Morgan Stanley says buy these 9 stocks to play a imminent rebound in transportation and infrastructure as the global economy recovers

  • With economic recovery on the cards in 2021, Morgan Stanley argues transport and infrastructure stocks will be the major beneficiaries of the rotation into value, according to research note.
  • But not all stocks are winners, Morgan Stanley notes.
  • These are the 9 they think you should own.
  • Visit Business Insider's homepage for more stories.

With economic recovery widely forecast for 2021, transport and infrastructure stocks have been a key beneficiary of the rotation to value to continue into 2021, according to a Morgan Stanley research note published Thursday.

Transport stocks were hard hit this year, falling around 13% so far this year, but they have gain "18% (11pp above broader market) since positive vaccine newsflow came to the market on 9 November," the note said.

The positive news caused a rally in the markets as investors saw the vaccine as a route out of national lockdowns and recession, moving into a possible broad economic recovery. This broad optimism favored many of the most beaten-down value stocks, whose businesses are highly dependent on the strength of the underlying economy.

In the case of airlines, the news that air travel might return to more historically normal levels has been a huge boost, the note said, adding that Morgan Stanley is "positive on air recovery, but not more than the market."

The speed and shape of air passenger recovery is the key theme for airlines and airports. "We think the rebound will be strong once travel restrictions are lifted, but 2019 volumes are unlikely to be achieved this summer, so we keep our preference for Ryanair, as a structural winner, with less downside in case the recovery takes longer to materialise," the note added.

However, not all stocks offer the same opportunity, and indeed, some should be avoided altogether. Flagship domestic airlines are less attractive than their lower-cost rivals such as Ryanair, or easyJet, for example. 

"We would avoid Air France-KLM and Lufthansa on restructuring risks and valuation and ADP on regulatory risks, rising capex and disappointment on retail," the note highlighted, noting that "airlines stocks could go in a high yield environment, and would pick easyJet as offering the best risk reward in this scenario (though AF and LHA would benefit significantly also). We would be most cautious on legacy carriers in the case environmental concerns for travel return, as it is likely to weaken business travel further."

While commercial air travel might struggle next year, Morgan Stanley expect seaborne freight volumes and rates to continue to pick up in 2021, with Danish freight groups Maersk and DSV Panalpina providing an attractive opportunity to tap into that, the note said.

"We think better fundamentals in shipping will likely continue in 2021, driving our overweight on Maersk. We expect air-freight yields to normalize, but slower than consensus expects, and increased e-commerce spend to be resilient into 2021, which coupled with good M&A prospects drive our overweight on DSV," the note added.

In addition, reflation and M&A are a focus for the infrastructure sector, Morgan Stanley said. The bank's assumption is that of "the global V- shaped growth recovery and ensuing reflation, particularly in the US," the note said. 

Spain's Ferrovial in particular should "play on the expected strength of the US economy recovery and reflation trade as well as the strength of US managed lanes as the new #1 valuation anchor," it added. Ferrovial's subsidiaries operate all over Europe, Latin America and the United States. The company owns major airports such as London's Heathrow and, across the United States, runs and maintains nearly 100 miles of major highways and expressways.

These are the nine stocks that Morgan Stanley think are ideally placed for the cyclical recovery within transport and infrastructure. 

Easyjet

  • Ticker: EZJ.L
  • Price Target (new/old/%change): 900p/800p/12.5%
  • Thesis: Equal-Weight
  • EPS estimates (2021/2022/%change): 71/84/18.31%

Commentary:

"We value easyJet at a forward EV/EBITDA 22e multiple of 6x , in line with 10-year one-year forward average. This implies 10x P/E 22e," the note said.

"Stronger prices and growth prospects for the holidays business postponed. easyJet had been benefiting from strong demand and strong outlook for summer 2020. We think Covid-19 delays the successful integration of its story," it added.

"easyJet's slow down in growth should help it sustain margins, but delay its earnings normalization as there could be loss of scale gains, we wait for further evidence on the demand recovery," it concluded.

 

Eiffage SA

  • Ticker: FOUG.PA
  • Price Target (new/old/%change): €117.00/110.00/6.4%
  • Thesis: Overweight
  • EPS estimates (2021/2022/%change): 7.12/8.61/20.93%

Commentary:

"Resilient, high-quality French toll road assets (APRR, A65, Millau Viaduct) under- appreciated and undervalued," the note said, adding that "contracting is well understood to face a few quarters of soft revenues (lagged impact from Covid-19 low tendering activity), yet we believe in an inflection into 2H21 with stimulus plans, a return of French local authorities' spending and large civil tenders boosting prospects."

"Strong FCFE support (7-10% in 2021-22e), cheap valuation (11x 2021e P/E, ~9x 2022e), leverage under control (~3x 2021 ND/EBITDA) and M&A/reinvestment optionality," it concluded.

Ferrovial SA

  • Ticker: FER.MC
  • Price Target (new/old/%change): €117.00/110.00/6.4%
  • Thesis: Overweight
  • EPS estimates (2021/2022/%change): (0.10)/0.27/370%

Commentary:

"Infrastructure play with long dated assets, dynamic tariffs indexation and traffic ramp- up potential. Infrastructure assets equal ~84% of target equity value (US MLs: 40%; 407-ETR: 35%; Heathrow: 5%)," the note said.

"Non-Infra assets are for sale (Services) with an exit likely over 12-18 months, or going through a refocus/restructuring (Construction) to manage risk (CF upside). ▪ 407-ETR's challenges are well known (traffic with WFH impact; tariffs trajectory lowered; schedule 22 payments), but overshadow the potential for US MLs to come out stronger on the other side of Covid (US growth, truck penetration)," the note added.

"Holdco liquidity is tight yet manageable (little spare cash before monetisation of services assets)," it noted.

Fraport AG Frankfurt Airport

  • Ticker: FRAG.DE
  • Price Target (new/old/%change): €55.00/54.00/1.9%
  • Thesis: Equal-Weight
  • EPS estimates (2021/2022/%change): -0.94/2.91/409.57%

Commentary:

"We view Fraport as a play on transformational cost-cutting, with the Covid-19 crisis having come as a wake-up call to structurally adapt the cost base," the note said.

"Opex containment makes regulation and challenged balance sheet palatable until Frankfurt's new T3 terminal opens in Summer 2025," it added, noting that for now, "we remain cautious on Frankfurt's historically under-performing Retail, with no improvement in spending/passenger before 2025e. Progress on 'Stabilize, Recover, Grow' programme could accelerate this."

"The international footprint is under- appreciated, providing a well-embedded ~33% of EV with a large exposure to Leisure travel with hope of fast traffic recovery," it concluded

Flughafen Zurich AG

  • Ticker: FHZN.S
  • Price Target (new/old/%change): CHF169.00/164.00/3.0%
  • Thesis: Equal-Weight
  • EPS estimates (2021/2022/%change): 0.31/8.03/2490.32%

Commentary:

"Zurich Airport is a high-quality, defensive airport with a resilient, affluent pool of passengers/Intra-EU skew, fair regulation, strong opex management, fast-improving underlying FCF generation and optionality on Int'l development," the note said.

"The improved traffic recovery backdrop is fairly priced in after the recent share bounce. Upside from here lies in faster business travel recovery (~26% of passengers) and/or Intra-EU leisure price war," it added.

"Zurich boasts the most defensive valuation profile within EU airports (low gearing; balanced split of EV between Aviation / Retail / Real Estate)," it noted, concluding that "given the risk/reward, we rate the shares Equal-weight."

Getlink

  • Ticker: GETP.PA
  • Price Target (new/old/%change): €14.50/13.90/4.3%
  • Thesis: Equal-Weight
  • EPS estimates (2021/2022/%change): 0.09/0.33/266.67%

Commentary:

"Stock stuck between short-term operational headwinds (Covid-19, Brexit, slower recovery from business-/International tourists-driven Eurostar) and medium-term ESG and special situations angle support to the narrative," the note said.

"Railways (Eurostar) offers a medium-term opportunity to accelerate growth via new routes (ramp-up in London Amsterdam), optionality from Eurostar/Thalys' 'Green Speed' initiative and a higher penetration of HSR travel," it added.

"We consider the stock is trading near Fair Value, on an all-time high 21x underlying 2021 EV/EBITDA (exc. Eleclink), falling to 17x 2022e (LT average EV/EBITDA)," it concluded.

Ryanair

  • Ticker: RYA.I
  • Price Target (new/old/%change): €18.00/15.60/15.4%
  • Thesis: Overweight
  • EPS estimates (2021/2022/%change): 0.76/1.32/73.68%

Commentary:

"We think Ryanair's flexible cost structure and large liquidity resources will be an advantage as the industry recovers (c€180- 200mn monthly cash burn with at least €4.5bn in cash)," the note said.

"We also believe Ryanair's delayed delivery of Boeing 737 Max, which we previously saw as a impediment to its growth prospects, has turned into an advantage, and the delays likely put Ryanair in a stronger position due to savings in aircraft costs and more flexible conditions," it added, noting that Morgan Stanley "estimate Ryanair can achieve its 200mn seat target by FY26 even on a weak market recovery."

"We see upside to shares if positive momentum continues, and a more defensive play if demand disappoints. With Ryanair trading at 7.1x EV/EBITDA 23e, vs 8x average valuation, we see 12% upside to shares," it added, concluding that "Ryanair presents the best long-term story, with opportunities for growth above market. We estimate EBIT CAGR of 25% for Ryanair in 2019-2023e, well above peer average of 11%."

Vinci SA

  • Ticker: SGEF.PA
  • Price Target (new/old/%change): €93.00/15.60/15.4%
  • Thesis: Overweight
  • EPS estimates (2021/2022/%change): 4.53/6.24/37.75%

Commentary:

"'King of Cash [Flow]' within the EU Infrastructure sector, with continued outperformance on cash on the back of strong operational delivery, good NWC and capex containment," the note said, addint that the stock has "under-appreciated, high-quality assets in both toll roads (ASF and Cofiroute) and Airports (ANA, GTW, Kansai, etc)."

"A PF ~€45bn Contracting revenue base, with MT upside from rebuilding depleted profit pools (France, Africa) and via Vinci Energies' growing TAM (Total Addressable Market) which offers M&A opportunities," it added.

"MT capital allocation remains key: the recently proven ability to deliver large deals within the Energies division on top of opportunities in Airports/Highways/renewables sets Vinci in an appealing position," it concluded.

Wizz Air Holdings Plc

  • Ticker: WIZZ.L
  • Price Target (new/old/%change): 5,000p/4,200/19.0%
  • Thesis: Overweight
  • EPS estimates (2021/2022/%change): 0.78/4.10/425.64%

Commentary:

"Solid position in cross-border CEE and Western Europe connectivity is strong," the note said, adding that "large liquidity reserves and flexible cost structure allow Wizz to have over 15 months of liquidity even assuming full grounding."

"Ability to gain share gives optionality. We think Wizz can grow above market, allowing it to deliver its capacity growth plans even in a slow recovery," it added, nothing that Morgan Stanley "see potential from cost base flexibility to boost confidence in the earnings outlook as the company grows scale."

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