Talk of US rate rise in middle of year unsettles investors, while Greece remains a worryMarkets are under pressure again on renewed talk of a US interest rate rise and continuing concerns about Greece’s future, but easyJet is flying high.Airlines have been helped recently by the slump in the oil price, reducing their fuel costs, but the budget carrier has been given another boost by analysts at Barclays. The bank has raised its recommendation from equalweight to overweight and its price target from £18.50 to £21.50, pushing the company’s shares up 44p to £18.11, the biggest riser in the leading index. It said:We see the first quarter interim management statement as conclusive evidence that easyJet has developed one of the best low cost carrier business models in Europe. The company has proven our capacity concerns unfounded, growing pricing despite a fierce competitive environment, which could now improve into the summer (despite lower oil). We think UK demand will remain strong and expect self-help to support fares through the second half. We assume -1.5% RPS (pricing) in the second half but think easyJet has the potential to do better (on blue-sky scenario 15% earnings per share upside potential). Valuation is attractive, in our view, and on a relative basis, shares have underperformed the recent sector rally.With some of the long-standing shareholders reportedly selling out of their holdings in Afren we believe that the company cannot count on their support. This is not a surprise in our view given that our estimated value of Afren’s assets of around $1.5bn in an $80 a barrel long-term oil price environment is just about enough to cover our 2014 year-end estimated net debt of around $1.5bn. Therefore, in our view, additional equity investment in the company would only make sense if an equity investor believes in (1) an around $100 a barrel environment and/or (2) the company will unlock additional value via exploration. We doubt many equity investors will be willing to invest in Afren on those assumptions given the risk of default and the fact that under the same assumptions they can find attractive investments in plenty of other names. At the mercy of the bondholders. With a $235m cash balance (albeit restricted) and 30,000 barrels a day of production, we believe the lender of the loan facility will likely be able to recover its loan fully. However, that may not be the case with the bondholders. We estimate that in a fire-sale (i.e. selling the assets in the current $50 a barrel environment) the assets may be valued in the $500-600m range, or roughly 1/3 of our estimated net- debt position. This is in line with the market value of the bonds that are currently trading roughly at 1/3 of their face value. If the bondholders are able to find an entity/management team that believes in an $80 plus barrel oil price environment we see a potential for a bond-to-equity swap, rather than a fire-sale. However, should Afren default on the coupon payments, the bondholders will have the opportunity to completely squeeze out the current equity holders from such a transaction. Continue reading...
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