easyJet plc (EZJ) Ordinary 27 2/7p
HL comment (19 November 2019)
Full year profit before tax was £427m, towards to the top of the £420-430m guidance range, but down 26% from last year.
A full year dividend of 43.9p per share has been proposed, down from 58.6p last year, in line with the group's policy of paying out half of earnings to shareholders.
The shares were up 3.3% following the announcement.
Airlines can be fickle friends for investors. Fortunes are influenced by lots of factors outside companies' control, including weather, terrorism and strikes. Most recently industry's been struggling with 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.
More recently, airlines have benefitted from bankruptcies at some smaller players, and strikes at easyJet's competitors have also 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 in slowing capacity growth, not only at easyJet but Ryanair too, and we could be entering a more stable pricing period.
However, the fact total costs are set to increase, potentially hitting profits, is bad news. Shareholder returns are tied directly to earnings, knocking the dividend by 25% this year. Rising fuel costs are outside of easyJet's control, but unfortunately, despite some recent progress, the group also expects non-fuel costs to rise slightly next year. This matters because while economic conditions and oil prices can swing at short notice, a well-managed cost base has longer-term benefits.
Fortunately, EasyJet benefits from a reasonably strong balance sheet, with 70% of planes owned outright. However, 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. To make progress easyJet will need to show it can start delivering again on cost control. Additionally, environmental concerns and regulations may prove a substantial threat to cheap air travel in the near future. easyJet thinks it can offset its emissions for just £25m a year as an interim measure, but this looks improbably cheap to us.
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 3.8% next year.
Full Year Results
Total revenue for the year was up 8.3% to £6.4bn, as passenger number rose 8.6% to 96.1m. That reflects a 10.7% increase in capacity, partially offset by a 2.7% fall in constant currency revenue per seat to £60.81. This was attributed to some weakness in consumer confidence and reduced load factor (a measure of how full easyJet's planes are flying), partially offset by higher pricing on last minute bookings.
Costs per seat excluding fuel fell 0.8% to £43.11, excluding currency movements, thanks to lower disruption costs. Including fuel and currency effects, costs per seat rose 1.5% to £56.74. Thanks to some small one offs, increased passenger numbers and cost savings of £139m, total cost per seat was £56.71, down 1% on last year.
easyJet Holidays will launch in the UK before Christmas. The service, which will tie holiday bookings to easyJet flights, is expected to at least break even next year.
easyJet expects capacity growth to slow next year, coming in towards the lower end of its 3-8% range. However, capital expenditure is expected to be around £1.35bn, compared to £984m this year.
The group finished the year with net debt of £326m, as new accounting rules significantly increased overall levels of reported debt.
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.
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