masters in finance equity research · this report was prepared by moritz geiger, a masters in...

THIS REPORT WAS PREPARED BY MORITZ GEIGER, A MASTERS IN FINANCE STUDENT OF THE NOVA SCHOOL OF BUSINESS AND

ECONOMICS, EXCLUSIVELY FOR ACADEMIC PURPOSES. THIS REPORT WAS SUPERVISED BY ROSÁRIO ANDRÉ WHO REVIEWED THE

VALUATION METHODOLOGY AND THE FINANCIAL MODEL. (SEE DISCLOSURES AND DISCLAIMERS AT END OF DOCUMENT)

See more information at WWW.NOVASBE.PT /32

MASTERS IN FINANCE

EQUITY RESEARCH

The Airline industry shows no sign of stopping its growth

with a forecasted passenger growth rate of 2,7% in Europe for the

next 20 years.

EasyJet’s most important markets UK, France, Germany,

Italy Spain, Portugal, Switzerland and the Netherlands indicate a

positive GDP outlook.

EasyJet was able to achieve a record EBITDAL margin of

20% in FY15 beating its competitors due to a leading load factor

and cost advantages. For FY16 an EBITDAL of £980 Million

leading to a Net Profit of £565 Million was forecasted.

The companies D/EV was converging to zero in the past

and is now expected to settle at 0.05%.

A discounted cash flow valuation method using a wacc of

4,98% provided a price target of £19,69 for FY16 resulting in the

recommendation of a BUY position due to an expected capital gain

of 11,76% and an expected cash gain of 3,27% at the current

share price of £17,62.

The price target is very sensitive to a decrease in

passenger volume as a 1% decrease would already lead to a

HOLD recommendation.

Company description

EasyJet is a British low-cost carrier which aims to be Europe’s

number one short-haul airline. The company is based in London

and operates its services at airports all over Europe creating a

network consisting of more than 130 routes.

EASY JET COMPANY REPORT

AIRLINES 08 JANUAR 2016

STUDENT: MORITZ GEIGER [email protected]

EasyJet continues success story

…driven by passenger growth and operational efficiency.

Recommendation: BUY

Price Target FY16: 19,69 £

Price (as of 8-Jan-16) 17,62 £

Source: Bloomberg

52-week range (£) 15,21-19,29

Market Cap (£m) 6629

Outstanding Shares (m) 397.208

Source: Bloomberg

(Values in £ millions) 2015 2016F 2017F

Revenues 4,685 5.037 5.494

EBITDAL 939 980 1032

EBITDAL Margin 20% 19,5% 18,8%

Net Profit 547 565 689

(Value in millions)

Seats flown 75 80,4 86,7

Passengers 68,6 73,1 78,9

EPS (£) 1,38 1,42 1,48

Source: Easy Jet’s Annual reports; Authors Valuation model

http://www.novasbe.pt/


PAGE 2/32

Table of Contents

EXECUTIVE SUMMARY .......................................................................... 3

COMPANY DESCRIPTION ....................................................................................... 4 Fleet...................................................................................................... 7 Cost Advantages ................................................................................ 8

SHAREHOLDER STRUCTURE ................................................................................. 9

AIRLINE INDUSTRY & CORE MARKETS ............................................... 9

MACROECONOMIC ENVIRONMENT ....................................................................... 9 Worldwide ............................................................................................ 9 Core markets..................................................................................... 10

EUROPEAN AIRLINE INDUSTRY ........................................................................... 11 Current Situation ............................................................................... 11 Outlook ............................................................................................... 14

COMPERABLES ................................................................................................... 16

FORECAST .............................................................................................19

PASSENGER VOLUME .......................................................................................... 19 REVENUES, EBITDAL, EBIT AND NET PROFIT ................................................ 21 WORKING CAPITAL ............................................................................................. 23 CAPITAL EXPENDITURES .................................................................................... 24 FCF..................................................................................................................... 24

VALUATION ............................................................................................25

CAPITAL STRUCTURE ......................................................................................... 25 WACC ................................................................................................................ 25 RECOMMENDATION ............................................................................................. 27 SENSITIVITY ANALYSIS ....................................................................................... 27

APPENDIX ..............................................................................................30

FINANCIAL STATEMENTS .................................................................................... 30

DISCLOSURES AND DISCLAIMER .......................................................32

RESEARCH RECOMMENDATIONS ........................................................................ 32


PAGE 3/32

Executive summary

In terms of passenger volume the airline industry was on a continuous expansion

throughout the last years and the International Air Transportation Association

(IATA) forecasts an average growth rate of 2,7 for the next 20 years in Europe

alone. Additionally, the low-cost segment showed especially strong growth and

increasing market shares surpassing the 40% mark in 2015.

With the additional fact of an optimistic GDP outlook for the core markets, UK,

France, Italy, Germany, Portugal Spain, and the Netherlands EasyJet is expected

to face a favourable macro-economic environment.

In presence of this external situation we believe that EasyJet has competencies

to significantly grow passenger numbers and profits. The company’s fleet and

flight network will be continuously extended and modernized reaching a 304

aircrafts strong fleet by 2019. This represents an increase of 26% from the

current 241 aircrafts operated. Combined with an industry leading load factor of

currently 91,5% this will enable the airline to increase the passenger volume by

19,1 million in the next four years. In terms of costs EasyJet has the advantage

that the low-cost approach is incorporated in the companies’ structure and

strategy since the founding. A fact that resulted in COSS without fuel of £33,96

per seat flown in FY15. From the major European airlines only RyanAir is able to

compete on this level. With strong competition and a highly segmented market

this inability to compete with the costs causes losses for a lot of other European

Airlines. Therefore, several cost cutting methods are currently undertaken in

order to keep this position allowing EasyJet to minimize the growth of its costs.

As a result the COSS without fuel are forecasted to experience an average

growth rate of 8,16% only slightly above the passenger growth for the next four

years.

With the current oil price we additionally except an only marginally increased fuel

bill for the coming FY of £1280 Million resulting in another record EBITDAL and

Net Profit of £980 Million and £565 Million respectively.

Given a Debt-to Equity ratio of 0,05% and a wacc off 4,98% the target price for

FY16 was estimated at £19.69 representing an expected capital gain of 11,76%

and an expected cash gain of 3,27% with the current share price being £17,62.

Consequently we recommend a BUY position for the stock.

However, a sensitivity analysis exposed potential risks. The company’s success

is naturally highly dependent on passenger volume where a 1% decrease leads

to a HOLD and a 5% decrease to a SELL recommendation.

Due to fleet and network growth and operational

efficiency easyJet is expected to capitalize on favourable

market conditions.

Growth in the Airline industry shows no sign of stopping

with a forecasted growth rate of 2,7% and an increasing

LCC market share.

Positive GDP Outlook for EasyJet’s core markets

enables growth in demand.

