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EasyJet shares gain after JPMorgan upgrades stock as it expects boost from Air Berlin deal

JP Morgan upgraded its rating on the stock to ‘overweight’ from ‘underweight’ and lifted its target price to 1,550p from 1,330p
JPMorgan expects a return to revenue per seat growth in fiscal year 2018

EasyJet PLC's (LON:EZJ) planned acquisition of parts of collapsed Air Berlin will boost profits and make it the leading airline in the German city, said JPMorgan Cazenove.

The airline in October agreed to buy some assets at Berlin Tegel Airport from Air Berlin for €40mln, including landing slots and leases for up to 25 A320 aircraft.

READ: EasyJet to go head-to-head with Lufthansa after buying parts of insolvent Air Berlin

JPMorgan upgraded its rating on the stock to ‘overweight’ from ‘underweight’ and lifted its target price to 1,550p from 1,330p.

Shares rose 1.33% to 1,445p in morning trading. 

The financial services firm expects profit contributions from the Air Berlin slots from fiscal year 2019 onwards.

JPMorgan expects organic pre-tax profit to fall 2% in fiscal year 2018 before recovering to 17% in 2019, including the impact of the Air Berlin deal.

“The purchase catapults EasyJet to the no.1 position in the combined Berlin Tegel and Schoenefeld (airport) market,” it said.

Improved pricing outlook

JPMorgan’s upgrade was also based on an improved outlook on pricing.

EasyJet revealed in its full year results in November that revenue trends in the first quarter of 2018 have been “encouraging” and that revenue per seat at constant currency was now expected to be “positive by low to mid-single digits”.

“Granted EasyJet’s shares are up 12% since the positive 2018 guidance was announced (Nov. 21), but our upwardly revised estimates and price target imply further upside potential, especially in 2019: our 2018 and 2019 pre-tax profit estimates sit 3% and 9% above consensus (Table 2); our price target (+17%) implies corresponding 9% upside potential,” JPMorgan said.

It predicts revenue per seat growth of 3.2% for the first half and 0.7% for the full year.

“This marks a return to positive unit revenue a year earlier than EasyJet had previously guided on the back of reduced market capacity owed to competitor disruptions and failures.”

Brexit concerns remain

However, JPMorgan said there is no change to its concerns around Brexit-related uncertainty given the group’s exposure to UK point-of-sale.

Consumer confidence has weakened and households’ disposable incomes have deteriorated due to a slump in the pound pushing up inflation following the UK’s vote to leave the European Union last year.

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