2023-05-21 01:57:28 ET
Summary
- The low-cost airline aims to grow with its new easyJet holiday new division.
- easyJet closed in negative territory in its first half; however, a profit of £80 million is expected by 2023 end.
- The Italian market records a strong increase in passengers. Following Deutsche Lufthansa AG's potential deal with ITA Airways, we believe that easyJet might increase its market share.
- Guidance was confirmed and so was our buy rating target.
Here at the Lab, we have a long-standing buy rating on European low-cost operators. This analysis is based on travel rebound and MICRO implications on both easyJet ([[EJTTF]], [[ESYJY]]) and Ryanair . This week, easyJet communicated the first half results, which ended March-end. Before going into detail about the analysis, it is important to recap our main company's highlights 1) clientele’s willingness to pay more after COVID-19 restrictions, 2) a de-leveraged balance sheet, 3) a ' Summer Season Rebound ' coupled with higher guidance (this followed our last analysis called ' Time to Fly ').
There is an additional upside that we would like to include in our analysis. Following the Deutsche Lufthansa AG potential deal on ITA Airways, we believe that the German flight operator will raise ITA's flight fares and more people will turn on low-cost operators. Therefore, the low-cost routes demand will increase. This positive confirmation was also emphasized by Michael O'Leary, the Ryanair group CEO. Looking at Lufthansa's past record, the company will likely increase traffic in Rome and Milan, as it did in previous acquisitions with Austrian Airlines and Swissair. And easyJet might benefit from second-important tiers destinations.
Q1 Results
Commenting on the results, Johan Lundgren, CEO of easyJet, continues to stress that research has shown that travel " demand is the number one priority for household discretionary spending ", with clientele that is safeguarding their vacations and increasingly choosing airlines and brands low-cost that can offer great value for money. According to the CEO, easyJet's optimized network will allow the company to comfortably face the summer demand.
Source: easyJet HY 2023 results presentation
easyJet closed the first half with a loss and a net pre-tax result negative of £411 million. Revenues were driven by strong summer demand. The company's top-line sales increased by 80% to £2.6 billion thanks to higher capacity which increased to 37.9 million seats (it was at 30.3 million in H1 2022), but also for higher ticket prices. Key to the report is ancillary revenue development which recorded a higher increase of 83% to £940 million. Ancillary products have transformed easyJet revenue generation. The company now expects full-year profits in excess of £80 million, thanks to its rapid UK growth as well as its entry into the European package holiday market. The Swiss market will be the first of a series.
Going to our investment buy thesis, during the 2023 first half, easyJet strengthened its presence in all three of its Italian bases: Milan Malpensa, Naples Capodichino, and Venice Marco Polo. In particular, in Milan, the company transported a total of over 3.3 million passengers, up by 24% compared to the 2.7 million in the first half of 2022. In Naples, the growth was instead 22%, with a total number of passengers carried of over 1.1 million. In Venice, the company recorded the highest percentage growth, carrying almost 800,000 passengers in six months, up 51% compared to 2022.
The company managed to have a £0.2 billion of net debt position with £3.5 billion of cash and money market deposits. Once again, it demonstrated solid financial strength.
Q3 2023 results are expected at +20% year-on-year and reservation returns to normalized levels.
Conclusion and Valuation
Here at the Lab, we expect the cost per seat, excluding fuel, to be broadly unchanged from last year. This is mainly due to the easyJet hedging policy in place. However, the company's business transformation is ongoing and we are confident that the management team will achieve medium-term goals to grow capacity to 105 million. As already mentioned in our last publication, we are above the Wall Street consensus forecast, and with these progressive positive results, we decided to leave unchange our twelve months estimates. Regarding the valuation, we set a target price of 560p per share based on a core operating profit of 8%, maintaining our buy rating. Risks are included in our initiation of coverage .
For further details see:
easyJet: Makes Travel Easy