BUY position is recommended due to a total expected shareholders return of

15,04%.

High exposure to passenger

volume constitutes major risk.

Figure 1:GDP Growth forecast Source: Data from OECD, own diagram.

Figure 2: Net Profit (million £) Source: Author’s valuation model, own

diagram.


PAGE 4/32

Rank Airport EasyJet

UK

1. Heathrow

2. Gatwick Base

3. Manchester Base

France

1. Charles de Gaulle Base

2. Paris-Orly Base

3. Nice

Italy

1. Rome Base

2. Milan-Malpensa Base

3. Milan-Laneta

Germany

1. Frankfurt

2. Munich

3. Düsseldorf

Portugal

1. Lisbon Base

2. Porto Base

3. Faro

Spain

1. Madrid

2. El-Prat Barcelona Base

3. Mallorca

Netherlands

1. Amsterdam

2. Eindhoven

3. Rotterdam

Switzerland

1. Zurich

2. Geneva Base

3. Basel Base

Company overview

EasyJet incorporated was founded in March 1995 by Sir Stelios Haji-Ioannou as

a provider of low-cost air services later becoming the first of many subsidiaries of

the easygroup (EasyGroup holdings Limited). Since then the airline has grown to

become the second-largest European low-cost carrier based on passenger

numbers. Being second to Irish airline RyanAir EasyJet’s goal naturally is to

become Europe’s preferred short-haul airline.

Company description

From the company’s headquarter at London Luton Airport EasyJet

operates in 31 countries providing over 700 routes from its bases

across Europe mainly focusing on high GDP markets. In order to

deliver these services the company continuously increased its fleet

size to 241 aircrafts by the end of the financial year 2015 (30.09.15).

In order to illustrate EasyJet’s position an overview over the

company’s bases in the most important countries is provided in

Table 2 below while Table 1 on the left displays the busiest airports

in each relevant country in order to show EasyJet’s position on

Europe’s major airports.

A striking fact is that EasyJet shows a rather low presence in

Germany despite the fact that a wealthy economy and a lot of

potential customers seem to provide a promising environment. The

reason is a strong market penetration by local low-cost providers

such as leader AirBerlin with a 43% market share and Germanwings

with a 29% market share in the year 2014.1 However, as we will

discuss in detail later these Airlines are not profitable giving

opportunities for EasyJet to steal market shares from the

incumbents in the future. In all other main countries EasyJet has

bases on the biggest or second biggest airports of the respective

country.

1 Market shares taken from “Low Cost Monitor 2014” from the German centre for aviation and space flights.

Founded

1995

Table 1: Busiest Airports* and EasyJet bases

*according to number of boardings Source: Own diagram.


PAGE 5/32

Table 2: EasyJet’s Market Share in main countries and bases (Source Annual Report 2015, own diagram)

Country

Market Share

in country

Base Based

Aircrafts

Uk 20% London: Gatwick, Luton, Southend, Stansted;

Bristol, Belfast, Edinburgh, Liverpool, Manchester, Newcastle, Inverness Airport

134

France 14% Charles de Gaulle, Paris Orly, Toulouse Lyon 26

Italy 12% Milan Malpensa, Naples, Nice, Venice (from

2016), Rome Fiumicino (Closing 2016) 29

Germany 4% Berlin-Schoenefeld, Hamburg 12

Portugal 13% Porto, Lisbon 6

Spain 8% Barcelona (from Feb 2016) -

Netherlands 9% Schipohl Amsterdam 3

easyJet Switzerland2

23% Geneva, Basel 23

On the 22th November 2000 the first easy jet plc shares have been issued under

the ticker EZJ. In order to provide an overview on the recent performance of the

stock Figure 3 below illustrates the share price development by displaying the

yearly return in comparison to the MSCI World Index (MXWO) as well as biggest

competitor RyanAir (RYA) for the last 10 years.

Figure 3: Yearly Return 2005-2015 - EasyJet vs. RyanAir vs. MSCI World. Source: Data from Bloomber, own diagram

-40,00%

-30,00%

-20,00%

-10,00%

0,00%

10,00%

20,00%

30,00%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Ye

arl

y R

etu

rn

Year

EasyJet RyanAir MSCI World

2 EasyJet Switzerland is a subsidiary where easyJet holds 49% of shares but has a dominant influence.

IPO

2000


PAGE 6/32

What can be seen here is that EasyJet‘s return was dropping negative in

response to the financial crisis in 2007 and 2008. After that period the stock

seems to have recovered and constantly earned positive returns similar to

biggest competitor RyanAir. However, these returns appear to be rather low and

both airlines clearly struggled to continuously outperform the index representing

the market.

On the first sight these results seem very odd when considering that EasyJet

constantly reported record profits and showed significant growth of its fleet during

that time period. When the analysis is extended to Europe’s leading legacy

carriers IAG, KLM-Air France and Lufthansa the impression arises that the

European airline industry in general showed rather weak returns on the financial

market in recent years.

Investors have historically been cautios when it comes to the airline industry

citing very high fix costs and a large exposure to macroeconomical developments

as major problems. This is hereby particulary true for the european industry

where a lot of airline struggle to earn profits in a highly segmented market with

fierce competition. Hence, a suitable business model has to be implemented and

enforced strictly in order to compete in this industry. However, EasyJet seemingly

has been able to do exactly that in the past showing a growing fleet size, record

net profits and increasing EBITDAL margins for the last five years in a row.

Figure 4: Easy Jet - Net Profit and EBITDAL Margin 20010-2015 Source: Author’s valuation model.

With this in mind it is not surprising that for the future EasyJet’s management

team around Chief Executive Officer Carolyn McCall announced that the airline

will continue to follow its current strategy of delivering point to point flights from

primary airports in high income countries and thereby achieve revenue growth


PAGE 7/32

and high shareholder returns. This positive outlook is hereby mainly based on

four internal drivers:

The Company’s growing fleet, the newly introduced customer

loyalty program, the digital innovation with a leading web

presence / mobile app and the maintenance of a cost

advantage through structural advantages and cost cutting

measures such as EasyJet Lean. EasyJet therefore believes

that it will be able to grow its capacity by 7% in 2016 and

consequently argues that there are significant long term

opportunities to grow both the revenues and profits. This view is

generally strongly aligned with our assessment that will be

discussed in detail later on.

Fleet

We consider the company’s fleet and cost structure as its most valuable

properties. Naturally the fleet composition is thereby strongly related to the cost

side of things as it represents a hugely important cost driver.

In order to allow every crew member to work in different machines and to achieve

cost savings in service and repair cost EasyJet applies the strategy of only

operating Aircrafts of the same type. An approach that is very common among

low cost airlines allowing for significant economies of scale.

The company’s fleet is currently comprised by Airbus models of the A320 family.

