Broker snap: Downside risk 'substantial' at easyJet

7th Jul 2010 10:17

New planes used by easyJet must make more money than anything the budget airline has achieved before if it is to create shareholder value, reckons Charles Stanley.If this is to happen, the company has to deliver its £190m cost reduction programme to plan, needs yields to rise and a recovery in asset utilisation to 2007 levels.It will also help if it can avoid shock events like volcanic ash clouds, higher fuel prices, aviation tax increases, recession, "or any other unforeseen 'one-off' events" The shares, which neared 500p in April, are now just below 400p and the broker thinks they may test 350p.Analyst Douglas McNeill believes pre-tax profit (PBT) per seat, normally about £3, has to hit £5.80 in order to justify the current share price. Its best ever is £5.34, in 2002."We do not take this kind of improvement for granted. Instead, we allow for asset utilisation to get some of the way back to pre-recession levels, and for the new planes to deliver PBT of £4.50 per seat," McNeill said in a note to clients."This would, we estimate, make the equity worth 334p, which we adopt as our target price. At the long-run average of £3, it would be difficult to justify a valuation above 300p."