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easyJet - profits and dividends rise

George Salmon | 20 November 2018 | A A A
easyJet - profits and dividends rise

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easyJet plc Ordinary 27 2/7p

Sell: 778.40 | Buy: 778.80 | Change -26.60 (-3.30%)
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easyJet's full year results are broadly in line with the guidance given a few weeks prior, with the shares little moved on the announcement.

Pre-tax profit for the year was £445m, or £578m after £133m of exceptional items are excluded.

The total payout for the year is set to rise 43%, to 58.6p per share, in line with easyJet's policy of paying out 50% of profits as a dividend.

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Our View

Running an airline can be tough. Fortunes are influenced by lots of factors outside companies' control - weather, the oil price and strikes to name just three.

Even when macro conditions give carriers a tailwind, companies don't have it all their own way. That's something we've seen recently.

On the one hand, rising passenger numbers have helped easyJet fly more and fuller planes, with upselling ensuring ancillary revenues have taken off too. However, easyJet wasn't the only one expanding. Capacity has flooded into the wider market, compressing margins.

The recent bankruptcies of Monarch, Air Berlin and Alitalia has dampened capacity growth, and mean that headwind has finally started to ease. As a result, profits have risen sharply this year.

The policy of paying out 50% of profits as dividends means those higher earnings are feeding straight to shareholders pockets. easyJet currently offers a prospective yield of 5.4% next year.

However, both easyJet and Ryanair are eyeing new planes with more seats, which has potential to reignite the price war. If that happens, cost control will decide the winner, and easyJet's not the strongest performer on that front.

The tailwind from lower fuel costs is running out of puff, and is outside easyJet's control in any case. More important are the non-fuel operating costs the group can influence.

Scale benefits from larger, more efficient aircraft and growth at key airports is helping, but non-fuel costs per seat remain stubbornly high.

This shouldn't be a problem in the short-run, but it won't make for a robust business if times turn tough, and with uncertainty lingering over the short-term impact of a disorderly Brexit, there's clear potential for turbulence ahead.

Perhaps reflecting these concerns, the shares trade on 1.7 times book value. That's lower than the long-run average, which could interest value-seeking investors, but we'd still like to see meaningful progress on non-fuel costs before turning more positive.

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Full year results

Total revenue increased by 16.8% to £5.9bn, with performance boosted by the addition of new capacity and relative weakness in sterling. However, a higher load factor of 92.9%, a measure of how full the average plane is on take-off, helped revenue per seat excluding the impact of currency moves, rise 4.7% to £61.94.

After excluding exceptional items such as a £65m IT charge and the £40m cost of integrating the Tegel operations, cost per seat increased by 4.4% to £55.87. At constant exchange rates, that's a 2.7% increase, with underlying cost inflation and airport disruption more than outweighing the impact of a lower realised fuel price - as a result of easyJet's hedging policy.

Looking ahead, bookings are roughly in line with the prior year, with 50% of first half seats already sold. Group capacity is expected to grow by around 10% in the year ahead, with capital expenditure expected to be around £1bn, broadly in line with 2018's spend.

Per-seat revenue is expected to dip by up to low to mid-single digit percentages in the first half, as a result of the non-recurrence of one-off benefits and the timing of Easter. Full year, underlying fuel costs (excluding fuel) are expected to remain flat.

easyJet has continued to prepare for Brexit, operating via airlines in the UK, Switzerland and Austria to enable ongoing flying in Europe, and is close to achieving majority EEA (excluding UK) ownership - currently at 47%. Ownership rules currently state that, for an airline to operate in the EU, over 50% of shares must be held by EU nationals.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.