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Ryanair - renewed lockdowns flatten traffic estimates

Nicholas Hyett, Equity Analyst | 7 January 2021 | A A A
Ryanair - renewed lockdowns flatten traffic estimates

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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: 14.24 | Buy: 14.28 | Change -0.04 (-0.24%)
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Ryanair has cut its full-year passenger forecast from "below 35m" to between 26m and 30m passengers.

The pared down forecast is the result of renewed national lockdowns in the UK, Ireland and a handful of EU countries. Management believes the new restrictions will cause January traffic to dip below 1.25m passengers. Ryanair says that figure could drop as low as 500,000 passengers a month in February and March.

In response to declining passenger numbers, Ryanair plans to cut its flight schedules from 21 January.

Due to Brexit rules, it's no longer possible for non-EU nationals, including UK nationals, to buy Ryanair shares. However, it's still possible to buy American Depository Receipts (ADRs), which represent an underlying stake in Ryanair shares but trade in the US.

The shares fell 3.2% following the announcement.

View the latest Ryanair share price and how to deal

Our view

Reduced flight schedules were to be expected as countries around the world tighten travel restrictions to cope with rising Covid numbers. We think Ryanair remains a strong player, but airlines are a tough industry to be in at the best of times, and with more lockdowns on the cards, this feels like it could be the worst of times.

The COVID-19 outbreak virtually cleared the skies of non-emergency flights between mid-March and the end of June, and after a brief glint of hope for a recovery in air travel, the third round of lockdowns is taking a toll on the sector once again.

Ryanair previously guided for capacity to be just 40% of 2019 levels between November and March. With the new estimates in mind, that figure is likely to come in even lower.

Fortunately, Ryanair has a relatively strong balance sheet, so we're not worried about a short term crunch. However, there are upcoming debt maturities and the group really needs a profitable summer to reassure lenders and generate some cash. Our biggest concern is whether these on-again-off-again lockdowns will stretch into the summer - which could pose a mortal threat.

If the group can weather the storm, then investors brave enough to stick it out might be rewarded, although it's too soon to say conclusively that the worst is behind us.

While a price to book ratio of 3.5 seems high given the circumstances, it's lower than it has been in the past , reflecting the challenges facing the sector. Bear in mind though that 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.

The shift to "Restricted Shares" will bar UK nationals from voting on company-wide measures and from buying more shares in the company. However, aside from the loss of voting rights, the Restricted Shares are economically identical to Ordinary Shares. The move has no effect on the day-to-day operations of the business.

In our opinion, the prospects for Ryanair, or any other airline, hinge on the length of the disruption, speed of a recovery in demand and the absence of a third wave of infections. We think Ryanair is in a relatively strong position compared to some peers. But even the strongest airlines can't keep running below capacity forever.

Ryanair key facts

  • Price/Book ratio: 3.5
  • 10 year average Price/Book ratio: 3
  • Prospective dividend yield (next 12 months): 0.0%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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Second Quarter Results- 02/11/20

Ryanair has reported a second quarter loss before exceptional items of €22.6m, compared with a €910.2m profit last year. Once exceptional items, which mainly relate to ineffective fuel hedges, are taken into account Ryanair's loss was €225.5m.

Ryanair has cut its winter capacity guidance from 60% to 40% of last year's level. The group is not providing detailed full year guidance.

Ryanair operated around 50% of its planned second quarter schedule, and about 72% of seats were filled. As a result scheduled revenue fell 69% to €690.1m, and ancillary revenue fell 58% to €360.9m. In total revenue fell 66% to €1.1bn.

Total operating costs fell 50% to €1.0bn, primarily reflecting a 58% fall in fuel costs to €334.1m, a 55% fall in airport costs to €151.6m and a 42% fall in staff costs to €166.2m. Ryanair therefore made a €10.8m operating profit in Q2, although this was someway behind €1.0bn profit last year.

Since the end of March net debt has risen from €403.2m to €1.1bn. Ryanair has around €4.5bn in cash and equivalents on the balance sheet, having raised new capital from investors in September. Ryanair has two upcoming debt maturities: £600m from the Bank of England's Covid Corporate Financing Facility in March and an €850m bond in June. The group suffered a free cash outflow of €1.0bn in the first half.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.