On Tuesday Easyjet released its first half update for 2017, on the back of which the share price plummet six thousand feet, or should I say percent. Investors were surprised to note a significant first half loss of £236m, far more than the £18m loss experienced a year before.
Its all about the position of the moon…
This is not quite as bizarre a statement as would first appear as Easyjets first half revenues were adversely affected by the timing of Easter, as well as the deterioration of the pound since the brexit vote, being responsible for a headline cost per seat of 4.9%. We also can’t ignore that fact that capacity in the market has been on the up and is expected to continue.
EasyJet’s headline cost per seat excluding fuel at constant forex was flat at £38.54, but including forex and fuel was £54.45.
But, regardless of the above, the company boasted a record period for both passenger numbers (9% up) and load factor (up 0.5%). The effect of the increased load factor and passenger numbers was a rise in revenue of 3.2%, partly offsetting the decrease in revenue per seat of 4.9% to £48.80.
Easyjet is clearly benefitting from a strong brand name and appealing price to the low cost thrill seekers and sun worshipers.
Some may say there are turbulent times ahead, and we cannot ignore the fact that market capacity growth looks set to continue, outstripping demand. Easyjets tight reign on costs will therefore become ever more important. Easyjet has reminded investors of its purchase of 30 321 NEO aircraft under its existing agreement with Airbus, allowing growth in slot constrained airports. The 321 NEO allows for a seat configuration of 220, versus a 186 configuration with the A320 NEO’s which dominate the fleet. Cost savings of up to 9% are deemed possible, in turn affective Easyjets competitive position in a positive way.
The Company’s bottom line profit it expected to fall by 30% in 2017, but I am of the opinion there could be a pleasant surprise in the full year results as the pound makes up more ground against the dollar. Already the pound is up from $1.22 in September to $1.30 today. With Trumps erratic form of presidency the dollar may weaken further and if inflationary pressures in the UK hold up, a BOE rate hike could be closer than we think, causing the pound the strengthen further still.
Attention should also be drawn to fact that holiday makers have proved very resilient in the wake of Brexit, and the slump in the pound that followed did not seem to deter the public from prioritising holidays over other luxuries as the market seemed to expect. It seems that we are adamant of getting our vitamin D fix regardless of economic woes.
The Company remains upbeat about its results, indicating growth of 17% in 2018. The Company trades on a price-to-earnings growth (PEG) ratio of just 0.8, leading me to recommend investors to continue to buy.
In light of the pounds strengthening and Easyjets resilience, my target price is amended to £14.50 from £12.50.