Ryanair: Fully-Fledged Recovery Not Yet Priced In
Summary
- Ryanair operates a low cost and free cash flow generative business, providing it the financial stamina to recover from the pandemic.
- We believe the carrier can take advantage of falling intra-European flight capacity as its peers retrench.
- With the shares trading on a free cash flow yield of 5.1% for FY3/2023, we are buyers of the shares.
Investment thesis
Ryanair (NASDAQ:RYAAY) is poised to bounce back from the pandemic in better shape that its peers, with increased routes and capacity as it takes orders for the Boeing 737-8200. With an estimated free cash flow yield of 5.1% in FY3/2023, we are buyers of the shares.
Our objectives
We want to assess the following in this piece:
- Look at the company's estimates over recovery in passenger numbers.
- Ryanair's market position versus its peer group.
We will take each in turn.
A recovery in stages
The company's 3Q FY3/2021 results highlighted orders for the Boeing 737-8200 has been increased by 75 to 210. Ryanair is in a position to do this, as it has a strong balance sheet and underlined management's intention to gain share as other carriers fail or retrench. The company's outlook for passenger volumes is as follows.
Guest volume projections by company
Source: Company, created by author
With a patchy vaccine rollout in Europe, we anticipate Easter travel volumes will remain subdued, and a tangible recovery in passenger numbers will start from summer 2021. Guest volumes may be at the lower end of FY3/2022 company range. We also think projections of FY3/2023 which matches the peak seen in FY3/2020 is too optimistic even with pent-up demand for both leisure and business travel.
Vaccination doses given - select European countries
Source: Our World In Data, created by author
Longer term we see Ryanair as a beneficiary from the pandemic. Peers that have disappeared since 2020 include Flybe, Germanwings, Level and Montenegro Airlines, with Norwegian under creditor protection examinership. Flag carriers are retrenching, and intra-European flight capacity is being reduced. Ryanair is poised to gain market share, the timing of which is dependent on the vaccination roll-out program and people's attitude to overseas holidays. We believe Ryanair is positioned well for a recovery.
Market positioning
Ryanair was the market leader in European low cost travel pre-pandemic, with the largest coverage, passenger volumes, lowest operating costs and a strong balance sheet. Post-pandemic, the company is set to become more competitive.
Company operating margin trend and consensus estimates
Source: Company, Refinitiv, created by author
In terms of cost reductions, the investment in the Boeing 737-8200 planes is seen as a 'gamechanger', as it carries 4% more seats but burn 16% less fuel. This will make a material difference longer term as more deliveries of the 8200 are made - the first is expected in Q4 FY3/2021.
For route development the company is expanding at Paris Beauvais, added a fourth aircraft to its Naples base, announced a 4 aircraft base in Venice Treviso and increased its route network/frequencies to Venice Marco Polo, Verona and Bari. It has also secured easyJet's (OTCQX:ESYJY) 7 based aircraft slot portfolio in London Stansted.
Ryanair's balance sheet strength comes from the recent equity and bond issuance in September 2020, but also from its track record of strong free cash flow generation. Consensus forecasts a return to peak free cash flow in FY3/2023.
Free cash flow generation trend
Source: Company, created by author
With the company financially capable of taking market share as rival carriers cut back on European flight capacity, we believe Ryanair's outlook is positive.
Valuation
On consensus forecasts the shares are trading on a free cash flow yield of 5.1%, above the historical average between FY3/16 and FY3/20 of 3.9%. We believe this is an attractive valuation when considering Ryanair's strengthening market position, solid balance sheet and its track record.
Risks
Ryanair's management is doing well with what is controllable, but significant risks are out of their control. The pandemic may take longer to subside with new variants, competitor capacity by flag carriers may ramp significantly in a recovery, and fuel price hikes will eat into margins (40% of 2021 fuel was hedged in December 2020).
Conclusion
We do not think that a fully-fledged recovery has been priced in the shares. Although there is no knowing when this may occur, we believe Ryanair is over the worst. Positioned to gain market share and maintaining its low cost model, we estimate free cash flow generation will recover to peak levels in FY3/2023. We are buyers of the shares.
This article was written by
Analyst’s 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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