easyJet PLC (LON:EZJ) should deliver impressive earnings growth over the next three fiscal years with its acquisition of Air Berlin assets delivering strong returns, Deutsche Bank expects.
Deutsche Bank sees the budget airline reporting an increase in earnings per share of 22.6% in 2018 followed by 23.1% in 2019 and 8.5% in 2020.
Shares in easyJet soared 5.7% to 23.26p in morning trading.
The airline on Tuesday reported a 14.4% increase in revenue to £1.14bn in the first quarter as passenger number rose 8%. It said revenue per seat grew 6.6% at constant currency to £55.03 and sees this rising by “mid to high single digits” in the second quarter.
READ: easyJet delivers strong quarter with revenue growth and purchase of Air Berlin assets
Following the first quarter trading update, Deutsche Bank raised its profit before tax estimate for 2018 by 9% to £498mln from £457mln previously. This excludes the acquisition of collapsed Air Berlin’s operations at Tegel Airport.
“The major change to our model is an increase in FY18 constant currency revenue per seat from +1.5% to +2.5%, reflecting the 1Q18 outlook that first half competitor capacity is diminished and will only partially come back in the second half as slots are taken over by new owners,” it said.
Air Berlin deal to generate 'very strong' returns
On the Air Berlin acquisition, the bank thinks easyJet is “solidly underplaying the likely performance” of the deal.
“Per previous analysis we have done, Berlin-Tegel is full and as the number one operator, easyJet in our view, should be able to quickly generate very strong returns.”
Deutsche Bank increased its target price to 1,560p from 1,450p but left its rating at ‘hold’ as it expects 2018 to be a transition year with start-up costs related to the Tegel Airport operations.
JP Morgan remains bullish on easyJet
JP Morgan also raised its target price on easyJet to 1,800p from 1,550p and repeated an ‘overweight’ rating.
“Net of updated fuel and foreign exchange guidance, where easyJet is advantaged relative to peers, full year pre-tax profit guidance is raised by 6% or about £30mln to £535mln from £505mln, excluding Air Berlin costs,” it said.
JP Morgan added: “easyJet ascribes the overall strength to the strength of its offering combined with the trimmed capacity in its markets owed in part to competitor bankruptcies and RYA’s flight cancellations.”
The broker sees upside risk to consensus expectations for Air Berlin contributions in fiscal 2018 and believes it is well-hedged against rising fuel costs.