Easyjet – Target Price £12.50

Easyjet (EZJ)

On the 1st October, Christine Browne, a former executive at tour operator TUI AG’s airline division, will be appointed as chief operating officer to assist the airline in handling the post Brexit turbulence which is currently battering airlines. She is to be succeeding Warwick Brady, who has held the position since 2009, and who is resigning from Easyjet altogether.

 

Easyjet is due to provide a trading update to the market on the 6th October, making now the perfect time to speculate on the general direction of the company. News from rival airline and holiday provider Thomas Cook (TGC) today has shown a fairly robust performance given the companies exposure to Turkey, and they boast bookings in line with last year for Winter 2016/17, and increased bookings into summer 2017. Their bookings increase has been across northern Europe, the Canaries other Mediterranean destinations as holiday makers avoid Turkey following terrorist attacks over the past year.

 

But how should we expect Easyjet to perform, and what inference can we draw from other airlines. Looking back at the July update, the company stated “Passengers carried increased by 5.8% to 20.2 million, driven by an increase in capacity of 5.5% to 21.9 million seats and load factor increasing by 0.3 percentage points to 92.0%.”

 

And with regards to their forward bookings

 

‘Approximately 65% of expected bookings for the fourth quarter have now been secured, with booked average revenue per seat for the quarter declining by around 7.5% at constant currency. As a result of events in the last week the revenue per seat trajectory in the fourth quarter remains uncertain. Capacity is expected to grow in the fourth quarter by 6%’.

 

So the company was being cautious in their statement on a revenue per seat basis, but bookings were at reasonable level. The board felt confident enough to increase the dividend ratio payout which indicates confidence in the company’s ability to trade profitably.

 

This bodes well when compared to Monarch, who have been the recipient of negative speculation about the company’s ability to re-new its air operator’s certificate without a significant cash injection.

 

On one side we have a struggling Monarch, and on the other we have TCG who quoted strong sales despite the Brexit vote, and it is my opinion that EZJ will also demonstrate a robust performance ahead of expectations. EZJ benefits from significantly higher economies of scale compared with either airline, and have taken the bull by the horns to reduce costs by 1% (excluding fuel). 1% may not sound like a lot, but that equates to 25p per seat, and in Q3 alone £20.2m passengers were flown, equating to a cost saving of over £5m.

 

The share price of Easyjet is down by 30% since the referendum – arguably the share was, until the vote, driven by sentiment rather than results as the price had been on a upward trend for several years, with the return on investment not keeping pace with the price. The company has been bought in line with an income investors criteria following the price crash resulting in a yield of nearly 5.3% at current prices. I am of the opinion that risk to the downside is limited. Should an investor decide to buy now and the price continues to drop, the said buyer will benefit from a high yield whilst they weather the storm.

 

My target price for Easyjet is £12.50, representing a 25% upside to the current price. I believe sentiment to be temporarily against Easyject until it updates the market and reassures investors on its dividend prospects. Downside is at a minimum given the price crash already endured, and I have taken a position in the company near recent lows – putting my money where my mouth is.

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