2024-01-07 20:52:54 ET
Summary
- First dividend payment for Ryanair Holdings. The positive trend in earnings revisions and solid demand.
- The Online Travel Agency Ryanair ban could be seen as an opportunity rather than a risk.
- With the Gamechanger Strategy always on, our buy rating is confirmed.
Here at the Lab, we have a long-standing buy on Ryanair Holdings ( RYAAY ). Since 2022, the company has been Our Bet On Travel Recovery . Despite an outstanding return (>40% in the period), in our last analysis, we upgraded the company with a Strong Buy recommendation. We emphasized three key points:
- The company will distribute its first ordinary DPS in its history, and we see significant scope for additional shareholder returns;
- Higher Q3 yield with conservative guidance from Wall Street and a clear upside on costs versus competitors (thanks to the Gamechanger Strategy );
- A compelling valuation implied a material deterioration in the P&L forecast, which our team was not anticipating.
Looking back to our above statements, we positively report the following: 1) the company announced a Fiscal Year 2024 interim dividend payment of €0.175 per share. This will be paid to shareholders on the company's register on 19 January 2024, with a payment date of 28 February 2024. As a reminder, the Irish low-cost airline has divided the dividend payment into two equal tranches: February and September. In number, Ryanair's cash-out equals €400 million. 2) Even if we are not looking at the sell-side estimates, a few banks (UBS, RBC, Citi, and JPM) raised target prices and confirmed a buy rating in the period. Lastly, 3) Ryanair published its usual monthly report ( November and December ), confirming a solid growth trajectory and a robust near-term demand.
Looking at the details in the December report, the company has seen a decline in the number of tickets. This happened after major online booking platforms removed the airline's flights from their websites. The low-cost airline carried 12.54 million passengers in the month, recording a 9% increase in traffic compared to the 11.52 million travelers reported in the same period in 2022. Yet, the load factor, which indicates the percentage of available seats an airline can sell on each flight, stood at 91% in December, marking a decline of 1 percentage point compared to 92% a year ago.
Ryanair attributed this decline to OTA's decision (Booking, Kiwi, and Kayak) to remove the company's flights from the option list. Although these travel sites represent only a tiny fraction of Ryanair's bookings, the company expects it will negatively impact the load factor by 1/2% in January 2024. Despite that, the company confirmed no impact on the financial forecasts for the year. Even if this news might negatively surprise our readers and Ryanair's investors, it is welcome. Many OTA websites charge customers additional fees, and the company might even lower its fares to encourage all passengers to book directly on the website, guaranteeing always the lowest fares possible. This supports Ryanair's gamechanger strategy: " more seats, less fuel consumption, higher capacity loads, lower tariffs, and consequently more customers that equal more profit. " Looking at the year results, the company carried 181.1 million passengers, with a 13% increase compared to the 2022 performance. The load factor increased by two percentage points, from 92% to 94%. OTA is the acronym for Online Travel Agency.
In our previous publication, in 2024 and 2025, we forecast 183.9 and 205 million passengers to be transported by low-cost operators. This was supported by a load factor of 94% and 94.4%. However, looking at the December passengers' performance, we believe the company will likely surpass our internal estimates. In our previous number, we implied an 8% growth from 2023 to 2024, but with the latest results, we are modeling a 10% growth, arriving in March 2024 with >185 million passengers transported. As a result, our sales estimates slightly increased. Maintaining an unchanged load factor and the same core operating profit per passenger (€10.69), we increased our 2024 EBIT to €2.02 billion.
What is critical to report is the following:
- Ryanair's historical earnings per share growth rate has always been in the single-digit range. In our forecast EPS waterfall, we anticipate an EPS increase of 24.57% between 2024 and 2025. In our number, the company reached an EPS of 1.75 and 2.15 in the next two years;
- Again, Ryanair's historical annualized cash flow growth rate has been negligible. We anticipate an FCF of €460 and €2.5 billion in 2024 and 2025, respectively. This includes a CAPEX plan of €2.8 and €1.35 billion in the following two years. There are investment projection details in our analysis called: Ryanair Is Equipped For A Decade Of Growth.
Conclusion and Valuation
In addition to our forward-thinking estimates outlined above, our readers should consider the positive trend in earnings revisions. Applying an unchanged P/E target of 10x with our updated 2025 EPS of €2.15, we increased our valuation from €21 to € 21.5 per share. Our projection could still end up too conservative; however, on the downside, the company is exposed to specific risks such as the B737 MAX introduction, additional restrictions on " non-qualifying national " company from the UK, and delays to aircraft deliveries from Boeing, which might cause lower growth plans.
For further details see:
Ryanair: Bullish Long-Term Story