ryanair holdings plc · 2016. 7. 25. · published by raymond james & associates please read...

Global Research Published by Raymond James & Associates

Please read domestic and foreign disclosure/risk information beginning on page 4 and Analyst Certification on page 5.

© 2016 Raymond James & Associates, Inc., member New York Stock Exchange/SIPC. All rights reserved.

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Ryanair Holdings plc July 25, 2016 (RYAAY-NASDAQ) Company Comment Savanthi Syth, CFA, RJA, (727) 567-5274, [email protected] Matt Roberts, Res. Assoc., RJA, (727) 567-2099, [email protected]

Airlines: Low Cost Carriers ______________________________________________

Stronger Outlook Than Expected; Reiterate Outperform Rating

Recommendation: Despite Brexit uncertainties and other European carriers recently lowering guidance, Ryanair reiterated its full-year net profit outlook (~13% y/y). While we believed the guidance to be conservative in May, we expected some deterioration in light of Brexit and recent geopolitical events. With 75% of F2Q17 seats sold, we are revising upward our recently diminished FY17E net profit (from +5% to +11% y/y), though still below pre-Brexit levels (+15%). Notably, FY17E and FY18E EPS of $5.92 (+17% y/y) and $6.25 (+6% y/y) are only 4% and 7% below pre-Brexit levels, respectively, while shares have declined 15% vs. +6% for the airline index. We continue to rate RYAAY Outperform due to attractive earnings growth given its fleet expansion, contribution from the build out of its AGB program, good cost visibility, and formidable balance sheet.

Pricing better than feared: Ryanair’s F1Q17 (Jun-Q) net profit of €256 million (+4% y/y) was above our €245 million estimate but in-line with consensus of €258 million. The y/y average fare (excluding ancillary) of (10)% was in-line with our forecast. With 75% of F2Q17 (Sep-Q) seats sold, average fares are tracking (6)% y/y compared to our previous (8)% forecast. Conservatively assuming some deterioration, we now expect (7)% y/y for the quarter, which is still below our pre-Brexit assumption of (5)%. For F2H17, we are revising our forecast from (10)% to (9)%, which is weaker than the May forecast of (6)%.

Brexit pivot: Due to the significantly weaker sterling (GBP) and likely weaker economic activity following the Brexit vote, Ryanair plans to lower its U.K. seat growth plans (particularly in London-Stansted and primarily via fewer frequencies) beginning in the winter, similar to peers. This capacity is likely to be diverted to markets such as Germany, Italy, Spain, and Poland. Of note, 28% of Ryanair’s revenue and 21% of its non-fuel costs (which accounts for 64% of total) are denominated in GBP. However, due to the forward sale of tickets, the profit exposure for the reminder of FY17 is €8 million (1% of total).

Enviable cost discipline: Ryanair’s Jun-Q y/y non-fuel unit costs of (4)% was 3 ppts better than our forecast, largely attributable to the timing of costs. As such our FY17E is only revised from (1)% y/y to (1.5)%. This compares to flat to +3% at peers easyJet, Wizz, and Norwegian despite similar to faster growth. Also, despite slowing growth at Stansted, where Ryanair was expected to continue to benefit from volume-based discounts, we expect good cost execution in FY17/18, which should also benefit from the weaker GBP.

Valuation: Our $90 target price (up from $85) is based on ~14x our CY17E EPS of $6.37 + $1.68/share, reflecting the at least €400 million in likely cash returns to shareholders over the next year (see page 2), which is not reflected in our EPS forecast. The multiple is below the 16.3x for the S&P 500 (2017E) due to the higher level of economic uncertainty in the Euro area. However, Ryanair has lower earnings volatility from fluctuating fuel prices as it has hedged 95% of its FY17 fuel needs at $62/bbl (down from $90/bbl in FY16) and 55% of FY18 at $50/bbl.

Non-GAAP Q1 Q2 Q3 Q4 Full Revenues EPS Jun Sep Dec Mar Year (mil.)

2016A $0.99 $3.44 $0.42 $0.21 $5.06 €6,536 Old 2017E 1.05 3.75 0.50 0.20 5.50 6,665

New 2017E 1.12A 3.90 0.48 0.42 5.92 6,740 Old 2018E UR UR UR UR 5.85 7,089

New 2018E UR UR UR UR 6.25 7,094

UR: Under Review. Rows may not add due to rounding. Non-GAAP figures use the average exchange rate for the period and exclude non-recurring charges. Figures are based on ADRs/ADSs. Reported figures are in accordance with International Financial Reporting Standards (IFRS).

