If someone had to ask me to name a company which comes close to being the most efficient in its sector, Ryanair would be it.
Ryanair is an Irish low-cost airline headquartered in Swords, Dublin, Ireland, with its primary operational bases at Dublin and London Stansted Airports. In 2013, Ryanair was both the largest European airline by scheduled passengers carried, and the busiest international airline by passenger numbers. Ryanair shares are traded both on the London and Dublin stock exchanges in Euro.
Ryanair offers value to customers and shareholders alike.
When an analyst comes up with a price target on a stock, he includes many assumptions in his valuation. All of these assumptions revolve around the management team’s ability of delivering what the analyst expects.
In my opinion, Ryanair’s transparent business model helps analysts unlock value through their valuations. Also, the management have a reputation of beating its own guidance over the last couple of years.
There are many reasons why Ryanair should continue creating wealth for shareholders. The following are factors which should support the positive momentum in the shares:
Share buyback program
In light of the Group’s improved profitability and cash flows the board approved a €400 million share buyback program.
Headroom for further special dividends
Ryanair paid a €520 million special dividend at the end February. I would not be surprised if the company announces further special dividends going forward as it has leeway in its balance sheet to do so.
Load factor active - yield passive
As lower oil prices kick in over the next two years, Ryanair intends to pass on much, if not all, of these savings to its rapidly growing customer base in the form of lower fares.
Price maker not price taker
Ryanair clearly has more flexibility than other European carriers to set the market fare. I expect management to continue to use this tool to their advantage to continue increase its market share.
Increasing its fleet – no signs of slowing down
Low cost does not come at the expense of lower quality for Ryanair. In summer of 2014, Ryanair placed a $22bn order with Boeing to buy up to 200 new Boeing 737 MAX 200 aircraft (comprising 100 firm orders and 100 options) with the first deliver in 2019. The new planes will be much more environmentally friendly and will lead to lower costs for the company.
Continued increase in passenger numbers
Ryanair is guiding towards stronger passenger growth, up 11% to 100mln passengers by end of March 2016. This will be driven by the 19 new airports and 8 new bases added in 2014 as well as new bases (eg Bratislava, Copenhagen) and airports being introduced presently.
Although growth in passenger numbers has been strong, the company has room for further growth particularly in the major European countries. At present, Ryanair has only 4% market share in Germany and 7% in France.
Management also expect passenger numbers to reach over 150m per annum by the end of the delivery of the new aircraft stream in 2024.
Increased Profit Forecasts
Ryanair said fuller planes and a 5% drop in costs because of lower fuel prices will help it deliver a profit of €840 million to €850 million for the year ending in March. Europe’s largest budget airline, which had already upgraded its profit outlook three times for this financial year, previously estimated a result of €810 million to €830 million.
Conclusion
With improved growth forecasts in Europe, a lower oil price, strong growth prospects and a buyback program in place, I am of the opinion that Ryanair should form part of a well-diversified portfolio.
Disclaimer:
This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri & Co. Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.