EasyJet flies lower on RBC Capital downgrade

EasyJet flew lower on Friday as RBC Capital Markets cut its stance on the stock to ‘underperform’ from ‘sector perform’.

The bank argued that without material and significant improvement in the fare/pricing outlook in the next three years, EasyJet shares might only deliver 1-2% total return compound annual growth rate.

“If pricing stays weak for longer, we estimate that over five years the shares could see total return downside by 2020,” it said.

RBC said that in order for it to work, EasyJet’s strategy needs fares to recover quicker than the rate of balance sheet deterioration. But if the group has misjudged its timing then equity shareholders risk being squeezed out of the embedded value before the pricing cycle recovers.

“We this risk growing,” the bank said.

It pointed out that EasyJet has a lower return on equity than peers Ryanair and Wizz Air, at a higher price-to-earnings ratio. In addition, it highlighted high exposure to the UK, with around 49% of its revenue derived from there, shrinking profits, negative equity free cash flow and rising debt/lease liabilities.

RBC has a 900p price target on the stock.

At 0900 GMT, EZJ shares were down 2.2% to 974.50p.