Rating _________________________________ Outperform 2 Current and Target Price __________________ Current Price (Jul-25-16 close) $68.78 Target Price: Old: $85.00 New: $90.00 52-Week Range $89.67 - $66.09 Suitability Medium Risk/Growth Market Data ___________________________ Shares Out. (mil.) 265.8 Market Cap. (mil.) $18,282 Avg. Daily Vol. (10 day) 441,158 Dividend/Yield $0.00/0.0% Book Value (Jun-16) $16.15 Adj. Net Debt (mil.)/% Cap. $537/11% Earnings & Valuation Metrics ______________

2016A 2017E 2018E

P/E Ratios (Non-GAAP) 13.6x 11.6x 11.0x

2016E 2017E 2018E

Non-GAAP EPS (CY) Old $5.51 $5.95 NA New $5.71 $6.37 NA

P/E Ratios (CY Non-GAAP) 12.0x 10.8x NM Company Description ____________________ Ryanair Holdings plc, headquartered in Dublin, Ireland, is Europe’s largest low cost carrier, with 81 bases and 1,600 routes across 29 countries. As of March 2016, it had a fleet of over 330 Boeing 737 aircraft and offered approximately 1,800 scheduled short-haul flights per day serving approximately 200 airports primarily in Europe.

mailto:[email protected]:[email protected]:[email protected]

Raymond James Global Research


International Headquarters: The Raymond James Financial Center | 880 Carillon Parkway | St. Petersburg, Florida 33716 | 800-248-8863 2

F1Q17 Highlights

Ryanair’s F1Q17 (Jun-Q) net income of €256 million (+4% y/y) was above our €245 million estimate but in-line with consensus of €258 million. Total revenue increased 2% y/y, reflecting an 8% decrease in total average fare (including ancillary) on an 11% increase in passengers. Operating margin expanded 70 bp y/y to 18% as the decline in revenue per passenger was more than offset by a 9% decrease in unit costs. Unit costs benefitted from a 17% decline in fuel cost per passenger while non-fuel costs per passenger decreased 4% y/y.

Ryanair ended F1Q17 with $4.5 billion in unrestricted cash and cash equivalents, representing 62% of TTM revenue. Further, net adjusted debt (including present value of operating leases minus unrestricted cash) was only $537 million, representing 11% of total net capitalization. We expect Ryanair to get to a net cash position starting in FY17, prior to future share buyback (not reflected in our forecast).

During the quarter, Ryanair bought back €468 million in shares, exhausting the €800 million share buyback program authorized in February 2016 and an additional €86 million authorized by the Board (following the Brexit vote and subsequent share value decline) in-line with the 5% of market cap annual buy-back limit. Ryanair has scheduled an Extraordinary General Meeting for Wednesday, July 27 for a shareholder vote to allow the Board discretion for additional share buybacks over the next 18 months, though a programmed share buyback (and possibly a special dividend) similar to that authorized in February is not expected until February 2017 at the earliest.

The table below summarizes the y/y change and variance vs. our expectation of the key F1Q17 earnings components.

F1Q17 Earnings Summary

Source: Ryanair, Raymond James research.

Currency Drags

Ryanair is long sterling (GBP) vs. the euro (EUR) with every £0.01 relative decrease having a negative €15 million impact on annual net income. Thus, the decline in GBP since the Brexit vote implies a negative ~€100 million impact on annual net income. However, due to the forward sale of tickets, the profit exposure for the reminder of FY17 is ~€8 million (~1% of total). While Ryanair has hedged most of its U.S. dollar (USD) cost exposure for FY17 (and 45% for FY18), the decline in the EUR/USD negatively impacts EPS per ADR.

Weakening Demand Likely

Given ongoing geopolitical risk from recent events in Nice and Turkey coupled with the likely negative impact on GDP caused by Brexit, we anticipate an adverse impact on demand. Further, intra-Europe industry capacity remains elevated with schedules showing 9% growth in 4Q. Thus, we believe taking a more cautious view is warranted. Our average fare for F2Q17E (Sept-Q) increases from (8)% to (7)% y/y (compared to (5)% pre-Brexit) and our F2H17 average fare increases from (10)% to (9)% (compared to (6)% pre-Brexit).

