Questor share tip: Hold easyJet as profits jump

easyJet
£15.25-19p
Questor says HOLD

EasyJet [LON:EZJ] shares continue to fly high as higher seat occupancy and lower fuel costs boost profitability, the company’s annual results showed yesterday, even though a cautious outlook for the future meant a muted reaction from investors.

The FTSE 100-listed discount airliner flew 4m more passengers around the world as it added nine new planes and more routes during the year. Capacity increased 5.1pc to 71.5m flights and this was the driving force behind a 6.3pc increase in revenue to £4.53bn during the 12 months ended September 30.

Crucially for investors, the costs of flying a plane half empty are about the same as flying it full to the brim. What happens as you add more passengers is that profits soar once you get above the break-even point. So by adding just 5.1pc more passengers, as easyJet did this year, nearly all of that goes to profit.

So easyJet was able to report a 21.5pc rise in pre-tax profits to £581m for the year and investors were rewarded with a 35.5pc increase in the full year dividend to 45.4p. The company increased the dividend payout ratio up from 30pc to 40pc of basic earnings per share of 114.5p, as announced in September.

The collapse in oil prices is also good news for airline investors. Brent Crude, the global benchmark for oil, has tumbled from a high of $115 a barrel in June to around $79 yesterday. easyJet said that based on jet fuel costs remaining at their current lower levels, the company could see the fuel bill reduced by between £22m and £70m in the coming year.

Carolyn McCall, chief executive, said: “easyJet has opened up clear blue sky between us and our competitors — both legacy and low cost — with our unique and winning combination of the best route network connecting Europe’s primary airports, with great value fares and friendly service.”

This is borne out by the share price, which has soared from about 255p in July 2009 to hit a high of £18.27 in April and is now cruising at a more realistic altitude a few pounds lower.

However, there was a cloud on the horizon. The airline said it expects cost per seat, excluding the movement in fuel prices, to increase by 2.5pc in the first half running to end of next March, as wages and aeroplane maintenance bite. The anticipated increase on costs is well above the 0.6pc increase in cost per seat excluding fuel reported in the annual results yesterday.

The management team is taking action and said it had cut £32m in costs during the year just finished and expects to cut another £30m to £40m a year in costs during the next five years.

But demand for low-cost flights remains strong going into the end of the year. easyJet said advance bookings for the winter period were slightly ahead of the same stage last year. It also expects to increase capacity, measured by the number of seats flown, by 5pc over the coming full year for the company, which ends next September.

Shares now trade on a 2015 earnings multiple of 12.2 times, well above the 12-month average earnings multiple of about 10.8 times. Investors are now paying more than two times the net asset value for the shares, with the 12-month average about 1.3 times.

The current price even looks full on next year’s numbers. Brokers forecast another 7pc increase in revenue and a 9pc rise in pre-tax profits next year.

Yet that looks quite challenging given the increased competition in the discount airline sector and a fairly weak market.

easyJet shares dipped 1pc yesterday on the strong set of annual results and Questor would be reluctant to get in at these levels with the shares only having come down slightly from record highs. The cost pressures should be offset by the falling oil price, but until we get a clearer picture on passenger demand next year the shares are no better than a hold.