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Ryanair - A decent year with a tough ending

Nicholas Hyett, Equity Analyst | 18 May 2020 | A A A
Ryanair - A decent year with a tough ending

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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.

Ryanair Holdings Ordinary Shares EUR0.006

Sell: 1,023.50 | Buy: 1,104.00 | Change -4.75 (-0.44%)
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For the full year ending 31 March 2020 Ryanair's revenue rose 10% to €8.5bn. Profit after tax rose 13% to €1.0bn, although this excludes a €353m charge relating to fuel hedges rendered ineffective due to COVID-19.

Ryanair expects to record a €200m loss in the first quarter of this financial year, and a slightly lower loss in the second quarter.

The shares rose 6.8% following the announcement.

View the latest Ryanair share price and how to deal

Our view

Ryanair is a strong player, but airlines are a tough industry to be in at the best of times, and this feels like it could be the worst of times. The COVID-19 outbreak has virtually cleared the skies of non-emergency flights.

Along with every other airline, Ryanair is looking to cut costs. You might think its cost conscious, no-frills service would stand it in pretty good stead - but in reality there are lots of fixed costs that can't be avoided. Ryanair does have at least one advantage: it owns the majority of its planes outright, so lease payments are relatively limited.

The group also has relatively little debt and some €4.1bn in cash and cash equivalents. This liquidity buffer will be essential, and gives Ryanair some leeway despite a weekly cash outflow of €60m. Once flights restart cash outflows will moderate, but management still expect to make losses over the crucial summer period.

If the group can weather the storm then investors brave enough to stick it out might be rewarded. The share price will fall further if things get worse though, and it's far too soon to say the worst is behind us.

Prior to today's update the shares changed hands for 1.8 times book value, well below the long run average. However, book value could be written down if conditions deteriorate, so investors should exercise caution when using backward looking valuation metrics at such a turbulent time.

In our opinion, the prospects for Ryanair, or any other airline, hinge on the length of the travel restrictions and the speed of a recovery in demand. This is going to be a really tough period for the group, but we think Ryanair is in a relatively strong position compared to some peers. However, even the strongest airlines can't keep running below capacity forever.

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Full year results

Ryanair carried 149m passengers over the full year, up 4% on last year. Scheduled revenue from ticket sales rose 6% to €5.6bn, comprising a 2% rise in fairs and passenger growth. Ancillary revenue grew 20% to €2.9bn as more passengers chose priority boarding and preferred seat services. Ryanair estimates that COVID-19 restrictions reduced passenger numbers by around 5m in the fourth quarter.

Costs per seat excluding fuel rose 4%, compared with the 2% expected, which the group attributed to the COVID-19 fleet grounding in March. Higher staff and maintenance costs were partially offset by lower route charges and fewer delays and cancelled flights. Fuel costs rose 14% over the year thanks to higher prices and traffic growth.

Ryanair's subsidiary, Lauda, underperformed expectations thanks to intense price competition with Lufthansa in the core German and Austrian markets. Buzz increased its fleet to 43 B737's and is expanding outside Poland to Prague and Budapest. Ryanair DAC performed well and opened new markets in Armenia, Georgia and Lebanon. Malta Air continued to grow in 2020 after becoming Ryanair's fourth airline last year.

Ryanair currently has a cash balance of €4.1bn after raising £600m from the UK's COVID Corporate Financing Facility. Thanks to cost saving measures the group's weekly cash burn has dropped from around €200m in March to around €60m in May. Ryanair generated €911m in free cash last year, and had €403m of net debt (debt minus cash) on 31 March.

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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.

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