Questor share tip: easyJet shares slide as growth slows

easyJet
£16.58-72p
Questor says HOLD

SHARES in easyJet fell by more than 4pc yesterday despite the company reporting interim results that beat expectations. The problem is that so much is expected from the budget airline in terms of growth that any sign of a slowdown can knock the shares from near record highs.

The airline’s profit performance is ahead of last year. easyJet said it made a pre-tax loss of £53m during the first half of its financial year, which was ahead of guidance of about £55m provided just six weeks previously, and the final interim result was a significant improvement on previous guidance for a loss of up to £90m. The company said profits were boosted by lower costs as a milder winter meant less de-icing of planes and other cost-saving initiatives were ahead of schedule.

A loss during the winter months is normal for the airline companies when traffic numbers are down. The company reported a loss of £61m during the same period last year.

Revenue continues to grow. The budget airline, which was promoted to the FTSE 100 last year, said revenue increased by 6.3pc to £1.7bn, from £1.6bn during the same stage last year. It attributed the improvement to introducing fees for allocating seating and the option to switch flights.

The growth rate is slower than last year. Revenue growth of 6.3pc during the first half was behind the 9.3pc reported in the same period last year. What’s more, the growth in revenue per seat of 2.6pc, to £54.80, was less than half the 5.8pc growth reported in the same period last year.

On other measures easyJet is also improving. Its planes are fuller – as demonstrated by the load factor inching up 0.4pc to 89pc – and the capacity has increased from 30m to 31.1m seats a year, but again the growth rates in both these measures were below a year earlier.

The budget airliner also said fuel costs were on the increase, up from £16.54 a year ago to £17.30 per seat during the first half. The company protects itself from sharp increases in fuel costs by setting the price it pays in advance, and said it had agreed the price on 80pc of the fuel needed for the next six months at $963 per tonne, and 67pc of the fuel for the next 18 months at $950 per tonne,

Amid fierce price competition among the low-cost carriers, easyJet has gained an advantage on its larger rival, Ryanair. However, easyJet provided a cautious outlook on the crucial summer period. The company still expects the overall European market to grow by 3pc and is putting on more capacity itself to cope with summer demand, but others are increasing capacity at the same time, which will eat into easyJet’s growth rates.

On the whole, analysts were happy to retain their targets for the budget airline, and expect full year pre-tax profits of £574m, on revenue of £4.58m, giving earnings per share of 115p.

That leaves easyJet shares trading on a price earnings ratio of 14.7 times, and, given the rapid growth trajectory, that falls to 12.6 times next year. Questor thinks that, taking into account the evidence here of a slight slowdown, the shares are still looking fully priced, even after pulling back from record highs of £18.28 in early April to £16.58 today.

The company has proven it is a quality operator and is delivering growth, despite it being at a slightly slower rate. The shares have had a fantastic run, increasing by 45pc, during the past 12 months, which is well ahead of the wider FTSE 100, up just 3.5pc during the same period. At these levels they are no better than a hold.