easyJet PLC (LON:EZJ) has bought profit growth through its acquisition of runway slots from insolvent Air Berlin but weak free cash flow remains a concern, Panmure Gordon & Co said.
Panmure raised its rating on the stock to ‘hold’ from ‘sell’ and lifted its target price to 1,300p from 1,100p after easyJet confirmed it would buy part of Air Berlin’s operations at Berlin Tegel Airport, including slots and 24 aircraft.
READ: EasyJet confirms acquisition of Air Berlin assets
“easyJet has bought profit growth from Air Berlin, and bought it well,” Panmure said.
“We remain concerned with weak free cash flow and rising leverage but accept that revenue momentum drives airline share prices; we therefore no longer expect easyJet to underperform and move to hold from sell.”
In reaction, shares rose 1.06% to 1,431p in morning trading.
The broker lifted its estimate for pre-tax profit in fiscal year 2019 by 20%, including half from earnings accretion and half from improving organic unit revenue trends.
Panmure reckons the acquired Tegel slots could add £50mln to pre-tax profit once fully optimised in the next 12 to 18 months.
It forecasts £195mln in acquisition costs, including a €40mln cash consideration for the deal, £60mln in start-up losses and £100mln in exceptional costs.
Earnings accretion is expected in 2019 after a profit drag the previous financial year as easyJet transitions from wet lease aircraft with initially lower loads and yields.
Disruption among easyJet’s competitors, including labour issues at Ryanair and the collapse of Air Berlin and Monarch, is supporting the current trading, Panmure said.
READ: EasyJet to go head-to-head with Lufthansa after buying parts of insolvent Air Berlin
“We now assume easyJet revenue per seat growth of 2.4% in FY18 (-1.2% previously) but remain wary over the extent positive unit revenue growth will be sustained given that ‘disrupted capacity’ is likely redeployed by summer 2018.”
Panmure expects negative free cash flows from fiscal years 2018 to 2020 as capital expenditure rises to £1.2bn, £0.9bn and £1.0bn respectively.
With dividends paid from debt, Panmure predicts net debt divided by earnings before interest, tax, depreciation, appreciation and restructuring costs increases to 2.0x by fiscal 2020 – the highest since 2010.
“As such the 50% dividend per share payout feels too high, but given its significance as a sop to Sir Stelios (easyJet’s founder who owns a 34% stake) is not likely to be under pressure.”