F1Q17A F1Q16A % Chg y/y F1Q17E Variance

(millions in USD, unless otherwise noted)

Operating Revenue € 1,687 € 1,653 2% € 1,685 0%

Passenger € 1,244 € 1,248 0% € 1,249 0%

Ancillary € 443 € 405 10% € 436 2%

Operating Expenses € 1,381 € 1,364 1% € 1,397 -1%

Operating Income € 307 € 288 6% € 288 6%

Operating Margin 18.2% 17.5% 0.7 pts 17.1% 1.1 pts

Other Income (Expenses) (€ 20) (€ 11) 92% (€ 10) 103%

Pretax Income € 287 € 278 -3% € 278 3%

Pretax Margin 17.0% 16.8% 0.2 pts 16.5% 0.5 pts

EPS (ADR) $1.12 $0.99 14% $1.05 7%

Passengers 31 28 11% 31 0%

Seats 33 30 9% 33 0%

Load Factor 93.9% 92.0% 1.8 pts 93.7% 0.2 pts

Average Fare € 39.92 € 44.58 -10% € 40 -1%

Total Average Fare € 54.15 € 59.03 -8% € 54 0%

Cost per Passenger € 44.31 € 48.73 -9% € 45 -1%

Non-fuel Cost per Passenger € 28 € 29 -4% € 28 -3%




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Important Investor Disclosures Raymond James & Associates (RJA) is a FINRA member firm and is responsible for the preparation and distribution of research created in the United States. Raymond James & Associates is located at The Raymond James Financial Center, 880 Carillon Parkway, St. Petersburg, FL 33716, (727) 567-1000. Non-U.S. affiliates, which are not FINRA member firms, include the following entities that are responsible for the creation and distribution of research in their respective areas: in Canada, Raymond James Ltd. (RJL), Suite 2100, 925 West Georgia Street, Vancouver, BC V6C 3L2, (604) 659-8200; in Latin America, Raymond James Argentina S.A., San Martin 344, 22nd Floor, Buenos Aires, C10004AAH, Argentina, +54 11 4850 2500; in Europe, Raymond James Euro Equities SAS (also trading as Raymond James International), 40, rue La Boetie, 75008, Paris, France, +33 1 45 64 0500, and Raymond James Financial International Ltd., Broadwalk House, 5 Appold Street, London, England EC2A 2AG, +44 203 798 5600.

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The views expressed in this report accurately reflect the personal views of the analyst(s) covering the subject securities. No part of said person's compensation was, is, or will be directly or indirectly related to the specific recommendations or views contained in this research report. In addition, said analyst has not received compensation from any subject company in the last 12 months.

Ratings and Definitions

Raymond James & Associates (U.S.) definitions

Strong Buy (SB1) Expected to appreciate, produce a total return of at least 15%, and outperform the S&P 500 over the next six to 12 months. For higher yielding and more conservative equities, such as REITs and certain MLPs, a total return of at least 15% is expected to be realized over the next 12 months. Outperform (MO2) Expected to appreciate and outperform the S&P 500 over the next 12-18 months. For higher yielding and more conservative equities, such as REITs and certain MLPs, an Outperform rating is used for securities where we are comfortable with the relative safety of the dividend and expect a total return modestly exceeding the dividend yield over the next 12-18 months. Market Perform (MP3) Expected to perform generally in line with the S&P 500 over the next 12 months. Underperform (MU4) Expected to underperform the S&P 500 or its sector over the next six to 12 months and should be sold. Suspended (S) The rating and price target have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and price target are no longer in effect for this security and should not be relied upon. Raymond James Ltd. (Canada) definitions

Strong Buy (SB1) The stock is expected to appreciate and produce a total return of at least 15% and outperform the S&P/TSX Composite Index over the next six months. Outperform (MO2) The stock is expected to appreciate and outperform the S&P/TSX Composite Index over the next twelve months. Market Perform (MP3) The stock is expected to perform generally in line with the S&P/TSX Composite Index over the next twelve months and is potentially a source of funds for more highly rated securities. Underperform (MU4) The stock is expected to underperform the S&P/TSX Composite Index or its sector over the next six to twelve months and should be sold. Raymond James Argentina S.A. rating definitions

Strong Buy (SB1) Expected to appreciate and produce a total return of at least 25.0% over the next twelve months. Outperform (MO2) Expected to appreciate and produce a total return of between 15.0% and 25.0% over the next twelve months. Market Perform (MP3) Expected to perform in line with the underlying country index. Underperform (MU4) Expected to underperform the underlying country index. Suspended (S) The rating and price target have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and price target are no longer in effect for this security and should not be relied upon.