More precisely, the fleet solely consists of the models A319 and A320 whereas

148 (61%) are A319s and 93(49%) are A320s. The delivery of another 56 A320s

is thereby already set for 2016-2021. The move towards a higher share of 320s

in the fleet is very valuable as the model offers more seats and a more efficient

use of fuel allowing for lower unit costs. Additionally, EasyJet has already

committed to the purchase of 30 and owns purchase right of another 100 of

Airbus new creation A320neo. According to manufacturer Airbus this next

generation aircraft promises a reduction of fuel consumption of up to 20%

compared to older models.

EasyJet is thereby confident that the fleet reformation and expansion can mainly

be funded internally with an already strong cash balance and future earnings and

through the achievement of very favourable prices as the airline is one of Airbus’

biggest and most important customers.

Figure 5: Aircrafts at year end 2009-2015 Source: easyJet plc. Annual Reports; own diagram


PAGE 8/32

Cost Advantages

On top of its fleet composition and close relationship with Airbus

EasyJet faces a few other valuable cost advantages. EasyJet

has incorporated the focus on cost in its structure and business

model from the start. The companies cost structure is historically

lean with long term contracts with relevant partners such as

Airports as well as staff such as pilots, cabin crew or the ground

handling agents. This sets EasyJet apart from legacy carriers

and their low-cost subsidiary as they in contrast did not manage

to imply a low-cost business model equally strictly in the past.

In order to keep this position further steps to keep this advantage

have been taken in the recent past. The most prominent one is a

new long-term maintenance and inventory management contract

that was signed with the AJW Group early in 2015. Due to the

multi-year horizon and large scale of these deal it is reasonable

to believe that it allows EasyJet to achieve economies of scale

as an important part of the cost-cutting initiative the airline calls

“EasyJet Lean”. Quantifying these measures our model forecasts

an average 8,16% year growth rate for COSS without fuel for the

next four years 2016-2019 while the number of passengers

grows by an average rate of 6,33% for the same period.

With all that said we believe that EasyJet generally has the

competencies to continue what it did in the recent years and

achieve significant growth and deliver shareholder returns in the

future.

Figure 8: Easy Jet – Revenue and passenger development 2010-2015 Source: easyJet plc. Annual Reports; own diagram

Figure 6: COSS per passenger Source: Companies’ annual reports; own diagram

Figure 7: EasyJet COSS without fuel / passenger Source: Companies’ annual reports; own diagram


PAGE 9/32

Shareholder structure

EasyJet plc is listed on the London Stock Exchange and is part of Britain’s most

important stock index - the FTSE100. Its major shareholders are the corperations

easyGroup Limited and easyGroup Holdings Limited. Whereas, easyGroup

Limited is a wholly owned subsidiary of easyGroup Holdings Limited itself.

EasyJet founder Sir Stelios Haji-Ioannou thereby holds a controlling interest in

the parent company. As a result of this structure the Haji-Ioannous family holds

33.73% of EasyJet plc’s issued share capital as of 30 September 2015 making

them the company’s biggest shareholder. Apart from that roughly 20% are

currently held by institutional investors such as Invesco LTD (5.15%), Standard

Life Investment (4.96%), Blackrock (4.23%) and Norges Bank (3.38)%.3 While

Invesco, Blackrock and Norges Bank did not change their position recently

Standard Life Investment reduced its investment during 2014 expressing

“concerns about increasing competition” (Standard Life Investment plc, Annual

Report Year ended 28. February, p.173) due to the fact that a lower oil price

allows other usually weaker airlines to survive in the market for a longer period.

Other than that there were no major movements in the composition of EasyJets

biggest shareholders in the recent past.

Airline Industry & Core Markets

Macroeconomic Environment

Worldwide

In 2014 3.3 billion people used air traveling worldwide and this number was

expected to reach 7.3 billion in 2034 according to a 20 year forecast published by

IATA (2014). This would constitute a 4.1% annual growth in demand in every of

the next 20 years. However, IATA (2015) recently updated its forecast

downgrading the expected worldwide annual growth rate to a yearly rate of 3.8%

for the next 20 years.

Yet, passenger growth alone is not a guarantee for a profitable industry.

Especially for the Airline industry where a famous study conducted by IATA

(2010) found that 2% GDP growth is a crucial value as profit margins tend to

become negative when the growth rate falls below that point.

3 As of 01.12.15. Data was taken from Bloomberg.

Figure 9: Shareholder structure Source: Bloomberg, own diagram.


PAGE 10/32

Figure 10: World economic growth and airline profit margins Source: CAPA – Centre for Aviation

Fortunately the GDP forecast published by the World Bank lies significantly

above 2% being 3.3% for 2016 and 3.2% for 2017.

In summary the general outlook for the airline industry worldwide can therefore

be seen at least slightly positively. However, EasyJet is mainly operating in the

short haul4 aviation market in Europe requiring a specific analysis of its core

markets.

Core markets

EasyJet focuses on Western and Northern Europe as these are

the areas where a high demand for traveling and wealthy

national economies in general is expected. When analysing

EasyJet it is therefore especially interesting to look at the GDP

development and passenger outlook of their core markets

being UK, France, Italy, Germany, Portugal Spain and the

Netherlands in particular. In the 20 year forecast already

mentioned above IATA (2015) forecasted the european market

to show an annual growth rate of 2.7%.

In another recent release IATA (2015) published current data

on the development of the european market in particular and

reported that European carriers faced an increased demand of

6.7% in October 2015 compared to the prior year. It is thereby

argued that this is the result of a recovery in the economic

situation of the euro zone highliting the importance of GDP

development for demand in the airline industry.

4 Short haul generally describes a flight below 3 hours.

Figure 11: Easy Jet – Passengers per country (%) Source: EasyJet’s Annual Report 2015.


PAGE 11/32

The forecast of the further GDP development for EasyJets major markets

published by OECD thereby looks as following.

Figure 12: GDP Growth of EayJet Main Markets

Source: Date from OECD, own diagram.

The figure above illustrates a generally positive GDP outlook for EasyJet’s main

markets allowing for a sustainable growth in the general demand for both

business and leisure travel that reflects in the IATA forecast.

European Airline Industry

Current Situation

In general, the airline industry can be divided into legacy carriers such as

Lufthansa, IAG or KLM-Air France and low-cost carriers such as EasyJet,

RyanAir as well a the low-cost subsidiaries of the legacy carriers Vueling (owned

by IAG), Germanwings (owned by Lufthansa) or Transavia (owned by KLM-Air

France). Altough legacy carriers engage in a different business model than

EasyJet they have to be considered as potential competitors for customers and

need to be taken into account when analysing the airline industry in general as

well as more specfifc comperables later on.

