2023-09-19 05:42:09 ET
Summary
- Gamechanger Strategy at full display with the Boeing new orders.
- We positively view the company's indication to return cash to the shareholders.
- Ryanair is set for the long-run. Our buy rating is confirmed.
Ryanair Holdings (RYAAY) hosted a one-day Capital Market Day event in Dublin focusing on ' a decade of growth ,' and Michael O'Leary unanimously convinced all the shareholders. Indeed, last week was a key milestone for the Irish low-cost operator, and investors said yes to the maxi-purchase order of 300 new planes from Boeing. This was already emphasized in our latest quarterly report " Ryanair Is Winning, Buy Confirmed ." With the Capital Market Day shareholders' approval, Ryanair will be able to purchase the 300 Boeing 737 Max-10s, and according to management's plans, the operator fleet will be at 800 aircraft by 2034. This plan is also considered sustainable and adequate for the company's growth plans. Indeed, in the next ten years, Ryanair estimates that it will go from 168 million to 300 million passengers transported per year, equal to a 30% market share in European skies.
Ryanair will add new planes to its fleet in a period between 2027 and 2033. The contract includes a signed order for 150 B737s and 150 as optional. The unit cost is approximately $135 million per plane; however, according to Ryanair owner Michael O'Leary, Boeing has granted a " significant discount. " We are not pricing in any discount factor, given inflation expectations.
The AGM results accepted the payment methods in the meeting documentation. The liquidity may come from aircraft sales (Ryanair's fleet is almost entirely owned), which will be carried out to make room for new planes and from operating cash flow generation. At the same time, the group " will remain opportunistic in its financing strategy and will consider various options, which may be deemed appropriate as the time of the respective delivery dates approaches ," such as bank loans and bonds.
Why are we supportive?
Here at the Lab, the long-term story was undeniably bullish but achievable.
- Following our analysis called " Back To Profitable Growth ," Ryanair's existing markets now appear to be real growth opportunities. Ryanair will again focus on existing markets with more efficient aircraft. Looking at the GEO market share development, Spain, Germany, and Germany could see the most significant share uplifts. The company is looking to reach a 30/50% market share in these markets;
- To support point 1), we believe that with constrained capacity amongst its closest peers and a lack of aircraft orders, Ryanair will fully benefit from aiding share gains and moving from a market penetration of 20% to 30%. We believe that the company's potential growth plans could be incrementally negative for Wizz, Lufthansa, and IAG;
- The company believes it can achieve market and passenger growth alongside a sizeable increase in profitability. In Ryanair estimates, the company set €3 billion profit by March 2034, calculated as (€300 million passengers multiplied by €10 gain per PAX). Here at the Lab, we believe that net income per passenger will be volatile, given that it depends on external factors such as demand and fuel. However, we see the €10 per PAX estimate as a conservative target, and according to our estimates, we forecast a €10 net profit per passenger already in 2024. Mid-term profitability could be materially higher given the cost savings achieved since COVID-19, new deals with airports, and a future fleet with Boeing;
- Regarding this Boeing commission, one of the hidden costs for airlines is training courses and training updates for aircraft. Having ordered 300 aircraft of the same brand, we can anticipate significant savings in fleet management costs;
- Although Ryanair was unclear about the timing, we believe the company will likely reimburse its shareholder base with an ordinary dividend. We anticipate no buybacks. Here at the Lab, we like Ryanair's capital allocation priorities: 1) have a solid balance sheet, 2) invest in growth, and 3) shareholder remuneration. Coming back to the dividend, we estimate a moderate 15% payout. Despite the CAPEX expectation of €2 billion in 2024 and 2025, we should recall that the company is highly cash-generative and has the most robust balance sheet within the sector with a 90% unencumbered fleet.
Ryanair net income evolution
Conclusion and Valuation
Here at the Lab, we believe that Ryanair is set to be a successful story. Looking at the slide below, we fully confirmed our target price set at €19 per share, confirming how Ryanair is Playing its Gamechanger Strategy : " More seats, less fuel consumption, higher capacity loads, lower tariffs, and consequently more customers that equal more profit ." This is a critical supportive catalyst for all the stakeholders involved. The company is also 20% discounted from its median pre-COVID-19 multiple, and we believe this is unjustified.
Ryanair-specific risks are fuel cost evolution and hedging strategy higher cost, Brexit evolution with restrictions for " non-qualifying national " company, delays to aircraft deliveries, which will likely affect the company's growth plans and higher industry capacity growth. European politicians are also increasingly focused on the ESG impact of aviation.
For further details see:
Ryanair Is Equipped For A Decade Of Growth