Raymond James Europe (Raymond James Euro Equities SAS & Raymond James Financial International Limited) rating definitions

Strong Buy (1) Expected to appreciate, produce a total return of at least 15%, and outperform the Stoxx 600 over the next 6 to 12 months. Outperform (2) Expected to appreciate and outperform the Stoxx 600 over the next 12 months. Market Perform (3) Expected to perform generally in line with the Stoxx 600 over the next 12 months. Underperform (4) Expected to underperform the Stoxx 600 or its sector over the next 6 to 12 months. Suspended (S) The rating and target price have been suspended temporarily. This action may be due to market events that made coverage impracticable, or to comply with applicable regulations or firm policies in certain circumstances, including when Raymond James may be providing investment banking services to the company. The previous rating and target price are no longer in effect for this security and should not be relied upon. In transacting in any security, investors should be aware that other securities in the Raymond James research coverage universe might carry a higher or lower rating. Investors should feel free to contact their Financial Advisor to discuss the merits of other available investments.

Rating Distributions

Coverage Universe Rating Distribution* Investment Banking Distribution

RJA RJL RJ Arg RJEE/RJFI RJA RJL RJ Arg RJEE/RJFI

Strong Buy and Outperform (Buy) 55% 69% 56% 51% 19% 39% 10% 0%




Market Perform (Hold) 41% 30% 44% 36% 6% 15% 0% 0%

Underperform (Sell) 5% 2% 0% 14% 2% 0% 0% 0%

* Columns may not add to 100% due to rounding.

Suitability Ratings (SR)

Medium Risk/Income (M/INC) Lower to average risk equities of companies with sound financials, consistent earnings, and dividend yields above that of the S&P 500. Many securities in this category are structured with a focus on providing a consistent dividend or return of capital.

Medium Risk/Growth (M/GRW) Lower to average risk equities of companies with sound financials, consistent earnings growth, the potential for long-term price appreciation, a potential dividend yield, and/or share repurchase program.

High Risk/Income (H/INC) Medium to higher risk equities of companies that are structured with a focus on providing a meaningful dividend but may face less predictable earnings (or losses), more leveraged balance sheets, rapidly changing market dynamics, financial and competitive issues, higher price volatility (beta), and potential risk of principal. Securities of companies in this category may have a less predictable income stream from dividends or distributions of capital.

High Risk/Growth (H/GRW) Medium to higher risk equities of companies in fast growing and competitive industries, with less predictable earnings (or losses), more leveraged balance sheets, rapidly changing market dynamics, financial or legal issues, higher price volatility (beta), and potential risk of principal.

High Risk/Speculation (H/SPEC) High risk equities of companies with a short or unprofitable operating history, limited or less predictable revenues, very high risk associated with success, significant financial or legal issues, or a substantial risk/loss of principal.

Raymond James Relationship Disclosures

Raymond James expects to receive or intends to seek compensation for investment banking services from the subject companies in the next three months.

Company Name Disclosure

Ryanair Holdings plc Raymond James & Associates makes a market in shares of RYAAY.

Stock Charts, Target Prices, and Valuation Methodologies

Valuation Methodology: The Raymond James methodology for assigning ratings and target prices includes a number of qualitative and quantitative factors including an assessment of industry size, structure, business trends and overall attractiveness; management effectiveness; competition; visibility; financial condition, and expected total return, among other factors. These factors are subject to change depending on overall economic conditions or industry- or company-specific occurrences. Only stocks rated Strong Buy (SB1) or Outperform (MO2) have target prices and thus valuation methodologies.

Target Prices: The information below indicates our target price and rating changes for RYAAY stock over the past three years.

Valuation Methodology: To estimate the value of Ryanair's ADSs, we utilize its price-to-earnings, or P/E ratio, comparison, which is based on




our long-range earnings model that is available upon request.

Risk Factors

General Risk Factors: Following are some general risk factors that pertain to the businesses of the subject companies and the projected target prices and recommendations included on Raymond James research: (1) Industry fundamentals with respect to customer demand or product / service pricing could change and adversely impact expected revenues and earnings; (2) Issues relating to major competitors or market shares or new product expectations could change investor attitudes toward the sector or this stock; (3) Unforeseen developments with respect to the management, financial condition or accounting policies or practices could alter the prospective valuation; or (4) External factors that affect the U.S. economy, interest rates, the U.S. dollar or major segments of the economy could alter investor confidence and investment prospects. International investments involve additional risks such as currency fluctuations, differing financial accounting standards, and possible political and economic instability.