With a low oil price and increasing passenger numbers this year was a good one

for the Euopean Airline Industry. However, not every airline was able to capitalize

on that. While the two big low cost carriers EasyJet and RyanAir reported record

profits of £547 and £657 million for the past financial year continuing the

development of an increasing market share for low cost airlines the story for the

legacy carriers on the other hand is ambiguous


PAGE 12/32

Figure 13: Europe LCC Share of Total Seats 2002-2014. Source: CAPA – Centre for aviation with data provided by OAG.

IAG with its subsidiariy airlines British Airwaya, Vuelling, Iberia Air an Aer Lingus

thereby seems to be the clear winner among the legacy carriers. Through

restructuring and strong cost-cutting measures the group was able to return to

profit and recently announced that it will pay its first ever dividend. Lufthansa and

KLM-Air France on the other hand were facing problems with labour and

recurrent strikes and are therefore expeced to face yet another year of losses.

This is not really new however as the airline industry in Europe in particular is

histrocally known to be very volatile and to show rather small returns due to

operational difficulties and strong segmentation. This is illustrated by a study

conducted by CAPA (2015) which analysed the operating margings for listed

european airlines providing the following findings.

Figure 14: Operating Margins for Listed European Airlines (% of Revenue) 2013 and 2014

Source: CAPA – Centre for aviation.


PAGE 13/32

Rank AirlinePassengers

2014

1 Lufthansa 104,6M

2 RyanAir 81,4M

3 Air France-KLM 77,9M

4 IAG 78,4M

5 easyJet 61,4M

6 Turkish Airlines 48,3M

7 Air Berlin 31,5M

8 Aeroflat 31,4M

9 SAS Group 25,7M

10 Norwegian Air 20,7M

Source: Company's annual reports

The comparison of operating margins displayed above illustrates two very

important facts.

Firstlly, it can be seen that in the past the low-cost carriers showed a clear

tendency of significantly stronger operational margins. This suggests that the

legacy carrier business model is generally inferior to the low-cost model in terms

of profitability which will be discussed in more detail later.

Secondly, the average margin seems to be rather low in general and a lot of

companies are dangerously close to zero or below. A fact that is not suprising as

we already discussed the volatility of profits in an industry where a GDP growth

below 2% is already enough to get into trouble. But apart form the fact that the

airline industry is regarded as highly competitive and operating margins are

usually relatively low another reason for low margins in the industry seems to lie

in the specific structure of the industry in Europe in particular.

With a vast abundance of airlines the european market is highly fragmented and

many believe that consolidation in the industry is overdue. This is illustrated in a

recent article from World Finance (2015) where it is argued that Data from OAG

revealed the fact that in Europa 17 airlines compete for customers, whereas

there are only 10 in the US and that Europes six biggest airlines only make up

53% of the local market whereas the two biggest airlines alone share 46% of the

market in the US.

Figure 15: Airline EBIT Margin 2015F vs. Market Concentration by region Source: CAPA – Centre for aviation.

Despite that the only major M&A activity in the European industry in 2015 was

the aquistion of irish airline Aer Lingus by IAG. The reason for this slow

development towards a more consolidated industry is given by govermental

influence both as a company shareholder (TAP, airBaltic, Croatia Air etc.) and

Table 3: Europe’s biggest

Airlines by Passenger numbers


PAGE 14/32

Month $ per Gallon Change

Oct 2,46 -

Nov 2,30 -6,63%

Dec 1,80 -21,59%

Jan 1,50 -16,94%

Feb 1,75 17,31%

Mar 1,63 -7,18%

Apr 1,70 4,48%

May 1,85 8,64%

Jun 1,73 -6,33%

Jul 1,54 -10,97%

Aug 1,39 -9,92%

Sep 1,39 0,29%

Oct 1,39 -0,14%

Source: indexmundi.com, own diagram

through a very strict regulatory environment regarding company acquistions or

mergers.

However, all of Europes leading legacy carriers have been trying to access the

low-cost segement in the past by aquiring or setting up subsidiaries with the

purpose of providing short-haul traveling at low cost: IAG bought the spanish

airline Vueling in 2013. The Lufthansa group already fully owns Germanwings

and is currently re-developing Eurowings with the aim of creating another

european low-cost airline while KLM-Air France uses its subsidiary Transavia for

the low-cost segment. However, the majority of these subsidiaries have yet to

prove their potential as they still struggle to compete in the cut-throat

environment with the established low-cost carriers RyanAir or EasyJet due to

firece competition and a rigid cost structure that will be analyzed in detail under

“Comperables” below.

Outlook

When looking in the airline industry’s future a very important factor is given by the

price of Jet Fuel as it represents a large portion of the industry’s operational

costs. The price for jet fuel is thereby usually measured in US Dollars and

naturally strongly correlated to the oil price as it is illustrated below.

Figure 16: Jet Fuel and Crude Oil Price ($/barrel) Jan-2007 – Sep-2012 Source: CAPA – Centre for aviation.

In the past year the price of Jet Fuel reached a yearly low at a price of 1.39 $ /

gallon in October representing a decline of almost 43% over the year 2015.5

Despite the fact that Airlines usually largely hedge against jet fuel prices this has

a significant positive impact on the cost structure of the industry although it is

spread out over time.

5 Data taken from indexmundi.com, accessed 01.12.2015.

Table 4: Oil Price Oct-15 – Oct-16


PAGE 15/32

Date Last Price ($)

Feb 16 36,44

Mar 16 37,37

Apr 16 38,11

May 16 38,82

Jun 16 39,42

Jul 16 39,92

Aug 16 40,47

Dec 16 42,31

Dec 17 46,21

Source: indexmundi.com, own diagram

In order to assess the expectation for the further development of the oil price and

hedging opportunities a look at Crude Oil Futures needs to be taken.

Figure 17: Oil Futures (Last Price)

Source: Data taken from indexmundi.com, own diagram.

From looking at the oil price futures we assume an increasing Oil price over the

next two years. This in turn clearly indicates the increase of the price for jet fuel

as well. However, despite the increasing tendency the level is still rather low and

when the currently applied hedging positions expire the industry will face

favourable conditions in terms of fuel prices

Consequently, IATA forecasts the global airline industry to grow its earnings to

$36 billion in 2016 and thereby reach an operational margin of 8%. Although the

European industry is still far below North America regarding profitability this

development will thereby also reflect in the European industry as the figure below

illustrates.

Figure 18: Global and regional Airline profitability Source: IATA

However, even with this positive short term outlook tougher times might lie

ahead. With the structural problems of the European industry an increasing oil

price would cause old problems to pop up again. Yet, there is some evidence

Table 5: Oil Futures


PAGE 16/32

that the industry structure will be subject to some changes. First of all, the

profitability problems are expected to gradually decrease governmental

involvement in the airline industry as it was for example illustrated in the case of

TAP. Additionally, the European commission recently published its new aviation

strategy setting the goal of a more competitive aviation sector in Europe. The

main steps towards this goal are thereby given by deregulation and liberalization

of the industry. Hence, we expect to see all types of consolidation such as

mergers, acquisitions or partnership in the European industry in the mid- and

long-term.

