Ryanair: the least turbulent in a stormy sector
Ian Hunter
Ian Hunter

Ryanair issued H121 results on 27th July that were ahead of market expectations. Unfortunately, they coincided with the UK’s announcement that anyone coming into the country from Spain would have to go into 14-days quarantine, which resulted in a sell-off of stocks in the travel and leisure sector. That said, while the other two airlines most directly affected by the announcement, easyJet and IAG, traded down 8.0% and 5.9% respectively on the day, Ryanair’s only dipped 3.7%. As the Covid-19 crisis has shown investing in airlines currently is not without risk. That said, if an investor is looking for exposure to the travel and leisure sector for potential upside recovery as lockdown measures ease then we believe that Ryanair is the best placed stock to be owning.

Q121 numbers beat market estimates
The stock is currently newsworthy given its recent results release. In brief, while the numbers were down significantly on Q120, they beat market forecasts. Ryanair reported a Basic earnings loss of 17.0c per share (37.5c forecast) from an operating loss of €187.6m (-€257.8m expected) and revenue of €125m (€40.7m forecast), 95% down on Q120. Given the already reported 98% monthly decline in passenger numbers, there was no surprise that only 0.5m customers were carried over the quarter (41.9m in Q120) and that the load factor was down to 61% (96% in Q120).

A second COVID-19 wave the biggest risk
Looking forward, management noted that it expects customer numbers in FY21 to fall by 60% (from 149m to 60m) and that air travel in general will be “depressed for at least the next 2 or 3 years”. The 60m passenger target is tentative and could go lower. The company expects to record a smaller loss in Q2 than Q121, reflecting a gradual return to flying from July 2020. Its “biggest fear”, however, is a second wave of COVID-19 across Europe in late autumn of the same year.

Strongest balance sheet in the sector
What differentiates Ryanair from its peers is that it had the strongest balance sheet before the pandemic. Net debt/EBITDA was a very healthy 0.2x at year-end 2019, well ahead of its peers, which were averaging 2.1x. A collapse in earnings will undoubtedly put temporary pressure on both cash flow and debt servicing, but within the sector, Ryanair appears the best positioned airline to weather these exceptional conditions. Indeed, the company noted that despite difficult operating conditions it would not be looking to strengthen the balance sheet through either a debt or equity issue in the near future, unlike easyJet.

In a position to take advantage of competitor weakness
In its results release, Ryanair noted that several EU airlines have already ceased operating because of cash flow and balance sheet difficulties. This will provide, in management’s opinion, opportunities for Ryanair to grow its network, expand its fleet and take advantage of lower airport and aircraft costs. Reserves will be required to fund the new Boeing 737 Max planes on the order book. $2bn was originally pencilled in for both FY21 (year-end March) and FY22. That guidance has been shelved as Ryanair is looking to negotiate a lower price for the aircraft and will receive late-delivery compensation, both of which are not yet quantified. The company is looking to take delivery of up to 40 planes in late calendar 2020. Taking competitor weakness and plane deliveries together, the company should be in a strong position to expand its fleet at lower costs than originally expected with the opportunity to deploy them in an expanded network in market with fewer competitors.

FY22 forecasts imply the stock is trading at a discount to historical multiples
For a company trading in such a volatile business environment, the stock has remained remarkably resilient. The share price fell 46.8% in the general market sell off in late February / early March, but subsequent recovery sees it only down 25.0% year to date. This compares favourably with its peers, which, on average, are down over 58% ytd. Looking through FY21 when Ryanair is forecast to be loss-making with little to no EBITDA, the stock is trading at 12.1x FY22 P/E and 6.6x EV/EBITDA, an average 15.8% discount to its 10-year pre-COVID P/E and EV/EBITDA multiples. We continue to see Ryanair as one of the best placed in the airline industry to weather the COVID-19 storm and come out the other end in a position to continue growing its geographic footprint, network and market share as other less-well financed airlines falter.

Ian Hunter is a Research Analyst at Cantor Fitzgerald.

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