UBS upgrades easyJet to 'buy'

Analysts at UBS upgraded their recommendation on EasyJet, judging the share price fall on the back of three profit warnings since June to be overdone.

In a research report entitled "Darkest before the dawn" analyst Jarrod Castle upgraded his recommendation on the shares to 'buy' from 'neutral', although the stock's target price was trimmed from 1,070p to 1,050p.

"Shares are pricing in material future value destruction – we don’t think this will be the case," Castle said in a research report dated 24 October.

The Swiss broker also said the stock now looked "attractive" following its "material" de-rating and the risks to the carrier's 2017 earnings forecasts now looked "balanced".

Easyjet's return on invested capital was seen declining over UBS's forecast period, which extended out to 2020, alongside negative free cash flow yields.

Nonetheless, that was due to a material capital expenditure cycle, while once it slowed adjusted ROIC was seen above 20% in 2020, with free cash flow yields of roughly 10% if expansionary capex was excluded.

Furthermore, the current environment was less severe than the previous earnings cycle and the company could still count on its cost and capex levers if needed, the analyst said.

Castle's new target price reflected a slight recovery multiple of seven times enterprise value-to-earnings before interest, taxes, depreciation, amortisation and rent costs.