Overview

EasyJet PLC (EZJ) is a British-based low-cost European point-to-point airline company. It has developed strong positions in leading European airports and is known for the cost efficiency achieved by it. The company is known for delivering low fares, which is achieved through operational efficiency on point-to-point routes. The company was founded in March 1995 by Sir Stelios Haji-Ioannou. The company was listed on London Stock Exchange in November 2000 and is a constituent of FTSE 100. The current Chief Executive Officer is Johan Lundgren; he joined easyJet in December 2017. As at 30 September 2018, the company operates 979 routes across its markets with its fleet of 314 Airbus aircraft, against 862 routes in 2017. The company has operations in 156 airports, an increase of 13 per cent over the last year. The company's principal competitors are the legacy airlines and charter carriers; however, the company's fundamental cost-advantage relative to these airlines allows it to offer customers cheaper fares. The cost-advantage is achieved through a combination of factors which includes better arrangement of seats in aircraft enabling the airline to operate a higher number of seats per flight; better utilisation and higher load factor due to the point-to-point strategy, and reduction in maintenance costs by operating younger and advance fleet. The groups sell most of its tickets through its official website.

Segments
The company has four geographic segments which differentiate according to the origin country. The segments include the United Kingdom, Southern Europe, Northern Europe and Other. The United Kingdom market is the largest segment for the company with 43.7 per cent of revenue being generated from it. Southern Europe consists of markets to the south of the border between Italy and Switzerland, plus France. In Switzerland, 26 aircraft are registered, 113 are registered in Austria, and the remaining 176 are registered in the United Kingdom.
 

Key Statistics



Key Financial Metrics (for FY 2018, in £m)
 

(Source: Company Filings)

Key Financial Highlights (for FY 2018, in £m)
In the financial year 2018, the total revenue increased by 16.8% to £5,898 million, against £5,047 million in FY 2017. This was assisted by growth in revenue per seat, which grew by 6.4% (4.7% at constant currency) to £61.94, and passenger revenue which rose by 15.4% to £4,688 million. This performance was driven by growth in passengers of 10.2% in FY 2018to reach a record 88.5 million, reflecting a rise of 8.3 million. Overall load factor also rose by 0.3 percentage points to a record 92.9%. The company reported underlying demand growth, helped by good performance in the UK and France, the company’s core markets. The Ancillary revenue was also very strong and reported a growth of 22.7% to £1,210 million in FY2018, reflecting attractive products and innovative ancillary management like new bag segmentation and improved bag pricing algorithms that better reflect demand. Total headline cost per seat excluding fuel increased by 5.3% in FY 2018 to £43.43. Headline cost per seat increased by 4.4% in FY 2018 to £55.87. This was mainly due to higher disruption costs, which remains a major industry challenge. It was also driven by exchange rates, underlying cost inflation, which led to higher crew costs. While total profit before tax increased to £445 million, headline profit before tax rose to £578 million, led by excellent revenue performance. Total headline profit before tax per seat rose by 28.7% in FY 2018 to £6.07 per seat, reflecting a favourable movement in foreign exchange and total profit before tax per seat increased by 5.2% to £4.68 per seat. While basic headline earnings per share rose by 43.4% in FY  2018 to 118.3p, basic total earnings per share grew by 17.4% to 90.9p. In line with the stated dividend policy of a payout ratio of 50% of headline profit after tax, the management announced a dividend per share of 58.6 pence, reflecting an increase of 43.3%.
 

Ratios

(Source: Thomson Reuters)

Ratios Commentary
The overall load factors increased by 30 bps to a record 92.9%, driven by underlying demand growth. The number of aircraft operated also increased as the routes under operations were expanded. The company’s gross margin is less than its competitors. However, the margin has improved in the last year and is moving towards the industry median. The operating margin of the company is less than its peers. Moreover, it has fallen over the periods. However, the company’s net margin is better than its competitors and gradually increased in FY 2018. The current ratio is lower than the industry; however, the times interest earned ratio is better, indicating the company’s ability to pay its interest on loan is better than its peers. The company’s leverage position is better than the industry and has remained stable over the periods. The fixed asset turnover and asset turnover ratios are in line with the industry.

Valuation Methodology
Method 1: Price/Book Multiple Approach (NTM)
 

Method 2: Price/Earnings Multiple Approach (NTM) (EPS (FY19E) approximately)


To compare easyJet with its peers, Price/Earnings has been used.The peers are Ryanair Holdings PLC(NTM P/E was 13.09), Air France KLM SA (NTM P/E was 6.8),Deutsche Lufthansa AG(NTM P/E was 5.23), Wizz Air Holdings PLC(NTM P/E was 12.68), International Consolidated Airlines Group SA(NTM P/E was 5.91), Aeroports de Paris SA(NTM P/E was 27.99) and Stagecoach Group PLC(NTM P/E was 10.45). The mean of Price/Earnings (NTM) of the company’s peers was 11.74x.
 
* All forecasted figures and Peer selection have been taken from the Thomson Reuters.
 
 Share Price Commentary

Daily prce chart as on March-04-2019, before market close. (Source: Thomson Reuters)

On 4^th March 2019, at the time of writing the report, EZJshares were trading at GBX 1,237.0, down by 1.513 per cent against its previous day closing price. Stock's 52 weeks High and Low is GBX 1,808.50/GBX 1,030.00. At the closing price, the share was trading 30.55 per cent lower than its 52w High and 21.94 per cent higher than its 52w low. Stock’s average traded volume for 5 days was 2,476,783.60; 30 days - 2,160,591.17 and 90 days - 2,137,003.31. The average traded volume for 5 days was down by 14.63 per cent as compared to 30 days average traded volume. On the valuation front, the stock was trading at a trailing twelve months PE multiple of 10.07 as compared to the industry median of 8.4x.The company’s stock beta was 0.28, reflecting significantly less volatility as compared to the benchmark index.  Total outstanding market capitalisation was around £4.99 billion and a dividend yield of 4.67 per cent.
 
Risks Assessment and Growth Prospects  
The bankruptcy of competitors and subsequent calls for consolidation presents an opportunity as well as a threat the company. A decline in demand for air travel may lead to excess capacity, adversely impacting the financials. Climate change is leading to unstable weathers, including a higher number of storms. This can impact the company’s operations, including a rise in cancelled or delayed flights which can increase disruption costs. Although the crude oil had remained stable in FY 2018, and no major upside expected in FY 2019, the company can take advantage of this. However, a sudden increase in jet fuel prices or fluctuations in interest rate can impact the financials. Although the company has set-up the Austrian AOC and new UK AOC to ensure smooth operations post-Brexit, the outcome of the Brexit negotiations remains unknown and could impact easyJet. Brexit can halt flights between the EU and Britain, which will have both revenue and cost impacts.
 
Conclusion
Although industry-wide disruption provided a tough working environment for the industry, it was still able to post strong financials. Uncertainty around Brexit and the wider macro-economic environment has put pressure on the stock lately, but the company is financially well-positioned, with a net cash position of £396 million at 30 September 2018, to tackle the challenges. Based on strong fundamental performance and the valuation done using the above two methods, we have given a BUY recommendation with double-digit upside potential based on 11.74x NTM Price/Earnings on FY19E earnings per share and 1.6x NTM Price/Book on FY19E Book value per share.

*Note: The buy recommendation is also valid for the current price as covered in the report as on (March-04-2019). 

Note- GBp or GBX are interchangeably used for Pence Sterling. 

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