Taking a look at North America shows what a more consolidated industry could

bring. There, deregulation led to bankruptcies and consolidation reducing the

number of Airlines operating in the market significantly. This highly consolidated

industry resulted in a very profitable one. Due to cost savings through economies

of scale and weaker price competition North America is now by far the most

profitable Airline industry. Due to labour laws and a generally stricter regulation

we will not see an European market consolidated to the same extinct. However, it

is an indicator where the European industry is inevitably developing to in the long

term. A development that will be challenging for low-cost carriers which will face

an increasing number of competitors able to compete with their costs.

Comperables

In addition to an understanding of the market development in general it is crucial

to develop a specific group of peers in order to conduct a competitive analysis.

For this purpose we choose RyanAir, Vueling, Germanwings and Transavia as

the most suitable European peer companies due to the fact that they are low-

cost-carriers and therefore direct competitors. Additionally our comparison will be

extended to Europe’s leading legacy carriers IAG, the Lufthansa Group and KLM-

Air France as well as low-cost carriers from outside Europe whenever suitable in

order to illustrate potential strengths and weaknesses.6

In terms of passenger numbers EasyJet is Europe’s second biggest airline in the

low-cost carrier segment and the fifth biggest airline in Europe general with 64,8

Million passengers in 2014.

Analysing operational measures the first striking fact is that easyJet was able to

achieve a significantly higher load factor7 than its European peer competitors

6 All Data is based on the Financial Year of the respective company, ending at 31.3 for RyanAir, 30.09 for easyJet and 31.12 for all others. 7 Load Factor is computed by Number of Passengers / Number of Seats flown.

Figure 19: Passengers 2014 Source: company’s annual reports, own

diagram.


PAGE 17/32

RyanAir, Vuelling and Transavia.8 Moreover, this finding also holds when the

comparison is extended to European legacy carriers Lufthansa IAG and KLM-Air

France. Hence, it can be said that EasyJet clearly has a major advantage as the

airline is achieving a higher load factor which in turn results in a larger distribution

base per aircraft flown and a potential cost advantage per passenger. Moreover,

in the recently published annual report 2015 easyJet reported an even further

increased load factor of 91,5%.

With that being said the following analysis of operational costs will be based on a

per seat flown basis as we already discussed the different load factors and their

potential effect. As it is very common among the airline industry we thereby

differentiate between COSS without fuel and fuel costs in order to provide an

insightful analysis of the true operational efficiency rather than just fuel price

development. Table 6 below illustrates the COSS without fuel for the year 2012-

2015.9

Table 6: COSS without fuel / seat flown10 Source: Companies’ annual reports, own diagram.

2012 2013 2014 2015

easyjet -32,99 -34,78 -34,31 -33,96

RyanAir -18,91 -19,51 -19,46 -19,29

Lufthansa -133,5 -139,2 -137,5 -

IAG -133,2 -149,2 -149,8 -

Coss without fuel / Seat flown(£)

Low-cost

carrier

Legacy

carrier

On the first sight this illustrates what is obvious, it can be seen that the low-cost

carriers have significantly lower non-fuel operational costs per seat flown than

legacy carriers. In comparison with its biggest competitor however easyJet faces

COSS without fuel almost twice as high as RyanAir. Yet, this might be largely

due to the fact that RyanAir follows a slightly different strategy allowing for

additional cost savings. The airline is not flying from prime airports and rather

uses small airports in solitary regions. However, RyanAirs CEO Michael O’Leary

recenty affirmed that the airline will continue to increae its activity on larger

airports in the future. Consequently it will be a very important challenge for

easyJet in the near future to further enhance operational efficency in order to

prohibit biggest competitor RyanAir to achieve cost leadership even if they

operate from main airports.

Table 4 below illustrates the fuel cost per seat flown for the years 2012-2014.11

8 There was not sufficient information to consider Germanwings in this analysis. 9 All currencies have been converted to British pound using an average currency rate for the year taken from xe.com. 10 Vueling, Germanwings, Transavia and KLM-Air France did not provide sufficent information.

Figure 20: Load Factor LCC Source: company’s annual reports, own

Figure 21: Passengers 2014 Source: company’s annual reports, own


PAGE 18/32

Table 7: Fuel cost / seat flown12 Source: Companies’ annual reports, own diagram.

2012 2013 2014 2015

easyjet -17,44 -17,38 -17,50 -15,99

RyanAir -14,26 -16,13 -16,57 -14,67

Lufthansa -46,71 -44,90 -41,27 -

IAG -67,50 -51,45 -70,12 -

Jet Blue -32,85 -31,74 -31,14 -

Allegiant Air -29,56 -28,50 -25,77 -

Fuel cost / Seat flown (£)

Low-cost

carrier

Legacy

carrier

Low-cost

carrier USA

What can be seen here is very similar to the COSS without fuel discussed above.

easyJet seems to be significantly more efficent than the legacy carriers and both

American low-cost airlines, but falls slightly short of reaching RyanAir

nevertheless. A more detailed look into easyJets specific fuel cost regarding

recent developments and hedging positions as well as potential risks etc. will be

given later.

When we then look at the developement of the revenues per passengers13 in the

European low-cost segement it can be seen that the fierce price competition did

not allow any significant price hikes in the last years and we believe that this

development will further continue in the next few years putting even more

importance on the ability to achieve low costs in order to grow profits.

Table 8: Revenue per passenger14 Source: Companies’ annual reports, own diagram.

2012 2013 2014 2015

easyjet 66,0 70,0 69,9 68,3

RyanAir 47,9 50,9 49,9 47,3

Vueling 61,9 68,0 64,3 -

Lufthansa 241,6 237,5 229,1 -

IAG 245,9 294,3 300,5 -

KLM-Air France 271,4 269,3 230,8 -

Revenues per Passenger (£)

Low-cost

carrier

Legacy

carrier

Again RyanAir shows a lower level than easyJet and therfore seems to be able to

provide cheaper tickets while Vuelings revenues per passenger are very similiar

to easyJets.

With all that being said it is then interesting to look at the EBITDAL margins. This

provides two main findings. Firsty, as discussed in the industry analysis the low

cost carriers and IAG are ahead of Lufthansa and KLM-Air France. Secondly, the

11All currencies have been converted to British pound using an average currency rate for the year taken from xe.com. 12 Vueling, Germanwings, Transavia and KLM-Air France did not provide sufficent information. 13 All currencies have been converted to British pound using an average currency rate for the year taken from xe.com. 14 Germanwings and Transavia did not provide sufficent information.

