Philip O'Sullivan's Market Musings

Financial analysis from Dublin, Ireland

Market Musings 21/5/2012

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(Disclaimer: I am a shareholder in Ryanair) From an Irish perspective the main news today has been FY12 results from LCC gorilla Ryanair. In the preview I wrote yesterday I noted that the market (as reflected by consensus of €494m) was expecting net income to come in ahead of company guidance (€480m) and said that updates on possible special dividends and yields would be of particular interest. In the event, Ryanair unveiled 25% higher net income of €503m, announced a €483m special dividend (equivalent to a circa 8.5% yield) and broke the €1bn operating cashflow mark for the first time. Buoyed by the impressive cash generation, the carrier finished the year with net debt of only €110m – or 0.1x EBITDA. Assuming shareholders approve the special dividend announced today, it will mean that Ryanair will have returned €1.5bn to shareholders between buybacks and dividends over the past 5 years – that’s over a quarter of its current market cap.


Looking ahead to the current year, Ryanair is guiding 5% passenger growth to just over 79m passengers, but changes in passenger mix (greater exposure to Hungary, Poland, Spain and provincial UK), higher fuel costs and the effects of “recession, austerity [and] currency concerns” have seen it pitch FY13 net income guidance in a range of €400-440m. This forecast pushed the shares lower earlier today but against that I would point to the carrier’s form for low-balling guidance – don’t forget that Ryanair upgraded its earnings projection twice in the past 6 months – along with its 90% hedging of its FY13 fuel needs (which reduces the risks from a volatile expenditure item that accounted for 43% of its operating costs in FY12) as a sign that perhaps this represents the ‘minimum’ out-turn we can expect from Ryanair in FY13. In any event, having provisionally updated my model (I still need to add some extra information from the annual report when it comes out) I’m coming out with a SOTP valuation (15x average earnings for the next 2 years + the current value of its stake in Aer Lingus) of close to €5/share (as before), which offers some pretty chunky upside from the €4.04 the shares closed at this evening. Put another way, if you strip the 34c/share dividend from tonight’s close, Ryanair is trading on an ‘ex div’ price of €3.70, which represents 11x trailing earnings for what is an effectively debt free sector leader that is generating free cash flow of >15% of its market capitalisation. To me that is far too cheap.


Elsewhere, in the blogosphere Lewis did a great write-up on Cranswick – I really liked the way he dis-aggregated the extent to which movements in both the top line and costs contributed to the net out-turn over the past few years. Something I should think of more overtly building into my own case studies.


Finally, did you know that British American Tobacco rolled about 100 cigarettes for every man, woman and child on earth in 2011?


Written by Philip O'Sullivan

May 21, 2012 at 4:48 pm

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