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Ryanair: Still A Buy

Ryanair

Investment thesis: BUY

As of 23/01/2015, I believe Ryanair (RYA.L: 10,3 €) to be a structural long

Sector

The low taxation, high fleet utilization rate, but most importantly, the macroeconomic environment are all elements that make the point-to-point, low cost business model more sustainable and robust than forecasted. Propensity to fly, both for leisure or business purposes, is on the increase in the world, outclassing GDP world growth (although its estimates lacks quality): Airbus estimates that air traffic is set to double in 15 years (RPK: +6% emerging markets, +4,2% advanced economies) thanks to the increase of the global middle class. Ryanair has recently made a deal to buy more planes to be able to harvest these trends.

Competition

The competition is fierce in the low cost space and it's always a challenge to manage fuel costs and FX swings as well as to keep labour costs to the minimum, not to mention the danger of overcapacity (EasyJet knows it) but the company is championing these problems. Moreover, Ryanair has an excellent grip on the employees thanks to uniquely brutal contracts and no unions to defend them. It isn't prone to airports' bullying and the management minimizes each cost in every conceivable way.

Financials

Financial performance backs up this thesis: revenues, EBIDTA and EBIDTA margin are all rising (LTM data). That aside, FX and fuel hedging are prudently taken care of and the financial structure, while leveraged, is not an immediate threat (interest coverage=14,3x ; Debt/EBIDTA=3,4x).

Risks

Risks stay in place: a bad public image that might compromise elasticity to low cost, European political pressure over tax, security concerns, uncertainty over future states' aides, airports behaviour, fuel and labour costs are not to be underestimated.

Valuation

In my opinion, Ryanair is undervalued due to an overly pessimistic estimation of the aforementioned problems: actual multiples should be adjusted for higher growth and lower risk.

My target, based on multiples and DCF, would be: 12,56 €, +21% (consensus: 11 €). Overall the risk-return profile is very attractive (3:1) and, while it's true that downside potential is in place, at the very worst it would still trade above its competitors (9,58 €; - 7%).

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.