RYAAY - Ryanair Plays The Gamechanger Strategy

2023-05-23 11:30:42 ET

Summary

• After our analysis called back to profitable growth, Ryanair achieved a yearly net income of €1.43 billion.
• Travel demand has soared above 2020 levels.
• Upside on Gamechanger strategy thanks to a new Boeing order. Our buy rating is then confirmed.

Since our initial buy rating released in July 2022 called " Ryanair Is Set To Fly ", the company delivered a 41.77% in stock price appreciation, outperforming the S&P 500 return. Our buy case recap was supported by Ryanair Holdings plc (RYAAY) Gamechanger strategy: " more seats, less fuel consumption, higher capacity loads, lower tariffs, and consequently more customers that equal more profit ". This created a positive continuous circle for end clients, investors, and all the stakeholders involved. Our investment thesis was also backed by 1) a tasty valuation thanks to travel recovery, 2) the most solid balance sheet among EU airlines, 3) a " Back To Profitable Growth " analysis, and 4) travel " demand is the number one priority for household discretionary spending " according to easyJet and Ryanair's competitive advantages on ticket price.

Today, we are commenting on the Ryanair Gamechanger strategy and also the newly released results.

The low-cost flight operator did a maxi-order of 300 Boeing 737-10 Max aircraft for a combined value of approximately $40 billion. In detail, the order consists of 150 orders (and 150 options) for the new aircraft delivery between 2027 and 2033. This is a record deal and the new fleet will replace the older B737NGs and will also guarantee a substantial increase in turnover. Why?

The new Boeing will have 21% more seats than the current ones (228 against the current 189) and this will allow an additional increase in turnover of 20%. During the joint press conference with Boeing, O'Leary Ryanair CEO explained that fleet modernization will advantage passengers, who will be able to travel at lower prices. In addition, the new Boeing will consume 20% less fuel and will be 50% quieter than the current ones. Boeing's supply chain problems have caused delays in recent months. However, the manufacturing company complied with 95% of the expected delivery times. With this new announcement, Ryanair will further increase its competitive advantages over its closest competitors.

Source: Ryanair Q4 results presentation

Q1 results

The strong recovery in air traffic and fare increases pushed Ryanair to a profit of €1.43 billion in 2022-2023. This was achieved despite a Q4 loss of €154 million. However, the company narrowly beat Wall Street analyst expectations which estimated yearly profits of €1.425 billion.

In the press release, Ryanair is optimistic that summer bookings will be strong and expects a 10% increase in passengers on an annual basis. The increase in ticket sales will allow for a further increase in profits in the next 12 months, despite fuel costs exceeding €1 billion. Looking at the numbers, Ryanair's total revenues reached €10.78 billion and were up 124%, and the company has experienced a return to passenger volume above pre-pandemic levels. Traffic grew by 74% to 168.6 million passengers, 13% more than in 2020. Despite that, operating costs also grew by 75% to €9.2 billion.

Italy was a key value driver for the Irish company. Ryanair gained significant market shares in the Belpaese, where it rose from 27% to 40%. Poland increased from 26% to 36% and Ireland from 49% to 58%.

Conclusion and Valuation

Forecasts for 2024 are 185 million passengers (+10%) and the company expects a strong 2023 summer. Demand is robust and fares are expected to increase compared to last summer. Key to report is the following: 1) Ryanair aims to be a zero debt company despite CAPEX investment, 2) the company will generate sufficient cash flow to repay bond obligations, and 3) and also to preserve cash for the first 2027 Boeing payment. Our readers know that we were already ahead of Wall Street estimates, and supported by the latest announcement, we confirm our target price at €19 per share . Today, we are not surprised to see a plus 2%. Risks include in our TP are 1) health restriction to limit travel, 2) geopolitical instability with the ongoing Ukraine war, 3) lower consumer discretionary on travel demand, and 4) higher fuel cost and wage inflation.

For further details see: