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Broker tips: QinetiQ, System1, Ryanair, easyJet
Analysts at Berenberg downgraded their recommendation for shares of defence contractor Qinetiq to 'hold' on Friday, saying its most recent set of results demonstrated that continued progress had been made under its chief executive's strategy and its shares were now "fully valued".
2018 was QinetiQ's second consecutive year of organic growth, with a meaningful expansion of its international business, now accounting for 27% of group sales, which helped drive a 28% jump in the share price over the previous three months.
Berenberg highlighted QinetiQ's solid execution of its growth strategy and the recovery from what the broker said was an "oversold situation" in the previous year as the chief factors behind the shares re-rating back to their sector multiples.
However, given the anticipated decline in underlying profit and reduction in QinetiQ's free cash flow in the current year, Berenberg felt the stock was "unlikely to outperform in the short-term".
As a result, Berenberg stripped QinetiQ of its 'buy' rating on Friday but kept its 276p target price unchanged.
After marketing agency System1 posted better than expected full-year results on Friday, analysts at Canaccord Genuity saw scope for material upside over the next year.
System1 saw gross profits fall 18% to £22.2m, in line with pre-close guidance, while pre-tax profits came in at £2.1m, at the top of its guidance range.
Canaccord said this year was a tough one for SYS1, as management took the tough decision to accelerate its launch of scaleable ad/innovation testing products, effectively splitting consulting-style services to data.
However, looking forward, Canaccord said, "The shift towards more automated, high speed/scale products should provide a more stable revenue mix, and the ability to drive up margins with scale. And products are aimed at generating efficiency in marketing spend, which should resonate with clients"
The broker also noted there had been some more positive signs, with fourth-quarter revenues up 18% on Q3 and cost reductions put into effect throughout the second half in the form of dropping its headcount 5%, but overall, Canaccord said it was "too early to call the turn".
Canaccord reiterated its 400p target price and its 'buy' rating on System1's stock.
"SYS1 shares were hit hard by last year's warnings, but we think it is turning a corner," Canaccord stated.
Following a series of positive short haul industry developments, analysts at Morgan Stanley turned their eyes to Ryanair and easyJet on Friday and highlighted several opportunistic expansion and pricing tailwinds that could appear at both firm's through 2020.
Supportive industry trends, such as opportunities for growth in certain countries as a result of a recent speight of competitors going under, led Morgan Stanley to reiterate its 'buy' ratings and target price of £20 on easyJet and 20 on Ryanair.
MS noted that the European short haul market was considerably different to the US, leading it to believe that cost pressures from fuel and FX, as well as risks from macro developements, regulatory or political factors that can affest capacity and supplier costs to its larger scale rivals would be far less likely to hurt the lower cost EU focussed carriers.
The broker highlighted that short haul European capacity trends had seen "marked changes" in the past six months, a trend that looked set to continue throughout the summer, and that While some capacity had returned to fill gaps left by the liquidation of Monarch and Air Berlin, with some disciplined introduction of new capacity into the market and a sustained strong demand, the analysts believe the pricing environment could easily be supported.
Discussing the likelihood of oil prices rising to as much as $90 per barrel, the analysts said, "Increase in demand could drive up prices for crude oil as well as the spread on jet fuel, creating a compounding effect."
"During recent results we had a few airlines acknowledge that with a lower oil price the industry still saw three major European airlines go into administration last year allowing for market share gains at the larger players - now with an increasing oil price capacity consolidation which we believe is good for our main picks Ryanair and easyJet," MS added.