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easyJet - rights issue announced

Sophie Lund-Yates, Equity Analyst | 9 September 2021 | A A A
easyJet - rights issue announced

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easyJet plc Ordinary 27 2/7p

Sell: 686.20 | Buy: 686.60 | Change -24.80 (-3.50%)
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easyJet plans to raise £1.2bn through a rights issue. Participants will be offered 31 shares for every 47 they own, at a 35.8% discount to the expected market price following the issue. The group has also secured a new $400m credit facility.

The money will be used to strengthen the balance sheet, and allow the group to invest following changes to the airline industry during the pandemic. Proposed plans include upping its presence at major airports, increasing revenue per-seat through ancillary revenues (things like extra legroom, bag fees and food), and expanding easyJet holidays.

easyJet saw August travel improve nearer to pre-pandemic levels, but capacity in the final quarter is expected to be about 57% of 2019 levels.

The shares were down 10.5% following the announcement

View the latest easyjet share price and how to deal

Our View

easyJet's asking shareholders to open their wallets to help the low-cost airline make a smooth landing after a year's worth of unprecedented turbulence. The group's done well to weather the pandemic, but the sector looks to be in for some big shifts and easyJet wants to have cash on hand to make the most of potential opportunity.

It's also a bold move but there's some merit to the theory. Legacy carriers may pare down some of their shorter-haul routes indefinitely, leaving space for easyJet to up its presence at major airports. Management's promised shareholders that some of the funds will be earmarked for this purpose.

If it pans out, this would help easyJet build upon its existing strategy--focusing on profitable routes within major airports . In doing so, easyJet sets itself apart from other low-cost carriers who trim costs by flying in and out of smaller, less convenient airports. With the pandemic making some wary of public transport, this could prove to be an important upper hand.

But the ''if'' is doing a lot of work. We're supportive of the ideas, but there's a lot of execution risk that comes with these kinds of changes. Not to mention the fact that the pandemic and its impact on the economy continues to hang over the sector like a dark cloud.

The summer season showed signs of progress, with domestic UK capacity back to normal levels. Travel within the EU has been slower to recover as restrictions and varying degrees of vaccination efforts have kept people from international travel. But as winter approaches and the delta variant continues to spread, easyJet's battening down the hatches for another year of lacklustre travel trends.

The group's become well-versed in changing alongside the pandemic, scaling up and down as needed. But net debt is uncomfortably high at £1.1bn or 1.2x pre-pandemic profits. That's a worry when you consider profits aren't expected to recover to that level until 2023. The cash infusion from the rights adds a layer of safety, but even the biggest resource pile will start to deplete if conditions aren't supportive.

Ultimately, when a company asks the market for more money you want it to be for growth rather than necessity. In easyJet's case, it's a combination of the two. Depending on how the pandemic plays out over the next six months, the cash injection could be useful either way. The winds of change are blowing in the airline sector and we think easyJet's preparing itself to utilise the uncertainty as a tailwind. However, visibility within the sector is still quite thin, so investors will need a strong stomach to get behind this plan.

easyJet key facts

  • Price/Book ratio: 1.9
  • 10-year Average Price/Book ratio: 2.18
  • Prospective dividend yield (next 12 months): 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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Trading Update

August capacity in the UK rose to 105% of 2019 levels, with 82% of available seats filled. Capacity within the EU rose to 81% of pre-pandemic levels with planes 85% full.

In the fourth quarter, domestic UK capacity is expected to continue growing beyond pre-pandemic levels, and capacity within the EU will continue to climb toward normal levels. Group capacity is expected to improve to 60% of 2019 levels in the first quarter of 2022.

easyJet received an unsolicited takeover offer, which was rejected. The potential bidder confirmed that a possible acquisition was no longer being considered.

Find out more about easyJet shares including how to invest

A Non-Executive Director of Hargreaves Lansdown plc is also a Non-Executive Director of easyJet.

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.