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easyJet - steady despite headwinds

Nicholas Hyett | 8 October 2019 | A A A
easyJet - steady despite headwinds

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

easyJet plc Ordinary 27 2/7p

Sell: 826.60 | Buy: 828.00 | Change -11.40 (-1.36%)
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Full year profit before tax is now expected to land between £420 - £430m, the upper half of previous guidance. That reflects increased passenger numbers and progress on non-fuel cost savings.

The shares fell 4.5% on the news, with some investors worried about slower growth going forward.

View the latest easyjet share price and how to deal

Our View

Airlines can be fickle friends for investors. Fortunes are influenced by lots of factors outside companies' control, including weather, terrorism and strikes. Most recently the group has been held back by intense competition and Brexit uncertainty.

Sterling fell sharply after the vote back in 2016 and remains well down versus the euro. That reduces Brits' spending power abroad. And when the UK finally goes through the EU departure gate, there could be extra travel regulations to contend with.

Bankruptcies at some smaller players have helped douse the fierce competition to a degree. Less competition is good news for prices, as the same number of flyers chase fewer seats. Add to this the fact that capacity growth seems to be slowing, not only at easyJet but Ryanair too, and we could be entering a more stable pricing period.

The fact total costs are set to increase, potentially hitting profits, looks, on first glance, bad news. And in some ways it is, especially since the dividend is tied directly to earnings, meaning investors can expect the payout to be cut by around 25%.

However, that's mostly due to the rising cost of fuel, a major and unavoidable cost. What's encouraging is that after little progress in recent years, the group's finally confident it can get non-fuel operating costs per seat down. That's important because while economic conditions and oil prices can swing at short notice, a well-managed cost base has longer-term benefits.

A strong balance sheet, helped by the fact 69% of the total fleet is owned outright, is another plus. But we don't think the group is out of the woods yet.

Uncertainties linger around the implications of the UK's exit from the EU, and customer sentiment remains weak. easyJet will need to show it can keep delivering on cost control.

Those uncertainties likely explain why the shares trade at a discount to their longer-term average on a price to book basis, and are set to offer a prospective yield of 4.1% this year.

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Trading details - results in constant currency

Total revenue per seat for the full year is expected to fall by around 2.7%. This is despite a better than expected second half, which saw revenue per seat rise 0.8% following a strong fourth quarter. easyJet attributed the rise to its pricing strategy and increased demand following disruption at British Airways and Ryanair.

Total costs for the year will increase by about 12%. That reflects a 10.3% increase in capacity, to 105m seats, higher fuel prices and foreign exchange headwinds. These were partly offset by a 0.8% decline in headline cost per seat excluding fuel.

Load factor (a measure of how full easyJet's planes are) fell 1.4 percentage points to 91.5%. Total passenger numbers rose 8.6% to 96m.

Capacity growth for the coming year is expected to be at the lower end of the historic range, around 2%. First quarter bookings are in line with the same period last year.

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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 disclosure for more information.