Shares in easyJet PLC (LSE:EZJ) fell after being downgraded by two brokers after the airline’s takeover-fuelled rally left analysts questioning the risk-reward balance.
Citi cut its rating to ‘neutral/high risk’ from ‘buy/high risk’, although it raised its target price to 580p from 500p, following a period where the shares climbed 75% from their mid-May lows after geopolitical concerns eased and Castlelake’s bid interest emerged.
The US investment bank said a successful takeover could offer a further 20-25% upside, but analysts argued that was not enough to stay positive given the "outstanding impediments" to completion of a deal and the lack of further upside from easyJet’s own turnaround plan after the recent rally.
Citi also said current trading "continues to sound challenging" for this summer.
RBC Capital Markets also downgraded easyJet, moving to ‘sector perform’ from ‘outperform’, while increasing its target price to 600p from 405p.
With the shares having risen about 44% since the Castlelake-led approach became public they have outperformed most peers by more than 30 percentage points, RBC noted.
The broker said it sees potential for more than 20% upside in a takeover scenario, with a possible 700p bid implying around 22% upside.
But it also flagged downside of more than 20% if no deal emerges, with the shares potentially falling back towards 443p.
RBC said the market appeared to be pricing the situation as roughly 50:50, which it described as reasonable given there was still no certainty of a firm offer.
