easyJet plc (LON:EZY) shares dropped after UBS downgraded the budget airline to a ‘neutral’ rating from ‘buy’, citing “insufficient share and earnings upside”.
“While we consider easyJet one of the leading European short haul operators we are not confident enough to flex our valuation multiple or 2018 earnings upward…,” UBS said.
“We think investors need to be disciplined at this point in the cycle and let earnings drive valuation rather than the expansion of the earnings multiple.”
Nevertheless, UBS believes operational recovery is underway and increased its forecasts and target price to 1,900p from 1,800p.
The broker expects pre-tax profit of £492mln in 2018, above the easyJet’s current forecasts of £430-480mln. Its estimates for 2019 are also ahead of consensus forecasts by 7%.
UBS sees scope for the company’s management team to further raise its guidance at the third quarter results in July but the investment bank said its new 2018 pre-tax forecast is already ahead of easyJet’s current estimates.
easyJet earlier this month said it narrowed its first half loss to £68mln from £236mln the same period a year ago as the collapse of its rivals allowed the airline to raise fares.
READ: easyJet boasts ‘excellent performance’ in interims as revenue passes £2bn
The airline completed the acquisition of collapsed Air Berlin’s operations at the capital’s Tegel Airport in January.
READ: easyJet delivers strong quarter with revenue growth and purchase of Air Berlin assets
“Whilst the backdrop is supportive with recovering European GDP (gross domestic product), easyJet exploiting market opportunities (such as Air Berlin), a strong balance sheet and experienced management team we do see some challenges,” UBS said.
“We would highlight the new High Speed Rail on the London to Amsterdam route, which will be a concern for industry short haul capacity and the potential impact on demand given Brexit (easyJet is the largest short haul carrier in the UK).”
Shares fell 1.3% to 1,712p in late morning trading.