Airlines help Footsie to fly
IAG basked in the spotlight, lifting sentiment with near-5pc gains for most of the session after Morgan Stanley rated the owner of Iberia and British Airways its top pick in the sector, as the broker updated forecasts to account for fuel and currency changes.
The bullish view of IAG reflects its recent acquisition of Irish flag-carrier Aer Lingus, whose crown jewels are undoubtedly the clutch of Heathrow landing slots that it has clung on to tightly, so far.
Morgan Stanley said that the enlarged group may now capitalise on the benefits of increased Atlantic exposure, as well as potential rationalisation of short-haul routes, as it lifted the price target to €10 from €9.5, and raised forecasts by 3-12pc. IAG shares, rated ‘ overweight’, ended the session 27p higher at 594p.
European airlines have been taking advantage of the low price of crude oil and jet fuel over the last year to lock in attractive fuel prices for up to two years in advance, with the 50pc oil price fall providing ample opportunity for hedging and cost savings across the sector.
In a note on the low-cost airlines, Barclays pointed out that a sudden drop in the price of oil has traditionally signalled a downturn in the economy, followed by a decline in demand for travel – but this time, demand for European leisure travel among both lowcost carriers and the legacy carriers like Lufthansa has remained strong.
‘With fuel hedges now rolling off, profitability at low-cost carriers could soar, reaching the point of unnecessarily high margins/ returns, where if one of them chooses not to add supply, it is likely that a competitor will,’ said Barclays’ Oliver Sleath.
Easyjet, rated ‘overweight’ by Morgan Stanley, is even more appealing given its expected 2016 dividend yield of 6pc in a sec- tor where few other carriers are expected to deliver a pay-out. Its shares ended up 59p at 1759p, after its price target was raised to 1980p from 1910p.
Ryanair was also in demand, bolstered by Morgan Stanley nudging its price target up to €15.50 euros from €13.10 euros, with full year estimates for 2016-2018 increased by 17-21pc.
‘Competitor activity is not something that concerns us about Ryanair,’ said Sleath. ‘It has the lowest cost base and is the most feared of the European low- cost carriers, meaning it tends to be the cause, rather than the victim, of additional competition.’
The Footsie bounced back into positive ter- ritory, recovering from the commoditiess-parked rout which saw global markets sink deep into the red on fears of contracting growth in China.
Still, the US failed to be won over so easily, with the Dow Jones Industrial Average closing down 50.58 points at 16,279.89.
‘The uncertainty regarding whether global markets have enough juice left in the tank is more relevant than ever, with recent months seeing both the European and US indices suffering the biggest sell-off since 2011,’ said Josh Mahony of IG.
‘Yes, today has provided a welcome reprieve from yesterday’s manic selling, but the question remains as to what factors will bring the bulls back to the fore given the continued Chinese slowdown and impending monetary tightening.’
Media companies were in focus, with United Business Media up 18p at 499.1p on rumours – confirmed after the market close – that the events and communications group is in talks with a number of parties to sell its PR Newswire press release service.
Analysts at Liberium pencilled in a valua- tion of £500m for the newswire, which Private Equity-owned US group Cision is rumoured to be circling.
Fellow media group Euromoney was well bid ahead of a pre-close trading statement from owner DMGT on Thursday – the shares were 34p firmer at 1064p.
Elsewhere, online white goods group AO World rose by 4.4p to 156.7p after house broker Jefferies reiterated its ‘ buy’ advice following the group’s capital markets day. ‘The revised strategy may deliver our preferred outcome, a high revenue growth investment case,’ noted David Reynolds.
Among small cap stocks, industrial maintenance and repair group Brammer was given a fillip by a Peel Hunt upgrade to ‘buy’ from ‘hold’ on valuation grounds, ending the day 1p higher at 260p.
‘The VW emissions scandal has also weighed on industrials sentiment in recent days, dragging the share price below 260p,’ said Dominic Convey.
‘Whilst it is prudent to trim our forecasts and 12-month target price, we now feel that the earnings risk is discounted adequately in the current share price.’
÷ SHARES in Eckoh, the AIM-listed secure payment system, were boosted by a threeyear contract win with the Co-operative Group. In an AGM statement the group said it was optimistic that growth would continue into 2016, adding that current trading is in line with expectations. The shares closed 1.25p higher at 41.75p.