Liberum lifts Easyjet target, reiterates 'buy'

21st Nov 2014 12:22

Broker Liberum has lifted its target price for budget airline Easyjet from 1,650p to 1,725p and repeated its 'buy' recommendation, hailing the company's efforts to adapt to an "inflationary world".Analyst Gerald Khoo said that Easyjet's full-year results last week "delivered the expected combination of strong margins, return on capital employed well above weighted average cost of capital, and cash generation".He said that these drivers are now considered "normal" for Easyjet. "However, this remains rare and highly unusual in the airline industry and the wider market."Nevertheless, he added: "It may also have seen the last non-fuel unit cost reduction for the foreseeable future. We expect cost inflation to assert itself from here on."Khoo believes that Easyjet's so-called 'lean' cost-saving initiatives and additional larger A320 aircraft "will be crucial in mitigating this".The company's move to a higher unit revenue model had already anticipated the inflationary pressure, he said."Opportunities remain to drive incremental and iterative savings, but it is difficult for the best to get better."Khoo said that the stock's valuation is currently at a premium to its five-year average, but this is justified by the "rapid and dramatic improvement" in the firm's margins and return on invested capital in recent years.Easyjet's shares were down 0.8% at 1,552p by 12:20.