Figure 22: LCC EBITDAL Margins Source: company’s annual reports, own

diagram


PAGE 19/32

analysis reveals that EasyJet is the company with the strongest margin for the

years 2013 and 2014. This finding suggest that despite the fact that easyJet

shows a higher COSS per seat flown it can be seen as a leader in operational

efficieny among its peers due to an oustanding load factor and higher revenues

per passenger. Additionaly it seems that easyJet will be able to maintain this

position as the company very recently published results for the finacial year 2015

and thereby reported a further increased EBITDAL margin of 20% - representing

an increase by 2% from 18% in 2014 and our forecast projects continouingly high

margins for the future as well.

Table 9: EBITDAL Margins Source: Companies’ annual reports, own diagram.

2012 2013 2014 2015

easyjet 14% 17% 18% 20%

RyanAir 16% 15% 13% 18%

Vueling 3% 10% 9% -

Lufthansa 5% 3% 3% -

IAG 0% 14% 7% -

KLM-Air France -1% 0% -1% -

Jet Blue 8% 8% 9% -

Allegiant Air 15% 16% 14% -

EBITDAL Margin

Low-cost

carrier

Legacy

carrier

Low-cost

carrier USA

With all that being said we now arrive at the company’s overall profitability

analysing net profits and we find what has already been indicated in the industry

analysis. Apart from EasyJet and RyanAir European low-cost carriers struggle to

achieve a sustainable profit just like the Legacy carriers owning them where only

IAG earned a profit in two consecutive years.

Forecast

Passenger volume

Figure 23: Net Profits of European Airlines 2012-2014 Source: company’s annual reports, own diagram.


PAGE 20/32

The basis and one absolutely crucial input four our analysis is given by the

passenger forecast. For the purpose of forecasting passenger numbers a bottom-

up approach was used as we believe that there will be sufficient demand for

EasyJet’s services due to the industry and macroeconomic developments

discussed above. Consequently, the number of passengers will highly depend on

EasyJet’s internal capacities and flight network.

With that being said the first key input four our valuation model is the number of

aircrafts that EasyJet has in its fleet at the end of each financial year. Based on

historical information and the current purchase agreements between EasyJet and

Airbus the past development and forecast thereby looks as follows:

Figure 24: Fleet forecast (million) Source: Author’s valuation model, own diagram.

As already discussed above EasyJet’s load factor is already significantly higher

than the industries average and we consequently believe that it will not be

possible to further increase it with the development towards aircrafts with more

seats so that we forecasted the load factor to remain stable at 91%. All this then

leads to a forecast for the number of seats flown as well as the number of

passengers per year that is illustrated in Figure 12 below.

Figure 25: Passenger forecast (million) Source: Author’s valuation model, own diagram.


PAGE 21/32

Revenues, EBITDAL, EBIT and Net Profit

As the low-cost airline sector is very competitive in terms of pricing we believe

that the average revenue per passenger or in other words the price for a flight

ticket will not significantly grow in the near future and derived a revenue forecast

where the upward sloping trend is mainly based on passenger growth. For the

FY16 we expect total revenues to reach £5037 Million which is a 7,5% increase

compared to FY15.

Assuming a 2% growth rate reflecting inflation for Airport & Ground, Crew and

Navigation costs and forecasting Maintenance, Selling & Marketing and other

costs on a 13% of sales basis the forecasted COSS without fuel are expected to

reach £2777 Million representing an increase of 9%.

The last remaining COSS driver is fuel. Due to its importance and complexity a

deeper analysis is thereby inevitable. It is thereby important to note that first, the

price of jet fuel is highly correlated with the oil price and second, that EasyJet

applies a hedging policy to reduce short term volatility. Consequently, a crude oil

price forecast constitutes a suitable growth rate estimate for jet fuel in our

analysis. However, this estimation has to be adjusted for two factors. A more

efficient usage related to a modernised fleet and EasyJet’s hedging position that

currently looks as follows.

Figure 26: EasyJet’s Fuel Hedging Source: Annual report 2015.


PAGE 22/32

With this favourable conditions we forecast Fuel Cost to only grow by 6,8% in

FY16 reaching £1280 Million.

Consequently, we believe that EasyJet will be able to remain a strong EBITDAL

margin and forecast EBITDAL for FY16 to increase to £980 Million from £939 for

FY15 representing an EBITDAL margin of 19,5%.

Figure 27: Revenue, COSS and EBITDAL forecast (million £) Source: Author’s valuation model, own diagram.

In terms of the fleet composition EasyJet does not give clear information.

However, we believe that a large share of the new fleet will be bought. This

results in more or less constant leasing costs while a bigger fleet implies a rising

trend in depreciation and large capital expenditures.

With that being said the forecasted NET Profit for FY16 amounts to £565 Million

constituting a 3,3 % growth rate and yet another all-time profit record for the

company.

Figure 28: EBITDAL, EBIT, EBT, Net Profit forecast (million £) Source: Author’s valuation model, own diagram.


PAGE 23/32

Working Capital

Often broadly defined as Current Assets – Current Liabilities forecasting Working

Capital naturally requires these two items to be forecasted in a first step.

In the case of EasyJet Current Liabilities consist of Trade and other Payables,

Current Tax Payable and Maintenance provision, whereas Trade and other

Payables constitutes the lion’s share. Due to that Current Liabilities were jointly

forecasted using average Days of Working Capital (Liabilities) the number of

average days was thereby composed as an average of the last three years

resulting in 100 for FY16 and further.

Regarding Current Assets the story is slightly more complicated. First of all not

all items were classified as operational here as Money Market Deposits and

Excess Cash are considered as negative debt and are therefore excluded from

working capital. The remaining items, namely Trade and other receivables,

Restricted Cash and Operating Cash were forecasted on an aggregated basis

using the same approach as for the liabilities with the number of average days

being 51 in this case. In contrast, operating cash was forecasted using a

minimum ratio of the cash balance.

With all that being said we can then display the forecast for Current Liabilities and

Operational Current Assets and display the Working Capital as the difference in

Figure 22 below:

Figure 29: Working Capital Profit forecast (million £) Source: Author’s valuation model, own diagram.


PAGE 24/32

Capital Expenditures

Due to the very capital intensive industry and the rapid fleet growth of easyJet in

particular capital expenditure is of crucial importance and an accurate forecast

constitutes one of the most important factors of a meaningful valuation. The main

trunk of capital expenditure in EasyJet’s case is thereby naturally given by the

balance sheet item Property, Plant & Equipment. This in turn can mainly be

attributed to aircrafts. Therefore, we decided to forecast the item using the

number of aircrafts which are owned or under financial leasing. Consequently, we

believe that Net Capex will amount to -£569 Million for FY16. A figure that seems

reasonable as we expect easyJet to buy 18 new Airbus A320 in that period

whereas the purchase of 15 new aircrafts caused Net Capex of -£487 in the prior

year.

FCF

With all necessary inputs known the forecasted Free Cash Flows then look as

follows:

Figure 32: Free Cash Flow forecast (million £) Source: Author’s valuation model, own diagram.

