Ryanair – The Most Resilient Amongst Its Peers
Ian Hunter
Ian Hunter

With all TV channels reporting on the return of tourists to beaches in Spain and Portugal as Europe opens up under the EU digital COVID certificate scheme, we believe it opportune to revisit Ryanair, albeit with the caveat that over the short-term there may be some share price volatility. This was no more evident than in mid-July, when concerns over the rising number of Delta variant cases caused a ripple across the sector, which then just as quickly dissipated. On the day, Ryanair’s price came off 6.5%, only to appreciate 5.6% in the subsequent two days. Given the underlying dynamics, we would see any such short-term weakness in the future as a buying opportunity. We currently believe that the overriding dynamic is that as more people are vaccinated, hospital levels remain low and the EU Certificates are honoured, international travel is back on the agenda.

In what some would see as an uncertain market, two variables that can be measured accurately are vaccination progress and reduction in hospitalisations. We believe that combined they should provide some guide to the removal of travel restrictions. This is particularly relevant as evidence grows that the current vaccines provide protection against the Delta variant. At the end of March 2021, 12% of the EU population on average had received their first vaccination, increasing to just over 70% by the end of July. Importantly, with the more susceptible in the population prioritised in vaccination programmes, the numbers in hospital have fallen. In Ireland the numbers are down 90.5% from their peak, while in the UK they are down 81.2%.

Given the growing realisation that increasing case numbers are not leading to a material increase in hospitalisations, we believe that the well-flagged pent-up demand for travel to holiday destinations will translate into a rapid increase in not only flight numbers but also load factors on those flights. This has most recently been highlighted in Ryanair’s monthly traffic statistics. July traffic has been materially higher than June for Ryanair, carrying 9.3 million passengers at a load factor of 80%, representing a 4 million jump on the 5.3 million passengers it carried in June and surpassing the 7 million the airline carried in August of last year when travel restrictions were temporarily eased after the first wave of Covid-19 in Europe. In not giving forward guidance, the company has noted that bookings are being made much closer to proposed travel dates than in pre-pandemic times. We can all relate to that dynamic, where decisions on overseas holidays have only been made in the last number of weeks rather than planned well in advance.

Throughout the pandemic, Ryanair has been our preferred play in the airline sector given its superior balance sheet, low operating cost base and route flexibility. Airline balance sheets have remained stretched through the pandemic as ongoing running costs have had to be met primarily from debt or equity raises as revenue all but dried up through 2020 and 2021 to-date. The relative strength of Ryanair’s balance sheet can be illustrated on annualised 2022 forecasts. On those metrics, while the company is currently forecast to have ND/EBITDA down to 0.7x, by the end of the year, its nearest peer easyJet is expected to be at 2.4x, with IAG a distant third at 3.4x, we presume close to standard covenant levels (3.5x).

Ryanair has not disappointed investors that have held the stock over the pandemic. It remains the most resilient in the sector, currently trading at pre-pandemic levels compared to its peers which are still down almost 50%, on average. Given the material disruption to the industry over the past 15 months, comparative metrics remain all but meaningless. We would, however, note that at 9.0x FY22 EV/EBITDA, Ryanair is not stretched, trading close to its 10-year average. Two breaks downwards notwithstanding, the stock has been trading largely in the €15 to €17 range over the past seven months, we believe treading water until there were some signs of a sustainable return to air travel. Given the above noted underlying conditions and the issue of EU digital COVID certificates rolling out across Europe facilitating such travel, we believe that this catalyst may materialise sooner rather than later.

We have previously cautioned that investing in the airline sector is high risk in current conditions. That said, we believe that as the vaccine rollout and concurrent certificate issue continues apace, while hospitalisation rates continue to remain low as noted above, those risks are increasingly diminishing. The return to more normal conditions in the travel industry may come at a quicker rate than expected, albeit at a later start date than first envisaged by the sector and the market. Again, we re-iterate that if an investor is comfortable with a degree of risk exposure then Ryanair remains our preferred play in the airlines sector.

Ian Hunter is a Senior Research Analyst with Cantor Fitzgerald Ireland.

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