We increased the price target on Ryanair from €18 to €20. The increase in price target is based on an increase in PE from 15x to 16x. The shares are trading on a PE of 18x.
Ryanair posted results last week. Management believes the business is performing ‘very well’, stressing continued cost discipline and an expanding pipeline of airport growth opportunities which is causing the company to look at raising its growth rate.
NB: Make sure you buy the stock trading on the London exchange rather than Dublin, due to lower stamp duty costs: London (0.5%), Dublin (1%).
About the company
Ryanair is headquartered in Swords, a suburb of Dublin, Ireland, with its primary operational bases at Dublin and London Stansted Airports. In 2016, Ryanair was the largest European airline by scheduled passengers flown, and carried more international passengers than any other airline.
Valuation
With consensus earnings per share expected to come in at €1.22 in 2018 and using a PE multiple of 16x, we expect the price of Ryanair shares to move towards the €20 level. This means a potential 7% capital upside. I would also like to stress that an EPS of €1.22 conservative considering the outlook of this Company. If you look at what other analysts are saying (e.g. Barclays) they are forecasting earnings of €1.32/share which would result in a Price Target of €21.
Investment rationale
• Share Buyback - Ryanair says it has entered into arrangements with its brokers to start share buyback program to repurchase ordinary shares till end October 2017 up to a maximum of €600 million
• Net Income – Ryanair sees 8% Rise in 2017/18 Net Income
• Earnings Yield - The shares are trading on a forecasted earnings yield of 7% (2018E)
• PE Multiple - During 2013-2015 the shares were trading on a PE of 19x as the market were pricing in strong growth going forward. The PE then dropped to 15x as earnings started to kick in. We believe that a PE ratio of 16x on Ryanair is a fair multiple for valuation purposes
• Outlook - Management believes the business is performing ‘very well’, stressing continued cost discipline and an expanding pipeline of airport growth opportunities which is causing the company to look at raising its growth rate.
Other
• We like the sector Ryanair trades in because it benefits from global economic growth. Our house view stance is that positive growth figures should continue to sustain the rally we are seeing in equity markets and Ryanair should continue to benefit from this
• We view Ryanair as well positioned to continuously expand market share on the back of superior unit cost economics, scale, and track record
• We do not expect to see large shocks in the oil price and any disruption in the cost base of Ryanair
• We like Ryanair because of its low costs, superior growth prospects, and strong balance sheet
• Ryanair has a plan in place to increase its presence in its major markets and expansive order book through 2024
• Ryanair is also increasing its presence in major airports. Expansion into primary airports has proven successful. Although this presence will result in increased costs, we higher margin contributions from upgraded ancillary revenue growth as well as monetization of expanding market share
• We are confident margins can also improve due to an increase in prices. Fares are being sold very fast and the planes are filling up fast leaving no room to increase its load factor. With its competitors under pressure and economic growth kicking in, there are positive arguments why Ryanair can increase its fares
• Ryanair does not have the problems that legacy carriers face when it comes to unions and strikes
• Other low cost carriers such as EasyJet are finding it difficult to compete once the UK voted for Brexit. The weakness in the Sterling has effected them negatively. Ryanair stands to gain from this
• The pilots at Ryanair are self-employed meaning that Ryanair avoids paying certain costs which other airlines pay to their employees making their business model a success. Also, airline pilots are paid for the hours they work. The more they are productive, the more they earn making it a win-win situation for both the employer and employee
Concerns
On the labour front, there is the possibility that an EU ruling later this year requires employees to pay personal taxes in their local countries, rather than Ireland, but Ryanair does not see this as a concern.
Conclusion
Ryanair's strategic transformation may have already doubled its profitability and share price but we believe the best is yet to come. Positive economic growth, potential to increase prices and market share will all contribute to increased margins going forward. We believe 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 Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.