Ryanair: DCF Model Suggests 41% Upside To Current Market Price

Aug. 20, 2019 5:28 PM ETRyanair Holdings plc (RYAAY)5 Comments
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  • Ryanair operates ultra-low-cost routes throughout eastern and western Europe.
  • Its recent acquisitions demonstrate it is consolidating its position in established territories, and expanding its vision to new markets.
  • Strong traffic growth (11%) in Q1 FY20 shows a continuing consumer trend toward low-cost air travel.
  • Using a calculated discount rate of approximately 6%, I value Ryanair’s shares at €12.53 and rate it as a buy.
  • Issues such as the grounding of the new 737 Max aircraft, a "no-deal Brexit" and security concerns suggest a vigilant investment approach should be advised.

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Investment Thesis:

The objective of this article is to provide the reader with a comprehensive valuation of Ryanair (NASDAQ:RYAAY)(LON:RYA) using a Discounted Cash Flow (DCF) Model, and by making assumptions about its future cash flows and potential for growth. Based on the results of my DCF and evaluation of other factors discussed throughout this article, I value Ryanair's shares at €12.53 and rate it as a buy.

Some of the key assumptions made within the DCF model include an average growth rate for the forecast period, maintaining an average operating margin, and the average effective tax rate Ryanair can expect to pay.

Key Challenges/Opportunities:

737 Max:

Ryanair's investment in the "game changer" 737 Max is expected to bring about significant cost savings for the airline, as each 737 Max has 4% greater capacity, 16% less fuel consumption and 40% lower noise emissions. According to the Q1 FY20 results published recently by Ryanair, the board believe that these aircraft will "transform [Ryanair's] costs and business." However, due to the tragedies aboard the Lion Air and Ethiopian Airlines flights in October 2018 and March 2019 respectively, an international grounding of the 737 Max has been put in place. As a result, Ryanair has been forced to delay its anticipated receipt of its first 5 737 Max aircraft to "January 2020 at the earliest," and reduce its expected fleet of 737 Max aircraft from 58 to 30 by summer 2020 - resulting in the predicted cost savings being delayed until FY21. Yet, this relies upon the 737 Max being cleared for

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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