Figure 30: Change in NWC Source: Author’s valuation model, own diagram.

Figure 31: Net CapEx Source: Author’s valuation model, own diagram


PAGE 25/32

Valuation

For the valuation process we decided to use a discounted cash flow method

using the wacc as we believe that easy Jets capital structure will stay relatively

stable.

Capital Structure

In FY13 easyJet built up its assets of financial nature Money, Market Deposits

and Excess cash and thereby cut 594 Million of Net Debt leading to a negative

Net Debt for the year. After that company’s Net Debt was only slightly above zero

leading to a Debt to Equity ratio at Market Values of 0,03% and 0,05% for FY14

and FY15. The Airline has ambitious expansion plans and therefore needs a

strong cash balance and deposits as they plan on financing that expansion

mostly without large additional debt. Hence, we believe that the Debt to Equity

ratio will remain more or less constant and very low.

Taking a look at the industry reveals the fact that RyanAir seems to have the

same approach of achieving high flexibility and easy access to new funds by

keeping its Debt-to-Equity ratio low with a current value of 5%. The legacy

carriers on the other hand show very high Debt-to-Equity ratios ranging anywhere

between 30% and 50% while they are currently not able to achieve the ratios

they aim for.

WACC

As an approximation for the market portfolio the MSCI World has been chosen.

Hence, the levered betas of the comparable firms were computed by their

covariance. In a first step we thereby computed a 5-year moving beta for the last


PAGE 26/32

10 years and the associated 95% confidence interval. Intuitively, the large and

worldwide operating legacy-carriers show higher dependence on the overall

market as they are more expensive and additionally provide other services such

as cargo deliveries. It thereby seems that pricing is highly important as RyanAir

shows an even lower beta than easyJet.

Figure 33: 5-year moving average beta and 95% Confidence Interval for 2005-2015

Source: Data from Bloomberg, own diagram.

easyJet 0,51 ; 0,90

Ryan Air 0,25 ; 0,70

Lufthansa 1,04 ; 1,37

IAG 1,24 ; 1,93

Jet Blue 0,30 ; 0,76

Allegiant Air -0,11 ; 0,28

95% Confidence Interval

Un-Levering the betas of the European peer group and re-levering the average

with the average Debt-to-equity ratio of 20,2% computed from the comparable

group then leads to an estimated industry beta of 0.9.

With all this information given we decided to use a beta of 0.7 in order to estimate

EasyJet’s Cost of Equity.

Research suggests a market premium between 4% and 6,5%. Due to the positive

economic outlook we decided to use the upper bound of that range. The risk free

rate is adapted on the US Treasury Bill and was set at 0,4%. Consequently,

EasyJet’s Cost of Equity was estimated at 4,98%.

Due to the fact that the weight of debt in the wacc was found to be extremely

small the Cost of Debt was estimated using a simplistic approach of dividing the

interest by the average Financial Debt for the respective year resulting in a Cost

of Debt of 2,06%.


PAGE 27/32

Consequently EasyJet’s future cash flows have to be discounted by its weighted

average cost of capital of 4,98%.

After the explicitly forecasted periods the terminal value in FY19 was computed

using the perpetuity formula with a free cash flow growth rate g. In the long term

we expect NOPLAT to grow with the economy at a rate of 2%. Additionally, we

believe that 50% of NOPLAT will be needed to invest in order to continue the

companies operations. From this we arrive at a long term growth rate of g=1%.

Due to the challenging environment of the airline industry we thereby believe that

this rather conservative growth rate is appropriate.

Recommendation

With all these inputs EasyJet plc’s Enterprise value was estimated at £7826

Million for the coming FY16. After subtracting Net Debt that leaves an Equity

market value of £7822 Million. Divided by the number of shares outstanding

(397.208.000) we therefore arrived at a FY16 price target of £19,69. As EasyJet’s

shares are currently trading at £17.62 we consequently recommend a Buy

Position.15

Sensitivity Analysis

EasyJet faces the risks of two very important drivers of its free cash flow being

subject to a potentially high volatility. These two drivers are the number of

passengers and the price of jet fuel. Consequently, a comprehensive sensitivity

analysis regarding them was conducted in order to illustrate and measure these

potential risks.

As already discussed above the number of passengers is an absolutely crucial

driver of EasyJet’s success. However, there might be certain risks affecting it.

First of all although our analysis argues otherwise the demand might not be as

high as thought in general. Additionally terror attacks or an internal tragedy such

as the crash of a Germanwings aircraft in 2015 can cause problems. It is not

easy to quantify the passenger decrease Germanwings faced as Lufthansa

strikes in 2015 generally caused reduced traffic and falsify the conclusion but a

decrease in passengers in a reaction to an event like this seems more than likely.

However, it does not take a disaster like that when even just a lower than

expected load factor can adversely affect passenger numbers tremendously.

Therefore we constructed 3 scenarios: Passenger numbers go down 1%, 5% and

15 As of 07.01.2015. Data on shares outstanding and current share price was taken from Bloomberg.

Figure 34: wacc vs. ROIC Source: Author’s valuation model.


PAGE 28/32

10% and illustrated the effect on revenues, net profit and the price target

exemplary for the FY16. We choose these scenarios as our aim is to illustrate

risks and an increased traffic volume would not be insightful as our

recommendation is already at BUY. Interestingly, a 1% reduction in passenger

numbers is enough to change the recommendation to HOLD while 5% even

sends the Price target downhill by more than 68%. As all other things are kept

equal an analysis like that might underestimate the flexibility EasyJet could react

to a development like this up to a certain degree. Yet it is important to note that

the exposure to changes in demand is extremely high with a low-cost business

model that is dependent on high utilisation.

Table 3: Sensitivity Analysis: Passenger volume Source: Author’s valuation model, own diagram.

Scenario

Number of

Passengers

FY16

Revenues FY16

(million £)

Net Profit FY16

(million £)

Price Target

FY16

(£)

Recommendation

Normal73.1

million5037 582 19,69 BUY

1% Passenger

decrease

72.3

million4987 530 17,00 HOLD

Change -0,99% -9,00% -13,68%

5% Passenger

decrease

69.4

million4786 389 6,21 SELL

Change -4,99% -33,09% -68,47%

10% Passenger

decrease

65.8

million4534 214 -7,3 SELL

Change -9,99% -63,19% -136,97%

The second very important factor for EasyJet as for every airline is the price of jet

fuel and the currency risk related to it. EasyJet hereby gives information on

sensitivity regarding their hedging position with additional respect to associated

currency movements as follows:

Table 4: Sensitivity Analysis: Price of jet fuel Source: Based on Table from EasyJet’s Annual Report 2015l, own diagram.


