Broker tips: Wizz Air, Cineworld, Softcat
Analysts at Deutsche Bank initiated coverage on budget carrier Wizz Air on Thursday, choosing to hit the group's shares with a 'buy' rating right out the gate.
With Wizz's management demonstrating a cost base "similar to Ryanair" and margins well ahead of competitor easyJet, Deutsche said Wizz presented an "exciting opportunity" to investors, the German broker said.
Deutsche also highlighted that Wizz's route network was focused primarily on Central and Eastern Europe destinations, where the broker saw a "significant opportunity" to grab market share from rivals.
"Legacy competitors are weak, economies are set to grow faster than Western Europe, and 'travel' per capita is set to increase," Deutsche said when discussing the aforementioned markets.
All of the above led Deutsche to conclude that Wizz had "substantial" scope for multiyear earnings growth and forecast a compound annual growth rate for the company's earnings per share of 27% until 2022.
In addition to the 'buy' rating, Deutsche started Wizz off with a target price of 41.50p.
With Cineworld off to a good start in 2018, analysts at Citi reiterated their 'buy' rating on the firm's shares on Thursday, seeing their risk/reward profile as "still being skewed towards the upside".
Cineworld has seen pro-forma revenue increase 6.7% in constant currency terms at the beginning of 2018, predominately driven by US cinema chain Regal, which has shown above-market growth, the analysts said.
As a result of this success, Citi forecast 5.3% constant currency growth for the full-year on a pro-forma basis, but dropped its earnings per share estimates by 1%, due to the US dollar's appreciation, which has more than offset its increased Regal estimates.
Nevertheless, Citi added: "We have taken a conservative approach by assuming Regal's growth slows for the remainder of the year, given performance is film dependent."
"We keep our buy rating and view the risk/reward as still being skewed to the upside."
Citi also increased its target price on Cineworld to 300p from 270p, after factoring in the stronger US dollar and assuming a slightly faster debt paydown.
Softcat was under the cosh on Thursday as Jefferies cut the stock to 'hold' from 'buy' following recent share price strength.
The bank noted the shares are up 37% year-to-date versus a flat FTSE 250 and 62% in the past 12 months, versus a 5% gain for the FTSE 250, making the valuation less attractive.
In addition, it said that while there is scope for the company to exceed its FY18 estimates, the continued share price strength suggests that a positive surprise is factored into investor expectations.
Jefferies pointed out that Softcat now trades at a 60% to 70% premium to global peers in CY19. "This premium valuation points to a less attractive risk-reward and underpins our change in recommendation," it said.
The bank also said that while its initiation note back in October 2017 suggested that Softcat could potentially deliver 15% total shareholder return on a five-year view, it now reckons the likely TSR is less than 10%.
Nevertheless, it said Softcat remains a high-quality business which should perform "robustly", and upped its price target to 690p from 600p.