Specific Investment Risks Related to the Industry or Issuer

Airline Industry Risk Factors Companies within the airline industry are exposed to risks relating to general economic and market conditions. External economic factors include the fluctuations in the price of jet fuel and capacity changes by competing airlines, which can negatively impact operating costs and revenue, respectively. Airlines operating in international markets may also be exposed to fluctuations in foreign currencies. Also, the airline industry is highly unionized, which implies that a significant number of employees may be subject to risks associated with labor contract negotiations and potential strikes. Moreover, Airlines are subject to various federal, state, local, and foreign laws and regulations and, as a result, are highly exposed to the impacts of new regulation. Greater U.S. government scrutiny on ancillary revenue and the European Union’s recently enacted carbon emissions tax are examples of recent concerns faced by the industry.

Company-Specific Risk Factors for Ryanair Holdings plc Currency Mismatch Majority of Ryanair’s costs are in U.S. dollars (USD) while a majority of its revenue is in British pounds (GBP) and euros (EUR). Moreover, 28% of Ryanair’s revenue and 21% of its non-fuel costs (which accounts for ~64% of total) are denominated in GBP, making it net long the GBP. Regarding its USD costs, Ryanair has hedged 100% of its aircraft purchase costs through FY19 at ~1.31 USD/EUR. Moreover, it has hedged ~95% of its FY17 (March year-end) and ~45% of its FY18 fuel purchases (most of the USD cost) at an exchange rate of 1.18 and 1.12 USD/EUR, respectively. Therefore, the strengthening of the USD against the euro is unlikely to have a material negative impact on its earnings through YE CY17. However, while the USD strength does not impact earnings, it has a material impact in the translation to EPS (per ADR share).

Brexit Vote Uncertainty The recent vote by the U.K. to leave the European Union creates substantial uncertainty not only in terms of economic growth and currency exchange rates, but also on whether the U.K. will remain part of the European Common Aviation Area (CAA). If the U.K. is required to leave the CAA, it will need to negotiate bilateral agreements with the EU and other countries, which may require Ryanair to discontinue intra-U.K. service (~1.5% of total seats) or to set up a U.K. subsidiary.

Additional Risk and Disclosure information, as well as more information on the Raymond James rating system and suitability categories, is available at rjcapitalmarkets.com/Disclosures/index. Copies of research or Raymond James’ summary policies relating to research analyst independence can be obtained by contacting any Raymond James & Associates or Raymond James Financial Services office (please see raymondjames.com for office locations) or by calling 727-567-1000, toll free 800-237-5643 or sending a written request to the Equity Research Library, Raymond James & Associates, Inc., Tower 3, 6

th Floor, 880 Carillon Parkway, St. Petersburg, FL

33716.

For clients in the United Kingdom:

For clients of Raymond James & Associates (London Branch) and Raymond James Financial International Limited (RJFI): This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in the FCA rules or persons described in Articles 19(5) (Investment professionals) or 49(2) (High net worth companies, unincorporated associations etc) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (as amended) or any other person to whom this promotion may lawfully be directed. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is therefore not intended for private individuals or those who would be classified as Retail Clients.

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For purposes of the Financial Conduct Authority requirements, this research report is classified as independent with respect to conflict of interest management. RJA, RJFI, and Raymond James Investment Services, Ltd. are authorised and regulated by the Financial Conduct Authority in the United Kingdom.

For clients in France:

This document and any investment to which this document relates is intended for the sole use of the persons to whom it is addressed, being persons who are Eligible Counterparties or Professional Clients as described in “Code Monétaire et Financier” and Règlement Général de l’Autorité des Marchés Financiers. It is not intended to be distributed or passed on, directly or indirectly, to any other class of persons and may not be relied upon by such persons and is therefore not intended for private individuals or those who would be classified as Retail Clients.

For clients of Raymond James Euro Equities: Raymond James Euro Equities is authorised and regulated by the Autorité de Contrôle Prudentiel et de Résolution and the Autorité des Marchés Financiers.

For institutional clients in the European Economic Area (EEA) outside of the United Kingdom:

This document (and any attachments or exhibits hereto) is intended only for EEA institutional clients or others to whom it may lawfully be submitted.

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This report is not prepared subject to Canadian disclosure requirements, unless a Canadian analyst has contributed to the content of the report. In the case where there is Canadian analyst contribution, the report meets all applicable IIROC disclosure requirements.

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This report is provided to clients of Raymond James only for your personal, noncommercial use. Except as expressly authorized by Raymond James, you may not copy, reproduce, transmit, sell, display, distribute, publish, broadcast, circulate, modify, disseminate or commercially exploit the information contained in this report, in printed, electronic or any other form, in any manner, without the prior express written consent of Raymond James. You also agree not to use the information provided in this report for any unlawful purpose. This is RJA client releasable resear ch

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ryanair holdings plc · 2016. 7. 25. · published by raymond james & associates please read...

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