Broker tips: easyJet, DS Smith, Hays

7th Oct 2016 10:48

(ShareCast News) - Bank of America Merrill Lynch downgraded low-cost carrier easyJet to 'neutral' from 'buy' and cut the price target to 1,050p from 1,300p given the increasing lack of visibility on pricing.Merrill reckoned the shares have limited upside potential until there is capacity constraint and/or yield momentum stability.It said the company's fourth-quarter trading update on Thursday indicated that consensus full-year pre-tax profit needed to fall by around 20%. BofA's own forecasts dropped to £400m from £575m, driven by lower pricing and slightly higher costs.On Thursday, easyJet warned that profits for the year would be hit by the weakening of the pound.The company said foreign exchange movements are expected to have around a £90m adverse impact compared to the final year to 30 September, which is an increase of £35m since 23 June.Merrill said: "The company has a relatively strong balance sheet, a business-oriented airport exposure (which is poised to take share over the legacy carriers in the long-term) and a well-respected CEO at its helm."However with a lack of pricing momentum, alongside the uncertainties facing the UK (both growth and FX; leading to management not providing typical pricing guidance) and a lack of tangible cost savings in FY17, it is hard to see how easyJet will regain its (much-needed) earnings momentum in the near-term." Barclays initiated coverage of corrugated packaging manufacturer DS Smith at 'overweight' with a 465p price target.The bank said its investment case is based on expectations that DS Smith will continue to gain market share in a very fragmented market. It also pointed to the company's substantial exposure to the fast-moving consumer goods sector, saying this makes its returns more stable than those of its competitors."Since the arrival of Miles Roberts as its CEO, DS Smith has continued to increase its share of sales in this segment, which has allowed the company to generate more stable cash flows compared with its competitors that are more exposed to the industrials sector."Barclays said increasing dividends are attractive in a very low rate environment and the recent depreciation of the pound should boost company earnings before interest, taxes, depreciation and amortisation.The bank noted that as interest rates have remained low for the past six years, the company's dividends have grown at a 26% compound annual growth rate.It expects to see a 12% three-year CAGR with the dividend yield set to reach around 4.6% by full-year 2019. UBS downgraded Hays to 'neutral' from 'buy' saying the risk/reward is now more balanced, but lifted the price target to 140p from 130p as it upped estimates slightly due to FX.The bank pointed out that the good news has now passed, saying UK macroeconomic data has rebounded, concerns over contagion have faded, and Hays has re-rated from a low.UBS said Hays' first-quarter trading update on 18 November will be key. It noted that July and August are quiet months, so the trend in September is a better indication."We expect group like-for-like growth of around 2% (including UK -12%) after Q4 +8%, but for tougher comps and UK deterioration to impact thereafter."However we continue to see upside risk to consensus (particularly with the continued GBP weakening): we are around 4% ahead of the consensus mid-point on EBITA, but 15% above the lower end."In addition, UBS pointed out that Hays' special cash return policy sees the shares yielding more than 5% even in tough markets.