Capex Holiday Should Send Ryanair Flying

| About: Ryanair Holdings (RYAAY)

Ryanair (NASDAQ:RYAAY) is Europe's largest discount airline; it has a market cap just north of US$8.5Bn, Europe's youngest fleet of aircraft, and a balance sheet that most other players in the sector would die for, shifting into net cash within the next six months. That aside, there are times when it is a far, far better thing to be a shareholder of a company than its customer. I am both in this case: A shareholder by choice and an austerity-driven user; I just wish that the cabin crews would let one sleep on the 6:30am up from Madrid to London.

Ryanair is one of those rare beasts that does well in a downturn, as travelers become more cost conscious and care less about discomfort and being treated like cattle. But what truly sets this stock company apart is its decision to take a capex holiday for the next four or five years. Southwest Airline (NYSE:LUV) did the same back in the nineties and the stock boomed as capacity growth slowed, yields rose and free cash-flow churned out of the company. Ryanair's capex holiday has just started and from here the stock is likely to rise sharply over the coming years.

There are four principle reasons to own Ryanair:

  1. In Europe, the company is a market leader and has the lowest prices and lowest cost structure. As other players cut back or fall away, Ryanair continues to grow its market-share, having a 30%+ market share on three-quarters of its routes. Low cost carriers continue to take market share in Europe, rising from 4% back in 1998 to 40% today, and within overall gain the main taker of share has been Ryanair (as both full-service and charter carriers have lost share). The company is #1 in short haul seat capacity in both Spain and Italy; it is #2 behind Easyjet in the UK and more recently has built itself into being the #3 player in Poland.
  2. As fleet growth slows, three dynamics come into play: Free cash-flow yield surges as capex falls; route yields rise as what had been "new" sectors mature; and the EBIT margin jumps. The slide below (click to enlarge) shows passenger growth in blue versus fare growth in yellow.

  3. In December '09 the company announced a five year capex-holiday, which mean that fleet capex falls from Є1.0Bn in 2009 to just Є50mn in 2013. With the balance sheet turning net cash positive over the next couple of quarters, the company starts to throw off cash. Having already paid an extraordinary dividend in 2010, the company has just brought forward the next "extraordinary" dividend to 2012. That said, o this company will generate almost two-thirds of its current market cap over the next three to four years.
  4. The stock is a clear "austerity play". As the company itself proclaims, recessions are good for it, driving travelers towards the company without any need for increased ad-spend. With Europe digging itself ever deeper into ongoing austerity, Ryanair is set to be an ongoing beneficiary. Should we see oil prices fall on the back of slowing global growth, then Ryanair becomes and even bigger story.

With a market cap of Є5.5Bn today, the stock trades on a forward PE of 10x next year and 7.5x 2013. On a cash-adjusted basis that translates to less than 5x 2013 for a market leading brand that rates as the best run airline in the world.

All in all, Ryanair is another of those peripherally-impaired growth stocks on a crazy rating. No debt, surging free cash-flow, a 10% dividend in sight, buybacks, and an amazing management. Thank you Ireland! Oh, and did I mention that the company owns 30% of Irish national carrier Aer Lingus - not worth much in money terms these days ($140mn), but those Heathrow slots are worth a fortune and at some point the (near) bankrupt Irish government will have to put the airline up for sale, and Ryanair will be the rain-maker.

Disclosure: In client funds I am long the UK line RYA LN

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