Broker snap: Jefferies raises its view on easyJet to 'buy', from 'hold'

25th Nov 2013 11:25

Analysts at Jefferies on Monday moved to a 'buy' recommendation (from 'hold') on the shares of low-cost carrier easyJet premised on the potential for further cash returns and greater confidence in the company's ability to maintain its strong competitive position. easyJet's strong return on capital employed (ROCE) and special dividend are a positive signal of capital/returns discipline, which we expect to drive further cash returns, they wrote. More specifically, they highlight the company's ROCE for the fiscal year, which at 17.4% was up from 11.3% in the previous year. They take this as "a strong sign of management focus on returns, which we expect to warrant further ad hoc cash returns". The broker is now more relaxed about easyJet sustaining its strong competitive position, with "self-help initiatives supporting further unit revenue and cost progress, as the business continues to evolve". The broker further explained that the shares now trade at a 35% premium to the sector average but would be at a 55% premium if their price target of 1,620p were reached. That would, however, be justified given its ROCE, which in turn drives their estimated 2014 target for the shares to reach a multiple of 1.6 times lease-adjusted enterprise value/invested capital (EV/IC) - an alternate measure of price/book for some analysts. AB