PAGE 29/32

impacts

impacts

impacts

impacts

$10 movement per metric tonne

FY16 EBT by £0.7 million

$0.01 movement in £/$

$0.01 movement in £/$

€0.01 movement in €/CHF

FY16 fuel cost by $3.5 million



Source: Based on Table from easyJet plc results 2015, own diagram


PAGE 30/32

Appendix

Financial Statements

Income Statement 2012 2013 2014 2015 2016F 2017F 2018F 2019F

Revenues: £ million £ million £ million £ million £ million £ million £ million £ million

Seats 3794 4194 4462 4616 4964 5415 5844 6138

Non-Seats 60 64 65 69 73 79 84 88

Total Revenues 3854 4258 4527 4685 5037 5494 5928 6225

Fuel -1149 -1182 -1251 -1199 -1280 -1417 -1564 -1682

Airports and ground handling -955 -1078 -1107 -1122 -1225 -1350 -1471 -1560

Crew -432 -454 -479 -505 -551 -608 -662 -702

Navigation -280 -294 -307 -313 -345 -373 -398 -414

Maintenance -203 -212 -212 -607 -655 -714 -771 -809

Selling and marketing -104 -101 -103 0 0 0 0 0

Other costs -200 -226 -245 0 0 0 0 0

COSS: -3323 -3547 -3704 -3746 -4057 -4462 -4867 -5169

EBITDAL 531 711 823 939 980 1032 1061 1057

Aircraft dry leasing -95 -102 -124 -114 -114 -114 -114 -114

Depreciation -97 -102 -106 -125 -141 -161 -185 -204

Ammortisation of intangible assets -8 -10 -12 -13 -15 -16 -18 -19

Other 0 0 0 0 0 0 0 0

EBIT 331 497 581 687 710 741 744 719

Interest receivable and other fin. Income 11 5 11 9 6 6 6 6

Interest payable and other fin. Charges -25 -24 -11 -11 -10 -11 -11 -12

EBT 317 478 581 685 706 736 739 714

Tax -62 -80 -131 -138 -141 -147 -148 -143

Net Profit 255 398 450 547 565 589 591 571

Balance Sheet (million £) 2012 2013 2014 2015 2016F 2017F 2018F 2019F

Goodwill and other intangible Assets 456 467 478 492 505 519 534 551

Property, Plant & Equipment 2.395 2.280 2.542 2.877 3.277 3.767 4.149 4.413

Loan Notes 10 7 4 0 0 0 0 0

Other Non-current Assets 86 197 161 136 172 172 172 172

Total Non-current Assets 2.947 2.951 3.185 3.505 3.954 4.458 4.855 5.136

Working Capital (Assets) 732 593 647 651 700 763 824 865

Money Marktet Deposits 238 224 561 289 300 300 300 300

Excess Cash 284 614 0 211 227 248 267 281

Total Current Assets 1.254 1.431 1.208 1.151 1.227 1.311 1.391 1.446

Total Assets 4.201 4.382 4.393 4.656 5.181 5.769 6.246 6.582

Financial Debt 957 679 563 504 531 552 571 585

Net Derivative fin. instruments -44 71 21 297 297 297 297 297

Non-current deferred income 46 68 62 47 47 47 47 47

Maintenance provisions 141 171 147 165 165 165 165 165

Deferred Tax 198 144 186 176 176 176 176 176

Total Non-current Liabilities 1.298 1.133 979 1.189 1.216 1.237 1.256 1.270

Working Capital (Liabilities) 1.109 1.232 1.242 1.218 1.380 1.505 1.624 1.706

Total Current Liabilities 1.109 1.232 1.242 1.218 1.380 1.505 1.624 1.706

Total Liabilities 2.407 2.365 2.221 2.407 2.596 2.742 2.881 2.975

Equity 1.794 2.017 2.172 2.249 2.584 3.027 3.366 3.607

Total Liabilities + Equity 4.201 4.382 4.393 4.656 5.181 5.769 6.246 6.582


PAGE 31/32

Cash Flow statement (million £) 2012 2013 2014 2015 2016F 2017F 2018F 2019F

EBIT 331 497 581 687 710 741 744 719

Notional Income Tax -79 -114 -122 -137 -142 -148 -149 -144

Tax Adjustments 14 30 -9 -1 0 0 0 0

NOPLAT 266 413 450 548 568 593 596 575

Depreciation 97 102 106 125 141 161 185 204

Ammortization 8 10 12 13 15 16 18 19

Gross Free CF 371 525 568 686 724 770 799 799

-Change in NWC -22 289 -54 28 113 62 59 40

-Net CapEx -356 -8 -391 -487 -569 -681 -601 -505

Other -24 -85 1 20 -36 0 0 0

Operating CF -31 721 124 247 233 151 257 334

Non Operating CF 24 -34 48 -3 0 0 0 0

Total Free CF Available to Investors -7 687 172 244 233 151 257 334


PAGE 32/32

Disclosures and Disclaimer

Research Recommendations

Buy Expected total return (including dividends) of more than 15% over a 12-month period.

Hold Expected total return (including dividends) between 0% and 15% over a 12-month period.

Sell Expected negative total return (including dividends) over a 12-month period.

This report was prepared by Moritz Geiger, a student of the NOVA School of Business and Economics, following the Masters in Finance Equity Research – Field Lab Work Project, exclusively for academic purposes. Thus, the author, which is a Masters in Finance student, is the sole responsible for the information and estimates contained herein and for the opinions expressed, which reflect exclusively his/her own personal judgement. This report was supervised by professor Rosário André (registered with Comissão do Mercado de Valores Mobiliários as financial analyst) who revised the valuation methodology and the financial model. All opinions and estimates are subject to change without notice. NOVA SBE or its faculty accepts no responsibility whatsoever for the content of this report nor for any consequences of its use. The information contained herein has been compiled by students from public sources believed to be reliable, but NOVA SBE or the students make no representation that it is accurate or complete, and accept no liability whatsoever for any direct or indirect loss resulting from the use of this report or its content. The author hereby certifies that the views expressed in this report accurately reflect his/her personal opinion about the subject company and its securities. He/she has not received or been promised any direct or indirect compensation for expressing the opinions or recommendation included in this report. The author of this report may have a position, or otherwise be interested, in transactions in securities which are directly or indirectly the subject of this report. NOVA SBE may have received compensation from the subject company during the last 12 months related to its fund raising program. Nevertheless, no compensation eventually received by NOVA SBE is in any way related to or dependent on the opinions expressed in this report. The Nova School of Business and Economics, though registered with Comissão do Mercado de Valores Mobiliários, does not deal for or otherwise offers any investment or intermediation services to market counterparties, private or intermediate customers. This report may not be reproduced, distributed or published without the explicit previous consent of its author, unless when used by NOVA SBE for academic purposes only. At any time, NOVA SBE may decide to suspend this report reproduction or distribution without further notice.

masters in finance equity research · this report was prepared by moritz geiger, a masters in...

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