Ryanair can re-engage with easyJet management and the share price. Such an inflection, in our view, can only be stimulated by management change or a capitulation on easyJet's illogical capacity growth plans. Until then, we wait."

Merrill said that overall, at both Ryanair and easyJet, despite some signs of their underperformance bottoming, there is not enough improving fundamental data to substantiate a 'buy' case for either.

The bank downgraded British Airways and Iberia parent International Consolidated Airlines Group to 'underperform' from 'buy' and cut the price target to 500p from 550p.

It reckoned that IAG's North Atlantic performance - a key contributor - will splutter in the second quarter and second half of this year as a number of factors put pressure on sentiment and fundamentals.

It said there is evidence to suggest that broader corporate travel spend, in particular financial services, will see pressure through the course of 2017.

As far as leisure travel is concerned, there have been a number of new entrants into this market, in particular Norwegian Air Shuttle, which despite a "likely flawed and certainly leveraged business model", will possibly cause deflation in the market.

Tullow Oil

Goldman Sachs upgraded Tullow Oil to ‘neutral’ from ‘sell’ and lowered its target price to 200.6p from 207.4p, as it sees the company having a more balanced risk and reward following a rights issue.

The investment bank sees “risks and rewards roughly balance and do not see a compelling value trade either positive or negative” from the company as it considers Tullow most sensitive to the oil price.

It expects a drawdown in global inventories in the second quarter which should benefit Tullow with an increase in the price of oil.

Since being added to the Pan-Europe Sell list on 5 December 2016, Tullow’s stock is down 38% compared to the Stoxx 600 Oil and Gas index which is up 3% and the FTSE All Shares index which is up 9%.

Goldman Sachs said that Tullow’s guidance in January for the year was “disappointing” as the company announced it had sold a stake in its Ugandan asset and in March announced a $750m rights issue.

The bank thinks this rights issue “will give management the headroom to prevent many negative catalysts from crystalising”, mainly reduced production from its Ten and Jubilee sites from 2018 onwards.

The lower target price to 200.6p included updates from the rights issue and 32.9p merger and acquisition premium.

Berendsen

Commercial laundry group Berendsen was under the cosh as RBC Capital Markets cut the stock to 'underperform' versus 'outperform' and slashed the price target to 660p from 950p saying the risk profile has significantly increased.

The bank said weak current trading and the scale of the incremental capex investment and people change make it far more cautious.

RBC pointed out that when it turned positive on the stock two months ago, it thought forecasts were largely underpinned and that the UK business was in the price for nothing, assuming an extra £50m capex was required to fix the underinvestment issues.

However, since then its earnings per share estimates have come down a further 17% for 2018E, while plant capex will be around £300m more than it had expected over the next three years.

"The scale of this investment, and the scale of people change within a business, where local relationships are key, means we now believe the risk profile is significantly increased, whilst the company will be cash flow negative for the next three years."

RBC said it is now 4% below the company's £150m profit guidance for 2017, as it reckons the second half will be a stretch after what will be a very weak first half.